Nektar Therapeutics — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Nektar is a research-based biopharmaceutical company developing drug candidates in oncology and immunology, with revenue primarily from collaboration agreements, royalties, and product supply.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $50.6 million | $28.2 million; up 79% |
| Operating loss | $133.6 million | $120.7 million |
| Net loss | $138.7 million | $119.6 million |
| Net loss per share, basic and diluted | $0.78 | $0.69 |
| Cash used in operations | $78.1 million | $80.9 million |
| Cash and marketable investments | $1.532 billion at March 31 | $1.604 billion at December 31, 2019 |
| Current assets / current liabilities | $1.429 billion / $377.5 million | At March 31, 2020 |
| Total liabilities | $591.5 million | At March 31, 2020 |
| Senior secured notes | $250.0 million principal outstanding at March 31 | Repaid at par on April 13, 2020, with $4.8 million accrued interest |
| Product gross margin | Negative 11% | Negative 24% |
Revenue comprised $3.4 million product sales, $9.7 million royalty revenue, $9.9 million non-cash royalty revenue, and $27.5 million license, collaboration and other revenue. Operating cash use includes the effect of working-capital movements and non-cash items; investing cash inflow of $197.8 million primarily reflected investment maturities exceeding purchases.
Material changes versus the prior comparable period
- Revenue rose mainly because Nektar recognized a $25.0 million BMS milestone after the first patient’s first visit in a registrational muscle-invasive bladder cancer trial. License, collaboration and other revenue increased to $27.5 million from $4.2 million.
- Net loss widened by $19.0 million. A new $45.2 million expense for impairment and other costs from the terminated NKTR-181 program was the principal unusual charge; it included a $19.7 million write-off of manufacturer advances and $25.5 million of other costs, primarily non-cancellable manufacturing commitments and severance.
- Research and development expense decreased 8% to $109.0 million, largely because of pre-commercial NKTR-181 costs recorded in the termination expense line rather than R&D. Management expects R&D expense to increase in 2020 as programs advance.
- Product sales fell 22% and royalty revenue fell 15%, reflecting lower partner demand and product sales, respectively. Non-cash royalty revenue rose 20%; it does not represent current-period cash receipts.
- Operating cash use was $78.1 million, modestly lower than the prior-year quarter. Cash and investments declined by about $72.2 million from year-end, while cash and cash equivalents increased due in part to investment maturities.
Outlook, management commentary and risks
- Management estimated that available working capital would fund current business plans for at least 12 months. Nektar reported no credit facility or other committed capital source.
- Management expected 2020 product sales to be below 2019 and product gross margin to remain negative, due in part to a supply arrangement priced below fully burdened manufacturing cost. Management expected 2020 R&D and G&A expenses to rise versus 2019.
- Nektar expected license, collaboration and other revenue to increase significantly in 2020, citing the recognized BMS milestone and the potential for a further $25.0 million adjuvant melanoma milestone if its trigger is achieved. Future milestone income is contingent and uncertain.
- Nektar’s lead program, bempegaldesleukin with BMS’s Opdivo, was in multiple clinical studies. Nektar identified clinical and regulatory success as important to future milestone receipts, commercialization prospects, and liquidity. The collaboration includes substantial potential milestones, but they are not assured.
- COVID-19 had varying effects on clinical programs at the filing date. Management cited possible delays of about three months for certain Nektar-run early-stage studies and three to six months for partner-run studies, with enrollment and site-start delays among the concerns. The ultimate impact was unclear; management could not reliably estimate the pandemic’s full effects.
- The FDA advisory committee did not recommend approval of NKTR-181 in January 2020; Nektar withdrew the NDA, stopped further investment, and began winding down Inheris and the program. Nektar also announced in February that the ONZEALD development program would be wound down after its Phase 3 ATTAIN study showed no overall-survival improvement.
- Other material risks include drug-development failure, reliance on partners and contract manufacturers, single-source supply exposures, competition, and potential liquidity or investment-sale losses. Nektar disclosed securities class actions and derivative suits relating to allegations about bempegaldesleukin; the cases were at an early stage, and the company said it could not reasonably estimate a loss range. No liability was recorded for those matters.
- For the future-royalty sale liability, Nektar recorded $9.9 million of non-cash royalty revenue and $7.0 million of non-cash interest expense in the quarter. Its estimated prospective interest rate remained 38%, subject to change with projected royalty receipts.
Important facts for investors to verify
- Whether bempegaldesleukin trials meet enrollment, efficacy, safety, and regulatory objectives, and whether any BMS milestones are achieved.
- Actual COVID-19 effects on trial schedules, partner activity, manufacturing, and the timing of potential approvals or commercial launches.
- Cash burn and investment balances following the April 13, 2020 repayment of the notes, including whether management’s stated 12-month funding outlook remains valid.
- 2020 revenue, product sales, gross margin, R&D, and G&A trends against management’s expectations, distinguishing cash receipts from non-cash royalty revenue and contingent milestones.
- Developments in the bempegaldesleukin-related securities and derivative litigation and any resulting financial exposure.