Nektar Therapeutics — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018; filed November 7, 2018. Nektar is a research-based biopharmaceutical company developing medicines in oncology, immunology and pain. Financial statements are unaudited.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $27.8 | $152.9 | $1,153.5 | $212.2 |
| Operating income (loss) | ($98.6) | $69.5 | $788.2 | ($35.6) |
| Net income (loss) | ($96.1) | $60.9 | $779.5 | ($62.9) |
| Diluted earnings (loss) per share | ($0.56) | $0.37 | $4.34 | ($0.41) |
- Nine-month 2018 results were dominated by $1,059.8 million of license revenue recognized from the BMS collaboration. The resulting profit is therefore not indicative of recurring operating performance.
- Q3 revenue fell 82% year over year, largely because Q3 2017 included $127.6 million of Lilly-related collaboration revenue. Nine-month revenue rose more than fivefold, primarily due to the BMS license recognition.
- Q3 research and development expense was $102.9 million, up 57%; general and administrative expense was $18.7 million, up 55%. For the nine months, R&D was $290.7 million, up 55%, and G&A was $57.7 million, up 44%.
- Nine-month product sales fell 34% to $16.4 million, mainly following termination of the Ophthotech collaboration. Royalty revenue rose 25% to $29.9 million. Product gross margin was negative 3% for the nine months, versus positive 16% a year earlier; management expected full-year 2018 product gross margin to decline and potentially remain negative.
- Cash provided by operating activities was $835.8 million for the nine months, versus approximately zero in 2017. This included BMS-related collaboration cash and a $10.0 million Baxalta milestone; excluding upfront, milestone and other contingent receipts, operating cash use was $219.3 million. Investing activities used $1,467.5 million, primarily reflecting purchases of marketable securities. Financing activities provided $849.3 million, including $790.2 million from BMS’s share purchase.
Financial position, liquidity and debt
- At September 30, Nektar held $222.3 million in cash and cash equivalents, $1,817.3 million in short- and long-term investments, and $2,039.6 million in total cash and investments. Total current assets were $1,505.2 million; current liabilities were $108.1 million.
- Total liabilities were $459.0 million and stockholders’ equity was $1,790.1 million. Senior secured notes had $250.0 million principal outstanding, due October 2020, bearing 7.75% interest; the balance-sheet carrying amount, net, was $246.5 million. The notes require at least $60.0 million of cash and investments.
- Management said existing working capital was expected to fund current business plans for at least 12 months. The company had no credit facility or other committed capital source.
Material developments, outlook and risks
- BMS collaboration: Effective April 3, 2018, BMS paid a $1.0 billion upfront cash payment and separately purchased $850.0 million of Nektar stock. Nektar recognized $1,059.8 million as collaboration revenue and $790.2 million as equity value for the shares. Nektar may receive up to approximately $1.4 billion in development and regulatory milestones and $350.0 million in sales milestones, subject to achievement. Nektar retains worldwide sales recording rights for NKTR-214 and shares commercialization profits and losses 65%/35% with BMS; development costs are shared at agreement-specific rates.
- Management expected full-year 2018 royalty revenue to increase, but product sales to decline; R&D and G&A expenses were expected to increase. No full-year earnings or revenue forecast was provided in the filing.
- Pipeline updates included ongoing NKTR-214 combination studies, initiation of the NKTR-262 Phase 1/2 study, and enrollment in an NKTR-358 multiple-ascending-dose study in lupus. The FDA accepted the NKTR-181 NDA and set a May 29, 2019 target action date. Management noted commercialization plans for NKTR-181 were not established and remained uncertain.
- Nektar expects continued substantial R&D investment and, apart from the BMS upfront-related income, expects substantial losses and negative operating cash flow. Key risks include clinical and regulatory setbacks—particularly for NKTR-214—partner performance, manufacturing and single-source supply dependencies, commercialization capability, and the uncertain timing of milestones and royalties.
- A putative securities class action filed October 30, 2018 named Nektar, its CEO and CFO and alleged misrepresentations concerning NKTR-214 efficacy and safety. Nektar said it believed the allegations lacked merit; the company could not estimate potential losses and recorded no accrual.
- A new San Francisco lease covers 135,936 square feet through January 2030, with space to be delivered in phases. If all phases are delivered as expected, annual base rent would be approximately $10.9 million, escalating 3% annually. Nektar expected adoption of the new lease accounting standard in 2019 to materially increase reported assets and liabilities.
- ASC 606 was adopted on a modified retrospective basis, with a $12.7 million reduction to opening accumulated deficit. Reported 2018 revenue includes estimation and timing effects from the new standard; management disclosed the company’s revenue would have been $27.4 million for Q3 and $1,154.3 million for the nine months under the previous standard.
Investor verification priorities
- Separate recurring revenue and cash generation from the one-time BMS license recognition and related stock issuance; reconcile the $1.85 billion BMS proceeds between operating and financing cash flows.
- Monitor NKTR-214 clinical efficacy and safety data, trial progress, and the conditions and timing for BMS milestones and cost-sharing.
- Check actual operating cash use, R&D spending and liquidity against management’s at-least-12-month funding assessment.
- Track NKTR-181 FDA review, potential opioid scheduling and commercialization arrangements, along with partner sales and royalties from marketed products.
- Follow developments in the securities litigation, the 2020 notes and covenants, and delivery and lease obligations for the new facility.