Nektar Therapeutics — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing was signed March 1, 2018. Nektar is a research-based biopharmaceutical company developing medicines in oncology, autoimmune disease and chronic pain, alongside technology licensing, manufacturing and royalty arrangements.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $307.7 million | $165.4 million |
| Operating loss | $59.6 million | $112.9 million |
| Net loss | $96.7 million | $153.5 million |
| Net loss per share, diluted | $0.62 | $1.10 |
| Operating cash flow | $(80.4) million | $(117.0) million |
| Cash, cash equivalents and marketable investments at year-end | $353.2 million | $389.1 million |
| Working capital at year-end | $270.7 million | $353.7 million |
| Senior secured notes, principal | $250.0 million | $250.0 million |
Revenue rose 86%, largely reflecting the $150.0 million NKTR-358 upfront payment from Lilly, of which $130.1 million was recognized in 2017, and revenue recognized when the Bayer, Ophthotech and Daiichi agreements ended. The reported $307.7 million includes $30.5 million of non-cash royalty revenue from previously sold royalty rights. Product sales fell 41% to $32.7 million, primarily due to lower Fovista-related demand. Cash-flow use improved year over year, but Nektar continued to fund substantial research and development spending.
Research and development expense increased 32% to $268.5 million; general and administrative expense was $52.4 million. Product gross profit was $2.1 million, a 7% gross margin, versus $25.1 million and 45% in 2016; management attributed the deterioration to lower sales and an unfavorable product mix. Year-end total assets were $508.9 million and stockholders’ equity was $87.8 million. Cash and investments included just $4.8 million of cash and cash equivalents; most was invested in marketable securities. The notes bear 7.75% interest, mature in October 2020, are secured by substantially all assets, and require at least $60 million of cash and investments.
Fourth-quarter 2017 revenue was $95.5 million and net loss was $33.8 million, compared with revenue of $37.5 million and net loss of $42.2 million in fourth-quarter 2016. The 2017 quarterly results were uneven: third-quarter revenue of $152.9 million and net income of $60.9 million included significant collaboration revenue and should not be read as a recurring run rate.
Material changes versus the prior period
- Revenue increased from $165.4 million to $307.7 million, while net loss narrowed by $56.8 million. Revenue recognition and collaboration milestones make year-to-year results volatile.
- R&D expense rose from $203.8 million to $268.5 million, driven by development of NKTR-214, NKTR-358, NKTR-262 and NKTR-255, as well as personnel and outside services.
- Operating cash use declined from $117.0 million to $80.4 million, partly reflecting the Lilly upfront payment and other receipts. Cash and investments nevertheless declined by $35.9 million.
- Nektar recorded $16.0 million of impairment and other termination costs after Bayer ended the Amikacin Inhale collaboration following unsuccessful Phase 3 results. Ophthotech’s Fovista program also ended after failed Phase 3 trials; Daiichi terminated its ONZEALD agreement following the negative EU regulatory opinion. Nektar paid Daiichi $12.5 million.
- The 2017 increase in outstanding shares to 159.5 million at year-end primarily reflected employee equity plans; the filing reports $59.5 million of proceeds from those plans. Separately, the 2018 BMS share purchase, if completed, would issue additional shares.
Outlook, risks and notable items
- BMS agreement, subsequent event: In February 2018, Nektar agreed to collaborate with Bristol-Myers Squibb on NKTR-214. BMS agreed to pay a $1.0 billion upfront cash payment and buy $850 million of Nektar shares at $102.60 per share. Nektar may earn up to $1.43 billion in development and regulatory milestones and $350 million in sales milestones. Nektar would book worldwide NKTR-214 sales and share commercialization profits and losses 65%/35% with BMS. The closings were expected in the second quarter of 2018 and remained subject to conditions; these amounts were not part of 2017 year-end cash or results.
- Management expected R&D expense to increase significantly in 2018, primarily due to expanded NKTR-214 development, and expected G&A and stock-based compensation expense to rise. It anticipated lower product sales and potentially negative product gross margin in 2018 following the Ophthotech termination.
- Nektar planned to submit an NDA for NKTR-181 in the first half of 2018 and was seeking a development and commercialization partner. The company identified regulatory uncertainty, including opioid scheduling, as a risk. It also planned further NKTR-358 clinical development and to begin NKTR-262 Phase 1 enrollment.
- Management estimated existing working capital would fund current business plans through at least March 1, 2019, while noting that this outlook preceded the expected BMS closings. It cited clinical outcomes, collaboration receipts, partner performance and development costs as material uncertainties.
- The company remained loss-making and said it expected substantial losses and negative operating cash flows. Revenue was entirely derived from collaborations, royalties and product supply, with Lilly and UCB representing 42% and 12% of 2017 revenue, respectively.
- Key risks include clinical and regulatory failure, dependence on collaboration partners, competitive and reimbursement pressures, manufacturing and single-source supply risks, patent disputes and the restrictive covenants on secured notes. Nektar disclosed Bayer-related patent litigation concerning PEGylated Factor VIII and ADYNOVATE; it stated that it was vigorously defending its intellectual property. The filing says it was not aware of proceedings expected to have a material adverse effect on the company.
- Adoption of ASC 606 in 2018 was estimated to reduce accumulated deficit by approximately $11–$13 million at adoption, subject to final assessment. The filing also described the 2017 U.S. tax-law change and stated its accounting was not complete.
Important facts for investors to verify
- Whether the BMS collaboration and share purchase closed, and the resulting cash, dilution, cost-sharing and milestone terms.
- Subsequent NKTR-214 clinical data, trial execution, safety and development spending relative to the collaboration plan.
- NKTR-181 NDA timing, FDA requirements and opioid scheduling; and progress for NKTR-358 and NKTR-262.
- Trends in cash burn, product royalties and sales, collaboration revenue concentration, and the 2020 notes’ covenants and maturity funding.
- Developments in the Bayer patent disputes, terminated programs and any related financial or intellectual-property exposure.