Nektar Therapeutics — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing was signed March 1, 2017. The Q4 figures below are unaudited; annual financial statements were audited by Ernst & Young, which issued unqualified opinions on the financial statements and internal control over financial reporting.
Business context
Nektar is a research-based biopharmaceutical company developing medicines using its polymer-conjugate technology, with programs in cancer, autoimmune disease and chronic pain. Its revenue comes from collaboration agreements, product supply, royalties, milestones and license-related payments. It depends substantially on partners to develop and commercialize products; no single proprietary drug candidate was commercially approved during the year.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $165.4 million | $230.8 million |
| Operating costs and expenses | $278.3 million | $260.2 million |
| Loss from operations | $112.9 million | $29.4 million |
| Net loss | $153.5 million | $81.2 million |
| Net loss per share | $1.10 | $0.61 |
| Cash used in operating activities | $117.0 million | $73.1 million |
- Revenue fell 28%, principally because FY2015 included $140 million of MOVANTIK/MOVENTIG commercial-launch milestones. FY2016 included a $28 million share of AstraZeneca’s Kirin sublicense payment and a $20 million ONZEALD upfront payment from Daiichi Sankyo Europe.
- Product sales rose 38% to $55.4 million, primarily on increased Fovista-related supply to Ophthotech. Product gross margin improved to 45% from 15%, reflecting product mix; the filing cautions that margin may fall significantly in 2017, potentially near breakeven, as Ophthotech orders decline.
- Research and development expense increased 11% to $203.8 million, led by NKTR-181 and NKTR-214 spending. Management expected R&D and general and administrative expenses to rise in 2017.
- FY2016 included $30.2 million of non-cash royalty revenue from previously sold CIMZIA and MIRCERA royalty rights, and $19.7 million of related non-cash interest expense. These items affect reported results but do not represent current-period royalty cash receipts to Nektar.
- At year-end, cash, cash equivalents and marketable securities totaled $389.1 million; working capital was $354.0 million. Debt was $255.1 million, including $250 million principal of 7.75% senior secured notes due October 2020 and $5.1 million of capital leases. The notes require at least $60 million of cash and investments and impose operating covenants.
- Operating cash use increased from 2015. Nektar raised approximately $189.3 million net through an October 2016 common-stock offering, increasing shares outstanding and diluting existing holders. Management estimated funding for current plans through at least March 1, 2018; it also noted there was no committed credit facility.
- Q4 2016 revenue was $37.5 million, versus $39.4 million in Q4 2015; operating loss was $32.1 million versus $29.4 million, and net loss was $42.2 million versus $54.1 million.
Material developments, outlook and risks
- Pipeline and expected milestones: NKTR-181 Phase 3 SUMMIT-07 enrollment was complete, with top-line results expected in March 2017; the filing notes that its earlier Phase 2 trial missed its primary endpoint. NKTR-214 was in Phase 1/2 development, including a BMS collaboration testing combinations with Opdivo across five tumor types and eight potential indications. Nektar filed an IND for NKTR-358 in February 2017 and planned clinical studies. NKTR-262 and NKTR-255 remained preclinical.
- ONZEALD: The BEACON Phase 3 study did not meet its primary overall-survival endpoint or secondary endpoints, although pre-specified subgroups showed survival benefit. Nektar filed a conditional European marketing application for patients with breast cancer and brain metastases and began the ATTAIN confirmatory Phase 3 study. U.S. approval remained uncertain and dependent on results and regulatory review.
- Partner-program setback: Ophthotech reported that two pivotal Fovista Phase 3 trials failed their primary endpoints in December 2016. Nektar recorded $30.1 million of Fovista-related product sales in 2016 but expected no further 2017 sales beyond approximately $10.4 million of binding purchase commitments. A separate Fovista trial remained ongoing.
- Other partner programs: Management expected Amikacin Inhale Phase 3 results in the first half of 2017 and Cipro DPI results in 2017. These outcomes, sales of MOVANTIK/MOVENTIG and ADYNOVATE, and future milestones could materially affect financial results. Management anticipated 2017 royalty revenue growth, but lower license/collaboration revenue and increased operating cash use.
- Concentration and execution: AstraZeneca, UCB, Ophthotech and Roche accounted for 29%, 21%, 19% and 11% of FY2016 revenue, respectively. Revenue timing is uneven and depends on partner sales, milestones and clinical or regulatory events. Clinical failure, delays, competition, reimbursement pressure, manufacturing/supply constraints and the need for additional financing are material risks.
- Legal and accounting matters: Enzon’s $1.5 million licensing-fee claim was remanded for further proceedings after an appellate reversal; no liability was recorded. Nektar’s commercial contract suit against Allergan/MAP remained a disclosed dispute. Bayer asserted patent ownership and infringement claims concerning PEGylated Factor VIII/ADYNOVATE; Nektar disputed the claims. The filing also states adoption of the new revenue-recognition standard could materially affect financial statements.
Important facts for investors to verify
- SUMMIT-07 results and subsequent NKTR-181 development, including the separate high-dose abuse-liability study.
- ATTAIN enrollment, interim/final outcomes and European regulatory decisions for ONZEALD.
- Commercial sales and Nektar’s actual royalty receipts from MOVANTIK/MOVENTIG and ADYNOVATE, alongside the impact of Fovista order reductions.
- Amikacin Inhale and Cipro DPI trial results, and any resulting milestones or changes to development plans.
- Cash burn, financing needs, compliance with the secured-notes liquidity covenant, and dilution from potential future financing.
- Developments in the Enzon, Allergan/MAP and Bayer disputes, and the eventual accounting impact of adopting ASC 606.