Nektar Therapeutics — Q1 2013 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2013, compared with the three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2012. Nektar is a clinical-stage biopharmaceutical company developing drug candidates using polymer-conjugate technologies and earning revenue primarily through collaboration, manufacturing, licensing, milestone, and royalty arrangements.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Total revenue | $23.0 million | $17.9 million; up 28% |
| Product sales | $11.8 million | $6.9 million; up 70% |
| Net loss | $55.1 million | $41.1 million |
| Net loss per share | $0.48 | $0.36 |
| Operating cash used | $38.1 million | $34.6 million |
| Cash and cash equivalents | $28.5 million | $25.4 million at Dec. 31, 2012 |
| Cash, investments, and restricted cash | $261.2 million | $302.2 million at Dec. 31, 2012 |
- Product gross profit was $0.1 million, a 1% gross margin, versus a $1.8 million gross loss and negative 25% margin in Q1 2012. Management attributed the improvement to product mix and greater manufacturing activity, which reduced overhead per unit.
- Research and development expense rose 30% to $45.6 million, mainly from the etirinotecan pegol Phase 3 BEACON study and NKTR-181 Phase 2 studies. General and administrative expense increased 7% to $11.1 million.
- Total operating costs and expenses were $68.4 million; operating loss was $45.4 million. Net loss also reflected $4.6 million of interest expense and $5.5 million of non-cash interest expense related to the royalty transaction.
- Cash and cash equivalents increased $3.1 million during the quarter. Investing activities provided $43.7 million, primarily from investment maturities net of purchases; financing activities used $2.5 million. The cash-flow statement reports operating cash use of $38.1 million.
- Current assets were $267.0 million and current liabilities $83.2 million. Total liabilities were $450.5 million, and stockholders’ equity was negative $2.6 million. Debt included $125.0 million of 12% senior secured notes due July 2017 and capital leases; management reported $148.9 million of indebtedness, excluding the royalty-obligation liability. Restricted cash of $25.0 million was included in reported cash and investments.
Material changes and significant developments
- Revenue increased by $5.1 million year over year. Higher product sales and $4.4 million of non-cash royalty revenue following the sale of future CIMZIA and MIRCERA royalties more than offset lower cash royalty revenue and lower license, collaboration, and other revenue. The latter fell partly because Q1 2012 included a $2.0 million OMONTYS approval milestone.
- Nektar sold its CIMZIA and MIRCERA royalty rights to RPI Finance Trust in 2012 for $124.0 million. The proceeds are accounted for as a liability; royalties continue to be reported as non-cash revenue while the liability accrues non-cash interest. The estimated effective interest rate was approximately 17%.
- OMONTYS was voluntarily recalled by Affymax and Takeda in February 2013 following post-marketing reports of serious hypersensitivity reactions, including potentially fatal anaphylaxis. Nektar’s royalty revenue from the product was affected.
- Nektar paid RPI $3.0 million in Q1 2013 because MIRCERA sales did not meet the 2012 threshold. A further payment of up to $7.0 million may be due in 2014 if specified 2013 sales thresholds are not met.
- Clinical progress included AstraZeneca’s positive top-line Phase 3 naloxegol results, Baxter’s February 2013 initiation of a Phase 3 BAX 855 study, and Bayer’s first patient enrollment in a Phase 3 Amikacin Inhale study in April 2013. Nektar said it expected to complete BEACON enrollment by year-end 2013.
Outlook, risks, and contingencies
- Management said available working capital was expected to fund current plans for at least 12 months. However, Nektar had no credit facility or other committed capital and did not anticipate substantial upfront payments from new transactions in the near term. Without new collaboration funding or naloxegol milestone receipts in 2013, it would likely need to pursue financing, potentially including dilutive securities.
- Nektar could receive up to $95.0 million if AstraZeneca submits naloxegol regulatory filings accepted by the FDA and EMA; further regulatory and commercial milestones are possible. AstraZeneca was still finalizing plans after pre-NDA discussions. The filing notes FDA concern about potential cardiovascular risk with mu-opioid antagonists and uncertainty over whether an additional pre-approval study may be required.
- Management expected product sales for the remaining nine months of 2013 to be consistent with the comparable 2012 period; cash royalty revenue to decline; non-cash CIMZIA/MIRCERA royalty revenue to increase; and license, collaboration, and other revenue to increase, potentially significantly if naloxegol filing milestones are achieved. R&D expense and operating cash use were expected to increase as development spending continued, particularly for BEACON.
- The company expects substantial future losses and negative operating cash flow. Key uncertainties include clinical-trial outcomes and costs, regulatory decisions, partner performance, milestone timing, access to financing, product commercialization, manufacturing and single-source supply risks, and restrictive covenants on the senior secured notes.
- Nektar disputes a SUNY licensing-contract lawsuit. Summary-judgment motions were under court consideration; the company said it could not reasonably estimate a possible loss and had recorded no liability. The filing also describes potentially uncapped indemnification obligations under commercial agreements.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether AstraZeneca files naloxegol applications accepted by the FDA and EMA, and whether regulators require additional cardiovascular testing.
- Cash burn, investment balances and restrictions, and the timing and terms of any financing if expected milestones or collaborations do not materialize.
- Progress, cost, and results of BEACON, NKTR-181, Amikacin Inhale, and BAX 855 clinical programs.
- OMONTYS recall implications for royalties, manufacturing revenue, and any related obligations.
- MIRCERA sales against the thresholds that could trigger the additional RPI payment, and the company’s exposure in the SUNY litigation and under indemnities.