Nektar Therapeutics — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results. Nektar is a clinical-stage biopharmaceutical company whose revenue is primarily generated through collaborations, royalties, and manufacturing and supply agreements.
Financial performance and position
Amounts below are in millions of dollars except per-share data and margins.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $18.4 | $27.1 | $60.0 | $55.7 |
| Operating loss | $(32.9) | $(21.3) | $(97.8) | $(89.5) |
| Net loss | $(43.5) | $(24.1) | $(118.9) | $(96.5) |
| Basic and diluted loss per share | $(0.38) | $(0.21) | $(1.04) | $(0.86) |
| Product gross margin | 41% | 51% | 35% | 37% |
| Cash used in operating activities | Not separately stated | Not separately stated | $(82.4) | $(71.5) |
- Q3 revenue fell 32%, as product sales and royalties rose 20% to $12.3 million but license, collaboration and other revenue declined 64% to $6.1 million. The prior-year quarter included a $5.0 million license fee and $4.5 million of development milestones.
- Nine-month revenue rose 8%: product sales and royalties increased 38% to $35.9 million, partly offset by an 18% decline in license, collaboration and other revenue to $24.2 million. Management attributed the product and royalty growth to higher partner demand and increased CIMZIA and MIRCERA royalties.
- Research and development expense increased 10% in Q3 to $34.0 million and 9% for nine months to $102.3 million, principally reflecting the NKTR-102 Phase 3 BEACON study. General and administrative expense declined 18% in Q3 and 13% for nine months.
- Interest expense rose to $11.2 million in Q3 and $23.4 million for nine months, including non-cash interest on the royalty-sale liability and interest on the new senior notes. This contributed to the larger net loss.
- At September 30, cash and cash equivalents were $10.3 million; short-term investments were $308.9 million and restricted cash and long-term investments were $35.0 million. Total cash, cash equivalents and available-for-sale investments were $354.3 million, including $25.0 million restricted until July 2015. Current assets were $346.9 million and current liabilities $69.5 million.
- Reported indebtedness was approximately $152.0 million, including $125.0 million of 12% senior secured notes due July 2017. The balance sheet also reported $12.4 million of long-term capital lease obligations. Separately, the $126.7 million non-current liability from the royalty sale is not expected to be settled in cash, although contingent payments may be due.
Material changes and transactions
- In July 2012, Nektar issued $125.0 million of 12% senior secured notes due July 15, 2017, secured by a first-priority lien on substantially all assets. It used the proceeds and existing cash to retire $215.0 million of convertible subordinated notes: $42.5 million was exchanged for senior notes and the remaining $172.4 million was repaid at maturity in September. The financing included approximately $4.4 million of issuance costs and a $25.0 million restricted reserve.
- In February 2012, Nektar sold its future CIMZIA and MIRCERA royalty rights to RPI for $124.0 million, with approximately $4.4 million in transaction costs. Because Nektar retains manufacturing and supply obligations, it records the proceeds as a liability and continues to record the related royalties as revenue, while the liability accrues non-cash interest at an estimated effective annual rate of approximately 17%.
- Nektar recognized a $1.7 million long-lived-asset impairment in Q1 related to a Huntsville research building it plans to sell. No further impairment was recorded through Q3; additional impairment remains possible before disposal.
- Baxter notified Nektar in May that it would cease future Hemophilia B research under their agreement. Nektar recognized the remaining $3.9 million deferred revenue in Q2.
Outlook, management commentary and risks
- Management stated that existing cash and investments were expected to fund current business plans for at least 12 months. It also reported no credit facility or other committed capital source, did not anticipate a substantial upfront-payment transaction in the near term, and warned that absent new funding or naloxegol milestones it might need to reduce spending, delay programs, or seek financing, potentially dilutive financing.
- Management expected R&D spending to increase through the rest of 2012, including substantial investment in NKTR-102’s Phase 3 BEACON study and NKTR-181’s Phase 2 study. The BEACON study was planned to enroll approximately 840 patients and require substantial investment over about two and a half years.
- Naloxegol (NKTR-118) was in Phase 3 development by AstraZeneca. Nektar could receive up to $235 million in development, regulatory and launch milestones, including $95 million upon regulatory filings with the FDA and EMA; management highlighted the importance of potential 2013 filings. Future payments and royalties depend on development, approval and commercial success.
- NKTR-102 was also in Phase 3 for metastatic breast cancer. In November 2012, after the quarter, the FDA designated the program Fast Track for a specified breast-cancer population. Nektar was still compiling and verifying expanded Phase 2 ovarian-cancer data and cautioned that the study was unlikely to support an NDA by itself. A colorectal-cancer Phase 2 study remained underway.
- Amikacin Inhale Phase 3 preparation was delayed while the partners finalized and validated the nebulizer design and manufacturing work. If remaining work succeeded, Nektar and Bayer expected a Phase 3 start in Q1 2013; Nektar anticipated continued significant investment in clinical and commercial manufacturing capability.
- The royalty-sale agreement provides for a $3.0 million payment if a 2012 MIRCERA sales threshold is missed and up to a further $7.0 million if a 2013 threshold is missed. Nektar considered the first payment probable and expected to pay it in early 2013; the filing described a possible payment of up to $7.0 million in 2014 if applicable targets are not met.
- Nektar disputed a SUNY licensing-contract lawsuit. Summary-judgment motions were pending; the company said it could not reasonably estimate a possible loss and had recorded no liability. The filing also notes potentially uncapped indemnification obligations under commercial agreements and the possibility that litigation could adversely affect results or liquidity.
- Key risks include clinical-trial failure or delay, regulatory uncertainty, reliance on collaboration partners and single-source suppliers, manufacturing and device-validation challenges, competition, intellectual-property disputes, and the company’s continuing losses and cash needs. The senior-note indenture also includes restrictive covenants and reserve-account requirements.
Important facts for investors to verify
- Progress, timing and results of the NKTR-118, NKTR-102 and Amikacin Inhale programs, including any AstraZeneca regulatory filings and related milestone eligibility.
- Actual operating cash burn, investment liquidity and the duration of available funding, considering restricted cash, increased R&D spending and the absence of committed credit.
- Senior-note interest and covenant compliance, and the terms and accounting estimates for the royalty-sale liability, including MIRCERA threshold payments and the estimated 17% effective interest rate.
- Whether the Amikacin device and manufacturing work is completed in time for the anticipated Phase 3 start, and whether the ovarian-cancer data or other clinical results change the development outlook.
- Outcome of the SUNY litigation and any material developments in indemnification or other contingent obligations.