Nektar Therapeutics — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited consolidated results. Dollar amounts below are in millions unless stated otherwise. Nektar is a clinical-stage biopharmaceutical company developing drug candidates using its PEGylation and advanced polymer conjugate technologies, alongside collaboration, licensing, and manufacturing activities.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / prior balance-sheet date |
|---|---|---|
| Total revenue | $17.9 | $11.3; up 59% |
| Operating loss | $(37.9) | $(33.9) |
| Net loss | $(41.1); $(0.36) per share | $(36.0); $(0.33) per share |
| Operating cash flow | $(34.6) | $(14.9) |
| Cash, cash equivalents, and investments | $498.8 | $414.9 at Dec. 31, 2011 |
| Total liabilities | $532.3 | $408.7 at Dec. 31, 2011 |
| Indebtedness, as reported by management | Approximately $240.0, including $215.0 of convertible notes due Sept. 28, 2012 | — |
- Product sales and royalties were $10.1 million, versus $4.8 million; license, collaboration, and other revenue was $7.8 million, versus $6.5 million.
- Cost of goods sold was $8.7 million. Product gross profit was $1.4 million and product gross margin was 14%, down from 32%.
- Research and development expense increased 16% to $35.1 million; general and administrative expense declined 11% to $10.4 million. A $1.7 million long-lived-asset impairment was recorded.
- Interest expense rose to $4.3 million from $2.6 million. The filing attributes about $1.8 million of Q1 expense to the royalty-sale liability.
- Investing activities provided $48.4 million, largely reflecting investment maturities net of purchases. Financing activities provided $119.5 million, principally from the royalty transaction. Cash increased by $133.2 million during the quarter.
Material changes and unusual items
- In February 2012, Nektar sold to RPI Finance Trust its future royalty rights on CIMZIA and MIRCERA for $124.0 million gross, incurring about $4.4 million of transaction costs. Because Nektar retains manufacturing and supply obligations, it recorded the proceeds as a liability, which was $125.8 million at quarter-end, and expects to impute interest at an estimated rate of approximately 17%. Nektar will continue to recognize the royalties as revenue, although future royalty payments go to RPI.
- FDA approval of Affymax’s OMONTYS on March 27 triggered a $2.0 million milestone recognized as revenue.
- Nektar announced consolidation of U.S. research activities in San Francisco and plans to stop using and sell a research building in Huntsville, Alabama; the resulting preliminary impairment charge was $1.7 million. Further impairment may be recorded before disposal.
- Other comprehensive loss was $40.0 million. The quarter-end balance sheet showed stockholders’ equity of $162.5 million, down from $197.8 million at year-end.
Outlook, management commentary, and risks
- Management expected R&D expense to increase through 2012 versus 2011, particularly for the NKTR-102 Phase 3 BEACON breast-cancer trial and planned NKTR-181 Phase 2 work. G&A expense was expected to remain broadly consistent with 2011; management also expected product gross margin to decline in 2012.
- Nektar said its cash and investments should cover anticipated needs for at least 12 months, but the company had no material credit facility or other committed capital source and was pursuing financing alternatives for the September 2012 note maturity. Alternatives included additional royalty sales and term loans; equity-based financing could be required if non-dilutive funding was unavailable. Failure to raise funds could force spending reductions.
- AstraZeneca’s NKTR-118 Phase 3 KODIAC program is financially important: Nektar could receive $95 million upon regulatory filings and a further $140 million upon approvals and specified commercial launches, plus potential royalties. Timing and outcomes are uncertain.
- Nektar initiated its own NKTR-102 Phase 3 BEACON study, expected to enroll about 840 patients and require substantial investment. The expanded NKTR-102 ovarian-cancer Phase 2 study had enrolled approximately 97 of 110 planned patients as of April 2012; a Doxil shortage slowed enrollment, and preliminary results remained subject to verification. The filing cautions that an accelerated NDA based on this study was unlikely to be accepted or approved.
- Amikacin Inhale Phase 3 timing remained uncertain while device design, manufacturing readiness, and stability work continued. Management described the program as behind schedule.
- Key risks include clinical and regulatory failure, dependence on partners and collaboration revenue, manufacturing and single-source supply constraints, competition, intellectual-property disputes, and substantial financing needs. Nektar reported a pending SUNY licensing-contract lawsuit, disputed the claims, and said it could not reasonably estimate a possible loss; no liability was recorded. Certain indemnification exposures also could not be reasonably estimated.
- Management concluded disclosure controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How Nektar will fund repayment or refinancing of the $215 million notes due September 28, 2012, and whether additional financing will dilute shareholders or impose restrictive terms.
- Progress, timing, and results of AstraZeneca’s NKTR-118 KODIAC trials and the related milestone and royalty potential.
- NKTR-102 BEACON trial costs and progress, and the verified results and development path for the ovarian-cancer study.
- Whether Amikacin Inhale device and manufacturing work enables Phase 3 initiation, and whether the Huntsville property sale results in further impairment.
- Actual royalty remittances to RPI, any MIRCERA sales-threshold payments owed, and changes in the royalty obligation’s estimated interest rate or carrying value.
- Quarterly operating cash use, product gross margin, and the availability and liquidity of the investment portfolio.