Nektar Therapeutics — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Financial statements are unaudited. Nektar is a clinical-stage biopharmaceutical company developing drug candidates using PEGylation and polymer-conjugate technologies; revenue is primarily collaboration-related.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $27.1 million | $37.9 million | $55.7 million | $113.7 million |
| Operating loss | $21.3 million | $6.2 million | $89.5 million | $7.7 million |
| Net loss | $24.1 million | $8.7 million | $96.5 million | $15.4 million |
| Net loss per share | $0.21 | $0.09 | $0.86 | $0.16 |
- Q3 product sales and royalties rose 41% to $10.2 million; nine-month revenue increased 18% to $26.0 million. Product gross margin was 51% for Q3 and 37% for the nine-month period, compared with 14% and 30%, respectively, in 2010. Management attributed the improvement to royalties and product mix; manufacturing margins may fluctuate.
- License, collaboration and other revenue fell 45% in Q3 and 68% year to date. The principal driver was the completion in 2010 of amortization of AstraZeneca’s $125 million upfront payment. 2011 revenue included a new $5 million license fee and $4.5 million of development milestones in Q3.
- Research and development expense was $31.0 million in Q3 and $93.5 million year to date, up 12% and 22%. General and administrative expense was $12.4 million and $35.3 million, up 21% and 20%. Higher clinical-program, staffing and facility costs contributed to increases; G&A also included settlement-related expense.
- Operating cash used was $71.5 million for the first nine months, versus $76.3 million in 2010. Investing activities used $126.4 million, including purchases and sales/maturities of investments; financing provided $222.6 million, principally from the January equity offering. Cash and cash equivalents ended at $43.0 million.
- Cash, cash equivalents and marketable investments totaled $458.0 million at September 30, 2011, compared with $315.9 million at year-end 2010. Total assets were $648.1 million; total liabilities were $417.3 million; stockholders’ equity was $230.8 million. The filing reports no consolidated operating margin.
- Indebtedness was approximately $239.8 million, including $215.0 million of 3.25% convertible subordinated notes due September 2012. The notes were classified as current liabilities. The company reported no material credit facility or other committed capital source.
Material changes and significant items
- Nektar raised approximately $220.4 million gross through a public offering of 19 million common shares in January 2011; net cash proceeds reported were $224.1 million. Shares issued and outstanding rose to 114.4 million from 94.5 million at December 31, 2010.
- Prospective adoption of the milestone revenue method led to recognition of $4.5 million of substantive milestones when achieved in Q3. Nektar said the change increased 2011 revenue and reduced net loss by approximately $4.1 million versus its former method, or about $0.04 per share.
- In October 2011, after quarter-end, Nektar agreed to settle trade-secret and breach-of-contract litigation for an upfront $2.7 million, accrued at September 30, plus a contingent $3.0 million if a specified candidate receives FDA approval. The contingent amount was not accrued because management did not consider payment probable.
Outlook, management commentary and risks
- Management expected cash and investments to cover anticipated cash needs for at least 12 months, but said resources were insufficient to fund current R&D plans and repay the 2012 notes. Nektar was exploring repayment alternatives and cautioned that additional capital might not be available on acceptable terms.
- Management expected R&D spending and operating cash use to increase as programs advanced, particularly NKTR-102. It expected to start a Phase 3 NKTR-102 metastatic breast cancer study before year-end 2011 and anticipated substantial investment over several years. A Phase 3 study for Bayer’s Amikacin Inhale was then expected in the second half of 2012; device-manufacturing design work had delayed the program.
- AstraZeneca had begun enrolling patients in Phase 3 for NKTR-118. Nektar was reviewing NKTR-102 ovarian-cancer data; Doxil supply shortages were expected to constrain enrollment, and management planned to assess development options after reviewing available data. NKTR-181 had entered Phase 1 studies. Nektar did not then intend to advance NKTR-105 into Phase 2.
- Key risks include clinical-trial failure or delay, regulatory and manufacturing hurdles, dependence on collaboration partners and limited suppliers, volatile milestone and royalty revenue, and the need to restructure or repay the 2012 notes while funding development. Management warned that additional financing may require dilution, unfavorable terms or reduced development activity.
- Available-for-sale investments were largely debt securities with maturities of two years or less; management reported no material impairment and said it did not expect to need to sell them before recovery of cost. Controls and procedures were assessed as effective; no material change in internal control was reported.
Investor verification priorities
- Track the repayment, refinancing or restructuring plan for the $215 million notes due September 2012, including any effect on dilution and available R&D funding.
- Reconcile cash runway assumptions with operating cash use, planned NKTR-102 Phase 3 costs, and the company’s stated limitation that the cash balance does not cover both current plans and note repayment.
- Verify clinical and regulatory progress for NKTR-102, AstraZeneca’s NKTR-118, and Bayer’s Amikacin Inhale, including trial timing, enrollment constraints and manufacturing readiness.
- Assess the sustainability and timing of collaboration revenue after AstraZeneca upfront-payment amortization ended, and distinguish recurring product/royalty revenue from milestone and license receipts.
- Confirm the final cash and accounting effects of the October 2011 litigation settlement, especially the contingent FDA-approval payment.