Nektar Therapeutics — Q3 2015 Form 10-Q
Business context and period: Biopharmaceutical company developing drug candidates using PEGylation and polymer-conjugate technologies. This unaudited report covers the quarter and nine months ended September 30, 2015; comparisons are to the same periods in 2014. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $60.0 | $132.9 | $191.4 | $181.2 |
| Operating income (loss) | $0.4 | $80.3 | $(0.0) | $21.0 |
| Net income (loss) | $(8.2) | $70.6 | $(27.0) | $(8.2) |
| Net loss per share, diluted | $(0.06) | $0.53 | $(0.21) | $(0.07) |
| Operating cash flow | Not provided separately | Not provided separately | $2.0 | $(117.4) |
Q3 product sales and royalty revenue was $7.4 million, versus $6.2 million; non-cash royalties from previously sold CIMZIA and MIRCERA royalty rights were $6.1 million, versus $6.1 million. Product gross margin improved to 9% from negative 49% in Q3 2014. For the nine months, product gross margin was 6%, versus negative 24%.
Research and development expense was $43.2 million for Q3 and $135.7 million for the nine months, up 26% and 24%, respectively. General and administrative expense was $9.5 million for Q3 and $30.0 million for the nine months. Nine-month interest expense was $12.5 million, with a further $15.4 million of non-cash interest on the royalty-sale liability.
At September 30, cash and cash equivalents were $18.8 million and short-term investments were $249.0 million, for total cash and investments of $267.8 million. Current assets were $286.4 million and current liabilities were $208.1 million. Debt was $132.2 million, including $125.0 million of senior secured notes classified as current and $7.2 million in capital leases. Nine-month capital expenditures were $8.7 million. Total liabilities were $410.2 million; stockholders’ equity was $39.1 million.
Material changes versus the prior comparable period
- Q3 revenue declined 55%, primarily because Q3 2014 included $105 million of AstraZeneca milestones following U.S. approval of MOVANTIK. Nine-month revenue rose 6%, reflecting $100 million from the U.S. launch of MOVANTIK and $40 million following the first EU commercial sale of MOVENTIG, partly offset by lower comparative milestone revenue and the $10 million advertising-related reduction to revenue.
- Net income of $70.6 million in Q3 2014 shifted to a net loss of $8.2 million in Q3 2015. For the nine months, net loss increased from $8.2 million to $27.0 million, while operating income fell from $21.0 million to approximately break-even.
- Nine-month operating cash flow improved to $2.0 million from a use of $117.4 million. The 2015 period included $142 million of collaboration milestone receipts, while 2014 cash flow reflected substantial operating cash use and a $70 million refundable-milestone liability adjustment.
- Cash and investments increased by $5.0 million from year-end 2014. The $25 million restricted-cash balance was released in July 2015.
Outlook, commentary, and risks
- Management estimated that September 30 liquidity would fund current plans for at least 12 months. The company expected 2015 product sales and royalties, license/collaboration revenue, and product gross margin to increase from 2014; it also expected significantly higher R&D expense, primarily from NKTR-181 Phase 3 trials, and slightly higher G&A expense. These are expectations, not formal numerical guidance.
- Management said 2015 operating cash use excluding upfront and milestone receipts was expected to decrease versus 2014. Cash receipts and use are uneven and depend on milestone timing, partner sales, development outcomes, and spending needs.
- On October 5, 2015, after quarter-end, Nektar issued $250 million of 7.75% senior secured notes due 2020, redeemed its $125 million of 12% notes due 2017, and paid an $11.3 million redemption premium and $4.5 million interest. Net cash received after transaction costs and redemption was approximately $100.4 million. The new notes are secured by a first-priority lien on substantially all assets and impose restrictive covenants, including a $60 million minimum-cash requirement.
- NKTR-102’s BEACON Phase 3 trial did not meet its primary overall-survival endpoint at statistical significance. Management was evaluating possible regulatory paths and a confirmatory trial, and did not plan to advance NKTR-102 without a collaboration partner. The filing also reported initiation of the NKTR-181 Phase 3 program and a plan to start an NKTR-214 Phase 1/2 study by year-end 2015; the latter followed an October 2015 IND submission.
- Key risks include clinical-trial failure or delay, dependence on partners for development and commercialization (especially MOVANTIK sales), uncertain collaboration and milestone revenue, substantial R&D funding needs, manufacturing and single-source supply exposure, competition, and secured-debt covenants. The company reported ongoing disputes including its Allergan/MAP lawsuit, a German patent ownership proceeding involving Bayer, and an inter partes review petition concerning a MOVANTIK patent. The filing does not provide a clear quantified estimate of potential losses for these matters.
- The company reported no material change in contractual obligations during the nine months and no off-balance-sheet financing arrangements. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether MOVANTIK/MOVENTIG sales translate into meaningful recurring royalties and future milestone receipts.
- Clinical and regulatory developments for NKTR-181, NKTR-214, NKTR-102, Amikacin Inhale, and partnered programs, including BAX 855.
- Cash burn and liquidity after the October refinancing, including compliance with the new notes’ covenants and minimum-cash requirement.
- Future product gross margins, which management said may fluctuate with manufacturing volume and product mix.
- Progress and potential financial impact of the disclosed litigation, patent proceedings, and intellectual-property challenges.