Nektar Therapeutics — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Nektar is a clinical-stage biopharmaceutical company developing drug candidates using polymer-conjugate technologies and relies on collaborations, manufacturing, royalties and financing to fund operations.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Total revenue | $28.5 million | $33.9 million | $48.3 million | $56.9 million |
| Operating loss | $22.9 million | $32.6 million | $59.3 million | $77.7 million |
| Net loss | $32.6 million | $42.7 million | $78.8 million | $97.8 million |
| Basic and diluted loss per share | $0.26 | $0.37 | $0.63 | $0.85 |
| Operating cash used | Not provided for quarter | Not provided for quarter | $71.4 million | $72.4 million |
Q2 product gross margin was 13%, versus 53% a year earlier; first-half product gross margin was negative 10%, versus 27%. At June 30, cash and cash equivalents were $30.7 million, short-term investments were $245.7 million and restricted cash was $25.0 million, for total cash and investments of $301.4 million. Current assets were $298.2 million and current liabilities $84.4 million. Stockholders’ deficit was $35.4 million.
Reported indebtedness was $159.8 million, including $125.0 million of 12% senior secured notes due July 2017. The company’s separate liability from the sale of future royalties was $121.4 million and, according to the filing, will not be settled in cash. The royalty transaction nevertheless generates non-cash interest expense. Nektar raised approximately $117.2 million net of underwriting discounts in a January 2014 public share offering.
Changes versus prior year
- First-half revenue fell 15%, mainly because product sales and royalty revenue declined 48% to $11.8 million as partner demand and manufacturing shipments decreased. Non-cash royalty revenue from CIMZIA and MIRCERA rose 29% to $10.6 million.
- First-half license, collaboration and other revenue was essentially unchanged at $25.9 million. Q2 included $9.0 million of recognized manufacturing-technology-transfer milestones; the prior-year quarter included a $10.0 million Bayer milestone tied to starting the Amikacin Inhale Phase 3 trial.
- First-half research and development expense declined 23% to $75.0 million, principally reflecting lower activity as the BEACON study progressed and completion of the NKTR-181 Phase 2 study.
- Net loss narrowed year over year, while operating cash use remained broadly similar. Shares outstanding increased following the public offering.
Outlook, commentary and material risks
- Management estimated that available working capital would fund current plans for at least 12 months from June 30, 2014. It expected 2014 product sales and royalty revenue to be substantially below 2013, product gross margin to be breakeven to slightly negative, R&D expense to decrease, and G&A expense to remain broadly consistent.
- The September 16, 2014 FDA action date for MOVANTIK was a key near-term event. An FDA requirement for a pre-approval cardiovascular safety study could lead AstraZeneca to terminate U.S. or all rights; depending on its election, Nektar could face repayment of the $70.0 million refundable milestone plus interest or a reduction in non-U.S. royalties. If no pre-approval study were required, AstraZeneca owed a further $35.0 million milestone. Potential launch milestones and the DEA scheduling decision were also important to timing and cash receipts.
- The $70.0 million AstraZeneca payment remained recorded as a liability pending the relevant conditions. Nektar reported potential additional MOVANTIK development and launch-related payments, subject to regulatory and commercial outcomes.
- Other key programs included etirinotecan pegol, in the Phase 3 BEACON study; Bayer’s Phase 3 Amikacin Inhale program; Baxter’s Phase 3 BAX 855 program; and NKTR-181, for which the Phase 2 study missed its primary endpoint. Nektar said it was evaluating Phase 3 design and expected to start a study in early 2015.
- The company expected continuing losses and negative operating cash flow and had no credit facility or other committed capital. Funding needs depend on clinical and regulatory outcomes, collaboration receipts and access to financing; insufficient capital could require program reductions or dilutive financing.
- Risks include clinical and regulatory failure or delay, reliance on collaboration partners, variable collaboration revenue, manufacturing and single-source supply exposure, litigation and indemnification obligations, and restrictive covenants on the senior notes. A $25.0 million cash reserve was required under the notes through July 1, 2015.
- Unusual items and contingencies include the $70.0 million refundable milestone liability, the non-cash royalty-sale accounting and its estimated 17% effective interest rate, and a $12.0 million future-installment settlement with SUNY. The filing also describes indemnification obligations whose maximum potential amount could not be reasonably estimated; no liability was recorded for these obligations.
Investor verification points
- Check the FDA decision and any cardiovascular-study requirement for MOVANTIK, AstraZeneca’s response, the status of the $70.0 million liability, and any milestone or repayment consequences.
- Track unrestricted liquidity, operating cash burn, milestone receipts and financing needs against management’s 12-month estimate; distinguish the $25.0 million restricted reserve from available funds.
- Verify clinical progress and outcomes for BEACON, Amikacin Inhale, BAX 855 and the planned NKTR-181 Phase 3 trial.
- Assess the durability of partner-driven revenue, manufacturing demand and product margins, and review material litigation, indemnification and debt-covenant developments.