NEKTAR THERAPEUTICS quarterly report, Q2 FY2022

Nektar Therapeutics — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022. Nektar is a research-based biopharmaceutical company whose revenue is derived from collaboration agreements, product supply and royalties. Unless otherwise stated, amounts below are in U.S. dollars.

Financial results and liquidity

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Total revenue	$21.6 million	$28.3 million	$46.4 million	$52.0 million
Operating loss	$152.8 million	$110.2 million	$269.4 million	$219.6 million
Net loss	$159.1 million	$125.5 million	$249.5 million	$248.5 million
Net loss per share	$0.85	$0.69	$1.34	$1.37
Operating cash used	—	$163.4 million	$160.0 million

Q2 revenue comprised $5.3 million of product sales, $16.3 million of non-cash royalty revenue from previously sold royalty rights, and $9,000 of license, collaboration and other revenue. Six-month revenue included $11.0 million, $33.8 million and $1.6 million, respectively.
Q2 operating expenses were $174.4 million, including $106.0 million of restructuring, impairment and terminated-program costs. Research and development expense was $42.7 million and general and administrative expense was $20.5 million.
At June 30, cash and investments in marketable securities totaled $628.2 million, down from $798.8 million at December 31, 2021. Cash and cash equivalents were $77.5 million. Current assets were $665.5 million and current liabilities were $105.0 million.
Six-month investing cash flow was positive $214.4 million, largely reflecting investment maturities net of purchases. Financing cash flow was positive $1.4 million; cash and cash equivalents increased $52.3 million during the period.
Total liabilities were $403.3 million. The balance sheet included $176.8 million of net liabilities related to sales of future royalties and $139.5 million of operating lease liabilities. These royalty-sale obligations are accounted for as imputed debt; the filing does not report a conventional borrowing facility. Nektar said it had no credit facility or other committed capital source.
Product gross margin was 4% in Q2 and 5% for the first six months, versus 2% and negative 6% in the comparable 2021 periods. Management expects product gross profit to be negative for full-year 2022 due to a fixed-price manufacturing arrangement.

Material changes and management outlook

Bempegaldesleukin (NKTR-214) failed to meet primary endpoints in its registrational trials. Nektar and Bristol Myers Squibb discontinued the Opdivo combination program; Nektar also discontinued its Keytruda combination studies and NKTR-262 studies. The SFJ Pharmaceuticals head-and-neck study was discontinued, eliminating potential success payments under that agreement.
The April restructuring prioritizes NKTR-255, NKTR-358 and selected research programs. Nektar planned to reduce its workforce by approximately 70%, from about 735 to about 225 employees, close its India research facility and consolidate San Francisco office and laboratory space.
The company recorded $27.8 million of severance and benefits, $57.3 million of impairment charges and $20.4 million of bempegaldesleukin wind-down costs in Q2. It expects further wind-down costs, with a significant portion expected in 2022; ultimate costs depend in part on trial wind-down timing and potential subleases.
Management estimated available working capital would fund current business plans for at least 12 months from the filing date, including program wind-down payments. It expects operating cash use to decrease in 2022 versus 2021 because of restructuring, but continued investment in NKTR-255 and NKTR-358 will require substantial funding.
Management expected full-year 2022 product sales to be marginally below 2021 and license, collaboration and other revenue to increase, reflecting $1.5 million recognized from a license agreement in the first half. It expects research and development expense for NKTR-255 and NKTR-358 to increase, while reported total R&D expense was expected to remain lower year over year as bempegaldesleukin costs were wound down and reclassified.
For NKTR-358, Lilly discontinued development in ulcerative colitis following an interim Phase 2 analysis; Lilly continued other studies and planned a Phase 2 atopic dermatitis study. Lilly controls important development activities. Nektar’s Phase 1 NKTR-255 study enrolled more slowly than anticipated, partly due to COVID-19 challenges.

Risks, contingencies and unusual items

Clinical, regulatory and commercial outcomes for NKTR-255 and NKTR-358 remain uncertain. Nektar depends on partners, particularly Lilly for NKTR-358, and on collaborations for revenue; milestones and future royalties are uncertain.
Management cited risks from continued operating losses and cash use, possible need for additional financing, clinical-trial delays, competition, manufacturing and single-source supply dependencies, and potential COVID-19-related or broader supply-chain disruption. Nektar reported no significant COVID-19 supply impact to date.
A $33.4 million six-month gain from remeasuring the SFJ development derivative liability reduced reported loss; the liability was reduced to zero after the program was discontinued. The Q2 restructuring and impairment charge was a major unusual expense.
The Mulquin securities class action dismissal was affirmed by the Ninth Circuit on May 19, 2022. A related shareholder derivative action remained pending; an amended complaint was received July 29, 2022. Nektar recorded no liability and said potential losses could not be reasonably estimated. The filing also describes ongoing Aether litigation relating to MOVANTIK patents and other potential litigation and indemnification exposures.
Nektar stated its 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

Whether NKTR-255 and NKTR-358 trials progress on schedule and produce results sufficient to support further development, partnership payments or eventual approval.
Actual cash burn, remaining restructuring and program wind-down costs, and whether the stated 12-month funding estimate remains adequate.
Whether projected savings are achieved, and whether San Francisco space is subleased and the India facility is sold on the assumptions used in impairment estimates.
Trends in collaboration-partner product demand and the royalties underlying non-cash revenue, including the impact of royalty-sale obligations and their imputed interest costs.
Developments in pending litigation and any resulting costs or liabilities; the filing does not provide a clear estimate of potential losses for the derivative action or other identified contingencies.
Potential dilution: the company had 187.4 million common shares outstanding at June 30, 2022 and an unused shelf registration permitting up to $300 million of securities offerings.