Nektar Therapeutics — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. Unaudited consolidated results. Nektar is a biopharmaceutical company developing drug candidates using polymer-conjugate technologies and relying substantially on licensing, collaborations, manufacturing, milestones and royalties.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $108.8 million | $19.8 million; up $89.0 million |
| Operating income (loss) | $43.0 million | ($36.4 million) |
| Net income (loss) | $33.8 million; $0.26 basic and $0.25 diluted per share | ($46.2 million); ($0.37) per share |
| Research and development expense | $47.0 million | $38.3 million; up 23% |
| Operating cash flow | $63.3 million provided | $62.3 million used |
| Cash and investments | $325.8 million, including $25.0 million restricted | $262.8 million at December 31, 2014 |
| Debt and lease obligations | $134.8 million, including $125.0 million senior secured notes and $9.8 million capital leases | Notes mature July 2017 and bear 12% interest |
Revenue included $8.1 million of product sales and royalty revenue, $4.0 million of non-cash royalties related to previously sold CIMZIA and MIRCERA royalties, and $96.7 million of license, collaboration and other revenue. The latter included the AstraZeneca U.S. MOVANTIK launch milestone, recorded net of a $10.0 million reduction for an advertising-funding obligation. Product gross loss improved to $0.3 million from $2.0 million, but product gross margin remained negative at 4% versus 34% negative. Interest expense was $4.2 million, with a further $5.1 million of non-cash interest on the future-royalty liability.
At quarter-end, current assets were $347.3 million and current liabilities $75.4 million. The company stated that it had at least 12 months of working capital for its current plans. The $25.0 million restricted cash reserve was required under the notes through July 1, 2015; subsequent cash covenant requirements also apply.
Material changes and operating developments
- Revenue rose sharply primarily because AstraZeneca launched MOVANTIK in the U.S. on March 31, triggering a $100.0 million non-refundable milestone. Nektar reported $90.0 million from AstraZeneca in license and collaboration revenue after recording its $10.0 million obligation as a revenue reduction.
- BEACON Phase 3 testing of NKTR-102 in advanced metastatic breast cancer did not meet its primary overall-survival endpoint statistically: median survival was 12.4 months versus 10.3 months for control, hazard ratio 0.87 and p=0.08. Certain prespecified subgroups showed an overall-survival benefit; further analysis and discussions with U.S. and EU health authorities were planned.
- NKTR-181 Phase 3 development began, with the first patient enrolled in February 2015. Increased trial activity contributed to higher R&D expense.
- Cash and investments increased from year-end, largely reflecting the AstraZeneca milestone. Operating cash flow was also boosted by milestone receipts, so the quarter’s positive operating cash flow should not be assumed to represent recurring cash generation.
Outlook, risks and contingencies
- Management expected a net loss for full-year 2015 despite Q1 net income. It expected R&D expense to increase significantly, mainly due to NKTR-181 Phase 3 trials; G&A to increase slightly; and product sales and product gross margin to improve, subject to partner demand and product mix.
- Nektar expected royalties from MOVANTIK in 2015 and said AstraZeneca planned an EU launch of MOVENTIG in the second half of 2015. A $40.0 million milestone was contingent on that launch. Timing and commercial results remained uncertain.
- The company expected at least 12 months of liquidity but had no credit facility or other committed capital source. Future funding needs depend on clinical outcomes, partner performance, product sales, milestone timing and access to financing; additional equity or debt financing may be needed.
- Key risks include drug-development and regulatory failure, dependence on collaboration partners, uncertain commercialization and reimbursement, manufacturing and single-source supply constraints, intellectual-property disputes, and restrictive debt covenants. Nektar also warned of possible investment liquidity losses if securities had to be sold before maturity.
- The company reported no impairment after reviewing goodwill and long-lived assets following the BEACON result. It disclosed a lawsuit filed against Allergan and MAP over economic-sharing provisions, and a German patent proceeding in which Bayer sought co-ownership rights; Nektar said it was defending its position. General legal and partner-indemnification exposures may be material, but no related indemnification liability was recorded.
Important facts for investors to verify
- Whether MOVANTIK achieves sustained commercial sales and generates royalties, and whether MOVENTIG launches in the EU and triggers the potential $40.0 million milestone.
- Final BEACON analyses and the outcome of regulatory discussions regarding NKTR-102 after its primary endpoint miss.
- NKTR-181 Phase 3 progress, costs and results, and the resulting effect on cash consumption and full-year losses.
- Unrestricted liquidity, compliance with the senior-note cash covenants, and financing needs beyond the company’s stated 12-month horizon.
- Developments in the Allergan/MAP and Bayer disputes, as well as material changes in collaboration, supply or indemnification obligations.