Nektar Therapeutics — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results. Nektar is a clinical-stage biopharmaceutical company whose revenue is primarily generated through collaboration agreements, product supply and royalties.
Key financial results
Amounts in millions, except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $132.9 | $60.9 | $181.2 | $117.8 |
| Operating income (loss) | $80.3 | $(6.5) | $21.0 | $(84.2) |
| Net income (loss) | $70.6 | $(16.5) | $(8.2) | $(114.4) |
| Diluted earnings (loss) per share | $0.53 | $(0.14) | $(0.07) | $(0.99) |
| Operating cash flow | Not provided separately | Not provided separately | $(117.4) | $(92.2) |
- Revenue mix: Q3 license, collaboration and other revenue was $120.6 million, including $105.0 million attributed to AstraZeneca. Product sales and royalty revenue was $6.2 million; non-cash royalties associated with the sale of future royalties were $6.1 million.
- Margins and expenses: Product gross margin was negative 49% in Q3 and negative 24% for the nine months, versus 14% and 22% in the comparable 2013 periods. R&D expense fell 22% in Q3 and 23% for the nine months; G&A expense fell 14% and 7%, respectively.
- Cash and liquidity: Cash, cash equivalents and short-term investments totaled $236.6 million at September 30; an additional $25.0 million was restricted, bringing cash and investments to $261.6 million. The restricted amount is subject to the notes’ reserve requirements. Management estimated at least 12 months of working capital.
- Debt and liabilities: Nektar reported $158.3 million of indebtedness, including $125.0 million of 12% senior secured notes due July 2017. The $120.5 million liability from the sale of future royalties is excluded from that indebtedness figure and, according to the filing, will not be settled in cash. Total liabilities were $429.7 million; stockholders’ equity was $47.2 million.
- Other cash flows and financing: The company raised approximately $117.2 million net of underwriting discounts in a January 2014 share offering. Cash and cash equivalents ended the nine-month period at $32.0 million. Investing cash flow was $(12.8) million and financing cash flow was $123.1 million.
Material changes and unusual items
- Revenue rose 118% year over year in Q3 and 54% for the nine-month period, principally reflecting collaboration milestones. Product sales and royalty revenue declined 59% in Q3 and 52% for the nine months, mainly because of lower partner demand.
- FDA approval of MOVANTIK in September triggered a $35.0 million non-refundable AstraZeneca milestone and extinguished the refund obligation on a previously received $70.0 million payment. Nektar recognized both amounts as revenue in Q3; the $70.0 million had previously been recorded as a liability. The $35.0 million was received in October.
- Nektar recognized $8.0 million of Baxter milestones after positive top-line Phase 3 results for BAX 855. It also recognized $9.0 million of manufacturing technology-transfer milestones in the first half of 2014.
- Despite Q3 net income, Nektar reported a net loss for the first nine months. The quarter’s result was substantially affected by the milestone and liability-release revenue noted above. For the nine months, operating cash use increased to $117.4 million from $92.2 million.
- Accounts receivable increased to $46.1 million from $2.2 million at year-end, including $35.0 million due from AstraZeneca and $8.0 million due from Baxter. This contributed to the operating cash outflow.
- Common shares outstanding increased from 116.5 million at December 31, 2013 to 128.2 million at September 30, 2014, reflecting the public offering and equity compensation issuances.
Outlook, management commentary and risks
- Management expected full-year 2014 product sales and royalty revenue to be substantially below 2013, license and collaboration revenue to be higher, and product gross margin to be negative. R&D expense was expected to decrease significantly; G&A and interest expense were expected to be broadly consistent with 2013.
- At the filing date, Nektar expected the DEA decontrol process for MOVANTIK to be completed in Q1 2015, although no completion timetable was assured. The first U.S. commercial sale would trigger a $100 million milestone; a first commercial sale in a major EU country could trigger a $40 million milestone. European Commission approval was expected in December 2014 but remained pending.
- The Phase 3 BEACON study of etirinotecan pegol was expected to require substantial investment through 2015. Nektar expected to begin a Phase 3 study of NKTR-181 in early 2015, subject to finalizing the design with the FDA; its Phase 2 study missed the primary endpoint. Baxter planned to file a BLA for BAX 855 before year-end 2014.
- Management said existing cash and investments were expected to cover anticipated needs for at least 12 months, but also noted substantial ongoing development costs, no credit facility or other committed capital, and no expected near-term transaction with a substantial upfront payment. Failure to obtain milestones, new collaborations or financing could require reduced R&D investment or dilutive financing.
- Key risks include clinical and regulatory failure or delay, dependence on collaboration partners and milestone timing, manufacturing and single-source supply constraints, intellectual-property disputes and indemnification exposure, and debt covenants. The notes require a $25.0 million segregated reserve through July 1, 2015 and impose subsequent minimum unrestricted-cash conditions. Litigation outcomes and potential indemnification payments may be material, although the filing said related indemnification liabilities had not been recorded.
- The filing states that disclosure controls were effective as of quarter-end and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when MOVANTIK/MOVENTIG receives required regulatory decisions and commercial launches occur, triggering the potential $100 million U.S. and $40 million EU milestones.
- Collection timing for the $43 million of AstraZeneca and Baxter milestone receivables and the resulting effect on cash flow.
- Progress, design, cost and outcomes of the BEACON, NKTR-181 and Amikacin Inhale programs, plus BAX 855’s regulatory progress.
- Cash runway under ongoing operating cash use, the restricted-cash and note-covenant requirements, and availability and terms of any future financing.
- Whether lower partner product demand, negative product margins, collaboration changes, litigation or supply disruptions materially affect revenue and liquidity.