NEKTAR THERAPEUTICS quarterly report, Q3 FY2013

Nektar Therapeutics — Q3 2013 Form 10-Q

Period: Quarter and nine months ended September 30, 2013. Unaudited results; comparisons are with the corresponding 2012 periods. Nektar is a clinical-stage biopharmaceutical company whose revenue depends on product supply, royalties, and collaboration and milestone payments.

Financial results

Metric	Q3 2013	Q3 2012	Nine months 2013	Nine months 2012
Revenue	$60.9 million	$18.4 million	$117.8 million	$60.0 million
Operating loss	$6.5 million	$32.9 million	$84.2 million	$97.8 million
Net loss	$16.5 million	$43.5 million	$114.4 million	$118.9 million
Net loss per share	$0.14	$0.38	$0.99	$1.04
Operating cash used	Not separately provided	Not separately provided	$92.2 million	$82.4 million

• Q3 revenue growth reflected a $25 million AstraZeneca milestone after the EMA accepted naloxegol’s application for review, as well as $6.7 million of deferred revenue recognized following termination of the Affymax agreement. Nine-month revenue also included a $10 million Bayer milestone for starting an Amikacin Inhale Phase 3 trial.
• Product sales rose 76% in Q3 and 47% year to date, largely due to the timing of partner orders. Cash royalty revenue fell 74% year to date, primarily because Nektar sold its CIMZIA and MIRCERA royalty rights; related royalties continue to be reported as non-cash revenue.
• Product gross margin was 12% in Q3 versus 13% a year earlier, and 20% for the first nine months versus 7%. Management attributed the year-to-date improvement primarily to product mix and expects full-year 2013 product gross margin to be consistent with 2012.
• Research and development expense increased 29% in Q3 and 39% year to date, mainly from the etirinotecan pegol BEACON study and NKTR-181 Phase 2 study. General and administrative expense was broadly unchanged.

Financial position and liquidity

• At September 30, cash and cash equivalents were $65.4 million, short-term investments $118.1 million, and restricted cash $25.0 million; total cash and investments were $208.6 million. The restricted funds support the senior secured notes.
• Reported indebtedness was approximately $147.6 million, including $125.0 million of 12% senior secured notes due July 2017; this excludes the royalty-sale liability. The balance sheet also reported a $125.2 million long-term liability related to the sale of future royalties. Management said this obligation generally is not settled in cash, but expected a $7.0 million cash payment in early 2014 because a MIRCERA sales threshold was unlikely to be met.
• Current assets were $207.9 million and current liabilities $80.9 million. Stockholders’ equity was a deficit of $50.3 million. Operating cash use increased year over year despite lower net loss; cash used for interest payments on senior notes was $15.2 million during the first nine months.
• Management said available cash and investments should fund its current plans for at least 12 months. It had no credit facility or other committed capital and did not anticipate substantial upfront payments from new transactions in the near term. If milestone receipts or new collaborations do not materialize, financing may be needed, potentially through dilutive equity or convertible securities.

Outlook, developments and risks

• Management expected 2013 product sales, non-cash royalty revenue, and license, collaboration and other revenue to exceed 2012 levels; cash royalty revenue to decline; R&D expense to significantly exceed 2012; and G&A expense to remain broadly consistent. It also expected operating cash use, excluding upfront and milestone receipts, to increase, particularly because of BEACON spending.
• AstraZeneca had filed a U.S. naloxegol NDA, but FDA acceptance for review was still pending. Acceptance could trigger a $70 million milestone. Under the amended agreement, if a cardiovascular safety study is required, AstraZeneca may terminate all or U.S. rights, potentially requiring repayment or royalty reductions; a post-approval study could also reduce the U.S. royalty rate.
• Naloxegol’s EMA application was accepted for review and generated a $25 million milestone recognized in Q3. Nektar remained eligible for further regulatory and commercial milestones, subject to review, approval, and launch outcomes.
• Etirinotecan pegol BEACON Phase 3 enrollment was completed at approximately 840 patients; management expected substantial investment over the next two years. The FDA advised that a Phase 3 study would be required to support an ovarian-cancer NDA, though a positive interim result might support an accelerated filing.
• NKTR-181’s Phase 2 study missed its primary endpoint because the placebo group did not show the expected increase in pain scores. Nektar was evaluating Phase 3 design and expected to start a Phase 3 trial in mid-2014. Preliminary findings remain subject to verification.
• Affymax and Takeda had recalled OMONTYS after reports of serious hypersensitivity reactions, including anaphylaxis; Affymax terminated its Nektar agreement in July 2013. Nektar recognized the remaining $6.7 million of deferred revenue upon termination.
• Nektar accrued $3.0 million, including interest, in the SUNY licensing dispute after a partial summary judgment for SUNY. Trial was scheduled for Q1 2014; the company disputed the claims, and said it could not reasonably estimate any additional possible loss.
• Key risks include clinical and regulatory failure or delay, dependence on collaboration partners and milestone timing, continued losses and cash burn, potential financing dilution, single-source supply exposure, manufacturing and product-liability risks, and restrictive debt covenants. Disclosure controls were assessed as effective; no material change in internal control was reported.

Important facts for investors to verify

• Whether the FDA accepted the naloxegol NDA for review, its cardiovascular-safety requirements, and the resulting milestone, repayment, or royalty consequences.
• Cash burn, available unrestricted liquidity, the expected $7.0 million MIRCERA-related payment, and funding needs as clinical spending rises.
• BEACON and other late-stage trial progress, including final data and regulatory plans for NKTR-181 and etirinotecan pegol.
• The outcome and potential additional exposure in the SUNY litigation, and the status of OMONTYS-related commercial and contractual obligations.
• Partner order patterns, future collaboration and milestone receipts, and the continuing effect of the sold CIMZIA and MIRCERA royalty rights on reported revenue and interest expense.