Nektar Therapeutics — FY 2011 Form 10-K
Reporting period: Year ended December 31, 2011; filed February 29, 2012. Nektar is a clinical-stage biopharmaceutical company developing drug candidates using PEGylation and advanced polymer-conjugate technologies. Its revenue is generated through collaborations, royalties, product manufacturing and license arrangements; it has no marketed proprietary drug of its own.
Financial performance
Amounts below are in millions of dollars unless otherwise noted.
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $71.5 | $159.0 |
| Product sales | $24.9 | $27.4 |
| Royalty revenue | $10.3 | $7.3 |
| License, collaboration and other revenue | $36.3 | $124.4 |
| Research and development expense | $126.8 | $108.1 |
| Operating loss | $(123.9) | $(28.3) |
| Net loss | $(134.0) | $(37.9) |
| Net loss per share | $(1.19) | $(0.40) |
| Cash used in operating activities | $(113.7) | $(55.9) |
- Product gross margin improved to 12% from 6%; product gross profit was $3.0 million versus $1.7 million.
- At year-end, cash, cash equivalents and investments totaled $414.9 million; working capital was $1.2 million and total assets were $606.6 million.
- Indebtedness was reported as $239.9 million, including $215.0 million of 3.25% convertible subordinated notes due September 2012, $17.0 million of capital lease obligations and $7.9 million of other liabilities. The notes were classified as current at year-end.
- Cash and investments included $399.6 million of available-for-sale securities, with an average maturity of about ten months. Management said liquidity should cover anticipated needs for at least 12 months, while noting the 2012 note maturity and significant planned development spending.
Material changes and quarterly results
- FY 2011 revenue fell 55% from 2010, mainly because the $125.0 million AstraZeneca upfront license payment had been fully recognized by the end of 2010. 2011 royalty revenue rose 42%, while product sales declined 9%.
- Net loss widened substantially as R&D spending rose 17% to $126.8 million, reflecting expanded clinical programs and higher personnel and facility costs. Nektar reported an $18.7 million increase in R&D expense.
- FY 2011 included a $220.4 million gross public stock offering, with $224.3 million reported as net cash proceeds from common-stock issuance and employee plans. Shares outstanding rose to 114.5 million at year-end from 94.5 million.
- Fourth-quarter 2011 revenue was $15.8 million versus $45.3 million in Q4 2010; net loss was $37.5 million versus $22.6 million. Q4 2011 operating loss was $34.5 million.
- In 2011, Nektar adopted milestone-based revenue recognition prospectively. The change increased revenue and reduced net loss by approximately $3.0 million, or $0.03 per share, for the year.
Outlook, risks and unusual items
- Development outlook: Nektar planned to continue the NKTR-102 Phase 3 BEACON breast-cancer study, with estimated third-party and direct-material costs of $110–$120 million over the study’s life and anticipated completion around year-end 2014. It planned to begin Phase 2 testing of NKTR-181 and Phase 1 testing of NKTR-192 in 2012. The filing says R&D expense was expected to increase substantially over the next several years.
- Other forecasts: Management expected 2012 product sales to increase, license/collaboration revenue to be broadly consistent with 2011, product gross margin to decline, and interest expense to increase significantly. These are forward-looking expectations, not guarantees.
- Debt refinancing: After year-end, Nektar sold future CIMZIA and MIRCERA royalty rights for $124.0 million, incurring about $4.5 million in transaction costs. Proceeds were intended to fund more than half of the September 2012 note repayment. Nektar said it would pursue additional financing, including possible further royalty sales or borrowing; equity financing or spending reductions could be required if other funding was unavailable.
- Pipeline execution: NKTR-118 Phase 3 results, regulatory review and potential milestones are important to future funding prospects. The NKTR-102 BEACON trial is a substantial self-funded commitment. Amikacin Inhale Phase 3 preparation was significantly delayed by commercial-scale device design and manufacturing work; the company then expected the trial to start in the second half of 2012.
- Enrollment and regulatory uncertainty: A shortage of Doxil slowed enrollment in the expanded NKTR-102 ovarian-cancer Phase 2 study; about 94 of 110 planned patients were enrolled by February 2012. Interim data were subject to verification, and the filing cautioned that an accelerated NDA based on this study was unlikely.
- Concentration and operations: UCB and Roche accounted for 27% and 16% of FY 2011 revenue, respectively. Nektar also cited dependence on partners, clinical-trial outcomes, manufacturing and limited-source suppliers, regulatory approvals, competition, and continued access to capital as material risks.
- Legal matters: Nektar disputed a SUNY licensing-contract claim; it could not reasonably estimate a possible loss, recorded no liability, and reported a trial-ready date of September 2012. A separate 2011 settlement required a $2.7 million upfront payment and a contingent $3.0 million payment if a specified drug candidate receives FDA approval. The filing also lists $5.0 million of remaining payments, including interest, under an earlier University of Alabama in Huntsville settlement.
- Post-year-end manufacturing agreement: Roche agreed to a $5.0 million upfront payment and up to $22.0 million in manufacturing-readiness, validation and production milestones for MIRCERA materials; milestones were targeted through January 2013 and were not assured.
Important facts for investors to verify
- Progress, enrollment, cost and results of the NKTR-102 BEACON trial, and whether actual spending remains within the disclosed estimate.
- Whether the company repaid or refinanced the $215.0 million notes by their September 2012 maturity, and the terms and dilution of any financing.
- Actual cash burn and liquidity after the royalty sale, including the sale’s contingent payments and the accounting treatment that leaves royalty revenue recognized while remitting royalties to the buyer.
- Regulatory and clinical developments for NKTR-118, peginesatide and LEVADEX, as well as the status and timing of Amikacin Inhale Phase 3 preparation.
- Outcome of the SUNY litigation and any changes to the disclosed settlement obligations, partner concentration or material manufacturing commitments.
The independent auditor issued an unqualified opinion on the financial statements and on internal control over financial reporting. Nektar reported that its disclosure controls and internal controls were effective as of December 31, 2011.