Nektar Therapeutics — Q2 2019 Form 10-Q
Business context and reporting period. Nektar is a research-based biopharmaceutical company developing drug candidates in oncology, immunology and pain. This unaudited filing covers the quarter and six months ended June 30, 2019; amounts below are in U.S. dollars unless stated otherwise.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $23.3 million | $1,087.7 million | $51.5 million | $1,125.7 million |
| Operating income (loss) | ($111.0 million) | $973.6 million | ($231.7 million) | $886.9 million |
| Net income (loss) | ($109.9 million) | $971.5 million | ($228.4 million) | $875.7 million |
| Research and development expense | $106.7 million | $88.3 million | $225.1 million | $187.8 million |
| General and administrative expense | $22.6 million | $20.3 million | $47.6 million | $38.9 million |
| Operating cash flow | Not separately presented | Not separately presented | ($134.8 million) | $907.2 million |
Revenue in 2018 included $1,059.8 million recognized from the BMS collaboration license; the 2019 comparison therefore reflects an unusually large prior-year item, not a like-for-like recurring revenue decline. Q2 2019 product sales were $4.3 million and royalty revenue was $7.3 million; non-cash royalties were $9.1 million. For the six-month period, product sales were $8.7 million, royalty revenue $18.7 million and non-cash royalties $17.3 million.
Product gross margin was negative 15% in Q2 2019, versus positive 6% a year earlier; for the first half it was negative 20%, versus less than negative 1%. Management attributed the deterioration to lower sales, unfavorable product mix and a fixed manufacturing cost base. It expects negative product gross margin for 2019, absent improvement from potential NKTR-181 commercial sales.
Financial position and liquidity
At June 30, 2019, cash and investments in marketable securities totaled $1.792 billion, down from $1.918 billion at December 31, 2018. Cash and cash equivalents were $85.4 million; most liquidity was held in short- and long-term investments. Current assets were $1.597 billion and current liabilities $113.4 million. Stockholders’ equity was $1.557 billion.
Senior secured notes had $250.0 million principal outstanding, due October 2020, bearing 7.75% interest; the balance-sheet carrying amount was $247.8 million. The notes require at least $60 million of cash and investments. The company also reported a $77.8 million net liability from the sale of future royalties and $98.6 million of operating lease liabilities following adoption of the new lease standard.
First-half operating cash use was $134.8 million, compared with $907.2 million provided in 2018, which included the BMS collaboration payment. Investing activities provided $13.2 million, mainly reflecting investment maturities exceeding purchases; financing activities provided $12.2 million, largely from employee equity plans. Cash and cash equivalents declined by $109.5 million during the half.
Material changes and management outlook
- R&D expense rose 21% in Q2 and 20% for the first half, primarily from development of NKTR-214, NKTR-358 and NKTR-262, preclinical work on NKTR-255, and personnel and manufacturing costs. BMS reimbursements reduced R&D expense by $24.6 million in Q2 and $53.4 million in the first half.
- Management expects R&D expense and operating cash use, excluding upfront and milestone receipts, to increase significantly in 2019. G&A expense is also expected to increase, including costs to prepare for possible NKTR-181 commercialization.
- Management expects 2019 product sales, royalty revenue and non-cash royalty revenue to be broadly consistent with 2018, while license, collaboration and other revenue is expected to fall significantly because the BMS license revenue was recognized in 2018.
- The company estimates existing working capital can fund current plans for at least 12 months. It expects 2019 capital expenditures to rise significantly, mainly for facility improvements. Future liquidity also depends on clinical and regulatory outcomes, milestones, royalties, collaboration activity and spending.
- NKTR-214 development is a major investment and value driver. The company reported registration-enabling studies underway in several tumor types and said in August 2019 that the FDA granted Breakthrough Therapy designation for NKTR-214 plus Opdivo in untreated unresectable or metastatic melanoma. BMS milestone payments remain contingent on development and regulatory success.
- For NKTR-181, the FDA continued its NDA review but postponed the advisory committee meeting; the agency said it might not meet the August 29, 2019 target action date. Commercial launch plans and infrastructure remained uncertain.
Risks, contingencies and unusual items
- The company expects substantial losses and negative operating cash flow as it invests in drug development. Clinical, regulatory, manufacturing, reimbursement and commercialization risks could delay or prevent approvals or reduce future revenues and milestone payments.
- Two shareholder matters were pending: a putative securities class action and derivative complaints alleging misrepresentations about NKTR-214 efficacy and safety. The matters were in early stages; Nektar said it could not reasonably estimate potential losses and recorded no accrual.
- Other disclosed legal matters include patent disputes involving Bayer and litigation with generic-drug applicants challenging a MOVANTIK patent. The filing describes possible material effects from unfavorable outcomes but provides no clear estimate of exposure for these matters.
- Royalties from CIMZIA and MIRCERA are remitted to the purchaser under a prior royalty sale but continue to be reported as non-cash revenue, with related non-cash interest expense. The prospective imputed interest rate was 29%, and the expense could change with royalty forecasts.
- Operating lease assets and liabilities were recognized upon adoption of ASC 842 on January 1, 2019; prior-year comparative amounts were not restated.
- Key exposures include reliance on collaboration partners and contract manufacturers, including limited or single-source suppliers; competition and clinical-trial uncertainty; and debt covenants, including the minimum-liquidity requirement.
Investor facts to verify
- Progress and trial outcomes for NKTR-214, including the conditions and timing for BMS milestones and the company’s share of development costs.
- FDA action on the NKTR-181 NDA, any revised timing, and the feasibility and funding of a commercial launch.
- Cash and investment balances, operating cash burn, and the company’s ability to refinance or repay the $250 million notes due in October 2020.
- Actual 2019 R&D spending, capital expenditures, product margins and collaboration-related receipts versus management’s outlook.
- Developments and potential financial consequences in the securities, derivative and patent litigation matters.