Nektar Therapeutics — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Nektar is a research-based biopharmaceutical company developing drug candidates in oncology, autoimmune disease and chronic pain. The company reported substantial operating losses and said it expected continued losses and negative operating cash flow.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $38.0 million | $24.7 million | Up 54% |
| Operating expenses | $124.8 million | $79.2 million | Up 58% |
| Operating loss | $86.7 million | $54.4 million | Loss widened |
| Net loss | $95.8 million | $63.9 million | Loss widened |
| Net loss per share | $0.60 | $0.42 | Loss per share increased |
| Cash used in operating activities | $52.5 million | $34.6 million | Cash use increased |
Revenue growth reflected higher product sales and royalties, plus $10.0 million of milestone revenue following EU marketing authorization for ADYNOVI. Research and development expense rose 63% to $99.4 million, primarily due to development activity for NKTR-214, NKTR-181 and NKTR-262, preclinical work on NKTR-255, and higher personnel and stock-based compensation. General and administrative expense increased 56% to $18.7 million. Stock-based compensation was $19.9 million, versus $8.2 million.
Product sales were $6.3 million; product gross margin remained negative at 6%, improving from negative 29% a year earlier. Management expected full-year 2018 product sales and product gross margin to decline versus 2017, with gross margin potentially negative, partly because of the termination of the Ophthotech collaboration in October 2017. Royalty revenue was $11.1 million, up 53%; management expected royalties to increase for full-year 2018 on continued partnered-product sales and ADYNOVI’s EU approval. Non-cash royalty revenue from previously sold CIMZIA and MIRCERA royalties was $6.9 million.
At March 31, cash and investments in marketable securities totaled $333.8 million, including $34.8 million of cash and cash equivalents. Total current assets were $336.0 million and current liabilities $80.7 million. Senior secured notes had $250.0 million principal outstanding, due October 2020, bearing 7.75% interest; the balance-sheet carrying value was $245.6 million. The company also reported a $92.8 million liability related to its sale of future royalties. Its notes require at least $60.0 million of cash and marketable investments. Management estimated existing resources would fund current plans for at least 12 months.
Material changes and notable items
- BMS collaboration and share purchase, subsequent to quarter-end: The agreements became effective April 3, 2018, so their proceeds were not included in March 31 balances. BMS paid a $1.0 billion upfront collaboration payment and bought 8,284,600 shares for $850.0 million, or $102.60 per share. Nektar and BMS will jointly develop and commercialize NKTR-214; Nektar is to share 65% of global commercialization profits and losses. Nektar may receive up to $1.43 billion in development and regulatory milestones and up to $350.0 million in sales milestones.
- Revenue accounting: Nektar adopted ASC 606 on January 1, 2018 using the modified retrospective method. The $12.7 million cumulative transition adjustment reduced opening accumulated deficit. Q1 revenue under the new standard was $38.0 million; the company stated it would have been $37.9 million under the prior standard. ASC 606 also changed the timing of royalty recognition, including estimated royalties accrued based on partner sales.
- Other collaboration revenue: License, collaboration and other revenue increased to $13.7 million, including the $10.0 million ADYNOVI milestone and $2.4 million related to Lilly’s NKTR-358 agreement.
- Royalty-sale financing expense: Non-cash interest expense on the royalty-sale liability rose to $5.0 million. Following higher forecast CIMZIA sales, Nektar increased its estimated effective annual interest rate for the arrangement to 17.6%, with a prospective rate of approximately 21%.
Outlook, commentary and risks
Management expected full-year 2018 research and development and general and administrative expenses to increase versus 2017, and operating cash use excluding upfront, milestone and other contingent receipts to rise, primarily because of increased development spending. The company had no credit facility or other committed source of capital. Its plans and funding needs remain sensitive to clinical and regulatory outcomes, collaboration receipts, partnered-product sales, expenses and financing conditions.
Key development plans included broad NKTR-214 combination trials with BMS, planned across more than 20 indications and nine tumor types; a Phase 1 multiple-ascending-dose study of NKTR-358 in lupus patients initiated in May 2018; and an intended second-quarter 2018 NDA filing for NKTR-181. Nektar also reported that enrollment in the initial NKTR-262 Phase 1/2 study began in April 2018. These are forward-looking plans, not reported results.
Principal risks include clinical or regulatory failure—particularly for lead candidate NKTR-214—trial delays, manufacturing and single-source supplier constraints, dependence on collaboration partners for development and commercialization, volatile and milestone-dependent revenue, and the possibility of continuing losses. The filing also describes patent and product-liability exposure. Among specified proceedings, Bayer was pursuing claims relating to PEGylated Factor VIII patents and alleging that ADYNOVATE infringes a Bayer patent; Nektar said it was vigorously defending its position. The filing states litigation outcomes are unpredictable and could adversely affect results, cash flows or liquidity.
Nektar reported that disclosure controls and procedures were effective as of March 31, 2018 and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the BMS upfront payment and equity proceeds were received as described and how the collaboration’s cost-sharing, milestones and commercialization economics develop.
- Subsequent NKTR-214 clinical data, trial progress and regulatory developments, including the risks to anticipated milestone payments.
- Whether management’s 2018 revenue, expense, margin and cash-use expectations were borne out, and the effect of higher R&D investment on liquidity.
- Partner sales and royalty trends for MOVANTIK/MOVENTIG and ADYNOVATE/ADYNOVI, along with the impact of the MOVANTIK post-marketing study royalty reduction.
- Developments in the Bayer litigation and any other legal, manufacturing or supply contingencies that could materially affect Nektar.