Nektar Therapeutics — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are noted separately below. Nektar is a research-based biopharmaceutical company developing medicines in oncology, immunology and chronic pain, with revenue primarily from collaborations, royalties and product supply.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $1,193.3 million | $307.7 million |
| Operating income (loss) | $687.9 million | ($59.6 million) |
| Net income (loss) | $681.3 million | ($96.7 million) |
| Research and development expense | $399.5 million | $268.5 million |
| Operating cash flow | $718.2 million | ($80.4 million) |
| Cash, cash equivalents and investments | $1,918.2 million | $353.2 million |
| Working capital | $1,355.7 million | $270.7 million |
- FY2018 revenue included $1,059.8 million recognized from the BMS NKTR-214 collaboration. The reported profit and operating cash flow therefore reflect a large, nonrecurring transaction; management reported $332.1 million of net operating cash uses before the specified BMS and Baxalta receipts and note interest payments.
- Product sales were $20.8 million, down 36%; royalty revenue was $42.0 million, up 25%. License, collaboration and other revenue rose to $1,097.3 million, principally due to BMS.
- Product gross margin was negative 18%, versus positive 7% in 2017, reflecting lower sales and an unfavorable product mix. R&D expense increased 49%, driven by expanded development programs; general and administrative expense rose 56% to $81.4 million.
- Cash and investments included $1.8 billion of available-for-sale investments, with an average maturity of about eight months. The company estimated available working capital would fund its current plan through at least March 1, 2020, and stated liquidity was sufficient for at least the next 12 months.
- Debt included $250 million principal of 7.75% senior secured notes due October 2020; the balance-sheet carrying value, net, was $247.0 million. The company also reported an $82.9 million net liability related to the 2012 sale of future royalty rights.
- For Q4 2018, revenue was $39.8 million, operating loss was $100.3 million and net loss was $98.2 million. The filing cautions that quarter-to-quarter results may not indicate future performance.
Material changes and business developments
- In April 2018, BMS paid Nektar $1.0 billion upfront and purchased $850 million of common stock. Nektar retained a 65% profit interest in NKTR-214 and worldwide sales recording rights; BMS generally bears a majority of combination-development costs. Potential development and regulatory milestones total about $1.43 billion, with up to $350 million in sales milestones.
- BMS represented 89% of FY2018 revenue, underscoring significant partner and transaction concentration. The BMS upfront payment was recognized largely in 2018, making reported revenue and earnings a weak baseline for recurring performance.
- NKTR-214 was in multiple clinical studies, including registration-enabling trials with BMS. Nektar’s annual funding obligation under the collaboration development plan is capped at $125 million. NKTR-262 was in Phase 1; NKTR-358 was in Phase 1 with Lilly; and NKTR-255 remained preclinical.
- NKTR-181’s NDA was accepted for review. The FDA’s target action date was revised to August 29, 2019. If approved, Nektar was evaluating commercialization through a subsidiary and with commercial or capital partners.
- ONZEALD’s Phase 3 BEACON study did not meet its primary endpoint or key secondary endpoints; the EMA issued a negative opinion on its conditional marketing application. The ATTAIN Phase 3 study continued.
Outlook, risks and unusual items
- Management expected 2019 license, collaboration and other revenue to decline significantly because FY2018 included the BMS transaction. It expected royalty revenue to increase marginally and product sales to be broadly consistent with 2018, subject to possible NKTR-181 approval and launch.
- Management expected R&D expense to increase significantly in 2019, particularly from NKTR-214 development, and expected higher general and administrative expense and capital spending, including costs for new facilities. It anticipated negative product gross margin absent a change in product mix or NKTR-181 sales.
- The business remains dependent on uncertain clinical and regulatory outcomes, especially NKTR-214, and on partner decisions, commercialization, royalty-bearing product sales and milestone achievement. Nektar warned that it could continue to incur losses and negative operating cash flow excluding collaboration payments.
- Risks include clinical-trial failure or delay, competition, manufacturing capacity and single-source supply constraints, reimbursement and pricing pressures, intellectual-property disputes, and the need to build commercial capabilities. Senior notes impose restrictive covenants and a $60 million minimum cash-and-investments requirement.
- A securities class action filed in October 2018 and shareholder derivative complaints filed in February 2019 alleged misrepresentations concerning NKTR-214 efficacy and safety. The matters were at an early stage; Nektar had recorded no liability and could not estimate a loss range. The filing also describes ongoing patent disputes involving Bayer and challenges to MOVANTIK patents by generic applicants.
- FY2018 net income included the BMS-related revenue; Nektar also adopted ASC 606, which affected revenue timing. The 2018 financial statements received an unqualified audit opinion, and the auditor and management concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Progress, safety and efficacy results in NKTR-214 trials, regulatory milestones, and the scale and timing of Nektar’s development-cost commitments under the BMS agreement.
- NKTR-181’s FDA decision, final label and scheduling, reimbursement prospects, and the cost and feasibility of establishing a commercial route.
- Actual cash burn and runway as R&D and facility spending rise, alongside the October 2020 maturity and covenants on the secured notes.
- Recurring royalty trends and partner performance, particularly given BMS’s 89% share of FY2018 revenue and reliance on a small number of collaborators.
- Developments and potential financial effects of the NKTR-214-related securities litigation, patent proceedings, and generic challenges to MOVANTIK.