Nektar Therapeutics — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited interim results; comparisons are with the corresponding 2017 periods. Nektar is a research-based biopharmaceutical company developing drug candidates in oncology, autoimmune disease and chronic pain.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $1,087.7m | $34.6m | $1,125.7m | $59.3m |
| Operating income (loss) | $973.6m | $(50.7)m | $886.9m | $(105.1)m |
| Net income (loss) | $971.5m | $(59.9)m | $875.7m | $(123.7)m |
| R&D expense | $88.3m | $60.3m | $187.8m | $121.3m |
| G&A expense | $20.3m | $16.0m | $38.9m | $28.0m |
| Operating cash flow | Not presented by quarter | $907.2m | $(93.1)m |
Q2 diluted earnings per share were $5.33, versus a loss of $0.39 per share in Q2 2017. The reported 2018 profit principally reflects recognition of $1,059.8m of BMS collaboration revenue from the NKTR-214 license; it should not be read as evidence of recurring operating profitability. Nektar says it expects to continue to incur substantial losses and negative operating cash flows apart from the BMS upfront payment.
For Q2, product sales were $5.9m, royalty revenue was $8.6m, and non-cash royalty revenue from previously sold CIMZIA and MIRCERA royalty rights was $9.0m. Product gross margin fell to 6% from 43%; for the first half it was below zero, versus 26% in 2017. Nektar attributes the decline to lower sales, unfavorable product mix and fixed manufacturing costs.
At June 30, cash and investments in marketable securities totaled $2,106.1m, including $911.1m of cash and cash equivalents. Current assets were $1,905.9m and current liabilities $96.9m. Total liabilities were $452.7m; stockholders’ equity was $1,860.4m. Senior secured notes had $250.0m principal outstanding, carried a 7.75% coupon and mature in October 2020; the balance sheet reports $246.1m net. The separate liability for the sale of future royalties was $88.9m. Management estimated funding for current business plans through at least the next 12 months. Operating cash flow included the BMS payment and a $10.0m Baxalta milestone; excluding these and other items, the filing describes significant operating cash use.
Material changes and notable items
- BMS transaction: Effective April 3, BMS paid $1.0bn upfront under the NKTR-214 collaboration and separately purchased 8,284,600 Nektar shares for $850.0m. Nektar recognized $1,059.8m as collaboration revenue and recorded $790.2m in equity for the shares after fair-value adjustments. The companies will jointly develop and commercialize NKTR-214; Nektar retains worldwide sales recording rights and is entitled to 65% of net profits or losses. BMS shares most combination-development costs at contractually specified percentages. Nektar may receive up to approximately $1.4bn in development and regulatory payments and $350m in sales milestones; these potential milestones were excluded from revenue transaction price as constrained at June 30.
- Revenue growth also included a $10.0m EU approval milestone for ADYNOVI/ADYNOVATE. Product sales declined 63% in Q2 and 41% in the first half, principally following termination of the Ophthotech collaboration. Reported Q2 royalty revenue increased 15%; first-half royalty revenue increased 34%.
- R&D expense increased 47% in Q2 and 55% in the first half, reflecting development of NKTR-214 and NKTR-262, preclinical NKTR-255 work, and NKTR-181 filing and pre-commercial costs, partly offset by BMS reimbursements. Stock-based compensation was $40.6m for the first half, versus $16.3m a year earlier.
- Nektar adopted ASC 606 on January 1, 2018 using the modified retrospective method, reducing opening accumulated deficit by $12.7m. Prior-year results were not restated. The stated impact on 2018 revenue was modest: absent ASC 606, revenue would have been $1,089.0m for Q2 and $1,126.9m for the first half.
Outlook, risks and contingencies
- Management expects 2018 revenue to rise significantly versus 2017 due to BMS, product sales to decline, royalty revenue to increase, and R&D and G&A expenses to increase. It expects product gross margin to decline and could be negative for full-year 2018. No specific full-year earnings or revenue target is provided.
- Management expects higher operating cash use excluding upfront, milestone and other contingent receipts, and higher capital expenditures than in 2017. Nektar has no credit facility or other committed capital source. Its $250m notes require a minimum $60m balance of cash and marketable investments.
- Key development events include ongoing NKTR-214 combination trials, a Phase 1 multiple-ascending-dose NKTR-358 trial in lupus, and a Phase 1/2 NKTR-262 trial. The NKTR-181 NDA was accepted for FDA review after quarter-end, on July 30, 2018; the PDUFA target date is May 29, 2019. Nektar had not established commercial launch capabilities for NKTR-181 and was evaluating commercialization alternatives.
- Risks include clinical and regulatory failure—particularly for NKTR-214—dependence on collaboration partners, manufacturing and single-source supply risks, uncertain product uptake and reimbursement, and the possibility that future milestone or royalty receipts fall short. The filing notes substantial stock-price volatility and that interim clinical data may change with verification or additional follow-up.
- Nektar entered a lease for 135,936 square feet in San Francisco, with space to be delivered in phases. If all phases are delivered, annual base rent is expected to be about $10.9m, escalating 3% annually; the lease runs to January 2030, with an extension option.
- Legal matters include patent litigation involving Bayer and PEGylated Factor VIII, including disputes concerning Nektar patents and ADYNOVATE. The filing also discloses contractual indemnification obligations with no reasonably estimable maximum exposure; no related liability was recorded. Management states that an unfavorable litigation ruling could materially affect results or liquidity.
Important facts for investors to verify
- Whether NKTR-214 clinical results support continued development and achievement of the substantial contingent BMS milestones.
- How much of the reported earnings and operating cash flow is attributable to the one-time BMS upfront payment, and the ongoing cash costs of the collaboration and pipeline.
- Progress and potential FDA outcome for NKTR-181, including commercialization plans and any restrictions related to opioid scheduling.
- Sales trends for partnered products, royalty receipts, and the expected effect of lower product sales and product gross margins.
- Developments in Bayer litigation, manufacturing and supply continuity, and the company’s capacity to meet its 2020 note maturity and related covenants.