Nektar Therapeutics — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results. Unless otherwise noted, amounts below are in millions of U.S. dollars.
Business context
Nektar is a research-based biopharmaceutical company developing drug candidates in oncology, immunology and chronic pain using polymer-conjugate technology. Its revenue is generated through collaboration agreements, royalties and manufacturing and supply arrangements. The company expects continued substantial research investment, losses and negative operating cash flow.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $34.6 | $32.8 | $59.3 | $91.6 |
| Operating loss | $50.7 | $38.3 | $105.1 | $47.8 |
| Net loss | $59.9 | $48.6 | $123.7 | $68.1 |
| Net loss per share | $0.39 | $0.36 | $0.80 | $0.50 |
| Research and development expense | $60.3 | $52.4 | $121.3 | $101.6 |
| General and administrative expense | $16.0 | $11.0 | $28.0 | $21.3 |
- Revenue mix and change: Q2 product sales were $15.7 million, royalty revenue $7.4 million, non-cash royalty revenue from previously sold royalties $6.6 million, and license, collaboration and other revenue $4.8 million. Q2 revenue increased 6% year over year. First-half revenue declined 35%, primarily because 2016 included a $28.0 million AstraZeneca/Kirin sublicense-related payment; first-half product sales and license/collaboration revenue also fell.
- Profitability and margins: Product gross margin was 43% in Q2 versus 40% in Q2 2016, but 26% for the first half versus 39% a year earlier. Management expected full-year 2017 product gross margin to decrease significantly and potentially approximate breakeven, partly due to lower anticipated Ophthotech shipments and unfavorable product mix. The filing reports operating and net losses, not a consolidated gross-margin percentage.
- Cash flow: First-half operating cash use was $93.1 million, compared with $37.3 million in the prior-year period. Investing activities provided $28.9 million and financing activities provided $20.6 million. Cash and cash equivalents fell $43.5 million to $16.1 million.
- Liquidity and debt: Cash and investments in marketable securities totaled $310.7 million at June 30, down from $389.1 million at December 31, 2016. Debt was $253.8 million, including $250.0 million principal of 7.75% senior secured notes due October 2020 and $3.8 million of capital leases. The notes require at least $60.0 million of cash and investments. Management said available working capital was expected to fund current plans for at least 12 months; Nektar had no credit facility or other committed capital source.
- Balance sheet: Total assets were $475.9 million, total liabilities $472.5 million, and stockholders’ equity $3.4 million at June 30, 2017.
Material changes, outlook and key developments
- Q2 product sales rose 22%, largely from $10.4 million of Ophthotech shipments tied to prior binding purchase commitments. Following failed primary endpoints in two Fovista Phase 3 trials in December 2016, Nektar did not expect further Ophthotech sales in 2017 beyond those commitments.
- Cash royalty revenue increased, mainly reflecting higher sales of MOVANTIK and ADYNOVATE. Management expected full-year 2017 royalty revenue to increase versus 2016. R&D expense rose as development of NKTR-214 and NKTR-358 and preclinical work on NKTR-262 and NKTR-255 expanded; management expected full-year R&D and G&A expense to increase.
- During the quarter, Nektar settled the Enzon dispute for $7.0 million, covering past and future royalty obligations. The litigation was dismissed with prejudice June 30. Nektar paid $3.5 million in June and recorded the remaining $3.5 million, due January 2018, in current liabilities; $3.3 million was recorded as Q2 G&A expense.
- ONZEALD: After quarter-end, the European Medicines Agency’s CHMP adopted a negative opinion on conditional marketing authorization. Nektar requested re-examination. If the appeal is unsuccessful, Nektar may owe Daiichi Sankyo a $12.5 million termination payment; that contingent amount was recorded as a liability at June 30.
- NKTR-358 / Lilly: On July 24, Nektar announced a worldwide co-development license agreement, subject to U.S. government review. Following clearance, Nektar expected a $150 million initial payment and eligibility for up to $250 million in development and regulatory milestones. Nektar would share Phase 2 costs, with Lilly bearing 75%, and could receive royalties. This agreement was not effective at the filing date pending review.
- Pipeline: Nektar reported that NKTR-181 met primary and secondary endpoints in its SUMMIT-07 Phase 3 efficacy study and that top-line results from its abuse-potential study were positive; it planned to seek a partner for further development and commercialization. NKTR-214’s Phase 2 dose had been identified and dose expansion initiated. Management expected Amikacin Inhale Phase 3 topline results in 2017; it reported that Cipro DPI RESPIRE 2 showed a positive trend but did not reach statistical significance, while a pooled analysis of RESPIRE 1 and 2 was positive.
- Lease: On August 4, Nektar entered a lease for 128,793 square feet at its Mission Bay site, commencing February 2020 through January 2030. Base rent is $611,767 monthly, with 3% annual adjustments, plus specified operating expenses.
- Accounting and controls: Nektar planned to adopt ASC 606 in Q1 2018 using the modified retrospective method and anticipated a potentially material effect, particularly for variable and milestone consideration. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Risks and contingencies
- Clinical development and regulatory outcomes are uncertain; failure, delay or adverse safety findings could impair pipeline value and financing prospects. Collaboration partners control important development and commercialization decisions, and revenue depends heavily on their performance and product sales.
- Management cited substantial capital needs, ongoing losses and operating cash use, reliance on future collaboration payments and royalties, and the possibility of needing financing that could dilute shareholders or require rights concessions. Forecast liquidity depends on assumptions about spending, receipts and clinical outcomes.
- Other disclosed risks include competition, patent and commercial disputes, manufacturing and single-source supplier dependence, reimbursement and pricing pressures, and restrictions under the senior-note indenture. Nektar noted indemnification obligations for which the maximum potential exposure could not be reasonably estimated.
- The company’s $124 million sale of future CIMZIA and MIRCERA royalties remains recorded as a liability; Nektar recognizes associated non-cash royalty revenue and non-cash interest expense, with an estimated effective annual interest rate of about 17% that could change prospectively.
Important facts for investors to verify
- Progress and final outcomes for the ONZEALD CHMP re-examination, including whether the $12.5 million contingent termination payment becomes payable.
- Completion of government review and receipt of the $150 million initial payment under the Lilly NKTR-358 agreement.
- Clinical, regulatory and commercial progress for NKTR-214, NKTR-181, Amikacin Inhale, Cipro DPI and other programs, including partner decisions and timelines.
- Actual royalty and product-sale trends, especially MOVANTIK, MOVENTIG and ADYNOVATE, and the expected reduction in Ophthotech sales and product gross margin.
- Operating cash use, liquidity relative to the $60 million note covenant, debt service and any need for additional financing.
- The impact of ASC 606 adoption on collaboration revenue and the obligations and costs associated with the new Mission Bay lease.