Nektar Therapeutics — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Nektar is a research-based biopharmaceutical company developing drug candidates using polymer-conjugate technology, with revenue primarily from collaborations, royalties, and product supply.
Financial performance
- Revenue: $24.7 million, down 58% from $58.9 million in Q1 2016. License, collaboration and other revenue fell to $6.1 million from $34.2 million, chiefly because Q1 2016 included Nektar’s $28.0 million share of AstraZeneca’s payment from Kirin. Product sales declined 66% to $4.8 million; cash royalty revenue rose 78% to $7.2 million, mainly on higher MOVANTIK and ADYNOVATE sales.
- Profitability: Operating loss was $54.4 million versus $9.5 million; net loss was $63.9 million, or $0.42 per share, versus $19.5 million, or $0.14 per share. R&D expense rose 24% to $61.1 million, primarily from NKTR-214, NKTR-358 and preclinical programs.
- Product margin: Product gross margin was negative 29%, compared with 37% a year earlier, reflecting lower sales and a less favorable mix, including fixed-price supply below fully burdened manufacturing cost.
- Cash flow: Operating cash use was $34.6 million versus $23.6 million. Cash and cash equivalents decreased by $36.2 million during the quarter to $23.5 million. Cash, cash equivalents and marketable securities totaled $362.0 million at quarter-end, down from $389.1 million at December 31, 2016.
- Balance sheet and debt: Total assets were $528.5 million and total liabilities $483.7 million. Debt was $254.5 million, including $250.0 million principal on 7.75% senior secured notes due October 2020 and $4.5 million of capital leases. The notes require at least $60.0 million in cash and marketable securities; quarter-end holdings were above that threshold.
Changes, outlook and management commentary
- Management said available working capital was expected to fund current business plans for at least 12 months, while noting there was no credit facility or other committed capital source.
- For 2017, management expected royalty revenue to increase, but license/collaboration revenue to decrease. It expected R&D, G&A and capital expenditures to rise; product gross margin was expected to decline significantly and could be approximately breakeven for the year.
- Pipeline priorities included NKTR-214 combination trials, the recently initiated Phase 1 study of NKTR-358, and further development of NKTR-181 after positive SUMMIT-07 Phase 3 results. Nektar expected mid-year top-line data from the NKTR-181 human abuse liability study and planned to seek a development and commercialization partner for NKTR-181.
- Nektar reported approximately $147 million of potential future development milestone payments under collaboration agreements; these are contingent and timing or achievement is uncertain. Management also cited expected increases in partnered-product royalties and possible future collaboration payments as sources of funding.
Risks, contingencies and unusual items
- Nektar continues to expect substantial losses and negative operating cash flows. Funding needs depend on clinical outcomes, partner decisions, product sales and royalties, and its ability to secure collaborations or financing.
- Ophthotech’s two pivotal Fovista trials failed their primary endpoints in December 2016. Nektar did not expect further Ophthotech sales in 2017 beyond approximately $10.4 million of committed Q2 shipments; the effect on manufacturing revenue and margins is material to monitor.
- The Enzon contract dispute, seeking $1.5 million plus interest, was remanded for further proceedings after an appellate reversal of the dismissal. Nektar recorded no liability.
- A $12.5 million contingent repayment obligation related to the Daiichi ONZEALD agreement remains recorded as a liability until the specified approval condition is met.
- Nektar warned of clinical, regulatory, manufacturing, collaboration-partner, intellectual-property, litigation and financing risks. Its notes impose financial and operating covenants, including the minimum-liquidity requirement.
- Adoption of the new revenue-recognition standard was planned for Q1 2018; Nektar anticipated a potentially material impact, particularly for milestone and other variable collaboration consideration.
Key facts for investors to verify
- Whether MOVANTIK, MOVENTIG and ADYNOVATE sales translate into sustained royalty growth.
- Clinical and regulatory progress for NKTR-214, NKTR-358, NKTR-181, Amikacin Inhale and ONZEALD, including the NKTR-181 abuse-liability results.
- Ophthotech’s remaining purchase commitments and the impact of reduced Fovista-related demand on product sales and margins.
- Cash use, available liquidity, compliance with the $60.0 million minimum-liquidity covenant, and options for financing continued R&D investment.
- Developments in the Enzon matter and the conditions governing the ONZEALD-related $12.5 million contingent repayment.