Nektar Therapeutics — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited results; amounts below are in U.S. dollars and generally rounded to millions.
Business context
Nektar is a biopharmaceutical company developing drug candidates using its PEGylation and polymer-conjugate technologies. Its revenue is generated through product supply, royalties, licensing and collaborations. It reported substantial ongoing R&D investment and expected continuing losses and negative operating cash flows.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $32.8m | $22.7m | $91.6m | $131.5m |
| Operating loss | $38.3m | $43.5m | $47.8m | $0.4m |
| Net loss | $48.6m | $52.7m | $68.1m | $18.8m |
| Net loss per share | $0.36 | $0.40 | $0.50 | $0.14 |
| Operating cash flow | Not separately reported here | Not separately reported here | $(37.3)m | $16.1m |
- Q2 product sales were $12.9m; cash royalty revenue $3.5m; non-cash royalties from previously sold CIMZIA and MIRCERA royalty rights $8.1m; and license, collaboration and other revenue $8.3m.
- Q2 product gross margin improved to 40% from 4%. For the first half, it was 39%, versus approximately break-even in 2015; management attributed improvement to product mix.
- R&D expense was $52.4m in Q2 and $101.6m for the half, up 15% and 10%, respectively, mainly reflecting NKTR-181 Phase 3 and NKTR-214 clinical costs. First-half G&A was $21.3m, up 4%.
- At June 30, cash and investments totaled $274.9m, down from $308.9m at year-end. Total assets were $463.1m; current assets $318.3m; current liabilities $79.3m. Stockholders’ deficit was $39.3m.
- Debt was $256.4m, including $250.0m principal of 7.75% senior secured notes due October 2020 and $6.4m in capital leases. The balance sheet also included a $111.6m liability related to the sale of future royalties.
- The notes require a minimum $60m balance of cash and investments. Management estimated at least 12 months of working capital for current plans, but reported no credit facility or other committed capital source.
Material changes versus prior period
- Q2 revenue rose 45%, while first-half revenue fell 30%. The first-half comparison reflects the $100m MOVANTIK U.S. launch milestone recognized in 2015; 2016 included a $28m share of AstraZeneca’s ProStrakan sublicense payment.
- First-half cash from operations swung to an outflow of $37.3m from an inflow of $16.1m. The 2015 period benefited from $102m of collaboration milestone receipts, including the MOVANTIK launch payment.
- Cash royalties increased with launches of MOVANTIK/MOVENTIG and ADYNOVATE. Management expected 2016 product sales and royalty revenue to increase year over year, but license, collaboration and other revenue to decrease significantly.
- Interest expense increased, primarily due to the 2015 refinancing and higher note principal, despite the reduction in the coupon from 12% to 7.75%.
Outlook, developments and risks
- Management expected 2016 R&D expense to increase, G&A expense to decrease marginally, interest expense to increase, and product gross margin to remain substantially similar to the first-half level. Full-year 2016 capital expenditures were expected to decrease marginally from 2015.
- In May, Nektar licensed European ONZEALD (NKTR-102) commercialization rights to Daiichi Sankyo. The agreement provides a $20m upfront payment, up to $60m in regulatory and commercial milestones, and royalties of 20% in most covered territories and 15% in Turkey. At quarter-end, the $20m was receivable; $12.5m remained refundable under specified termination conditions. Nektar recognized $3.3m revenue in Q2 and deferred about $4.2m for development services.
- Nektar filed an EU application for conditional ONZEALD approval for advanced breast cancer patients with brain metastases; EMA validation for review was reported in July, after quarter-end. The planned confirmatory Phase 3 study was expected to begin in 2016. The prior BEACON Phase 3 trial did not meet its primary overall-survival endpoint at statistical significance.
- NKTR-181 Phase 3 enrollment was completed in the reported period; a preplanned interim assessment instructed Nektar to add approximately 200 patients. NKTR-214 was in Phase 1/2 development.
- Management identified dependence on partner execution and product sales, clinical and regulatory uncertainty, collaboration timing, possible financing needs, and manufacturing and single-source supplier risks. It warned that failure to obtain additional capital or partner payments could require reduced or delayed R&D programs.
- Contingencies include an Enzon claim for $1.5m plus interest; the court dismissed it and Enzon appealed. Nektar also disclosed other litigation and indemnification exposures; no liabilities were recorded for the described commercial-agreement indemnifications. The filing references an ongoing Allergan/MAP dispute and Bayer patent-ownership litigation in Germany.
Key facts for investors to verify
- Whether cash generation, royalties and partner receipts support the stated 12-month liquidity outlook, given first-half operating cash use, no committed credit facility and the $60m minimum-liquidity covenant.
- Actual partner sales and royalty trends for MOVANTIK/MOVENTIG and ADYNOVATE, and the timing and collectability of the Daiichi payment and any contingent amounts.
- ONZEALD regulatory progress and confirmatory-trial timing, alongside the implications of BEACON’s missed primary endpoint.
- NKTR-181’s expanded Phase 3 enrollment, clinical costs and results, and progress of NKTR-214 and partnered late-stage programs.
- Debt and royalty-obligation servicing, covenant compliance, and developments in the Enzon appeal, Allergan/MAP dispute and Bayer patent litigation.