Nektar Therapeutics — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts below are in U.S. dollars; financial statement figures are unaudited. Nektar is a biopharmaceutical company developing drug candidates using its polymer-conjugate technology and relies on collaborations, product supply, and royalties for revenue.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $36.3 million | $60.0 million | $128.0 million | $191.4 million |
| Operating income (loss) | $(32.9) million | $0.4 million | $(80.7) million | Approximately break-even |
| Net loss | $(43.2) million | $(8.2) million | $(111.3) million | $(27.0) million |
| Net loss per share | $(0.32) | $(0.06) | $(0.82) | $(0.21) |
| Research and development expense | $52.0 million | $43.2 million | $153.6 million | $135.7 million |
- Revenue mix: Q3 product sales were $14.7 million, cash royalty revenue $5.6 million, non-cash royalty revenue from previously sold royalty rights $7.7 million, and license, collaboration and other revenue $8.4 million. The non-cash royalties do not represent current-period cash receipts.
- Margins: Product gross margin was 52% in Q3 and 43% for the first nine months, versus 7% and 2%, respectively, in 2015. Management attributed the improvement to product mix and noted that margins may fluctuate with partner orders and manufacturing utilization.
- Cash flow: Operating cash use was $64.6 million for the first nine months, compared with $2.0 million of operating cash provided in 2015. Investing activities provided $59.7 million, mainly reflecting net investment maturities; financing activities provided $12.7 million. Cash and cash equivalents increased $7.7 million to $63.3 million.
- Balance sheet at September 30: Cash and marketable securities totaled $253.5 million, down from $308.9 million at year-end 2015. Current assets were $282.5 million and current liabilities $76.3 million. Total liabilities were $492.9 million; stockholders’ equity was a deficit of $67.9 million.
- Debt: Nektar reported $250.0 million principal of 7.75% senior secured notes due October 2020 and $4.5 million of capital leases. Separately, it carried a $108.9 million liability related to the sale of future royalties. The notes require at least $60.0 million of cash and investments and impose operating and financial covenants.
Material changes and notable developments
- Revenue fell 39% in Q3 and 33% year to date. The principal comparison was lower license and collaboration revenue: 2015 included $40 million from the European launch of MOVENTIG and, year to date, $100 million from the U.S. launch of MOVANTIK. In 2016, Nektar recorded $28 million for its share of a ProStrakan sublicense payment and $3 million of an additional sublicense milestone in Q3.
- Product sales and cash royalties increased, reflecting partner demand and the commercialization of MOVANTIK/MOVENTIG and ADYNOVATE. R&D expense rose 20% in Q3 and 13% year to date, primarily due to NKTR-181 Phase 3 and NKTR-214 Phase 1/2 development costs.
- In May 2016, Nektar granted Daiichi Sankyo European commercialization rights to ONZEALD (NKTR-102). It received a $20 million upfront payment, of which $12.5 million remained refundable subject to specified termination conditions and was recorded as a liability. Nektar recognized $3.5 million of revenue through September 30 and reported $4.0 million of deferred revenue for development services. Potential regulatory and commercial milestones total up to $60 million, with sales royalties also available.
- In September, Nektar and Bristol Myers Squibb agreed to conduct combination trials of NKTR-214 and Opdivo in five tumor types and seven potential indications. Each party bears its own internal costs; BMS funds 50% of specified third-party costs. Nektar retains global commercial rights to NKTR-214, subject to the agreement’s limited negotiation and matching rights.
- On October 24, after quarter-end, Nektar completed an offering of 14.95 million shares. Proceeds were approximately $189.7 million after underwriting discounts and commissions, and approximately $189.1 million after stated offering expenses. The filing reported 152.8 million shares outstanding on October 27.
Outlook, risks, and contingencies
- Management estimated that September 30 liquidity would fund at least 12 months of current business plans. The subsequent equity offering added capital, but the filing does not provide a revised runway estimate. Nektar stated it had no credit facility or other committed capital source and expected continuing losses and operating cash use.
- For full-year 2016, management expected product sales and cash royalties to increase versus 2015, license and collaboration revenue to decline significantly because of 2015’s non-recurring launch payments, R&D expense to increase, G&A expense to remain consistent, and product gross margin to be broadly similar to the first nine months. Management expected operating cash use, excluding upfront, milestone, and other contingent receipts, to decrease versus 2015.
- NKTR-181’s first Phase 3 efficacy study had completed enrollment; its sample size was increased by approximately 200 patients following a pre-specified assessment. Nektar planned to begin the ONZEALD ATTAIN confirmatory Phase 3 study before year-end 2016. The BEACON Phase 3 study had not met statistical significance on its primary overall-survival endpoint; subgroup results do not resolve that uncertainty. Positive ATTAIN results could support a U.S. application, according to FDA staff discussions described by Nektar.
- Key risks include clinical and regulatory failure or delay, dependence on partners for development and commercialization, variable milestone and royalty receipts, substantial R&D funding needs, manufacturing and single-source supply risks, competition, and the secured-note covenants. Nektar cautioned that it expects substantial losses and may need further financing or partnerships.
- Legal matters: Enzon seeks $1.5 million plus interest for alleged unpaid licensing fees. After quarter-end, on October 25, 2016, an appellate court reversed the dismissal of Enzon’s complaint and remanded the case for further proceedings. Nektar also disclosed broad contractual indemnification obligations for which potential maximum payments could not be reasonably estimated; no related liability was recorded.
- Management concluded disclosure controls and procedures were effective as of quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether commercialization of MOVANTIK/MOVENTIG and ADYNOVATE produces the sales and royalty growth management expected.
- Enrollment, timing, and results for NKTR-181, the ONZEALD ATTAIN study, NKTR-214 combination trials, and other key programs; distinguish primary endpoints from subgroup findings.
- Cash burn and liquidity after the October offering, including the effect of planned clinical investment and the $60 million minimum-liquidity covenant.
- The terms and accounting treatment of the Daiichi upfront payment, including the $12.5 million refundable portion and future milestone conditions.
- Progress and potential exposure in the Enzon case and any other collaboration, intellectual-property, or indemnification disputes.