Nektar Therapeutics — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Nektar is a biopharmaceutical company developing drug candidates using polymer-conjugate technologies and relies substantially on collaborations, partner product sales, royalties, and manufacturing revenue. Financial statements are unaudited; amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior balance date |
|---|---|---|
| Total revenue | $58.9 million | $108.8 million |
| Operating income (loss) | $(9.5) million | $43.0 million |
| Net income (loss) | $(19.5) million; $(0.14) per share | $33.8 million; $0.26 basic per share |
| Operating cash flow | $(23.6) million | $63.3 million provided |
| Cash and investments | $288.3 million | $308.9 million at Dec. 31, 2015 |
| Total assets | $491.9 million | $498.6 million at Dec. 31, 2015 |
| Total liabilities | $492.2 million | $492.2 million at Dec. 31, 2015 |
Revenue comprised product sales of $14.1 million, cash royalty revenue of $4.1 million, non-cash royalty revenue tied to sold CIMZIA and MIRCERA royalties of $6.5 million, and license, collaboration and other revenue of $34.2 million. Product gross profit was $5.2 million, a 37% margin, compared with a $0.5 million gross loss and negative 6% margin in Q1 2015. R&D expense was $49.3 million, up 5%; general and administrative expense was $10.2 million, broadly unchanged.
At quarter-end, debt was $258.1 million, including $250.0 million principal of 7.75% senior secured notes due October 2020 and $8.1 million of capital leases. The balance sheet showed a $0.3 million stockholders’ deficit. The notes require at least $60.0 million of cash and investments; the reported balance was above this threshold.
Material changes and notable items
- Revenue fell 46%, largely because Q1 2015 included a $100 million AstraZeneca payment following the U.S. launch of MOVANTIK. Q1 2016 included $28 million recognized for Nektar’s 40% share of AstraZeneca’s $70 million ProStrakan sublicense payment.
- Product sales rose 77% to $14.1 million, mainly on higher partner demand and a more favorable product mix. Cash royalty revenue increased following launches of MOVANTIK/MOVENTIG; the company also reported royalties from ADYNOVATE as an expected source of future revenue.
- Operating cash flow shifted from $63.3 million provided to $23.6 million used. Q1 2015 included $102 million of collaboration milestones, including the $100 million MOVANTIK launch payment. Q1 2016 cash use included operating requirements and interest payments; the $28 million AstraZeneca receivable was collected in April 2016.
- Cash and investments declined by $20.6 million from year-end, notwithstanding a $17.0 million increase in cash and cash equivalents; investment maturities and purchases affect the distinction between cash and the broader liquidity total.
- Interest expense increased 36% to $5.7 million, primarily reflecting the October 2015 refinancing and higher secured-note principal. Non-cash interest on the sold-royalty liability was $5.0 million, with an estimated effective annual rate of approximately 17%.
Outlook, management commentary and risks
- Management estimated at least 12 months of working capital for current plans, but reported no credit facility or other committed capital. It expects continued substantial R&D investment, losses, and negative operating cash flows; future funding needs depend on clinical results, partner payments, product sales and royalties, and access to financing.
- For full-year 2016, management expected product sales and royalty revenue to increase versus 2015; license, collaboration and other revenue to decrease significantly due to non-recurring 2015 launch payments; R&D expense to increase marginally; and product gross margin to improve, while remaining sensitive to manufacturing mix. Interest expense was expected to increase year over year. No numerical full-year guidance was provided.
- NKTR-181’s Phase 3 trial sample size was increased by approximately 200 patients following a preplanned interim assessment. The filing notes elevated design risk because the earlier Phase 2 study missed its primary efficacy endpoint.
- NKTR-214 was in Phase 1/2 development. For NKTR-102, the BEACON Phase 3 study showed a 2.1-month median overall-survival difference but did not meet statistical significance for its primary endpoint (p=0.08); secondary endpoints also failed significance. Nektar was evaluating regulatory and confirmatory-trial options and did not plan to advance development without a partner.
- Key business risks include clinical and regulatory failure or delay, dependence on partners’ development and commercialization decisions, variable collaboration revenue, financing needs, manufacturing and single-source supply risks, intellectual-property disputes, and note-indenture covenants. The filing describes an appeal by Enzon after dismissal of its $1.5 million licensing-fee claim, and other patent and commercial disputes. Potential indemnification obligations are generally not capped and were not accrued.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether MOVANTIK/MOVENTIG, ADYNOVATE and other partnered products generate the sales, royalties and milestones assumed in management’s outlook.
- Progress, enrollment, costs and results for NKTR-181 and NKTR-214, and any partner or regulatory decisions concerning NKTR-102.
- Operating cash use, cash and investment balances, availability of financing, and compliance with the $60 million minimum-liquidity covenant.
- The treatment and collection timing of the $28 million AstraZeneca receivable, and the effect of the sold-royalty liability and its estimated interest rate.
- Developments in the Enzon appeal and other disclosed litigation, patent matters, indemnification exposure, and collaboration agreements that may be cancelable by partners.