Nektar Therapeutics — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Nektar is a research-based biopharmaceutical company developing drug candidates in oncology, immunology and pain. Unless otherwise noted, financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $28.2 million | $38.0 million |
| Research and development expense | $118.5 million | $99.4 million |
| General and administrative expense | $25.0 million | $18.7 million |
| Operating loss | $120.7 million | $86.7 million |
| Net loss | $118.5 million | $95.8 million |
| Basic and diluted net loss per share | $0.68 | $0.60 |
| Net cash used in operating activities | $80.9 million | $52.5 million |
| Product gross margin | (24)% | (6)% |
At March 31, 2019, cash and cash equivalents were $106.8 million; short- and long-term marketable investments totaled $1.738 billion, for combined cash and investments of $1.845 billion. Total assets were $2.166 billion and stockholders’ equity was $1.634 billion. Senior secured notes had $250 million principal outstanding, due October 2020, with a 7.75% coupon; the balance-sheet carrying amount was $247.4 million. The company also reported an $80.8 million liability related to the sale of future royalties. Operating lease liabilities totaled $96.7 million following adoption of ASC 842.
Changes and drivers
- Revenue fell 26% to $28.2 million. License, collaboration and other revenue declined 69%, principally because Q1 2018 included a $10 million ADYNOVI European marketing-authorization milestone. Product sales declined 30% on lower partner demand; royalty revenue rose 3%.
- Net loss widened by $22.7 million. R&D expense rose 19%, driven mainly by NKTR-214 and NKTR-358 clinical development, NKTR-255 preclinical work, manufacturing and personnel costs. BMS cost-sharing reduced Q1 2019 R&D expense by a net $28.8 million, versus $2.3 million in Q1 2018.
- G&A expense increased 34%, including personnel, facilities, outside services and NKTR-181 commercialization-readiness costs. Interest income and other income rose to $12.5 million from $1.6 million, primarily reflecting returns on investments funded by the 2018 BMS transaction.
- Operating cash use increased to $80.9 million. Cash and cash equivalents decreased $88.2 million during the quarter; investment purchases and maturities largely explain why this movement differs from the change in total cash and investments.
Outlook, risks and unusual items
- Management said available working capital was expected to fund current business plans for at least 12 months. The company had no credit facility or other committed capital source; its note indenture requires at least $60 million of cash and marketable investments.
- For full-year 2019, management expected product sales to be consistent with 2018, royalty revenue to increase marginally, and license/collaboration revenue to decrease significantly compared with 2018, which included recognition of the BMS collaboration transaction. These are qualitative expectations, not numeric guidance.
- Management expected significantly higher R&D expense in 2019, continued negative product gross margin, higher G&A expense, and significantly higher capital expenditures, primarily for Third Street facility improvements. NKTR-181 approval and commercial launch, if achieved, could affect sales and margins and require substantial commercialization spending.
- The FDA’s target action date for the NKTR-181 NDA was August 29, 2019. Management emphasized uncertainty around regulatory approval, labeling, opioid scheduling, commercial potential and readiness to establish a launch capability.
- Nektar’s development plan depends heavily on NKTR-214. Management described ongoing registration-enabling studies and additional studies planned for 2019; development outcomes could affect potential BMS milestones, collaboration economics and future liquidity. The company reported up to $1.43 billion in BMS regulatory and commercial launch milestones, subject to achievement.
- Two shareholder derivative complaints and a putative securities class action allege, among other things, misrepresentations concerning NKTR-214 efficacy and safety. The cases were at an early stage; Nektar had not accrued a liability and said it could not reasonably estimate potential losses.
- Other material risks include clinical and regulatory failure or delay, manufacturing and single-source supplier constraints, reliance on collaboration partners, competition, intellectual-property disputes, and the ability to fund substantial development spending. Nektar also reported Bayer-related patent litigation and lawsuits concerning generic MOVANTIK applications; it stated the Bayer jury damages award was borne by Baxalta and did not affect Nektar’s ADYNOVATE royalties.
- ASC 842 lease accounting was adopted January 1, 2019, recording $83.5 million of right-of-use assets and $96.2 million of lease liabilities at adoption, with no cumulative adjustment to accumulated deficit. The 2018 comparative period was not restated.
Most important facts for investors to verify
- Clinical, regulatory and safety updates for NKTR-214 and the status and economics of its BMS collaboration.
- NKTR-181’s FDA decision, final label and scheduling, and the cost and feasibility of any commercial launch.
- Cash burn, investment liquidity, the October 2020 note maturity and compliance with the $60 million minimum-liquidity covenant.
- Whether 2019 R&D, G&A and capital spending follow management’s stated expectations, and how revenue changes as prior-period milestones roll off.
- Developments in the securities litigation, Bayer patent proceedings and MOVANTIK generic challenges, including any financial or operational effects.