Nektar Therapeutics — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated results. Nektar is a research-based biopharmaceutical company whose revenue is derived from collaboration agreements, product sales and royalties; it reported no approved proprietary product revenue.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $24.9 million | $30.0 million | $76.9 million | $129.5 million |
| Operating loss | $113.6 million | $103.1 million | $333.2 million | $314.4 million |
| Net loss | $129.7 million | $108.6 million | $378.2 million | $327.2 million |
| Basic and diluted loss per share | $0.70 | $0.61 | $2.07 | $1.84 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(261.1) million | $(214.7) million |
Q3 revenue included $19.4 million of non-cash royalty revenue and $5.2 million of product sales; license, collaboration and other revenue was $0.3 million. For the first nine months, non-cash royalty revenue was $58.7 million and product sales were $17.8 million. Product gross margin was negative 2% in Q3 and negative 5% for the nine months. Management expects full-year 2021 product gross margin to remain negative, reflecting a fixed-price manufacturing arrangement whose price is below fully burdened cost; related royalty revenue exceeded the negative product gross profit in the periods discussed.
At September 30, 2021, cash and investments totaled $955.3 million, down from $1,198.6 million at December 31, 2020; cash and cash equivalents alone were $54.0 million. Current assets were $986.1 million and current liabilities $140.0 million. Total liabilities were $475.7 million, including $181.8 million of liabilities for sold future royalties, a $21.4 million development derivative liability and lease liabilities. Nektar had repaid its $250 million senior notes in April 2020 and reported no interest expense on those notes in 2021. Nine-month cash used in operations was $261.1 million; investing activities provided $82.6 million, primarily reflecting net investment maturities and sales, and financing activities provided $33.7 million. Stockholders’ equity was $801.5 million; shares outstanding were 184.6 million, versus 180.1 million at year-end 2020.
Changes versus comparable periods
- Revenue fell 17% in Q3 and 41% for the nine months. The nine-month decline primarily reflects the absence of $50 million in BMS milestones recognized in 2020 and the accounting treatment of royalties sold to HCR: those royalties are now reported as non-cash royalty revenue rather than royalty revenue.
- Q3 net loss widened by $21.1 million year over year; nine-month net loss widened by $51.0 million. Increased Q3 R&D and G&A, higher non-cash interest on royalty-sale liabilities, and the new SFJ derivative-liability remeasurement contributed to the comparisons.
- Nine-month R&D expense decreased 2% to $300.7 million, while Q3 R&D rose 3% to $103.7 million. Nine-month G&A increased 17% to $90.7 million, primarily due to personnel and third-party costs as Nektar began building commercial capabilities.
- Operating cash use increased by $46.5 million year over year for the nine months. Cash and investments declined by $243.3 million from year-end, while the 2020 comparison included repayment of the senior notes.
Outlook, developments and risks
- Management said available working capital was expected to fund current business plans for at least 12 months from the filing date. It expected 2021 product sales, R&D expense and G&A expense to increase versus 2020, and operating cash use (excluding upfront, milestone and other contingent payments) to increase. It also expected interest income to decrease.
- Bempegaldesleukin is the lead immuno-oncology candidate and a major driver of future prospects. Nektar and BMS share development costs and potential commercial profits and losses; Nektar is eligible for substantial development, regulatory and commercial milestones, but their timing and receipt depend on clinical and regulatory success. Nektar disclosed approximately $1.7 billion of potential future development and regulatory milestone payments across collaboration agreements.
- Under the 2021 SFJ co-development agreement, SFJ committed up to $150 million to support the bempegaldesleukin/Keytruda head-and-neck cancer trial. Potential payments to SFJ are contingent on future approvals and could total $450 million for a first qualifying indication, an additional $150 million for a second, or a $37.5 million payment for another indication. The recorded derivative liability is fair-value based and sensitive to clinical-success and timing assumptions.
- COVID-19 had not materially affected current operations or supply as of the filing, but could delay trial enrollment, site initiation, manufacturing and partner-led studies. The company cited slower-than-expected enrollment in an NKTR-255 study and prior delays in certain partner studies; further delays and additional costs remained possible.
- Key risks include clinical or regulatory failure—particularly for bempegaldesleukin—dependence on BMS and Lilly, competitive oncology programs, reliance on collaboration revenue and future financing, manufacturing and single-source supply constraints, and potential inability to commercialize candidates. Nektar stated it had no committed credit facility and could need additional financing; its $300 million shelf registration had not been used.
- Legal matters include the appeal in the Mulquin securities action, for which oral argument was scheduled for December 10, 2021; the Damiba action and one California derivative action had been dismissed with prejudice. Nektar said potential losses in the remaining securities and derivative matters could not be reasonably estimated and no liability was recorded. Separately, an October 13, 2021 UCB settlement reduced royalty term and rates; Nektar was still evaluating the financial-statement effect, while saying the change did not affect its cash flows because those royalty rights had been sold to RPI.
Investor verification priorities
- Track bempegaldesleukin trial results, regulatory progress and BMS’s continued development priorities, including the milestone conditions and timing.
- Reconcile operating cash burn and the decline in cash and investments against management’s stated 12-month funding outlook and potential financing needs.
- Assess the distinction between cash-generating activity and reported non-cash royalty revenue, together with the substantial non-cash interest expense and remaining royalty-sale liabilities.
- Monitor SFJ trial funding, the contingent success-payment structure and changes in the derivative liability as clinical evidence and assumptions evolve.
- Review the accounting impact of the UCB settlement and developments in the remaining litigation and intellectual-property proceedings.