Nektar Therapeutics — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone quarterly filing; it also reports fourth-quarter results. Nektar is a research-based biopharmaceutical company developing medicines, particularly in immuno-oncology and autoimmune disease, and relies primarily on collaborations, royalties and product supply revenue.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $114.6 million | $1,193.3 million |
| Operating expenses | $554.7 million | $505.4 million |
| Operating income (loss) | $(440.0) million | $687.9 million |
| Net income (loss) | $(440.7) million | $681.3 million |
| Operating cash flow | $(328.7) million | $718.2 million |
| Cash, cash equivalents and investments | $1,604.0 million | $1,918.2 million |
- 2019 revenue comprised $20.1 million product sales, $41.2 million royalty revenue, $36.3 million non-cash royalty revenue, and $17.0 million license, collaboration and other revenue. The 2018 comparison included $1,059.8 million recognized from the BMS collaboration; therefore, the sharp year-over-year revenue decline largely reflects that one-time recognition, not a comparable decline in recurring sales.
- Research and development expense rose 9% to $434.6 million; general and administrative expense rose 21% to $98.7 million. Cost of goods sold was $21.4 million against product sales of $20.1 million, a $1.3 million product gross loss and negative 6% gross margin, improved from negative 18% in 2018.
- Cash used in operations was $328.7 million, compared with cash provided of $718.2 million in 2018, which included the BMS collaboration cash payment. Capital expenditures were $26.3 million.
- At year-end, working capital was $1,067.7 million. Senior secured notes had $250.0 million principal outstanding, due October 2020; the balance sheet classified the net carrying amount of $248.7 million as current. The notes bear 7.75% interest and are secured by substantially all assets, subject to stated exceptions.
- Fourth-quarter 2019 revenue was $33.9 million, operating loss was $109.6 million and net loss was $112.2 million. Fourth-quarter 2018 revenue included the large BMS-related recognition and was $39.8 million.
Material changes versus 2018
- Revenue and earnings shifted from a large collaboration-driven profit in 2018 to a substantial loss in 2019 as the BMS upfront collaboration revenue was not repeated. R&D investment continued to increase.
- Cash and investments fell by $314.3 million year over year, while operating cash flow turned negative. The company reported that its current cash position was expected to fund current plans through at least March 1, 2021.
- Revenue remains concentrated among a small number of partners. UCB, Takeda and AstraZeneca represented 28%, 19% and 17% of 2019 revenue, respectively.
- The share price ranged from $15.87 to $46.35 during 2019, versus a 2018 range of $30.43 to $108.44; the filing attributes substantial stock-price sensitivity to clinical developments and other factors.
Outlook, developments and risks
- Bempegaldesleukin: The lead immuno-oncology candidate is being developed with BMS and in other combinations. The FDA granted Breakthrough Therapy designation for the combination with Opdivo in previously untreated unresectable or metastatic melanoma. Registrational trials cover melanoma, urothelial cancer, renal cell carcinoma and muscle-invasive bladder cancer; the 2020 plan also included an adjuvant melanoma trial and other studies. The designation does not assure approval. Nektar generally bears 32.5% of development costs for the Opdivo combination, subject to a $125 million annual development-cost cap, and has a 65% share of commercialization profits or losses. Significant potential milestone payments remain dependent on clinical and regulatory success.
- 2020 management expectations: Product sales were expected to be lower than 2019, royalty revenue broadly consistent, and license/collaboration revenue higher due to expected BMS milestones. R&D and operating cash use were expected to rise; G&A was also expected to increase in preparation for a potential bempegaldesleukin launch. Management expected to redeem the senior notes in the second quarter of 2020. These are forward-looking expectations, not guarantees.
- NKTR-181: Following an FDA advisory committee vote against approval in January 2020, Nektar withdrew its NDA and decided to stop further investment. The wind-down was expected to generate $45–$50 million of first-quarter 2020 charges, including a $19.7 million non-cash impairment, while producing estimated 2020 cost savings of $75–$125 million.
- ONZEALD: On February 27, 2020, Nektar reported no overall-survival improvement in its Phase 3 study in patients with breast cancer and brain metastases and said it would wind down development.
- Other risks and contingencies: Drug-candidate failure, trial delays, manufacturing and single-source supply risks, dependence on collaboration partners, reimbursement and pricing pressures, and substantial ongoing losses are key risks. Securities class actions and shareholder derivative suits allege misrepresentations concerning bempegaldesleukin; the company had not accrued a liability because losses could not be reasonably estimated. Patent disputes include litigation relating to hemophilia products and challenges to MOVANTIK patents by generic applicants. The filing states it was not aware of legal proceedings expected to have a material adverse effect, while noting litigation outcomes are uncertain.
- The auditors issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective at year-end.
Most important facts for investors to verify
- Clinical results, timelines and regulatory prospects for bempegaldesleukin, including the primary endpoint in the metastatic melanoma registrational trial and the consequences for the broader BMS program.
- Whether anticipated BMS milestones are achieved, when payments are recognized and received, and how collaboration costs and the $125 million annual cap affect cash requirements.
- Actual cash burn, investment balances and runway relative to the expected $250 million note redemption and the stated March 2021 funding horizon.
- Final NKTR-181 wind-down charges and savings, and costs or liabilities associated with the securities litigation and patent proceedings.
- Partner sales and resulting royalties, especially for ADYNOVATE/ADYNOVI and MOVANTIK/MOVENTIG, alongside the impact of generic challenges and product-supply economics.