Nektar Therapeutics
NEKTAR THERAPEUTICS (Form: 10-Q, Received: 11/04/2016 06:08:51)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

or

TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 0-24006

 

NEKTAR THERAPEUTICS

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

94-3134940

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

455 Mission Bay Boulevard South

San Francisco, California 94158

(Address of principal executive offices)

415-482-5300

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes       No  

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, was 152,835,294 on October 27, 2016.

 

 

 

 

1


 

NEKTAR THERAPEUTICS

INDEX

 

PART I: FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements — Unaudited:

4

Condensed Consolidated Balance Sheets — September 30, 2016 and December 31, 2015

4

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015

5

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2016 and 2015

5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015

6

Notes to Condensed Consolidated Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3. Quantitative and Qualitative Disclosures About Market Risk

27

Item 4. Controls and Procedures

27

 

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

29

Item 1A. Risk Factors

29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3. Defaults Upon Senior Securities

42

Item 4. Mine Safety Disclosures

42

Item 5. Other Information

42

Item 6. Exhibits

43

Signatures

44

 

 

2


 

Forward-Looking Statements

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). All statements other than statements of historical fact are “forward-looking statements” for purposes of this quarterly report on Form 10-Q, including any projections of market size, earnings, revenue, milestone payments, royalties, sales or other financial items, any statements of the plans and objectives of management for future operations (including, but not limited to, preclinical development, clinical trials and manufacturing), any statements related to our financial condition and future working capital needs, any statements regarding potential future financing alternatives, any statements concerning proposed drug candidates, any statements regarding the timing for the start or end of clinical trials or submission of regulatory approval filings, any statements regarding future economic conditions or performance, any statements regarding the success of our collaboration arrangements, timing of commercial launches and product sales levels by our collaboration partners and future payments that may come due to us under these arrangements, any statements regarding our plans and objectives to initiate or continue clinical trials, and any statements of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, such expectations or any of the forward-looking statements may prove to be incorrect and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including, but not limited to, the risk factors set forth in Part II, Item 1A “Risk Factors” below and for the reasons described elsewhere in this quarterly report on Form 10-Q. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof and we do not intend to update any forward-looking statements except as required by law or applicable regulations. Except where the context otherwise requires, in this quarterly report on Form 10-Q, the “Company,” “Nektar,” “we,” “us,” and “our” refer to Nektar Therapeutics, a Delaware corporation, and, where appropriate, its subsidiaries.

Trademarks

The Nektar brand and product names, including but not limited to Nektar ® , contained in this document are trademarks and registered trademarks of Nektar Therapeutics in the United States (U.S.) and certain other countries. This document also contains references to trademarks and service marks of other companies that are the property of their respective owners.

 

 

3


 

PART I: FINANCI AL INFORMATION

 

 

Item 1.

Condensed Consolidated Financial Statements—Unaudited:

NEKTAR THERAPEUTICS

CONDENSED CONSOL IDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

 

 

September 30, 2016

 

 

December 31, 2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

63,295

 

 

$

55,570

 

Short-term investments

 

 

190,216

 

 

 

253,374

 

Accounts receivable, net

 

 

14,249

 

 

 

19,947

 

Inventory

 

 

10,754

 

 

 

11,346

 

Other current assets

 

 

4,008

 

 

 

9,814

 

Total current assets

 

 

282,522

 

 

 

350,051

 

Property, plant and equipment, net

 

 

65,553

 

 

 

71,336

 

Goodwill

 

 

76,501

 

 

 

76,501

 

Other assets

 

 

519

 

 

 

754

 

Total assets

 

$

425,095

 

 

$

498,642

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,118

 

 

$

2,363

 

Accrued compensation

 

 

15,733

 

 

 

5,998

 

Accrued clinical trial expenses

 

 

10,946

 

 

 

8,220

 

Other accrued expenses

 

 

6,761

 

 

 

4,156

 

Interest payable

 

 

4,198

 

 

 

4,198

 

Capital lease obligations, current portion

 

 

2,370

 

 

 

4,756

 

Liability related to refundable upfront payment

 

 

12,500

 

 

 

 

Deferred revenue, current portion

 

 

14,101

 

 

 

21,428

 

Other current liabilities

 

 

2,578

 

 

 

10,127

 

Total current liabilities

 

 

76,305

 

 

 

61,246

 

Senior secured notes, net

 

 

243,004

 

 

 

241,699

 

Capital lease obligations, less current portion

 

 

2,143

 

 

 

1,073

 

Liability related to the sale of future royalties, net

 

 

108,893

 

 

 

116,029

 

Deferred revenue, less current portion

 

 

57,088

 

 

 

62,426

 

Other long-term liabilities

 

 

5,515

 

 

 

9,740

 

Total liabilities

 

 

492,948

 

 

 

492,213

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000 shares authorized; no shares

   designated, issued or outstanding at September 30, 2016 or December 31, 2015

 

 

 

 

 

 

Common stock, $0.0001 par value; 300,000 shares authorized; 137,796 shares

   and 135,289 shares issued and outstanding at September 30, 2016 and

   December 31, 2015, respectively

 

 

13

 

 

 

13

 

Capital in excess of par value

 

 

1,912,907

 

 

 

1,876,072

 

Accumulated other comprehensive loss

 

 

(1,962

)

 

 

(2,170

)

Accumulated deficit

 

 

(1,978,811

)

 

 

(1,867,486

)

Total stockholders’ equity (deficit)

 

 

(67,853

)

 

 

6,429

 

Total liabilities and stockholders’ equity (deficit)

 

$

425,095

 

 

$

498,642

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

4


 

NEKTAR THERAPEUTICS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share information)

(Unaudited)

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

$

14,698

 

 

$

7,240

 

 

$

41,664

 

 

$

26,182

 

Royalty revenue

 

5,573

 

 

 

187

 

 

 

13,150

 

 

 

1,057

 

Non-cash royalty revenue related to sale of future royalties

 

7,692

 

 

 

6,050

 

 

 

22,341

 

 

 

14,752

 

License, collaboration and other revenue

 

8,373

 

 

 

46,475

 

 

 

50,829

 

 

 

149,423

 

Total revenue

 

36,336

 

 

 

59,952

 

 

 

127,984

 

 

 

191,414

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

7,033

 

 

 

6,760

 

 

 

23,611

 

 

 

25,738

 

Research and development

 

51,951

 

 

 

43,229

 

 

 

153,569

 

 

 

135,652

 

General and administrative

 

10,253

 

 

 

9,544

 

 

 

31,515

 

 

 

30,031

 

Total operating costs and expenses

 

69,237

 

 

 

59,533

 

 

 

208,695

 

 

 

191,421

 

Income (loss) from operations

 

(32,901

)

 

 

419

 

 

 

(80,711

)

 

 

(7

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,614

)

 

 

(4,202

)

 

 

(16,918

)

 

 

(12,491

)

Non-cash interest expense on liability related to sale of future royalties

 

(4,902

)

 

 

(5,226

)

 

 

(14,929

)

 

 

(15,428

)

Interest income and other income (expense), net

 

332

 

 

 

898

 

 

 

1,666

 

 

 

1,355

 

Total non-operating expense, net

 

(10,184

)

 

 

(8,530

)

 

 

(30,181

)

 

 

(26,564

)

Loss before provision for income taxes

 

(43,085

)

 

 

(8,111

)

 

 

(110,892

)

 

 

(26,571

)

Provision for income taxes

 

139

 

 

 

92

 

 

 

433

 

 

 

469

 

Net loss

$

(43,224

)

 

$

(8,203

)

 

$

(111,325

)

 

$

(27,040

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

$

(0.32

)

 

$

(0.06

)

 

$

(0.82

)

 

$

(0.21

)

Weighted average shares outstanding used in computing net loss per share

 

137,094

 

 

 

132,631

 

 

 

136,415

 

 

 

131,882

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Comprehensive loss

$

(43,167

)

 

$

(8,526

)

 

$

(111,117

)

 

$

(27,294

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

5


 

NEKTAR THERAPEUTICS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Nine months ended September 30,

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(111,325

)

 

$

(27,040

)

Adjustments to reconcile net loss to net cash (used in) provided by

   operating activities:

 

 

 

 

 

 

 

Non-cash royalty revenue related to sale of future royalties

 

(22,341

)

 

 

(14,752

)

Non-cash interest expense on liability related to sale of future royalties

 

14,929

 

 

 

15,428

 

Stock-based compensation

 

18,793

 

 

 

14,499

 

Depreciation and amortization

 

11,502

 

 

 

9,109

 

Other non-cash transactions

 

(2,190

)

 

 

(1,448

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

5,698

 

 

 

641

 

Inventory

 

592

 

 

 

2,600

 

Other assets

 

6,041

 

 

 

3,843

 

Accounts payable

 

4,799

 

 

 

(525

)

Accrued compensation

 

9,735

 

 

 

7,056

 

Accrued clinical trial expenses

 

2,726

 

 

 

3,394

 

Other accrued expenses

 

2,386

 

 

 

949

 

Interest payable

 

 

 

 

(3,750

)

Liability related to refundable upfront payment

 

12,500

 

 

 

 

Deferred revenue

 

(12,665

)

 

 

(11,832

)

Other liabilities

 

(5,793

)

 

 

3,854

 

Net cash (used in) provided by operating activities

 

(64,613

)

 

 

2,026

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of investments

 

(142,972

)

 

 

(202,870

)

Maturities of investments

 

201,449

 

 

 

155,683

 

Sales of investments

 

4,969

 

 

 

23,778

 

Release of restricted cash

 

 

 

 

25,000

 

Purchases of property, plant and equipment

 

(3,741

)

 

 

(8,722

)

Net cash provided by (used in) investing activities

 

59,705

 

 

 

(7,131

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Payment of capital lease obligations

 

(5,376

)

 

 

(3,798

)

Proceeds from shares issued under equity compensation plans

 

18,041

 

 

 

15,516

 

Net cash provided by financing activities

 

12,665

 

 

 

11,718

 

Effect of exchange rates on cash and cash equivalents

 

(32

)

 

 

(159

)

Net increase in cash and cash equivalents

 

7,725

 

 

 

6,454

 

Cash and cash equivalents at beginning of period

 

55,570

 

 

 

12,365

 

Cash and cash equivalents at end of period

$

63,295

 

 

$

18,819

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

$

15,513

 

 

$

16,095

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

Accrued debt issuance costs

$

-

 

 

$

8,503

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

6


 

NEKTAR THERAPEUTICS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

 

 

Note 1 — Organization and Summary of Significant Accounting Policies

Organization

We are a biopharmaceutical company headquartered in San Francisco, California and incorporated in Delaware. We are developing a pipeline of drug candidates that utilize our PEGylation and advanced polymer conjugate technology platforms, which are designed to enable the development of new molecular entities that target known mechanisms of action.  Our current proprietary pipeline is comprised of drug candidates across a number of therapeutic areas including oncology, pain, anti-infectives, and immunology.

Our research and development activities have required significant ongoing investment to date and are expected to continue to require significant investment. As a result, we expect to continue to incur substantial losses and negative cash flows from operations in the future. We have financed our operations primarily through cash generated from licensing, collaboration and manufacturing agreements and financing transactions. At September 30, 2016, we had approximately $253.5 million in cash and investments in marketable securities.  Also, as of September 30, 2016, we had $254.5 million in debt, including $250.0 million in principal of senior secured notes and $4.5 million of capital lease obligations, of which $2.4 million is current.

Basis of Presentation and Principles of Consolidation

Our consolidated financial statements include the financial position, results of operations and cash flows of our wholly-owned subsidiaries: Nektar Therapeutics (India) Private Limited (Nektar India) and Nektar Therapeutics UK Limited. All intercompany accounts and transactions have been eliminated in consolidation.

We prepared our Condensed Consolidated Financial Statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) for annual periods can be condensed or omitted. In the opinion of management, these financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and operating results.

Our Condensed Consolidated Financial Statements are denominated in U.S. dollars. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. dollar will affect the translation of each foreign subsidiary’s financial results into U.S. dollars for purposes of reporting our consolidated financial results. Translation gains and losses are included in accumulated other comprehensive loss in the stockholders’ equity section of the Condensed Consolidated Balance Sheets. To date, such cumulative currency translation adjustments have not been significant to our consolidated financial position.

Our comprehensive loss consists of our net loss plus our foreign currency translation gains and losses and unrealized holding gains and losses on available-for-sale securities, neither of which were significant during the three and nine months ended September 30, 2016 and 2015.  In addition, there were no significant reclassifications out of accumulated other comprehensive loss to the statements of operations during the three and nine months ended September 30, 2016 and 2015.

The accompanying Condensed Consolidated Financial Statements are unaudited. The Condensed Consolidated Balance Sheet data as of December 31, 2015 was derived from the audited consolidated financial statements which are included in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on February 29, 2016. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and the accompanying notes to those financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Revenue, expenses, assets, and liabilities can vary during each quarter of the year. The results and trends in these interim Condensed Consolidated Financial Statements are not necessarily indicative of the results to be expected for the full year or any other periods.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the

7


 

consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Accounting estimates and assumptions are inherently uncert ain. Actual results could differ materially from those estimates and assumptions. Our estimates include those related to estimated selling prices of deliverables in collaboration agreements, estimated periods of performance, the net realizable value of inv entory, the impairment of investments, the impairment of goodwill and long-lived assets, contingencies, accrued clinical trial expenses, estimated non-cash royalty revenue and interest expense from our liability related to our sale of future royalties, sto ck-based compensation, and ongoing litigation, among other estimates. We base our estimates on historical experience and on other assumptions that management believes are reasonable under the circumstances. These estimates form the basis for making judgmen ts about the carrying values of assets and liabilities when these values are not readily apparent from other sources. As appropriate, estimates are assessed each period and updated to reflect current information and any changes in estimates will generally be reflected in the period first identified.

Reclassifications

Certain items previously reported in specific financial statement captions have been reclassified to conform to the current period presentation, including as a result of the adoption of new accounting guidance related to debt issuance costs described below.  Such reclassifications do not materially impact previously reported revenue, operating income (loss), net income (loss), total assets, liabilities or stockholders’ equity (deficit).

Segment Information

We operate in one business segment which focuses on applying our technology platforms to improve the performance of established and novel drug candidates. We operate in one segment because our business offerings have similar economics and other characteristics, including the nature of products and manufacturing processes, types of customers, distribution methods and regulatory environment. We are comprehensively managed as one business segment by our Chief Executive Officer and his management team.

Significant Concentrations

Our customers are primarily pharmaceutical and biotechnology companies that are located in the U.S. and Europe. Our accounts receivable balance contains billed and unbilled trade receivables from product sales, milestones, other contingent payments and royalties, as well as time and materials based billings from collaborative research and development agreements. When appropriate, we provide for an allowance for doubtful accounts by reserving for specifically identified doubtful accounts. We generally do not require collateral from our customers. We perform a regular review of our customers’ payment histories and associated credit risk. We have not experienced significant credit losses from our accounts receivable and our allowance for doubtful accounts was not significant at either September 30, 2016 or December 31, 2015.

We are dependent on our suppliers and contract manufacturers to provide raw materials, drugs and devices of appropriate quality and reliability and to meet applicable contract and regulatory requirements. In certain cases, we rely on single sources of supply of one or more critical materials. Consequently, in the event that supplies are delayed or interrupted for any reason, our ability to develop and produce our drug candidates or our ability to meet our supply obligations could be significantly impaired, which could have a material adverse effect on our business, financial condition and results of operations.

Revenue Recognition

Our revenue is derived from our arrangements with pharmaceutical and biotechnology collaboration partners and may result from one or more of the following: upfront and license fees, payments for contract research and development, milestone and other contingent payments, manufacturing and supply payments, and royalties. Our performance obligations under our collaborations may include licensing our intellectual property, manufacturing and supply obligations, and research and development obligations.  In order to account for the multiple-element arrangements, we identify the deliverables included within the arrangement and evaluate which deliverables represent separate units of accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation to deliver goods or services, a right or license to use an asset, or another performance obligation. Revenue is recognized separately for each identified unit of accounting when the basic revenue recognition criteria are met: there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured.

8


 

At the inception of each new multiple-element arrangement or the material modification of an existing multiple- element arrangement, we allocate all consideration received under multiple-element arrangements to all units of accounting based on the relative selling price method, generally based on our best estimate of selling price (ESP). The objective of ESP is to d etermine the price at which we would transact a sale if the product or service was sold on a stand-alone basis. We determine ESP for the elements in our collaboration arrangements by considering multiple factors including, but not limited to, technical com plexity of the performance obligation and similarity of elements to those performed under previous arrangements. Since we apply significant judgment in arriving at the ESPs, any material change in our estimates would significantly affect the allocation of the total consideration to the different elements of a multiple element arrangement.

Product sales

Product sales are primarily derived from fixed price and cost-plus manufacturing and supply agreements with our collaboration partners. We have not experienced any significant returns from our customers.

Royalty revenue

Generally, we are entitled to royalties from our collaboration partners based on the net sales of their approved drugs that are marketed and sold in one or more countries where we hold royalty rights. We recognize royalty revenue when the cash is received or when the royalty amount to be received is estimable and collection is reasonably assured. With respect to the non-cash royalties related to sale of future royalties described in Note 4, revenue is recognized when estimable, otherwise, revenue is recognized during the period in which the related royalty report is received, which generally occurs in the quarter after the applicable product sales are made.

License, collaboration and other revenue

The amount of upfront fees and other payments received by us in license and collaboration arrangements that are allocated to continuing performance obligations, such as manufacturing and supply obligations, are deferred and generally recognized ratably over our expected performance period under each respective arrangement. We make our best estimate of the period over which we expect to fulfill our performance obligations, which may include technology transfer assistance, research activities, clinical development activities, and manufacturing activities from research and development through the commercialization of the product. Given the uncertainties of these collaboration arrangements, significant judgment is required to determine the duration of the performance period and this estimate is periodically re-evaluated.

Contingent consideration received from the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved, which we believe is consistent with the substance of our performance under our various license and collaboration agreements. A milestone is defined as an event (i) that can only be achieved based in whole or in part either on the entity’s performance or on the occurrence of a specific outcome resulting from the entity’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved, and (iii) that would result in additional payments being due to the entity. A milestone is substantive if the consideration earned from the achievement of the milestone is consistent with our performance required to achieve the milestone or the increase in value to the collaboration resulting from our performance, relates solely to our past performance, and is reasonable relative to all of the other deliverables and payments within the arrangement.

Our license and collaboration agreements with our partners provide for payments to us upon the achievement of development milestones, such as the completion of clinical trials or regulatory submissions, approvals by regulatory authorities, and commercial launches of drugs. Given the challenges inherent in developing and obtaining regulatory approval for drug products and in achieving commercial launches, there was substantial uncertainty whether any such milestones would be achieved at the time of execution of these licensing and collaboration agreements. In addition, we evaluated whether the development milestones met the remaining criteria to be considered substantive. As a result of our analysis, we consider our remaining development milestones under all of our license and collaboration agreements to be substantive and, accordingly, we expect to recognize as revenue future payments received from each milestone only if and as such milestone is achieved.

Our license and collaboration agreements with certain partners also provide for contingent payments to us based solely upon the performance of the respective partner. For such contingent amounts, we expect to recognize the payments as revenue when earned under the applicable contract, which is generally upon completion of performance by the respective partner, provided that collection is reasonably assured.

9


 

Our license and collaboration agreements with our partners also provide for payments to us upon the achievement of specified sales volumes of approved drugs. We consider these payments to be similar to royalty payments and we will recognize such sales-based payments upon achievement of such sales volumes, provided that collection is reasonably assured.

Research and Development Expense

Research and development costs are expensed as incurred and include salaries, benefits and other operating costs such as outside services, supplies and allocated overhead costs. We perform research and development for our proprietary drug candidates and technology development and for certain third parties under collaboration agreements. For our proprietary drug candidates and our internal technology development programs, we invest our own funds without reimbursement from a third party.

We record accruals for the estimated costs of our clinical trial activities performed by third parties. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows to our vendors. Payments under the contracts depend on factors such as the achievement of certain events, successful enrollment of patients, and completion of certain clinical trial activities. We generally accrue costs associated with the start-up and reporting phases of the clinical trials ratably over the estimated duration of the start-up and reporting phases. We generally accrue costs associated with the treatment phase of clinical trials based on the total estimated cost of the treatment phase on a per patient basis and we expense the per patient cost ratably over the estimated patient treatment period based on patient enrollment in the trials. In specific circumstances, such as for certain time-based costs, we recognize clinical trial expenses using a methodology that we consider to be more reflective of the timing of costs incurred. Advance payments for goods or services that will be used or rendered for future research and development activities are capitalized as prepaid expenses and recognized as expense as the related goods are delivered or the related services are performed. We base our estimates on the best information available at the time. However, additional information may become available to us which may allow us to make a more accurate estimate in future periods. In this event, we may be required to record adjustments to research and development expenses in future periods when the actual level of activity becomes more certain. Such increases or decreases in cost are generally considered to be changes in estimates and will be reflected in research and development expenses in the period identified.

Long-Lived Assets

We assess the impairment of long-lived assets, primarily property, plant and equipment and goodwill, whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. When such events occur, we determine whether there has been an impairment in value by comparing the carrying value of the asset with its fair value, as measured by the anticipated undiscounted net cash flows associated with the asset. In the case of goodwill impairment, we perform an impairment test at least annually, on October 1 of each year, and market capitalization is generally used as the measure of fair value. If an impairment in value exists, the asset is written down to its estimated fair value.

Income Taxes

For the three and nine months ended September 30, 2016 and 2015, we recorded an income tax provision for our Nektar India operations at an effective tax rate of approximately 35%. The U.S. federal deferred tax assets generated from our net operating losses have been fully reserved, as we believe it is not more likely than not that the benefit will be realized.

Adoption of New Accounting Principle

In April 2015, the Financial Accounting Standards Board (FASB) issued guidance to simplify the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability.  This guidance is effective for our interim and annual periods beginning January 1, 2016.  Upon adoption, the new guidance must be applied retrospectively to all periods presented.  Accordingly, as of January 1, 2016, we reclassified $0.4 million and $3.0 million of capitalized debt issuance costs to senior secured notes, net, and liability related to the sale of future royalties, net, respectively, from our other assets balance.  This reclassification has also been applied retrospectively to these balances in our Condensed Consolidated Balance Sheet as of December 31, 2015.

Recent Accounting Pronouncements

In May 2014, the FASB issued guidance codified in Accounting Standards Codification (ASC) 606, Revenue Recognition — Revenue from Contracts with Customers , which amends the guidance in former ASC 605, Revenue Recognition , and is effective for public companies for fiscal years beginning after December 15, 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. We are currently evaluating the impact of the provisions of ASC 606.

10


 

In March 2016, the FASB issued guidance to simplify several aspects of employee share-based payment accounting, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  This guidance will become effective for us beginning in the first quarter of 2017.  Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard.

In February 2016, the FASB issued guidance to amend a number of aspects of lease accounting, including requiring lessees to recognize almost all leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments.  The guidance will become effective for us beginning in the first quarter of 2019 and is required to be adopted using a modified retrospective approach.  Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard.

 

 

Note 2 — Cash and Investments in Marketable Securities

Cash and investments in marketable securities, including cash equivalents, are as follows (in thousands):

 

 

 

Estimated Fair Value at

 

 

 

September 30,

2016

 

 

December 31,

2015

 

Cash and cash equivalents

 

$

63,295

 

 

$

55,570

 

Short-term investments

 

 

190,216

 

 

 

253,374

 

Total cash and investments in marketable securities

 

$

253,511

 

 

$

308,944

 

 

We invest in liquid, high quality debt securities. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in securities with maturities of two years or less and maintain a weighted average maturity of one year or less. As of September 30, 2016 and December 31, 2015, all of our investments had maturities of one year or less.

Gross unrealized gains and losses were not significant at either September 30, 2016 or December 31, 2015. During the three and nine months ended September 30, 2016, we sold available-for-sale securities totaling $5.0 million and gross realized gains and losses on those sales were not significant.  During the three and nine months ended September 30, 2015, we sold available-for-sale securities totaling $18.6 million and $23.8 million, respectively, and gross realized gains and losses on those sales were not significant. The cost of securities sold is based on the specific identification method.

Under the terms of our 7.75% senior secured notes due October 2020, we are required to maintain a minimum cash and investments in marketable securities balance of $60.0 million during the term of the notes.

Our portfolio of cash and investments in marketable securities includes (in thousands):

 

 

 

 

 

 

 

Estimated Fair Value at

 

 

 

Fair Value

Hierarchy

Level

 

 

September 30,

2016

 

 

December 31,

2015

 

Corporate notes and bonds

 

 

2

 

 

$

74,564

 

 

$

181,969

 

Corporate commercial paper

 

 

2

 

 

 

95,924

 

 

 

61,150

 

Obligations of U.S. government agencies

 

 

2

 

 

 

16,798

 

 

 

7,325

 

Available-for-sale investments

 

 

 

 

 

 

187,286

 

 

 

250,444

 

Money market funds

 

 

1

 

 

 

62,092

 

 

 

53,728

 

Certificate of deposit

 

N/A

 

 

 

2,930

 

 

 

2,930

 

Cash

 

N/A

 

 

 

1,203

 

 

 

1,842

 

Total cash and investments in marketable securities

 

 

 

 

 

$

253,511

 

 

$

308,944

 

 

 

 

Level 1 —

Quoted prices in active markets for identical assets or liabilities.

Level 2 —

Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 —

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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All of our investments are categorized as Level 1 or Level 2, as explained in the table above. We use a market approach to value our Level 2 investments. The disclosed fair valu e related to our investments is based primarily on the reported fair values in our period-end brokerage statements, which are based on market prices from a variety of industry standard data providers and generally represent quoted prices for similar assets in active markets or have been derived from observable market data. We independently validate these fair values using available market quotes and other information. During the three and nine months ended September 30, 2016 and 2015, there were no transfer s between Level 1 and Level 2 of the fair value hierarchy.

Additionally, as of September 30, 2016, based on a discounted cash flow analysis using Level 3 inputs including financial discount rates, we believe the $250.0 million in principal amount of our 7.75% senior secured notes due October 2020 is consistent with its fair value.

 

 

Note 3 — Inventory

Inventory consists of the following (in thousands):

 

 

 

September 30,   2016

 

 

December   31,   2015

 

Raw materials

 

$

2,386

 

 

$

3,236

 

Work-in-process

 

 

6,695

 

 

 

6,087

 

Finished goods

 

 

1,673

 

 

 

2,023

 

Total inventory

 

$

10,754

 

 

$

11,346

 

 

Inventory is generally manufactured upon receipt of firm purchase orders from our collaboration partners. Inventory includes direct materials, direct labor, and manufacturing overhead and cost is determined on a first-in, first-out basis. Inventory is valued at the lower of cost or market and defective or excess inventory is written down to net realizable value based on historical experience or projected usage.

 

 

Note 4 — Liability Related to Sale of Future Royalties

On February 24, 2012, we entered into a Purchase and Sale Agreement (the Purchase and Sale Agreement) with RPI Finance Trust (RPI), an affiliate of Royalty Pharma, pursuant to which we sold, and RPI purchased, our right to receive royalty payments (the Royalty Entitlement) arising from the worldwide net sales, from and after January 1, 2012, of (a) CIMZIA ® , under our license, manufacturing and supply agreement with UCB Pharma (UCB), and (b) MIRCERA ® , under our license, manufacturing and supply agreement with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (together referred to as Roche). We received aggregate cash proceeds of $124.0 million for the Royalty Entitlement. As part of this sale, we incurred approximately $4.4 million in transaction costs, which will be amortized to interest expense over the estimated life of the Purchase and Sale Agreement.  Although we sold all of our rights to receive royalties from the CIMZIA ® and MIRCERA ® products, as a result of our ongoing manufacturing and supply obligations related to the generation of these royalties, we will continue to account for these royalties as revenue.  We recorded the $124.0 million in proceeds from this transaction as a liability (Royalty Obligation) that will be amortized using the interest method over the estimated life of the Purchase and Sale Agreement as royalties from the CIMZIA ® and MIRCERA ® products are remitted directly to RPI. During the nine months ended September 30, 2016 and 2015, we recognized $22.3 million and $14.8 million, respectively, in non-cash royalties from net sales of CIMZIA ® and MIRCERA ® and we recorded $14.9 million and $15.4 million, respectively, of related non-cash interest expense.

Since its inception, our estimate of the total interest expense on the Royalty Obligation resulted in an effective annual interest rate of approximately 17%. We periodically assess the estimated royalty payments to RPI from UCB and Roche and to the extent such payments are greater or less than our initial estimates, or the timing of such payments is materially different than our original estimates, we will prospectively adjust the amortization of the Royalty Obligation.

Pursuant to the Purchase and Sale Agreement, in March 2014 and March 2013, we were required to pay RPI $7.0 million and $3.0 million, respectively, as a result of worldwide net sales of MIRCERA ® for the 12 month periods ended December 31, 2013 and 2012 not reaching certain minimum thresholds.  The Purchase and Sale Agreement does not include any other potential payments related to minimum net sales thresholds and, therefore, we do not expect to make any further payments to RPI related to this agreement.

In addition, the Purchase and Sale Agreement grants RPI the right to receive certain reports and other information relating to the Royalty Entitlement and contains other representations and warranties, covenants and indemnification obligations that are customary for a transaction of this nature. To our knowledge, we are currently in compliance with these provisions of the Purchase and Sale

12


 

Agreement; however, if we were to breach our obligations, we could be required to pay damages to RPI that are not limited to the purchase price we received in the sale t ransaction.

 

 

Note 5 — Commitments and Contingencies

Legal Matters

From time to time, we are involved in lawsuits, arbitrations, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions are reviewed at least quarterly and adjusted to reflect the impact of settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. If any unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of our operations of that period and on our cash flows and liquidity.

On August 14, 2015, Enzon, Inc. filed a breach of contract complaint in the Supreme Court of the State of New York (Court) claiming damages of $1.5 million plus interest for unpaid licensing fees through the date of the complaint. Enzon alleged that we failed to pay a post-patent expiration immunity fee related to one of the licenses. Following a hearing held on December 21, 2015, the Court granted Nektar’s motion to dismiss the Enzon complaint. Enzon filed an appeal to the Court’s dismissal decision. On October 25, 2016 the Supreme Court of the State of New York, Appellate Division, reversed the earlier decision by the Court granting Nektar’s motion to dismiss the Enzon complaint. As a result, the case has been remanded to the Court for further proceedings.  

Indemnifications in Connection with Commercial Agreements

As part of our collaboration agreements with our partners related to the license, development, manufacture and supply of drugs based on our proprietary technologies and drug candidates, we generally agree to defend, indemnify and hold harmless our partners from and against third party liabilities arising out of the agreement, including product liability (with respect to our activities) and infringement of intellectual property to the extent the intellectual property is developed by us and licensed to our partners. The term of these indemnification obligations is generally perpetual any time after execution of the agreement. There is generally no limitation on the potential amount of future payments we could be required to make under these indemnification obligations.

From time to time we enter into other strategic agreements such as divestitures and financing transactions pursuant to which we are required to make representations and warranties and undertake to perform or comply with certain covenants.  In the event it is determined that we breached certain of the representations and warranties or covenants made by us in any such agreements, we could incur substantial indemnification liabilities depending on the timing, nature, and amount of any such claims.

To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification obligations. Because the aggregate amount of any potential indemnification obligation is not a stated amount, the overall maximum amount of any such obligations cannot be reasonably estimated. No liabilities have been recorded for these obligations in our Condensed Consolidated Balance Sheets at either September 30, 2016 or December 31, 2015.

 

 

Note 6 — License and Collaboration Agreements

We have entered into various collaboration agreements including license agreements and collaborative research, development and commercialization agreements with various pharmaceutical and biotechnology companies. Under these collaboration arrangements, we are entitled to receive license fees, upfront payments, milestone and other contingent payments, royalties, sales milestones, and payments for the manufacture and supply of our proprietary PEGylation materials and/or reimbursement for research and development activities. All of our collaboration agreements are generally cancelable by our partners without significant financial penalty. Our costs of performing these services are generally included in research and development expense, except that costs for product sales to our collaboration partners are included in cost of goods sold.

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In accordance with our collaboration agreements, we recognized license, collaboration and other revenue as follows (in thousands):

 

 

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

Partner

 

Drug or Drug Candidate

 

2016

 

 

2015

 

 

2016

 

 

2015

 

AstraZeneca AB

 

MOVANTIK TM and MOVANTIK TM fixed-dose combination program

 

$

3,000

 

 

$

40,000

 

 

$

31,000

 

 

$

130,000

 

Roche

 

PEGASYS ® and MIRCERA ®

 

 

1,929

 

 

 

3,212

 

 

 

5,771

 

 

 

9,619

 

Amgen, Inc.

 

Neulasta ®

 

 

1,250

 

 

 

1,250

 

 

 

3,750

 

 

 

3,750

 

Daiichi Sankyo Europe GmbH

 

ONZEALD TM (NKTR-102)

 

 

216

 

 

 

 

 

 

3,474

 

 

 

 

Bayer Healthcare LLC

 

BAY41-6551

(Amikacin Inhale)

 

 

357

 

 

 

357

 

 

 

1,072

 

 

 

1,562

 

Baxalta Incorporated

 

ADYNOVATE TM

 

 

336

 

 

 

409

 

 

 

648

 

 

 

607

 

Other

 

 

 

 

1,285

 

 

 

1,247

 

 

 

5,114

 

 

 

3,885

 

License, collaboration and other revenue

 

$

8,373

 

 

$

46,475

 

 

$

50,829

 

 

$

149,423

 

 

As of September 30, 2016, our collaboration agreements with partners included potential future payments for development milestones totaling approximately $147.0 million, including amounts from our agreements with Daiichi, Bayer, Baxalta and Ophthotech described below. In addition, under our collaboration agreements we are entitled to receive contingent development payments and contingent sales milestones and royalty payments, including those related to MOVANTIK TM and the MOVANTIK TM fixed-dose combination drug development programs, as described below.

There have been no material changes to our collaboration agreements in the nine months ended September 30, 2016, except as described below.

Bristol-Myers Squibb :  NKTR-214

 

On September 21, 2016, we entered into a Clinical Trial Collaboration Agreement (BMS Agreement) with Bristol-Myers Squibb Company, a Delaware corporation (BMS), pursuant to which we and BMS will collaborate to conduct Phase 1/2 clinical trials evaluating our IL-2-based CD122-biased agonist, known as NKTR-214, and BMS’ human monoclonal antibody that binds PD-1, known as Opdivo ( nivolumab) , as a potential combination treatment regimen in five tumor types and seven potential indications, and such other clinical trials evaluating the combined therapy as may be mutually agreed upon by the parties (each, a “Combination Therapy Trial”).

 

We will act as the sponsor of each Combination Therapy Trial.  Under the BMS Agreement, BMS will be responsible for 50% of all out-of-pocket costs reasonably incurred in connection with third party contract research organizations, laboratories, clinical sites and institutional review boards. Each party will otherwise be responsible for its own internal costs, including internal personnel costs, incurred in connection with each Combination Therapy Trial. Nektar and BMS will use commercially reasonable efforts to manufacture and supply NKTR-214 and Opdivo (nivolumab), respectively, for each Combination Therapy Trial with each party bearing its own costs related thereto. The parties will form a joint development committee to oversee clinical trial design, regulatory strategy, and other activities necessary to conduct and support the Combination Therapy Trials.

 

Ownership of, and global commercial rights to, NKTR-214 remain solely with us under the BMS Agreement.  If we wish to license the right to commercialize NKTR-214 in one of certain major market territories prior to September 30, 2018 (Exclusivity Expiration Date), we must first negotiate with BMS, for a period of three months (Negotiation Period), to grant an exclusive license to develop and commercialize NKTR-214 in any of these major market territories. If we do not reach an agreement with BMS for an exclusive license within the Negotiation Period, we will be free to license any right to NKTR-214 to other parties in any territory worldwide except that in the event that we receive a license offer from a third party during a period of 90 calendar days after the end of the Negotiation Period, we will provide BMS ten business days to match the terms of such third-party offer. After the Exclusivity Expiration Date, we are free to license NKTR-214 without any further obligation to BMS. Each party grants to the other party a non-exclusive, worldwide (subject to certain exceptions in the case of the license granted by BMS), non-transferable and royalty-free research and development license to such licensing party’s patent rights, technology and regulatory documentation to use its compound solely to the extent necessary to discharge its obligations under the BMS Agreement with respect to the conduct of the Combination Therapy Trials.  

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Daiichi Sankyo Europe GmbH :  ONZEALD TM (etirinotecan pegol), also referre d to as NKTR-102

 

Effective May 30, 2016, we entered into a collaboration and license agreement with Daiichi Sankyo Europe GmbH, a German limited liability company (Daiichi), under which we  granted Daiichi exclusive commercialization rights in the European Economic Area, Switzerland, and Turkey (collectively, the European Territory) to our proprietary product candidate ONZEALD™ (etirinotecan pegol), which is also known as NKTR-102, a long-acting topoisomerase I inhibitor in clinical development for the treatment of adult patients with advanced breast cancer who have brain metastases (BCBM). Nektar retains all rights to ONZEALD™ in all countries outside the European Territory including the United States.

 

Under the terms of the agreement and in consideration for the exclusive commercialization rights in the European Territory, Daiichi paid us a $20.0 million up-front payment in August 2016 and we will be eligible to receive up to an aggregate of $60.0 million in regulatory and commercial milestones, including a $10.0 million payment upon the first commercial sale of ONZEALD™ following conditional marketing approval by the European Commission (EC), a $25.0 million payment upon the first commercial sale following final marketing authorization approval of ONZEALD™ by the EC, and a $25.0 million sales milestone upon Daiichi’s first achievement of a certain specified annual net sales target. We are also eligible to receive a 20% royalty on net sales of ONZEALD™ by Daiichi in all countries in the European Territory except for net sales in Turkey where Nektar is eligible to receive a 15% royalty. The parties will enter into a supply agreement whereby we will be responsible for supplying Daiichi with its requirements for ONZEALD™ on a fully burdened reimbursed cost basis. Daiichi will be responsible for all commercialization activities for ONZEALD™ in the European Territory and will bear all associated costs. In addition, we are responsible for funding and conducting a Phase 3 confirmatory trial in patients with BCBM which we call the ATTAIN study.  

Daiichi may terminate the agreement in the event that the EC does not grant conditional marketing approval for ONZEALD™ based on existing clinical data for ONZEALD™ or the conditional marketing approval for ONZEALD™ is not granted prior to a pre-specified future date (Daiichi Pre-Conditional Approval Termination). We may terminate the Agreement in the event that the EC requires changes in the ATTAIN study that materially increase the costs of such trial and Daiichi elects not to reimburse us for such incremental costs (Nektar Pre-Conditional Approval Termination).  In the event of a Daiichi Pre-Conditional Approval Termination or a Nektar Pre-Conditional Approval Termination, we would be obligated to pay Daiichi a $12.5 million termination payment. Following conditional marketing approval of ONZEALD™ by the EC, we would no longer have such termination payment obligation. Each party has certain other termination rights based on the safety or efficacy findings including the outcome of the ATTAIN study and any material uncured breaches of the Agreement.  The $12.5 million contingent termination payment from us to Daiichi is recorded in our liability related to refundable upfront payment balance in our Condensed Consolidated Balance Sheet at September 30, 2016.

We identified our grant of the exclusive license to Daiichi on May 30, 2016 and our ongoing clinical and regulatory development service obligations as the significant, non-contingent deliverables under the agreement and determined that each represents a separate unit of accounting.  We made our best estimate of the selling price for the license grant based on a discounted cash flow analysis of projected ONZEALD™ sales and estimated the selling price for the development services based on our experience with the costs of similar clinical studies and regulatory activities.  Based on these estimates, we allocated the $7.5 million non-refundable portion of the $20.0 million upfront payment from Daiichi to these items based on their relative selling prices.  As a result, we recognized $3.5 million of revenue in the nine months ended September 30, 2016 from this arrangement, primarily related to the delivery of the license.  As of September 30, 2016, we have deferred revenue of approximately $4.0 million related to our development service obligations under this agreement, which we expect to recognize through May 2021, the estimated end of our development obligations.  If and when the remaining $12.5 million portion of the upfront payment becomes non-refundable, we expect to allocate this amount between the license and development service obligation consistent with the estimated selling prices of these deliverables.  The license related amount will be recognized immediately and the development service related amount will be recorded as deferred revenue and recognized ratably over the remaining obligation period.  

We determined that the milestones noted above payable to us by Daiichi upon the first commercial sale of ONZEALD™ following conditional marketing approval and following final marketing authorization approval of ONZEALD™ by the EC are substantive milestones that will be recognized if and when achieved.  In addition, we determined that the sales milestone due to us upon Daiichi’s first achievement of a certain specified annual net sales target should be considered a contingent payment and will be recognized if and when achieved.

AstraZeneca AB :  MOVANTIK TM (naloxegol oxalate), previously referred to as naloxegol and NKTR-118, and MOVANTIK TM fixed-dose combination program, previously referred to as NKTR-119

We are a party to an agreement with AstraZeneca AB (AstraZeneca) under which we granted AstraZeneca a worldwide, exclusive license under our patents and other intellectual property to develop, market, and sell MOVANTIK TM and MOVANTIK TM fixed-dose combination program. AstraZeneca is responsible for all research, development and commercialization and is responsible

15


 

for all drug development and commercialization decisions for MOVANTIK TM and th e MOVANTIK TM fixed-dose combination program. AstraZeneca paid us an upfront payment of $125.0 million, which we received in the fourth quarter of 2009 and which was fully recognized as of December 31, 2010. In addition, we have received the payments descri bed further below based on development events related to MOVANTIK TM completed solely by AstraZeneca. We are entitled to receive up to $75.0 million of commercial launch contingent payments related to the MOVANTIK TM fixed-dose combination program, based on development events to be pursued and completed solely by AstraZeneca.  In addition, we are entitled to significant and escalating double-digit royalty payments and sales milestone payments based on annual worldwide net sales of MOVANTIK TM and MOVANTIK TM fi xed-dose combination products.

On September 16, 2014, the United States Food and Drug Administration (FDA) approved MOVANTIK TM for the treatment of opioid-induced constipation (OIC) in adult patients with chronic, non-cancer pain.  On December 9, 2014, AstraZeneca announced that MOVENTIG ® (the naloxegol brand name in the European Union or EU) had been granted Marketing Authorisation by the European Commission (EC) for the treatment of opioid-induced constipation (OIC) in adult patients who have had an inadequate response to laxative(s).  In March 2015, AstraZeneca announced that MOVANTIK™ launched in the United States which resulted in our receipt of a $100.0 million non-refundable commercial launch payment on March 31, 2015, which was recognized as revenue in March 2015.  In March 2015, we agreed to pay AstraZeneca a total of $10.0 million to fund U.S. television advertising in consideration for certain additional commercial information rights. We recorded this $10.0 million obligation as a liability, made the initial $5.0 million payment to AstraZeneca in July 2015, and the remaining $5.0 million payment in July 2016.  We determined that this $10.0 million obligation should be recorded as a reduction of revenue, which we recorded in the three months ended March 31, 2015. In August 2015, we received and recognized as revenue an additional $40.0 million non-refundable payment triggered by the first commercial sale of MOVENTIG ® in Germany.

On March 1, 2016, AstraZeneca announced that it had entered into an agreement with ProStrakan Group plc (ProStrakan), a subsidiary of Kyowa Hakko Kirin Co. Ltd., granting ProStrakan exclusive marketing rights to MOVENTIG ® in the EU, Iceland, Liechtenstein, Norway and Switzerland. Under the terms of AstraZeneca’s agreement with ProStrakan, ProStrakan made a $70.0 million upfront payment to AstraZeneca and will make additional payments based on achieving market access milestones, tiered net sales royalties, as well as sales milestones. Under our license agreement with AstraZeneca, AstraZeneca and we will share the upfront payment, market access milestones, royalties and sales milestones from ProStrakan with AstraZeneca receiving 60% and Nektar receiving 40%. This payment sharing arrangement is in lieu of other royalties payable by AstraZeneca to us and a portion of the sales milestones as described below. Our 40% share of royalty payments made by ProStrakan to AstraZeneca will be financially equivalent to us receiving high single-digit to low double-digit royalties dependent on the level of ProStrakan’s net sales. ProStrakan’s MOVENTIG ® net sales will be included for purposes of achieving the annual global sales milestones payable to us by AstraZeneca and will also be included for purposes of determining the applicable ex-U.S. royalty rate, from the tier schedule in our AstraZeneca license agreement, that will be applied to ex-U.S. sales outside of the ProStrakan territory. The global sales milestones under our license agreement with AstraZeneca will be reduced in relation to the amount of ProStrakan MOVENTIG ® net sales that contribute to any given annual sales milestone target.  As a result, we were entitled to receive 40% (or $28.0 million) of the $70.0 million payment received by AstraZeneca from ProStrakan in March 2016, recognized this amount as revenue in March 2016 and received this $28.0 million in April 2016.  In the three months ended September 30, 2016, we recognized $3.0 million related to our share of an additional sublicense milestone payment made by ProStrakan to AstraZeneca in September 2016.  As of September 30, 2016, we do not have deferred revenue related to our agreement with AstraZeneca.

In general, other than as described above and in this paragraph, AstraZeneca has full responsibility for all research, development and commercialization costs under our license agreement.  As part of its approval of MOVANTIK TM , the FDA required AstraZeneca to perform a post-marketing, observational epidemiological study comparing MOVANTIK TM to other treatments of OIC in patients with chronic, non-cancer pain.  As a result, the royalty rate payable to us from net sales of MOVANTIK TM in the U.S. by AstraZeneca will be reduced by up to two percentage points to fund 33% of the external costs incurred by AstraZeneca to fund such post approval study once it is initiated, subject to a $35.0 million aggregate cap.  Any costs incurred by AstraZeneca can only be recovered by the reduction of the royalty paid to us.  In no case can amounts be recovered by the reduction of a contingent payment due from AstraZeneca to us or through a payment from us to AstraZeneca.

Baxalta Incorporated : Hemophilia

We are a party to an exclusive research, development, license and manufacturing and supply agreement with Baxalta Incorporated (Baxalta) entered into in September 2005 to develop products designed to improve therapies for Hemophilia A patients using our PEGylation technology.  Under the terms of the agreement, we are entitled to research and development funding and are responsible for supplying Baxalta with its requirements for our proprietary materials. Baxalta is responsible for all clinical development, regulatory, and commercialization expenses.

16


 

This Hemophilia A program includes ADYNOVATE TM , which was approved by the FDA in November 2015 for use in adult s and adolescents, aged 12 years and older, who have Hemophilia A, and is now marketed in the U.S.  As a result of the FDA’s approval, we achieved and recognized a $10.0 million development milestone in November 2015, which was received in January 2016. In addition, under the terms of this agreement, we are entitled to a $10.0 million development milestone due upon marketing authorization in the EU, as well as sales milestones upon achievement of annual sales targets and royalties based on annual worldwide net sales of products resulting from this agreement. As of September 30, 2016, we do not have deferred revenue related to this agreement.

Roche : PEGASYS ® and MIRCERA ®

In February 2012, we entered into a toll-manufacturing agreement with Roche under which we will manufacture the proprietary PEGylation material used by Roche to produce MIRCERA ® . Roche entered into the toll-manufacturing agreement with the objective of establishing us as a secondary back-up supply source on a non-exclusive basis.  Under the terms of our toll-manufacturing agreement, Roche paid us an upfront payment of $5.0 million and an additional $22.0 million in performance-based milestone payments upon our achievement of certain manufacturing readiness, validation and production milestones, including the delivery of specified quantities of PEGylation materials, all of which were completed as of January 2013. Roche will also pay us additional consideration for any future orders of the PEGylation materials for MIRCERA ® beyond the initial quantities manufactured through January 2013. Roche has the right to terminate the toll-manufacturing agreement due to an uncured material default by us. In addition, in August 2013, we agreed to deliver additional quantities of PEGylation materials used by Roche to produce PEGASYS ® and MIRCERA ® , all of which were delivered in the last quarter of 2013, for total consideration of $18.6 million.  As of September 30, 2016, we have deferred revenue of approximately $1.9 million related to this agreement, which we expect to recognize through December 2016, the estimated end of our obligations under this agreement.

In February 1997, we entered into a license, manufacturing and supply agreement with Roche, under which we granted Roche a worldwide, exclusive license to certain intellectual property related to our proprietary PEGylation materials used in the manufacture and commercialization of PEGASYS ® .  Our performance obligations under this PEGASYS ® agreement ended on December 31, 2015.

Amgen, Inc .: Neulasta®

In October 2010, we amended and restated an existing supply and license agreement by entering into a supply, dedicated suite and manufacturing guarantee agreement (the amended and restated agreement) and a license agreement with Amgen Inc. and Amgen Manufacturing, Limited (together referred to as Amgen). Under the terms of the amended and restated agreement, we received a $50.0 million payment in the fourth quarter of 2010 in return for our guaranteeing the supply of certain quantities of our proprietary PEGylation materials to Amgen.  As of September 30, 2016, we have deferred revenue of approximately $20.4 million related to this agreement, which we expect to recognize through October 2020, the estimated end of our obligations under this agreement.

Bayer Healthcare LLC : BAY41-6551 (Amikacin Inhale)

In August 2007, we entered into a co-development, license and co-promotion agreement with Bayer Healthcare LLC (Bayer) to develop a specially-formulated inhaled Amikacin. We are responsible for development and manufacturing and supply of our proprietary nebulizer device included in the Amikacin product.  In April 2013, Bayer initiated a Phase 3 clinical trial in the treatment of intubated and mechanically ventilated patients with Gram-negative pneumonia.  As of September 30, 2016, we have received an upfront payment of $40.0 million (which was paid to us in 2007) and milestone payments totaling $30.0 million (the last of which was paid to us in 2013).  In addition, in June 2013, we made a $10.0 million payment to Bayer for the reimbursement of some of its costs of the Phase 3 clinical trial.

We are entitled to receive a total of up to an additional $50.0 million of development milestones upon achievement of certain development objectives, as well as sales milestones upon achievement of annual sales targets and royalties based on annual worldwide net sales of Amikacin Inhale. As of September 30, 2016, we have deferred revenue of approximately $18.2 million related to this agreement, which we expect to recognize through June 2029, the estimated end of our obligations under this agreement.

Ophthotech Corporation : Fovista ®

We are a party to an agreement with Ophthotech Corporation (Ophthotech), dated September 30, 2006, under which Ophthotech received a worldwide, exclusive license to certain of our proprietary PEGylation technology to develop, manufacture and sell Fovista®. Under the terms of our agreement, we are the exclusive supplier of all of Ophthotech’s clinical and commercial requirements for our proprietary PEGylation reagent used in Fovista ® , which is currently in Phase 3 clinical development.  On May 19, 2014, Ophthotech entered into a Licensing and Commercialization Agreement with Novartis Pharma AG for Fovista ® .  Under our agreement with Ophthotech, in June 2014, we received a $19.8 million payment in connection with this licensing agreement.  As of

17


 

September 30, 2016, we have deferred revenue of approximately $17.2 million related to this agreement, which we expect to recognize through March 2029, the estimated end of our obligations under our agreement with Ophthotech.

In addition, we are entitled to up to $9.5 million in additional payments based upon Ophthotech’s potential achievement of certain regulatory and sales milestones, including a $2.5 million milestone due upon acceptance for review of a regulatory approval application in the U.S. or EU. We are also entitled to royalties on net sales of Fovista ® that vary based on sales levels, if commercialized.

Other

In addition, as of September 30, 2016, we have a number of collaboration agreements, including with our collaboration partner UCB, under which we are entitled to up to a total of $45.5 million of development milestones upon achievement of certain development objectives, as well as sales milestones upon achievement of annual sales targets and royalties based on net sales of commercialized products, if any. However, given the current phase of development of the potential products under these collaboration agreements, we cannot estimate the probability or timing of achieving these milestones.  As of September 30, 2016, we have deferred revenue of approximately $9.4 million related to these other collaboration agreements, which we expect to recognize through 2020, the estimated end of our obligations under those agreements.

 

 

Note 7 — Stock-Based Compensation

Total stock-based compensation expense was recognized in our Condensed Consolidated Statements of Operations as follows (in thousands):

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Cost of goods sold

$

396

 

 

$

274

 

 

$

1,186

 

 

$

837

 

Research and development

 

3,181

 

 

 

2,208

 

 

 

9,505

 

 

 

6,755

 

General and administrative

 

2,589

 

 

 

2,280

 

 

 

8,102

 

 

 

6,907

 

Total stock-based compensation

$

6,166

 

 

$

4,762

 

 

$

18,793

 

 

$

14,499

 

 

During the three months ended September 30, 2016 and 2015, we granted options to purchase 657,960 and 483,300 shares, respectively, at a weighted average grant-date fair value of $8.06 per share and $5.86 per share, respectively.  During the three months ended September 30, 2016 and 2015, we granted 56,000 and 120,000 restricted stock unit awards (RSUs), respectively.

 

During the nine months ended September 30, 2016 and 2015, we granted options to purchase 1,447,250 and 962,310 shares, respectively, at a weighted average grant-date fair value of $7.42 per share and $6.10 per share, respectively.  During the nine months ended September 30, 2016 and 2015, we granted 58,000 and 120,000 RSUs, respectively.

As a result of stock issuances under our equity compensation plans, during the three months ended September 30, 2016 and 2015, we issued 1,193,764 and 1,031,573 shares of our common stock, respectively, and during the nine months ended September 30, 2016 and 2015, we issued 2,507,701 and 2,000,823 shares of our common stock, respectively.

 

 

Note 8 — Net Loss Per Share

Basic net loss per share is calculated based on the weighted-average number of common shares outstanding during the periods presented. For all periods presented in the accompanying Condensed Consolidated Statements of Operations, the net loss available to common stockholders is equal to the reported net loss. Basic and diluted net loss per share are the same due to our historical net losses and the requirement to exclude potentially dilutive securities which would have an anti-dilutive effect on net loss per share.   

During the three and nine months ended September 30, 2016 and 2015, potentially dilutive securities consisted of common shares underlying outstanding stock options and RSUs.  During the three months ended September 30, 2016 and 2015, there were weighted average outstanding stock options and RSUs of 19.1 million and 20.6 million shares, respectively, and during the nine months ended September 30, 2016 and 2015, there were weighted average outstanding stock options and RSUs of 19.4 million and 21.3 million shares, respectively.

 

18


 

 

Note 9 — Subsequent Event

 

On October 24, 2016, we completed the issuance and sale of 14,950,000 shares of our common stock, including 1,950,000 shares issued upon the full exercise by the underwriters of an option granted by us to the underwriters, in an underwritten public offering with total proceeds of approximately $189.7 million after deducting the underwriting commissions and discounts of approximately $12.1 million. In addition, we incurred approximately $0.6 million in legal and accounting fees, filing fees, and other costs in connection with this offering.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section as well as factors described in “Part II, Item 1A-Risk Factors.”

Overview

Strategic Direction of Our Business

We are a biopharmaceutical company developing a pipeline of drug candidates that utilize our PEGylation and advanced polymer conjugate technology platforms, which are designed to enable the development of new molecular entities that target known mechanisms of action. Our current proprietary pipeline is comprised of drug candidates across a number of therapeutic areas including oncology, pain, anti-infectives, and immunology. Our research and development activities involve small molecule drugs, peptides and protein biologic drug candidates. We create innovative drug candidates by using our proprietary advanced polymer conjugate technologies and expertise to modify the chemical structure of pharmacophores to create new molecular entities. Polymer chemistry is a science focused on the synthesis or bonding of polymer architectures with drug molecules to alter the properties of a molecule. Additionally, we may utilize established pharmacologic targets to engineer a new drug candidate relying on a combination of the known properties of these targets and our proprietary polymer chemistry technology and expertise. Our drug candidates are designed to improve the overall benefits and use of a drug for patients by improving the metabolism, distribution, pharmacokinetics, pharmacodynamics, half-life and/or bioavailability of drugs. Our objective is to apply our advanced polymer conjugate technology platform to create new drug candidates in multiple therapeutic areas that address large potential markets.

In 2014, we achieved the first approval of one of our proprietary drug candidates, MOVANTIK TM (naloxegol), under a global license agreement with AstraZeneca.  MOVANTIK TM is an oral peripherally-acting opioid antagonist, for the treatment of opioid-induced constipation, or OIC, a side effect caused by chronic administration of prescription opioid pain medicines.  AstraZeneca markets and sells MOVANTIK TM in the United States in collaboration with Daiichi Sankyo, Inc.  On March 31, 2015, AstraZeneca and Daiichi launched MOVANTIK TM in the United States.  On March 1, 2016, AstraZeneca entered into an agreement with ProStrakan Group plc (ProStrakan), a subsidiary of Kyowa Hakko Kirin Co. Ltd., granting ProStrakan exclusive marketing rights to MOVENTIG ® (the naloxegol brand name in the EU) in the EU, Iceland, Liechtenstein, Norway and Switzerland. Under the terms of that agreement, ProStrakan made a $70 million upfront payment to AstraZeneca and will make future payments based on achieving market access milestones, tiered net sales royalties, as well as sales milestones.  Under our license agreement, AstraZeneca and Nektar will share the upfront payment, market access milestones, royalties and sales milestones from ProStrakan with AstraZeneca receiving 60% and Nektar receiving 40%.   Given the significant sales milestone and royalty opportunity for us associated with MOVANTIK TM under our AstraZeneca license agreement, the level of sales achieved by AstraZeneca for MOVANTIK TM will have a significant impact on our operating results and financial condition over the coming years.

We have a collaboration with Baxalta to develop and commercialize PEGylated drug candidates with the objective of providing new long-acting therapies for hemophilia patients.  Under this collaboration, we worked with Baxalta to develop ADYNOVATE TM (previously referred to as BAX 855), an extended half-life recombinant factor VIII (rFVIII) treatment for Hemophilia A based on ADVATE ® [Antihemophilic Factor (Recombinant)].  In November 2015, ADYNOVATE TM was approved by the FDA for use in adults and adolescents, aged 12 years and older, who have Hemophilia A. Baxalta announced the launch and first shipments of ADYNOVATE TM on November 30, 2015.  On April 4, 2016, Baxalta announced that the Ministry of Health, Labour and Welfare in Japan approved ADYNOVATE TM for patients aged 12 years and older with Hemophilia A.  ADYNOVATE TM is also under regulatory review in Europe, Switzerland and Canada.  The level of sales achieved by Baxalta for ADYNOVATE TM and our related royalties will be important to our operating results and financial condition over the coming years.

NKTR-181 is a novel mu-opioid analgesic drug candidate for chronic pain conditions and is currently in Phase 3 clinical development.  We enrolled the first patient in the first Phase 3 efficacy study in February 2015 and we recently completed enrollment in the study.  In this study, we are randomizing patients with chronic low back pain in an enriched enrollment randomized withdrawal design which will include a qualifying screening period, an open-label titration period where NKTR-181 is given to all patients, followed by a 12 week double-blind randomized period where subjects will be randomized on a 1:1 basis to receive either NKTR-181 or placebo. On February 29, 2016, we increased the sample size of this trial by approximately 200 patients following a pre-specified sample size assessment by the independent analysis center (IAC) after approximately fifty percent of the initially planned 416 patients completed the study.  The protocol of the NKTR-181 study defined only two possible outcomes for this pre-planned blinded interim sample size assessment:  (1) if the conditional powering at the midpoint of the trial fell between 50-85%, the sample size was to be increased by approximately 200 patients; or (2) if the conditional powering fell below 50%, or above 85%, the sample size was not to be changed.  The IAC’s determination is nondiscretionary and was based upon our determination of pre-defined acceptable power to detect a statistically significant difference between NKTR-181 and placebo based on the primary efficacy endpoint. 

20


 

NKTR-102 ( etirinotecan pegol, also known as ONZEALD TM ) is our next-generation topoisomerase I inhibitor proprietary drug candidate.  In 2015, we announced topline data from a Phase 3 clinical study for NKTR-102, which we call the BEACON study (BrEAst Cancer Outcomes with NKTR-102), as a single-agent therapy for women with advanced metastatic breast cancer.  The BEACON study compared NKTR-102 to an active control arm comprised of a single chemotherapy agent of physician’s choice (TPC) in patients who were heavily pre- treated with a median of three prior therapies for metastatic disease.  In a topline analysis of 852 patients from the trial, NKTR-102 provided a 2.1 month improvement in median overall survival over TPC (12.4 months for patients receiving NKTR-102 compare d to 10.3 months for patients receiving TPC).  Based on a stratified log-rank analysis, the primary endpoint measuring the hazard ratio  for survival in the NKTR-102 group compared to the active control arm was 0.87 with a p-value of 0.08, which did not ac hieve statistical significance.  Secondary endpoints in the BEACON study included objective response rate and progression-free survival, which did not achieve statistical significance in the study.  We also announced that we observed a significant overall survival benefit in two pre-specified subgroups—patients with a history of brain metastases and patients with baseline liver metastases at study entry.

We have explored future regulatory and development paths forward for ONZEALD TM with the EU and U.S. health authorities.  In Europe, we met with the National Authorities in Sweden and the United Kingdom, as well as the European Medicines Agency (EMA) to discuss the BEACON data.  On May 26, 2016, the Committee for Medicinal Products for Human Use granted an accelerated assessment procedure for the ONZEALD TM marketing authorization application (MAA) which provides for an accelerated review timeline. In June 2016, we filed an MAA for conditional approval of ONZEALD TM for adult patients with advanced breast cancer who have brain metastases .  On July 14, 2016, we received a letter from the EMA notifying us that the ONZEALD TM MAA successfully passed validation to be accepted for review.  As contemplated by our recently announced European commercialization collaboration with Daiichi and in connection with our MAA filing for ONZEALD TM , before the end of 2016 we plan to initiate a randomized Phase 3 confirmatory study to evaluate ONZEALD TM as compared to a single-agent chemotherapy of physician's choice in approximately 350 adult patients with advanced breast cancer who have brain metastases , which we call the ATTAIN study.  The primary endpoint of the ATTAIN study will be overall survival (OS) and the ATTAIN study will include a pre-specified interim analysis for OS which is to be conducted after 130 events have occurred in the study .  In addition, based on our meetings with the FDA’s Oncology Division, the FDA staff has indicated that positive results from the ATTAIN study could also support a New Drug Application (NDA) filing in the U.S. where Nektar has retained all rights to ONZEALD TM .

We are currently conducting a Phase 1/2 clinical study for NKTR-214, which is our engineered immunostimulatory CD122-biased cytokine designed to preferentially activate the beta and gamma sub-units of the IL-2 receptor with the objective to induce proliferation and accumulation of tumor-killing lymphocyte cells within the body (CD8-positive effector T cells and natural killer T cells) with limited activity on regulatory T cells (CD4-positive T cells).  The study is being conducted initially at three primary investigator sites: the University of Texas MD Anderson Cancer Center, Yale Cancer Center and the Providence Cancer Center in Portland, Oregon.  The dose-escalation stage of the Phase 1/2 study is designed to evaluate safety and efficacy, and define the recommended Phase 2 dose of NKTR-214 in patients with solid tumors. The study will assess the safety profile of NKTR-214, the immunologic effect of NKTR-214 on tumor-infiltrating lymphocytes and other immune activation markers in both blood and tumor tissue, the pharmacokinetic/pharmacodynamic profile as well as preliminary anti-tumor activity based on objective response rate. 

We plan to study NKTR-214 in combination with a number of therapeutic approaches where we believe there is a strong biologic rationale for complimentary mechanisms of action.  On September 21, 2016, we entered into a Clinical Trial Collaboration Agreement (BMS Agreement) with BMS, pursuant to which we and BMS will collaborate to conduct Phase 1/2 clinical trials evaluating NKTR-214 and BMS’ human monoclonal antibody that binds PD-1, known as Opdivo (nivolumab), as a potential combination treatment regimen in five tumor types and seven potential indications, and such other clinical trials evaluating the combined therapy as may be mutually agreed upon by the parties (each, a Combination Therapy Trial). Under the BMS Agreement, BMS will be responsible for 50% of all out-of-pocket costs incurred in connection with the Combination Therapy Trials.  In addition to the clinical trials in collaboration with BMS, we also plan to initiate a broad clinical development program, both on our own or in collaboration with other potential partners, to explore the potential of combining NKTR-214 with therapies such as cancer vaccines, adoptive cell therapy, small molecules, and other biological agents in order to generate novel immune-oncology approaches.  We will also explore potential monotherapy approaches for NKTR-214.

We also have two significant drug development programs with Bayer.  The first is a collaboration to develop BAY41-6551 (Amikacin Inhale, formerly known as NKTR-061), which is an inhaled solution of amikacin, an aminoglycoside antibiotic. We originally developed the liquid aerosol inhalation platform and the NKTR-061 drug candidate and entered into a collaboration agreement with Bayer to further advance the drug candidate’s development and potential commercialization. Bayer is currently enrolling patients in a Phase 3 clinical study for Amikacin Inhale. Bayer is conducting this study under a Special Protocol Assessment process agreed to with the FDA.  The second is our significant royalty rights in the Cipro DPI (Cipro Dry Powder Inhaler, previously called Cipro Inhale) program with Bayer that we transferred to Novartis as part of the 2008 pulmonary asset divestiture transaction. In August 2012, Bayer initiated a global Phase 3 program called RESPIRE for the Cipro DPI product candidate in patients with non-cystic fibrosis bronchiectasis.  These programs represent a significant future economic opportunity for us.

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While the approved drugs and clinical development programs described above are key elements of our future success, we believe it is critically important that we con tinue to make substantial investments in our earlier-stage drug candidate pipeline. We have several drug candidates in earlier stage clinical development or being explored in research that we are preparing to advance into the clinic in future years. We are also advancing several other drug candidates in preclinical development in the areas of cancer immunotherapy, pain and other therapeutic indications.  While we believe that our substantial investment in research and development has the potential to create significant value if one or more of our drug candidates demonstrates positive clinical results, receives regulatory approval in one or more major markets and achieves commercial success, drug research and development is an inherently uncertain process and there is a high risk of failure at every stage prior to approval and the timing and outcome of clinical trial results are extremely difficult to predict. Clinical development successes and failures can have a disproportionately positive or negative impact on our scientific and medical prospects, financial condition and prospects, results of operations and market value.

Historically, we have entered into a number of license and supply contracts under which we manufactured and supplied our proprietary PEGylation reagents on a fixed price or cost-plus basis. Our current strategy is to manufacture and supply PEGylation reagents to support our proprietary drug candidates or our third-party collaborators where we have a strategic development and commercialization relationship or where we derive substantial economic benefit.

Key Developments and Trends in Liquidity and Capital Resources

As of September 30, 2016, we estimated that we had at least twelve months of working capital to fund our current business plans. At September 30, 2016, we had approximately $253.5 million in cash and investments in marketable securities.  Also, as of September 30, 2016, we had $254.5 million in debt, including $250.0 million in principal of senior secured notes and $4.5 million of capital lease obligations.  On October 24, 2016, we completed a public offering of common stock with net proceeds of approximately $189.1 million.  

Results of Operations

Three and Nine Months Ended September 30, 2016 and 2015

Revenue (in thousands, except percentages)

 

 

 

Three months ended September 30,

 

 

Increase/

(Decrease)

2016 vs. 2015

 

 

Percentage

Increase/

(Decrease)

2016 vs. 2015

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

Product sales

 

$

14,698

 

 

$

7,240

 

 

$

7,458

 

 

>100

%

Royalty revenue

 

 

5,573

 

 

 

187

 

 

 

5,386

 

 

>100

%

Non-cash royalty revenue related to sale of future royalties

 

 

7,692

 

 

 

6,050

 

 

 

1,642

 

 

 

27

%

License, collaboration and other revenue

 

 

8,373

 

 

 

46,475

 

 

 

(38,102

)

 

 

(82

)%

Total revenue

 

$

36,336

 

 

$

59,952

 

 

$

(23,616

)

 

 

(39

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

Increase/

(Decrease)

2016 vs. 2015

 

 

Percentage

Increase/

(Decrease)

2016 vs. 2015

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

Product sales

 

$

41,664

 

 

$

26,182

 

 

$

15,482

 

 

 

59

%

Royalty revenue

 

 

13,150

 

 

 

1,057

 

 

 

12,093

 

 

>100

%

Non-cash royalty revenue related to sale of future royalties

 

 

22,341

 

 

 

14,752

 

 

 

7,589

 

 

 

51

%

License, collaboration and other revenue

 

 

50,829

 

 

 

149,423

 

 

 

(98,594

)

 

 

(66

)%

Total revenue

 

$

127,984

 

 

$

191,414

 

 

$

(63,430

)

 

 

(33

)%

 

Our revenue is derived from our collaboration agreements, under which we may receive product sales revenue, royalties, license fees, milestone and other contingent payments and/or contract research payments. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured. The amount of upfront fees received under our license and collaboration agreements allocated to continuing obligations, such as manufacturing and supply commitments, is recognized ratably over our expected performance period under the arrangement. As a result, there may be significant variations in the timing of receipt of cash payments and our recognition of revenue. We make our best

22


 

estimate of the period over which we expect to fulfill our performance obligations. Given the uncertainties in research and development collaborations, significant ju dgment is required by us to determine the performance periods.

Product sales

Product sales include predominantly fixed price manufacturing and supply agreements with our collaboration partners and result from the receipt of firm purchase orders from those partners.  The timing of shipments is based solely on the demand and requirements of our collaboration partners and is not ratable throughout the year.

Product sales increased for the three and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015 primarily due to increased product demand from one of our collaboration partners. For the same reason, we expect product sales for the full year of 2016 will increase as compared to 2015.

Royalty revenue and non-cash royalty revenue related to sale of future royalties

We receive royalty revenue from certain of our collaboration partners based on their net sales of commercial products. Royalty revenue received in cash increased for the three and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015 primarily due to the launch of commercial sales by AstraZeneca of MOVANTIK TM in the U.S. in March 2015 and MOVENTIG ® in the EU in August 2015 and the launch of ADYNOVATE TM by Baxalta in the U.S. in November 2015. We expect royalty revenue for the full year of 2016 will increase as compared to 2015 due to royalties we expect to receive from MOVANTIK TM , MOVENTIG ® and ADYNOVATE TM .

In February 2012, we sold all of our rights to receive future royalty payments on CIMZIA ® and MIRCERA ® . As described in Note 4 to our Condensed Consolidated Financial Statements, this royalty sale transaction has been recorded as a liability that amortizes over the estimated royalty payment period. As a result of this liability accounting, even though the royalties from UCB and Roche are remitted directly to the purchaser of these royalty interests, we will continue to record revenue for these royalties.  We expect non-cash royalties from net sales of CIMZIA ® and MIRCERA ® for the full year of 2016 will increase as compared to 2015.

License, Collaboration and Other Revenue

License, collaboration and other revenue includes the recognition of upfront payments, milestone and other contingent payments received in connection with our license and collaboration agreements and reimbursed research and development expenses. The level of license, collaboration and other revenue depends in part upon the estimated amortization period of the upfront payments, the achievement of milestones and other contingent events, the continuation of existing collaborations, the amount of reimbursed research and development work, and entering into new collaboration agreements, if any.

License, collaboration and other revenue decreased for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 primarily due to the recognition of the $40.0 million milestone payment received in August 2015 as a result of the EU commercial launch of MOVENTIG ® . License, collaboration and other revenue decreased for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 primarily as a result of the recognition in March 2015 of the $100.0 million milestone payment received from AstraZeneca as a result of the U.S. commercial launch of MOVANTIK TM and the $40.0 million milestone payment received in August 2015 partially offset by the recognition of $28.0 million in March 2016 for our 40% share of the $70.0 million sublicense payment received by AstraZeneca from ProStrakan. In addition, in March 2015, we agreed to pay AstraZeneca $10.0 million, including $5.0 million paid in July 2015 and $5.0 million paid in July 2016, to fund U.S. television advertising in consideration for certain additional commercial information rights.  We determined that this $10.0 million obligation should be recorded as a reduction of revenue, which we recorded in the three months ended March 31, 2015.

We expect our license, collaboration and other revenue for the full year of 2016 will decrease significantly as compared to 2015 primarily due to the recognition in 2015 of the significant non-recurring payments resulting from AstraZeneca’s commercial launches of MOVANTIK TM and MOVENTIG ® .

23


 

Cost of Goods Sold and Product Gross Margin (in thousands, except percentages)

 

 

 

Three months ended September 30,

 

 

Increase/

(Decrease)

2016 vs. 2015

 

 

Percentage

Increase/

(Decrease)

2016 vs.   2015

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

7,033

 

 

$

6,760

 

 

$

273

 

 

 

4

%

Product gross profit

 

 

7,665

 

 

 

480

 

 

$

7,185

 

 

>100

%

Product gross margin

 

 

52

%

 

 

7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

Increase/

(Decrease)

2016 vs. 2015

 

 

Percentage

Increase/

(Decrease)

2016 vs.   2015

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

23,611

 

 

$

25,738

 

 

$

(2,127

)

 

 

(8

)%

Product gross profit

 

 

18,053

 

 

 

444

 

 

$

17,609

 

 

>100

%

Product gross margin

 

 

43

%

 

 

2

%

 

 

 

 

 

 

 

 

 

Cost of goods sold during the three months ended September 30, 2016 increased marginally compared to the three months ended September 30, 2015.  Cost of goods sold decreased during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 primarily due to the mix of product sales, which resulted in decreases to cost of goods sold even though product sales increased during the same period.

The improvement in product gross profit and product gross margin during the three and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015 is primarily due to a more favorable product mix in 2016 compared to 2015.  In particular, the increased demand from our collaboration partners in 2016 results in product sales where we have a relatively higher gross margin.  This increased margin is partially offset by a manufacturing arrangement with another partner that includes a fixed price which is less than the fully burdened manufacturing cost for the reagent in 2016 and 2015 and we expect this situation to continue with this partner in future years.  There were fewer shipments to this partner relative to shipments to other customers during the three and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015. In addition to product sales from reagent materials supplied to the partner where our sales are less than our fully burdened manufacturing cost, we also receive royalty revenue from this collaboration. In the three and nine months ended September 30, 2016 and 2015, the royalty revenue from this collaboration exceeded the related negative gross profit. 

We expect product gross margin to continue to fluctuate in future periods depending on the level and mix of manufacturing orders from our customers due to the predominantly fixed cost base associated with our manufacturing activities. We expect product gross margin for the full year of 2016 to be substantially similar to the nine months ended September 30, 2016, as a result of anticipated collaboration partner demand and product mix.

Research and Development Expense (in thousands, except percentages)

 

 

 

Three months ended September 30,

 

 

Increase/

(Decrease)

2016 vs. 2015

 

 

Percentage

Increase/

(Decrease)

2016 vs. 2015

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

Research and development expense

 

$

51,951

 

 

$

43,229

 

 

$

8,722

 

 

 

20

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

Increase/

(Decrease)

2016 vs. 2015