Nektar Therapeutics
NEKTAR THERAPEUTICS (Form: 10-Q, Received: 08/09/2017 06:10:49)

 

 

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 June 30, 2017

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)

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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 156,327,530 on August 3, 2017.

 

 


 

NEKTAR THERAPEUTICS

INDEX

 

PART I: FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements — Unaudited:

4

Condensed Consolidated Balance Sheets — June 30, 2017 and December 31, 2016

4

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016

5

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2017 and 2016

5

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016

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

44

Signatures

45

 

 

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 CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

 

 

June 30, 2017

 

 

December 31, 2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,149

 

 

$

59,640

 

Short-term investments

 

 

249,398

 

 

 

329,462

 

Accounts receivable, net

 

 

4,114

 

 

 

15,678

 

Inventory

 

 

11,008

 

 

 

11,109

 

Other current assets

 

 

7,496

 

 

 

10,063

 

Total current assets

 

 

288,165

 

 

 

425,952

 

Long-term investments

 

 

45,160

 

 

 

 

Property, plant and equipment, net

 

 

64,929

 

 

 

65,601

 

Goodwill

 

 

76,501

 

 

 

76,501

 

Other assets

 

 

1,104

 

 

 

817

 

Total assets

 

$

475,859

 

 

$

568,871

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,241

 

 

$

2,816

 

Accrued compensation

 

 

14,346

 

 

 

18,280

 

Accrued clinical trial expenses

 

 

6,683

 

 

 

7,958

 

Other accrued expenses

 

 

6,683

 

 

 

4,711

 

Interest payable

 

 

4,144

 

 

 

4,198

 

Capital lease obligations, current portion

 

 

2,706

 

 

 

2,908

 

Liability related to refundable upfront payment

 

 

12,500

 

 

 

12,500

 

Deferred revenue, current portion

 

 

13,373

 

 

 

14,352

 

Other current liabilities

 

 

5,937

 

 

 

4,499

 

Total current liabilities

 

 

72,613

 

 

 

72,222

 

Senior secured notes, net

 

 

244,336

 

 

 

243,464

 

Capital lease obligations, less current portion

 

 

1,056

 

 

 

2,223

 

Liability related to the sale of future royalties, net

 

 

101,897

 

 

 

105,950

 

Deferred revenue, less current portion

 

 

48,979

 

 

 

51,887

 

Other long-term liabilities

 

 

3,592

 

 

 

5,000

 

Total liabilities

 

 

472,473

 

 

 

480,746

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000 shares authorized; no shares designated, issued or outstanding at June 30, 2017 or December 31, 2016

 

 

 

 

 

 

Common stock, $0.0001 par value; 300,000 shares authorized; 155,861 shares and 153,212 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

15

 

 

 

15

 

Capital in excess of par value

 

 

2,150,019

 

 

 

2,111,483

 

Accumulated other comprehensive loss

 

 

(1,662

)

 

 

(2,363

)

Accumulated deficit

 

 

(2,144,986

)

 

 

(2,021,010

)

Total stockholders’ equity

 

 

3,386

 

 

 

88,125

 

Total liabilities and stockholders’ equity

 

$

475,859

 

 

$

568,871

 

 

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 June 30,

 

 

Six months ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

$

15,693

 

 

$

12,867

 

 

$

20,449

 

 

$

26,966

 

Royalty revenue

 

7,434

 

 

 

3,516

 

 

 

14,651

 

 

 

7,576

 

Non-cash royalty revenue related to sale of future royalties

 

6,638

 

 

 

8,115

 

 

 

13,301

 

 

 

14,650

 

License, collaboration and other revenue

 

4,824

 

 

 

8,270

 

 

 

10,916

 

 

 

42,457

 

Total revenue

 

34,589

 

 

 

32,768

 

 

 

59,317

 

 

 

91,649

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

8,989

 

 

 

7,708

 

 

 

15,120

 

 

 

16,578

 

Research and development

 

60,260

 

 

 

52,350

 

 

 

121,318

 

 

 

101,618

 

General and administrative

 

15,996

 

 

 

11,035

 

 

 

27,972

 

 

 

21,262

 

Total operating costs and expenses

 

85,245

 

 

 

71,093

 

 

 

164,410

 

 

 

139,458

 

Loss from operations

 

(50,656

)

 

 

(38,325

)

 

 

(105,093

)

 

 

(47,809

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,510

)

 

 

(5,627

)

 

 

(10,912

)

 

 

(11,304

)

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

 

(4,512

)

 

 

(4,982

)

 

 

(9,064

)

 

 

(10,027

)

Interest income and other income (expense), net

 

906

 

 

 

458

 

 

 

1,564

 

 

 

1,333

 

Total non-operating expense, net

 

(9,116

)

 

 

(10,151

)

 

 

(18,412

)

 

 

(19,998

)

Loss before provision for income taxes

 

(59,772

)

 

 

(48,476

)

 

 

(123,505

)

 

 

(67,807

)

Provision for income taxes

 

99

 

 

 

127

 

 

 

232

 

 

 

294

 

Net loss

$

(59,871

)

 

$

(48,603

)

 

$

(123,737

)

 

$

(68,101

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

$

(0.39

)

 

$

(0.36

)

 

$

(0.80

)

 

$

(0.50

)

Weighted average shares outstanding used in computing basic and diluted net loss per share

 

155,352

 

 

 

136,350

 

 

 

154,514

 

 

 

136,072

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Comprehensive loss

$

(59,684

)

 

$

(48,787

)

 

$

(123,036

)

 

$

(67,950

)

 

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)

 

 

Six months ended June 30,

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(123,737

)

 

$

(68,101

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Non-cash royalty revenue related to sale of future royalties

 

(13,301

)

 

 

(14,650

)

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

 

9,064

 

 

 

10,027

 

Stock-based compensation

 

16,283

 

 

 

12,627

 

Depreciation and amortization

 

8,287

 

 

 

7,634

 

Other non-cash transactions

 

(1,089

)

 

 

(1,260

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

11,564

 

 

 

(7,830

)

Inventory

 

101

 

 

 

1,084

 

Other assets

 

2,280

 

 

 

4,637

 

Accounts payable

 

3,221

 

 

 

17

 

Accrued compensation

 

(3,934

)

 

 

6,465

 

Accrued clinical trial expenses

 

(1,275

)

 

 

5,250

 

Other accrued expenses

 

2,388

 

 

 

2,831

 

Interest payable

 

(54

)

 

 

(54

)

Liability related to refundable upfront payment

 

 

 

 

12,500

 

Deferred revenue

 

(3,887

)

 

 

(7,704

)

Other liabilities

 

1,000

 

 

 

(725

)

Net cash used in operating activities

 

(93,089

)

 

 

(37,252

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of investments

 

(121,135

)

 

 

(72,806

)

Maturities of investments

 

147,558

 

 

 

107,363

 

Sales of investments

 

8,823

 

 

 

 

Purchases of property, plant and equipment

 

(6,344

)

 

 

(3,234

)

Net cash provided by investing activities

 

28,902

 

 

 

31,323

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payment of capital lease obligations

 

(1,369

)

 

 

(3,517

)

Proceeds from shares issued under equity compensation plans

 

22,016

 

 

 

9,643

 

Net cash provided by financing activities

 

20,647

 

 

 

6,126

 

Effect of exchange rates on cash and cash equivalents

 

49

 

 

 

(91

)

Net (decrease) increase in cash and cash equivalents

 

(43,491

)

 

 

106

 

Cash and cash equivalents at beginning of period

 

59,640

 

 

 

55,570

 

Cash and cash equivalents at end of period

$

16,149

 

 

$

55,676

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

$

10,010

 

 

$

10,448

 

 

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

 

 

6


 

NEKTAR THERAPEUTICS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

 

Note 1 — Organization and Summary of Significant Accounting Policies

Organization

We are a research-based biopharmaceutical company headquartered in San Francisco, California and incorporated in Delaware. We are developing a pipeline of drug candidates that utilize our advanced polymer conjugate technology platforms, which are designed to enable the development of new molecular entities that target known mechanisms of action. Our research and development pipeline of new investigational drugs includes treatments for cancer, auto-immune disease and chronic pain.

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 June 30, 2017, we had approximately $310.7 million in cash and investments in marketable securities. Also, as of June 30, 2017, we had $253.8 million in debt, including $250.0 million in principal of senior secured notes and $3.8 million of capital lease obligations, of which $2.7 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 six months ended June 30, 2017 and 2016.  In addition, there were no significant reclassifications out of accumulated other comprehensive loss to the statements of operations during the three and six months ended June 30, 2017 and 2016.

The accompanying Condensed Consolidated Financial Statements are unaudited. The Condensed Consolidated Balance Sheet data as of December 31, 2016 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, 2016 filed with the SEC on March 1, 2017. 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, 2016.

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 period.

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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Accounting estimates

7


 

and assumptions are inherently uncertain. 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 inventory, the impairment of investments, the impairment of goodwill and long-lived assets, contingencies, accrued clinical trial expenses, estimated non-cash royalty revenue and non-cash interest expense from our liability related to our sale of future royalties, stock -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 judgments 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 the classification of deferred tax assets described below. Such reclassifications do not materially impact previously reported revenue, operating loss, net loss, total assets, liabilities or stockholders’ equity.

Segment Information

We operate in one business segment which focuses on applying our technology platform to improve the performance of established drugs and to develop novel drug candidates. 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.

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 reimbursable costs 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 June 30, 2017 or December 31, 2016.

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 arrange ments 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 determine 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 complexity 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 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, is 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 and the drug development process, significant judgment is required to determine the duration of our performance periods and these estimates are 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 achieveme nt of specified annual 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 annual sales volumes, provided that collection is reasonably assur ed.

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. Where we perform research and development activities under a clinical joint development collaboration, such as our collaboration with Bristol-Myers Squibb, we record the cost reimbursement from our partner as a reduction to research and development expense when reimbursement amounts are due to us under the agreement.

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 six months ended June 30, 2017 and 2016, 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 Principles

In March 2016, the Financial Accounting Standards Board (FASB) issued guidance to simplify several aspects of employee share-based payment accounting, including forfeitures, income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance was effective for our interim and annual periods beginning January 1, 2017. As a result of the adoption of this guidance, as of January 1, 2017, we recorded a $0.2 million charge to our accumulated deficit in our Condensed Consolidated Balance Sheet related to our election to recognize forfeitures of awards as they occur.  In addition, prior to adoption of this guidance, tax attributes related to stock option windfall deductions were not recorded until they resulted in a reduction of cash tax payable. As of December 31, 2016, the excluded windfall deductions for federal and state purposes were $20.6 million and $9.8 million, respectively. Upon adoption, we recognized the excluded windfall deductions as a deferred tax asset on a tax-effected basis with a corresponding increase in the valuation allowance.

In November 2015, the FASB issued guidance to require that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. Previous guidance required deferred tax assets and liabilities to be separated into current and noncurrent amounts on the

10


 

balance sheet. Accordingly, as of January 1, 2017, we reclassified $0.3 million f rom other current assets to our other assets balance. This reclassification was applied retros pectively to these balances in our Condensed Consolidated Balance Sheet as of December 31, 2016.

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 annual and interim periods beginning after December 15, 2017. Numerous updates have been issued subsequent to the initial FASB guidance that provide clarification on a number of specific issues as well as requiring additional disclosures. We plan to adopt the standard in the first quarter of 2018 using the modified retrospective method. Although we are still evaluating our contracts and assessing all the potential impacts of the standard on existing arrangements, we anticipate the adoption may have a material impact on our consolidated financial statements. Specifically, the new standard differs from the current accounting standard in many respects, such as in the accounting for variable consideration, including milestone payments or contingent payments from our collaboration partners. Under our current accounting policy, we recognize contingent or milestone payments as revenue in the period that the payment-triggering event occurred or is achieved. The new revenue standard, however, may require us to recognize these payments before the payment-triggering event is completely achieved, subject to management’s assessment of whether it is probable that the triggering event will be achieved and that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

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

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Cash and cash equivalents

 

$

16,149

 

 

$

59,640

 

Short-term investments

 

 

249,398

 

 

 

329,462

 

Long-term investments

 

 

45,160

 

 

 

 

Total cash and investments in marketable securities

 

$

310,707

 

 

$

389,102

 

 

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 June 30, 2017, $45.2 million of our total investments had maturities greater than one year and as of December 31, 2016, all of our investments had maturities of one year or less.

Gross unrealized gains and losses were not significant at either June 30, 2017 or December 31, 2016. During the six months ended June 30, 2017, we sold available-for-sale securities totaling $8.8 million and gross realized gains and losses on those sales were not significant. During the three months ended June 30, 2017 and the three and six months ended June 30, 2016, we did not sell any of our available-for-sale securities. 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.

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

 

 

 

 

 

 

 

Estimated Fair Value at

 

 

 

Fair Value

Hierarchy

Level

 

 

June 30,

2017

 

 

December 31, 2016

 

Corporate notes and bonds

 

 

2

 

 

$

163,598

 

 

$

156,044

 

Corporate commercial paper

 

 

2

 

 

 

123,787

 

 

 

160,920

 

Obligations of U.S. government agencies

 

 

2

 

 

 

4,243

 

 

 

13,749

 

      Available-for-sale investments

 

 

 

 

 

 

291,628

 

 

 

330,713

 

Money market funds

 

 

1

 

 

 

14,553

 

 

 

51,104

 

Certificate of deposit

 

N/A

 

 

 

2,930

 

 

 

2,930

 

Cash

 

N/A

 

 

 

1,596

 

 

 

4,355

 

      Total cash and investments in marketable securities

 

 

 

 

 

$

310,707

 

 

$

389,102

 

 

 

 

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.

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 value related to our investments is 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. During the three and six months ended June 30, 2017 and 2016, there were no transfers between Level 1 and Level 2 of the fair value hierarchy.

Additionally, as of June 30, 2017, 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):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Raw materials

 

$

1,543

 

 

$

2,055

 

Work-in-process

 

 

7,207

 

 

 

7,311

 

Finished goods

 

 

2,258

 

 

 

1,743

 

Total inventory

 

$

11,008

 

 

$

11,109

 

 

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 net realizable value 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

12


 

obligations related to the genera tion of these royalties, we will continue to account f or 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 li fe of the Purchase and Sale Agreement as royalties from the CIMZIA ® and MIRCERA ® products are remitted directly to RPI. During the six months ended June 3 0 , 201 7 and 201 6 , we recognized $ 13.3 million and $ 14.7 million, respectively, in non-cash royalt y revenue from net sales of CIMZIA ® and MIRCERA ® and we recorded $ 9.1 million and $ 10 .0 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 from our original estimates, we will prospectively adjust the amortization of the Royalty Obligation.

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 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 transaction.

 

 

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 (the “Enzon Litigation”) 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 was remanded to the Court for further proceedings. On June 26, 2017, we entered into a Second Amendment to the Cross-License and Option Agreement (Cross-License Agreement) with Enzon in which we agreed to pay Enzon a sum of $7.0 million to satisfy all past and future obligations of royalty payments pursuant to the Cross-License Agreement and to have the Enzon Litigation dismissed. The Enzon Litigation was dismissed with prejudice on June 30, 2017.  We paid $3.5 million in June 2017.  We will pay the remaining $3.5 million in January 2018, which is included in other current liabilities on our Condensed Consolidated Balance Sheet as of June 30, 2017. Of the total $7.0 million consideration, $1.4 million represents our accrued royalty liability to Enzon related to commercial sales of certain products from January 2017 through June 2017 recorded in cost of goods sold for the six months ended June 30, 2017.  In addition, $2.3 million is recorded as a prepaid royalty asset in other current assets as of June 30, 2017 for estimated future commercial sales of certain products through the term of the applicable underlying Enzon patents expiring in March 2018, which Nektar will amortize over this period. We recorded the remaining $3.3 million of consideration in general and administrative expense in the three months ended June 30, 2017 . No liability was recorded for this matter on our Condensed Consolidated Balance Sheets as of December 31, 2016.  

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

13


 

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, an d 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 June 30, 2017 or December 31, 2016.

 

 

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 milestone payments, and payments for the manufacture and supply of our proprietary PEGylation materials and/or 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.

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

 

 

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

Partner

 

Drug or Drug Candidate

 

2017

 

 

2016

 

 

2017

 

 

2016

 

AstraZeneca AB

 

MOVANTIK ®

and MOVANTIK ® fixed-dose

combination program

 

$

1,600

 

 

$

 

 

$

4,600

 

 

$

28,000

 

Amgen, Inc.

 

Neulasta ®

 

 

1,250

 

 

 

1,250

 

 

 

2,500

 

 

 

2,500

 

Bayer Healthcare LLC

 

BAY41-6551

(Amikacin Inhale)

 

 

357

 

 

 

357

 

 

 

714

 

 

 

714

 

Daiichi Sankyo Europe GmbH

 

ONZEALD TM (NKTR-102)

 

 

216

 

 

 

3,258

 

 

 

431

 

 

 

3,258

 

Roche

 

MIRCERA ®

 

 

 

 

 

1,914

 

 

 

 

 

 

3,842

 

Baxalta Incorporated

 

ADYNOVATE ®

 

 

45

 

 

 

207

 

 

 

45

 

 

 

313

 

Other

 

 

 

 

1,356

 

 

 

1,284

 

 

 

2,626

 

 

 

3,830

 

License, collaboration and other revenue

 

$

4,824

 

 

$

8,270

 

 

$

10,916

 

 

$

42,457

 

 

As of June 30, 2017, 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 ® and the MOVANTIK ® fixed-dose combination drug development programs, as described below.

There have been no material changes to our collaboration agreements in the six months ended June 30, 2017, except as described below.

AstraZeneca AB :  MOVANTIK ® (naloxegol oxalate), previously referred to as naloxegol and NKTR-118, and MOVANTIK ® 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 ® and MOVANTIK ® fixed-dose combination program. AstraZeneca is responsible for all research, development and commercialization and is responsible for all drug development and commercialization decisions for MOVANTIK ® and the MOVANTIK ® 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 payments based on development events related to MOVANTIK ® completed solely by AstraZeneca. We are entitled to receive up to $75.0 million of commercial launch contingent payments related to the MOVANTIK ® fixed-dose combination program, based on development events to be pursued and completed solely by

14


 

AstraZeneca. In addition, we are entitled to significant and escalating double-digit royalty payments and sa les milestone payments based on annual worldwide net sales of MOVANTIK ® and MOVANTIK ® fixed-dose combination products.

On September 16, 2014, the United States Food and Drug Administration (FDA) approved MOVANTIK ® 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 Authorization 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).

On March 1, 2016, AstraZeneca announced that it had entered into an agreement with ProStrakan Group plc, a subsidiary of Kyowa Hakko Kirin Co. Ltd. (Kirin), granting Kirin exclusive marketing rights to MOVENTIG ® in the EU, Iceland, Liechtenstein, Norway and Switzerland. Under the terms of AstraZeneca’s agreement with Kirin, Kirin 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, we and AstraZeneca will share the upfront payment, market access milestone payments, royalties and sales milestone payments from Kirin 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 Kirin to AstraZeneca will be financially equivalent to us receiving high single-digit to low double-digit royalties dependent on the level of Kirin’s net sales. Kirin’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 Kirin territory. The global sales milestones under our license agreement with AstraZeneca will be reduced in relation to the amount of Kirin MOVENTIG ® net sales that contribute to any given annual sales milestone target. As a result, in March 2016, we recognized $28.0 million for our 40% share of the $70.0 million payment received by AstraZeneca from Kirin. In addition, in the three and six months ended June 30, 2017, we recognized another $1.6 million and $4.6 million, respectively, related to our share of similar payments made to AstraZeneca. As of June 30, 2017, 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 ® , the FDA required AstraZeneca to perform a post-marketing, observational epidemiological study comparing MOVANTIK ® 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 ® 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, 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.

Daiichi Sankyo Europe GmbH :  ONZEALD TM (etirinotecan pegol), also referred 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). We retain 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 payment 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 we are eligible to receive a 15% royalty. 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, which was initiated in the fourth quarter of 2016.

On July 21, 2017, we were informed by the European Medicines Agency’s Committee for Medicinal Products for Human Use (CHMP) that it had adopted a negative opinion for the conditional marketing authorization application for ONZEALD  in the

15


 

European Union.  On July 26, 2017, we filed a request for re-examination of the opinion adopted by the CHMP (the “CHMP Appeal” ). During the CHMP Appeal process, Nektar and Daiichi will continue to collaborate on ONZEALD a nd the parties have agreed that, with respect to Daiichi’s right to term inate the agreement prior to conditional approval, Daiichi would not exercise such right prior to the earlier of the conclusion of the CHMP Appeal process or a pre-specified date in the first half of 2018. If we are not successful with the CHMP Appeal, we would be obligated to pay Daiichi a $12.5 million termination payment. 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 Shee t at June 30, 2017 and December 31, 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 at agreement inception, 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, in the three months ended June 30, 2016, we recognized a total of $3.3 million of revenue from this arrangement, primarily related to the delivery of the license. As of June 30, 2017, we have deferred revenue of approximately $3.4 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 the EC were to grant conditional marketing approval of ONZEALD™, the remaining $12.5 million portion of the upfront payment becomes non-refundable and 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.

Baxalta Incorporated : Hemophilia

We are a party to an exclusive research, development, license and manufacturing and supply agreement with Baxalta Incorporated (Baxalta), a subsidiary of Shire plc, 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.

This Hemophilia A program includes ADYNOVATE ® , which was approved by the FDA in November 2015 for use in adults and adolescents, aged 12 years and older, who have Hemophilia A, and is now marketed in the U.S. A marketing approval application for ADYNOVATE ® is currently under review in the EU. 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 approval in the EU, as well as sales milestones upon achievement of annual sales targets and royalties based on annual worldwide net sales. As of June 30, 2017, we do not have deferred revenue related to this agreement.

Roche : MIRCERA ®

In February 2012, we entered into a toll-manufacturing agreement with Roche under which we agreed to 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. Our performance obligations under this MIRCERA ® agreement ended on December 31, 2016.

16


 

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 June 30, 2017, we have deferred revenue of approximately $16.7 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. Bayer is responsible for most future clinical development and commercialization costs, all activities to support worldwide regulatory filings, approvals and related activities, further development of Amikacin Inhale and final product packaging and distribution. 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 June 30, 2017, 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, including $22.5 million related to FDA approval, as well as sales milestones upon achievement of annual sales targets and royalties based on annual worldwide net sales of Amikacin Inhale. As of June 30, 2017, we have deferred revenue of approximately $17.1 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.  

On December 12, 2016, Ophthotech announced that its two pivotal Phase 3 clinical trials investigating the superiority of Fovista ® therapy in combination with Lucentis ® therapy compared to Lucentis ® monotherapy for the treatment of wet age-related macular degeneration (AMD) had failed to meet their pre-specified primary endpoints. A separate Phase 3 clinical trial evaluating Fovista ® in combination with Eylea ® or Avastin ® compared to Eylea ® or Avastin ® monotherapy for the treatment of wet AMD is fully enrolled and remains ongoing. As of June 30, 2017, our obligations under the Ophthotech agreement are ongoing. As of June 30, 2017, we have deferred revenue of approximately $18.3 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, in January 2017, we received a $12.7 million advance payment from Ophthotech, which included $10.4 million for reagent shipments recognized in the second quarter of 2017 as well as approximately $2.3 million for 2017 minimum purchase requirements, which will be recognized over our estimated remaining performance obligation period. Our estimated performance obligation period is subject to reassessment each quarter and could change significantly based on Ophthotech’s pending Phase 3 study results.

Based on successful clinical study outcomes, we are entitled to additional payments based upon Ophthotech’s potential achievement of certain regulatory milestones. If commercialized, we are also entitled to royalties on net sales of Fovista ® that vary based on sales levels as well as a sales milestone.

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 are collaborating 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 eight potential indications,

17


 

and such other clinical trials evaluat ing the combined therapy as may be mutually agreed upon by the parties (each, a “Combination Therapy Trial”).

We are acting as the sponsor of each Combination Therapy Trial.  Under the BMS Agreement, BMS is 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 and we record cost reimbursement payments to us from BMS as a reduction to research and development expense. 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 formed 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.  

Other

In addition, as of June 30, 2017, we have a number of other collaboration agreements, including with our collaboration partners UCB and Halozyme, under which we are entitled to up to a total of $45.5 million of development milestone payments 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 June 30, 2017, we have deferred revenue of approximately $6.8 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 June 30,

 

 

Six months ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Cost of goods sold

$

538

 

 

$

402

 

 

$

1,092

 

 

$

790

 

Research and development

 

4,620

 

 

 

3,125

 

 

 

9,217

 

 

 

6,324

 

General and administrative

 

2,941

 

 

 

2,737

 

 

 

5,974

 

 

 

5,513

 

Total stock-based compensation

$

8,099

 

 

$

6,264

 

 

$

16,283

 

 

$

12,627

 

 

During the three months ended June 30, 2017 and 2016, we granted 956,160 and 589,090 stock options, respectively, and these options had a weighted average grant-date fair value of $8.96 per share and $7.22 per share, respectively. During the six months ended June 30, 2017 and 2016, we granted 1,285,020 and 789,290 stock options, respectively, and these options had a weighted average grant-date fair value of $8.70 per share and $6.88 per share, respectively. We granted no RSUs during the three and six months ended June 30, 2017 and 2,000 RSUs were granted in the three and six months ended June 30, 2016.

As a result of stock issuances under our equity compensation plans, during the three months ended June 30, 2017 and 2016, we issued 1,130,164 and 451,391 shares of our common stock, respectively, and during the six months ended June 30, 2017 and 2016, we issued 2,648,769 and 1,313,937 shares of our common stock, respectively.

 

 

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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 six months ended June 30, 2017 and 2016, potentially dilutive securities consisted of common shares underlying outstanding stock options and RSUs. During the three months ended June 30, 2017 and 2016, there were weighted average outstanding stock options and RSUs of 20.2 million and 19.4 million shares, respectively, and during the six months ended June 30, 2017 and 2016, there were weighted average outstanding stock options and RSUs of 20.7 million and 19.6 million shares, respectively.

 

Note 9 — Subsequent Events

On July 24, 2017, we announced that we entered into a worldwide license agreement to co-develop NKTR-358 with Eli Lilly and Company (Lilly) that is subject to review by the U.S. government under the Hart-Scott-Rodino Act (HSR Act) and will not become effective until the expiration or early termination of the waiting period. NKTR-358 is a novel immunological therapy that was invented by us. Under the terms of the agreement and following government clearance of the license agreement under the HSR Act, we (i) will receive an initial payment of $150.0 million and be eligible for up to $250.0 million in additional development and regulatory milestones, (ii) will co-develop NKTR-358 with Lilly with Nektar responsible for completing Phase 1 clinical development, (iii) will share with Lilly Phase 2 development costs with 75 percent of those costs borne by Lilly and 25 percent of the costs borne by Nektar, (iv) will have the option to participate in Phase 3 development on an indication-by-indication basis, and (v) will have the opportunity to receive up to double-digit sales royalty rates that increase commensurate with our Phase 3 investment and product sales. Lilly will be responsible for all costs of global commercialization and we will have an option to co-promote in the U.S. under certain conditions.

On August 4, 2017, we entered into a Lease Agreement (Lease) with ARE-San Francisco No. 19, LLC (ARE) for 128,793 square feet of space located at 455 Mission Bay Boulevard, San Francisco, California (the “Mission Bay Facility”). The Lease will allow us to continue using the same site we currently use for our San Francisco-based R&D activities following the expiration of our current sublease with Pfizer Inc., which sublease is set to terminate no later than the end of January 2020.  

The term of the Lease will commence on February 1, 2020, and will expire January 31, 2030.  The monthly base rent for the Mission Bay Facility is $611,767, which is subject to an annual rent adjustment rate of 3%.  During the term of the Lease, Nektar is responsible for paying its share of operating expenses specified in the Lease, including insurance costs and taxes.  The Lease also provides Nektar with a potential to increase the space leased by us at the Mission Bay Facility location by approximately 24,000 square feet, in accordance with the terms of Lease.  The Lease includes various covenants, indemnities, defaults, termination rights, security deposits and other provisions customary for lease transactions of this nature.

The foregoing summary is qualified in its entirety by reference to the Lease, which will be filed as an exhibit to Nektar’s next Quarterly Report on Form 10-Q for the period ended September 30, 2017.

 

 

19


 

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

Nektar Therapeutics is a research-based biopharmaceutical company that discovers and develops innovative new medicines in areas of high unmet medical need. Our research and development pipeline of new investigational drugs includes treatments for cancer, auto-immune disease and chronic pain. We leverage our proprietary and proven chemistry platform to discover and design new drug candidates. These drug candidates utilize our advanced polymer conjugate technology platforms, which are designed to enable the development of new molecular entities that target known mechanisms of action.

We continue to make significant investments in building and advancing our pipeline of proprietary drug candidates as we believe that this is the best strategy to build shareholder value.

 

In early 2017, we commenced a broad clinical development program for NKTR-214 in combination with other immuno-oncology agents including Opdivo ® (nivolumab) as part of our broad Phase 1/2 clinical collaboration with BMS in five tumor types and eight potential indications, a dose-escalation study with atezolizumab, and numerous preclinical collaboration programs. We have successfully enrolled subjects in the dose-escalation phase of the NKTR-214 study in a number of dose cohorts. We have identified the Phase 2 dose for NKTR-214 and have initiated the dose expansion phase of our study. On May 22, 2017, we announced a research collaboration that will allow Nektar and Takeda Pharmaceutical Company Limited (Takeda) to evaluate NKTR-214 with five oncology compounds from Takeda’s cancer portfolio.

 

In February 2017, we filed an IND for NKTR-358, our auto-immune disease drug candidate, and began the Phase 1 study for this program in healthy volunteers in March 2017. This study is designed to establish a range of dose levels and evaluate pharmacokinetics and safety. In the next stages of development for this program, we plan to advance the program into Phase 1b for auto-immune disease indications. On July 24, 2017, we entered into a license agreement with Lilly to co-develop NKTR-358. Our license agreement with Lilly is subject to review by the U.S. government under the HSR Act and will not become effective until the expiration or earlier termination of the waiting period.

 

On March 20, 2017, we announced that NKTR-181 met its primary and secondary endpoints in the SUMMIT-07 Phase 3 efficacy study. On July 18, 2017, we announced positive top-line data for our ongoing pivotal human abuse potential study (HAP) for NKTR-181. The NKTR-181 HAP study was designed to assess the relative oral abuse potential of NKTR-181 at its highest tested therapeutic dose as well as at the highest dose to which patients have been exposed in our long-term safety study and at a supratherapeutic dose compared to common therapeutic doses of oxycodone, a Schedule II opioid. Following the success of the SUMMIT-07 Phase 3 efficacy study and the HAP study, we plan to seek a collaboration partner to support future development and commercialization activities for NKTR-181.

 

We are also completing preclinical research and investigational new drug (IND)-enabling work for NKTR-262 and NKTR-255 with the goal of advancing those programs into the clinic later this year or in the early part of next year. The level of our future research and development investment will depend on a number of trends and uncertainties including clinical outcomes, future studies required to advance programs to regulatory approval, and the economics related to potential future collaborations that may include up-front payments, development funding, milestones, and royalties.

We have significant milestone and royalty economic interests in approved drugs and drug candidates in late stage development with our collaboration partners. With AstraZeneca, we have a collaboration for MOVANTIK ® , an oral peripherally-acting mu-opioid antagonist for the treatment of opioid-induced constipation in adult patients with non-cancer pain. We have a collaboration with Baxalta (a wholly-owned subsidiary of Shire plc) for ADYNOVATE ® , that was approved by the FDA in late 2015 for use in adults and adolescents, aged 12 years and older, who have Hemophilia A. The FDA recently expanded the approval of ADYNOVATE ® for the treatment of Hemophilia A in patients under 12 years of age, and for the use in surgical settings for both adult and pediatric patients. In 2016, the Ministry of Health, Labour and Welfare in Japan approved ADYNOVATE ® in Japan for patients aged 12 years and older with Hemophilia A. In late 2016, Swissmedic approved ADYNOVATE (marketed as ADYNOVI) in Switzerland for use in Hemophilia A patients aged 12 years and older.  In March 2017, Health Canada approved ADYNOVATE in Canada for use in adults for the treatment of Hemophilia A. ADYNOVATE ® is under regulatory review in the European Union.  We also have significant milestone and royalty interests in two drug development programs with Bayer. BAY41-6551 (Amikacin Inhale), which is an inhaled solution of amikacin, is an aminoglycoside antibiotic in Phase 3 clinical development to treat ventilated associated pneumonia and we expect topline results from this program in 2017. The second program with Bayer Schering, Cipro DPI (Cipro Dry Powder Inhaler, previously called Cipro Inhale), is an inhaled dry powder ciprofloxacin in Phase 3 development to treat non-cystic fibrosis bronchiectasis. The first Phase 3 clinical study for Cipro DPI (“RESPIRE 1”) met its co-primary endpoints for the every 14-day

20


 

dosing arm of Cipro DPI. On April 5, 2017, an abstract with data from the second Phase 3 clinical study for Cipro DPI (“RESPIRE 2”) trial was published by the American Thoracic Society in c onnection with the American Thoracic Society 2017 International Conference. The RESPIRE 2 trial showed a positive trend of Cipro DPI efficacy for both the 14 and the 28 days on/off regimens, but did not reach statistical significance. A pooled analysis of the primary efficacy results of RESPIRE 1 and RESPIRE 2 is positive. Bayer has informed us that they plan to discuss next steps with regulatory authorities based on the findings from RESPIRE 1 and RESPIRE 2. We also have milestone and royalty interests in other collaboration partner programs including PEGPH20 with Halozyme that is in Phase 3 development and dapirolizumab pegol with UCB Pharma that is in Phase 2 development for systemic lupus erythematosus (SLE). The level of sales growth of MOVANTIK ® and AD YNOVATE ® , together with the future clinical trial results and potential subsequent approvals of these collaboration partner drug candidates, will have a material impact on our future financial results and financial position.

Our business is subject to significant risks, including the risks inherent in our development efforts, the results of our clinical trials, our dependence on the marketing efforts by our collaborative parties, uncertainties associated with obtaining and enforcing patents, the lengthy and expensive regulatory approval process and competition from other products. For a discussion of these and some of the other risks and uncertainties affecting our business, see Part II, Item 1A "Risk Factors."

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 continue to make substantial investments in our earlier-stage drug candidate pipeline such as NKTR-262, NKTR-255, and NKTR-358. 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, immunology, 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 polymer reagents on a fixed price or cost-plus basis. Our current strategy is to manufacture and supply polymer 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

We estimate that we have working capital to fund our current business plans through at least the next twelve months. At June 30, 2017, we had approximately $310.7 million in cash and investments in marketable securities. Also, as of June 30, 2017, we had $253.8 million in debt, including $250.0 million in principal of senior secured notes and $3.8 million of capital lease obligations.

21


 

Results of Operations

Three and Six Months Ended June 30, 2017 and 2016

Revenue (in thousands, except percentages)

 

 

 

Three months ended June 30,

 

 

Increase/

(Decrease)

2017 vs. 2016

 

 

Percentage

Increase/

(Decrease)

2017 vs. 2016

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

Product sales

 

$

15,693

 

 

$

12,867

 

 

$

2,826

 

 

 

22

%

Royalty revenue

 

 

7,434

 

 

 

3,516

 

 

 

3,918

 

 

>100

%

Non-cash royalty revenue related to sale of future royalties

 

 

6,638

 

 

 

8,115

 

 

 

(1,477

)

 

 

(18

)%

License, collaboration and other revenue

 

 

4,824

 

 

 

8,270

 

 

 

(3,446

)

 

 

(42

)%

Total revenue

 

$

34,589

 

 

$

32,768

 

 

$

1,821

 

 

 

6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

 

Increase/

(Decrease)

2017 vs. 2016

 

 

Percentage

Increase/

(Decrease)

2017 vs. 2016

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

Product sales

 

$

20,449

 

 

$

26,966

 

 

$

(6,517

)

 

 

(24

)%

Royalty revenue

 

 

14,651

 

 

 

7,576

 

 

 

7,075

 

 

 

93

%

Non-cash royalty revenue related to sale of future royalties

 

 

13,301

 

 

 

14,650

 

 

 

(1,349

)

 

 

(9

)%

License, collaboration and other revenue

 

 

10,916

 

 

 

42,457

 

 

 

(31,541

)

 

 

(74

)%

Total revenue

 

$

59,317

 

 

$

91,649

 

 

$

(32,332

)

 

 

(35

)%

 

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 estimate of the period over which we expect to fulfill our performance obligations. Given the uncertainties in research and development collaborations, significant judgment 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 are the result 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 months ended June 30, 2017 compared to the three months ended June 30, 2016 primarily due to $10.4 million of product sales to our partner Ophthotech. Product sales decreased for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 primarily due to decreased product demand from our collaboration partners, including Ophthotech. In the year ended December 31, 2016, product sales to Ophthotech totaled $30.1 million. In December 2016, Ophthotech announced that two pivotal Phase 3 clinical trials for Fovista ® failed to meet their primary endpoints although a separate Phase 3 trial for Fovista ® remains ongoing. As a result, other than $10.4 million of product sales to Ophthotech based on prior binding purchase commitments and recognized in the second quarter of 2017, we currently do not expect any further sales to Ophthotech in 2017.

Royalty Revenue

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 six months ended June 30, 2017 compared to the three and six months ended June

22


 

30, 2016 primarily due to incr eased sales of MOVANTIK ® and ADYNOVATE ® . We expect royalty revenue for the full year of 2017 to increase as compared to 2016 due to royalties we expect to receive from net sales of MOVANTIK ® , MOVENTIG ® and ADYNOVATE ® as a result of sales growth of these pa rtnered products.

Non-cash Royalty Revenue Related to Sale of Future Royalties

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 2017 to decrease marginally compared to 2016.

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 certain research and development activities. 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 research and development work, and entering into new collaboration agreements, if any.

License, collaboration and other revenue decreased for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 primarily due to the recognition in the second quarter of 2016 of $3.3 million from our collaboration agreement with Daiichi.  License, collaboration and other revenue decreased for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 primarily due to the recognition in March 2016 of $28.0 million for our 40% share of a sublicense payment received by AstraZeneca from Kirin.

As a result of the Lilly agreement, we expect our license, collaboration and other revenue for the full year of 2017 will increase as compared to 2016.  The Lilly collaboration agreement is currently subject to HSR Act review and will not be effective until that review is complete.

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

 

 

 

Three months ended June 30,

 

 

Increase/

(Decrease)

2017 vs. 2016

 

 

Percentage

Increase/

(Decrease)

2017 vs. 2016

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

8,989

 

 

$

7,708

 

 

$

1,281

 

 

 

17

%

Product gross profit

 

 

6,704

 

 

 

5,159

 

 

$

1,545

 

 

 

30

%

Product gross margin

 

 

43

%

 

 

40

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

 

Increase/

(Decrease)

2017 vs. 2016

 

 

Percentage

Increase/

(Decrease)

2017 vs. 2016

 

 

 

2017

 

 

2016