SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|☒||QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the quarterly period ended June 30, 2021
|☐||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
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of|
incorporation or organization)
455 Mission Bay Boulevard South
San Francisco, California 94158
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
|Securities registered pursuant to Section 12(b) of the Act:|
|Title of each class||Trading symbol(s)||Name of each exchange on which registered|
|Common Stock, $0.0001 par value||NKTR||NASDAQ Global Select Market|
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 x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x 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||☐||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 183,801,441 on July 30, 2021.
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 initiation, formation, or 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, any statements related to potential, anticipated, or ongoing litigation, any statements concerning estimates and predictions of the COVID-19 pandemic's impact on our business and 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 “believe,” “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 terms “Company,” “Nektar,” “we,” “us,” and “our” refer to Nektar Therapeutics, a Delaware corporation, and, where appropriate, its subsidiaries.
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.
Summary of Risks
We are providing the following cautionary discussion of risk factors, uncertainties and assumptions that we believe are relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results and our forward-looking statements. We note these factors for investors as permitted by Section 21E of the Exchange Act and Section 27A of the Securities Act. Investors in Nektar Therapeutics should carefully consider the risks described below before making an investment decision. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider this section to be a complete discussion of all potential risks or uncertainties that may substantially impact our business. Moreover, we operate in a competitive and rapidly changing environment. New factors emerge from time to time and it is not possible to predict the impact of all of these factors on our business, financial condition or results of operations.
Risks to our business are more fully described below in Item IA in this Form 10-Q, which risks include, among others:
•Risks Related to our Research and Development Efforts:
◦we are highly dependent on the success of bempegaldesleukin, our lead immuno-oncology (I-O) candidate, and our business will be significantly harmed if we are not successful in developing this drug candidate;
◦the outcomes from competitive I-O and combination therapy clinical trials, and the discovery and development of new potential oncology therapies could have a material and adverse impact on the value of our I-O pipeline;
◦significant competition for our polymer conjugate chemistry technology platforms and our partnered and proprietary products and drug candidates could make our technologies, drug products or drug candidates obsolete or uncompetitive;
◦preliminary and interim data from our clinical studies are subject to audit and verification procedures that could result in material changes in the final data and may change as more patient data become available; and
◦clinical trials for any of our drug candidates could be delayed for a variety of reasons.
•Risks Related to our Collaboration Partners:
◦we are highly dependent on our collaboration partners to initiate, properly conduct and prioritize clinical trials for bempegaldesleukin and NKTR-358, our lead drug candidates, and to perform important additional development and commercialization activities, and our business will be significantly harmed if their actions deprioritize or otherwise harm the prospects of our drug candidates; and
◦the operations of our collaboration partners have been affected by the COVID-19 pandemic in the past, and it is possible that the COVID-19 pandemic will affect the operations of our collaboration partners in the future, which would cause delays in initiating or completing one or more clinical trials involving our drug candidates.
•Risks Related to our Financial Condition and Capital Requirements:
◦we have substantial future capital requirements and there is a risk we may not have access to sufficient capital to meet our current business plan;
◦if the market size for a new drug that receives approval is significantly smaller than we anticipate, it could negatively impact our revenue, results of operations and financial condition;
◦if third-party payers (including government programs) do not provide payment or reimbursement for our products, those products will not be widely accepted, which would negatively impact our business, results of operations and financial condition; and
◦our revenue is exclusively derived from our collaboration agreements. If we are unable to establish and maintain collaboration partnerships on attractive commercial terms, our business, results of operations and financial condition could suffer.
•Risks Related to the COVID-19 Pandemic: Our business could be adversely affected by the effects of health epidemics, including the recent COVID-19 pandemic. While the COVID-19 pandemic has not had a material adverse effect on our current operations, the ongoing challenges associated with the pandemic, including the emergence of new variants of the coronavirus, such as the Delta variant, and resurgences in number and rates of infections, could have a material negative impact on our business and our clinical trial timelines.
•Risks Related to Supply and Manufacturing:
◦if we or our contract manufacturers are not able to manufacture drugs or drug substances in sufficient quantities that meet applicable quality standards, our business, financial condition and results of operations could be negatively harmed; and
◦we purchase some of the starting material for drugs and drug candidates from a single source or a limited number of suppliers, and the partial or complete loss of one of these suppliers could cause delays, loss of revenue and contract liability.
•Risks Related to Business Operations: If we are unable to create robust sales, marketing and distribution capabilities or to enter into agreements with third parties to perform these functions, we will be unable to commercialize our drug candidates successfully.
•Risks Related to Intellectual Property, Litigation and Regulatory Concerns:
◦we may not elect or be able to take advantage of any expedited development or regulatory review and approval processes available to drug candidates granted Breakthrough Therapy designation by the United States Food and Drug Administration (FDA);
◦we or our partners may not obtain regulatory approval for our drug candidates on a timely basis, or at all; and
◦patents may not issue from our patent applications for our drug candidates, patents that have issued may not be enforceable, or additional intellectual property licenses from third parties may be required, which may not be available to us on commercially reasonable terms.
In addition to the above-mentioned risks, our business is subject to a number of additional risks faced by businesses generally.
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements—Unaudited:
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
|June 30, 2021||December 31, 2020|
Cash and cash equivalents
|$||152,345 ||$||198,955 |
|847,720 ||862,941 |
|28,871 ||38,889 |
|14,616 ||15,292 |
Other current assets
|12,596 ||21,928 |
Total current assets
|1,056,148 ||1,138,005 |
|57,397 ||136,662 |
Property, plant and equipment, net
|58,599 ||59,662 |
Operating lease right-of-use assets
|122,362 ||126,476 |
|76,501 ||76,501 |
|Other assets||344 ||1,461 |
|$||1,371,351 ||$||1,538,767 |
LIABILITIES AND STOCKHOLDERS’ EQUITY
|19,701 ||22,139 |
|28,665 ||14,532 |
Accrued clinical trial expenses
|41,085 ||44,207 |
Accrued contract manufacturing expenses
|8,392 ||11,310 |
Other accrued expenses
|16,404 ||9,676 |
Operating lease liabilities, current portion
|16,776 ||13,915 |
Total current liabilities
|131,023 ||115,779 |
Operating lease liabilities, less current portion
|131,658 ||136,373 |
|Development derivative liability||11,607 ||— |
|Liabilities related to the sales of future royalties, net||188,072 ||200,340 |
|Other long-term liabilities||4,016 ||8,980 |
|466,376 ||461,472 |
Commitments and contingencies
Preferred stock, $0.0001 par value; 10,000 shares authorized; no shares designated or outstanding at June 30, 2021 or December 31, 2020
|— ||— |
Common stock, $0.0001 par value; 300,000 shares authorized; 183,773 shares and 180,091 shares outstanding at June 30, 2021 and December 31, 2020, respectively
|18 ||18 |
Capital in excess of par value
|3,466,001 ||3,388,730 |
|Accumulated other comprehensive loss||(3,400)||(2,295)|
Total stockholders’ equity
|904,975 ||1,077,295 |
Total liabilities and stockholders’ equity
|$||1,371,351 ||$||1,538,767 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
|Three months ended June 30,||Six months ended June 30,|
|$||7,846 ||$||5,485 ||$||12,641 ||$||8,929 |
|— ||9,403 ||— ||19,122 |
Non-cash royalty revenue related to sale of future royalties
|20,456 ||7,684 ||39,254 ||17,579 |
License, collaboration and other revenue
|28 ||26,275 ||82 ||53,790 |
|28,330 ||48,847 ||51,977 ||99,420 |
Operating costs and expenses:
Cost of goods sold
|7,667 ||5,773 ||13,423 ||9,584 |
Research and development
|101,313 ||96,436 ||196,917 ||205,423 |
General and administrative
|29,555 ||24,347 ||61,234 ||50,564 |
|Impairment of assets and other costs for terminated program||— ||— ||— ||45,189 |
Total operating costs and expenses
|138,535 ||126,556 ||271,574 ||310,760 |
|Loss from operations||(110,205)||(77,709)||(219,597)||(211,340)|
Non-operating income (expense):
Non-cash interest expense on liability related to sale of future royalties
|Change in fair value of development derivative liability||(2,713)||— ||(4,312)||— |
Interest income and other income (expense), net
|845 ||5,191 ||2,257 ||13,543 |
|— ||(647)||— ||(6,851)|
Total non-operating income (expense), net
|Loss before provision for income taxes||(125,162)||(79,856)||(248,037)||(218,307)|
|Provision for income taxes||357 ||144 ||449 ||344 |
|Basic and diluted net loss per share||$||(0.69)||$||(0.45)||$||(1.37)||$||(1.23)|
|Weighted average shares outstanding used in computing basic and diluted net loss per share||182,698 ||178,327 ||182,038 ||177,755 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|Three months ended June 30,||Six months ended June 30,|
|Other comprehensive income (loss):|
|Net unrealized gain (loss) on available-for-sale investments||(64)||7,688 ||(830)||2,567 |
|Net foreign currency translation gain (loss)||(215)||(96)||(275)||(847)|
|Other comprehensive income (loss)||(279)||7,592 ||(1,105)||1,720 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Comprehensive Income (Loss)
|Balance at December 31, 2019||176,505 ||$||17 ||$||3,271,097 ||$||(1,005)||$||(1,864,718)||$||1,405,391 |
|Shares issued under equity compensation plans||1,358 ||— ||11,347 ||— ||— ||11,347 |
|Stock-based compensation||— ||— ||24,211 ||— ||— ||24,211 |
|Comprehensive loss||— ||— ||— ||(5,872)||(138,651)||(144,523)|
|Balance at March 31, 2020||177,863 ||17 ||3,306,655 ||(6,877)||(2,003,369)||1,296,426 |
|Shares issued under equity compensation plans||947 ||1 ||7,825 ||— ||— ||7,826 |
|Stock-based compensation||— ||— ||24,396 ||— ||— ||24,396 |
|Comprehensive income (loss)||— ||— ||— ||7,592 ||(80,000)||(72,408)|
|Balance at June 30, 2020||178,810 ||$||18 ||$||3,338,876 ||$||715 ||$||(2,083,369)||$||1,256,240 |
Comprehensive Income (Loss)
|Balance at December 31, 2020||180,091 ||$||18 ||$||3,388,730 ||$||(2,295)||$||(2,309,158)||$||1,077,295 |
|Shares issued under equity compensation plans||2,199 ||— ||17,106 ||— ||— ||17,106 |
|Stock-based compensation||— ||— ||23,898 ||— ||— ||23,898 |
|Comprehensive loss||— ||— ||— ||(826)||(122,967)||(123,793)|
|Balance at March 31, 2021||182,290 ||18 ||3,429,734 ||(3,121)||(2,432,125)||994,506 |
|Shares issued under equity compensation plans||1,483 ||— ||12,553 ||— ||— ||12,553 |
|Stock-based compensation||— ||— ||23,714 ||— ||— ||23,714 |
|Comprehensive income (loss)||— ||— ||— ||(279)||(125,519)||(125,798)|
|Balance at June 30, 2021||183,773 ||$||18 ||$||3,466,001 ||$||(3,400)||$||(2,557,644)||$||904,975 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|Six months ended June 30,|
|Cash flows from operating activities:|
|Adjustments to reconcile net loss to net cash used in operating activities:|
|Non-cash royalty revenue related to sale of future royalties||(39,254)||(17,579)|
|Non-cash interest expense on liability related to sale of future royalties||26,385 ||13,659 |
|Change in fair value of development derivative liability||4,312 ||— |
|Non-cash research and development expense||5,795 ||— |
|Stock-based compensation||47,612 ||48,607 |
|Depreciation and amortization||7,090 ||7,692 |
|Impairment of advance payments to contract manufacturers and equipment for terminated program||— ||20,351 |
|Amortization of premiums (discounts), net and other non-cash transactions||4,090 ||(782)|
|Changes in operating assets and liabilities:|
|Accounts receivable||10,018 ||(10,443)|
|Inventory||676 ||81 |
|Operating leases, net||2,260 ||4,245 |
|Other assets||11,585 ||(27,214)|
|Accounts payable||(2,101)||425 |
|Accrued compensation||14,133 ||12,469 |
|Other accrued expenses||(3,496)||8,952 |
|Net cash used in operating activities||(159,986)||(161,978)|
|Cash flows from investing activities:|
|Purchases of investments||(527,887)||(543,631)|
|Maturities of investments||612,419 ||860,330 |
|Sales of investments||5,035 ||41,700 |
|Purchases of property, plant and equipment||(6,157)||(3,594)|
|Net cash provided by investing activities||83,410 ||354,805 |
|Cash flows from financing activities:|
|Proceeds from shares issued under equity compensation plans||28,523 ||19,120 |
|Cash receipts from development derivative liability||1,500 ||— |
|Repayment of senior notes||— ||(250,000)|
|Net cash provided by (used in) financing activities||30,023 ||(230,880)|
|Effect of foreign exchange rates on cash and cash equivalents||(57)||(104)|
|Net decrease in cash and cash equivalents||(46,610)||(38,157)|
|Cash and cash equivalents at beginning of period||198,955 ||96,363 |
|Cash and cash equivalents at end of period||$||152,345 ||$||58,206 |
|Supplemental disclosures of cash flow information:|
|Cash paid for interest||$||— ||$||9,742 |
|Operating lease right-of-use asset recognized in exchange for lease liabilities||$||1,057 ||$||2,133 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
Note 1 — Organization and Summary of Significant Accounting Policies
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 leverage our proprietary and proven 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 potential therapies for oncology, immunology and virology.
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, 2021, we had approximately $1.1 billion in cash and investments in marketable securities.
Basis of Presentation and Principles of Consolidation
Our Condensed Consolidated Financial Statements include the financial position, results of operations and cash flows of our wholly-owned subsidiaries: Inheris Biopharma, Inc., Nektar Therapeutics (India) Private Limited (Nektar India), Nektar Therapeutics Europe GmbH, and certain other entities in Europe. We have eliminated all intercompany accounts and transactions 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, we may condense or omit certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) for annual periods. 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. We include translation gains and losses in accumulated other comprehensive income (loss) in the stockholders’ equity section of our 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. 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, 2021 and 2020.
The accompanying Condensed Consolidated Financial Statements are unaudited. The Condensed Consolidated Balance Sheet data as of December 31, 2020 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, 2020 filed with the SEC on February 26, 2021. 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, 2020.
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 and assumptions are inherently uncertain.
Actual results could differ materially from those estimates and assumptions. As appropriate, we assess our estimates each period, update them to reflect current information and generally recognize any changes in such estimates in the period first identified.
Certain items previously reported in specific financial statement captions have been reclassified to conform to the current period presentation. Such reclassifications do not materially impact previously reported revenue, operating loss, net loss, total assets, liabilities or stockholders’ equity.
We operate in one business segment which focuses on applying our technology platform 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.
Our customers are primarily pharmaceutical and biotechnology companies that are located in the U.S. and Europe and with whom we have multi-year arrangements. Our accounts receivable balance contains billed and unbilled trade receivables from product sales, milestones (to the extent that they have been achieved and are due from the counterparty), and other contingent payments, as well as reimbursable costs from collaborative research and development agreements. As of June 30, 2021, our accounts receivable includes $25.0 million for unbilled net expense reimbursements from our collaboration partner Bristol-Myers Squibb Company (BMS) and $3.4 million under customer contracts from our collaboration partners. As of December 31, 2020, our accounts receivable included $38.7 million for unbilled net expense reimbursements from BMS and $0.2 million from customer contracts. We generally do not require collateral from our customers. We perform a regular review of our customers’ credit risk and payment histories, including payments made after period end. Historically, we have not experienced credit losses from our accounts receivable and recorded no bad debt expense for the three and six months ended June 30, 2021 and 2020. We have not recorded a reserve for credit losses at June 30, 2021 or December 31, 2020.
We are dependent on our suppliers and contract manufacturers to provide raw materials and drugs 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, including as a result of the COVID-19 pandemic, our ability to develop and produce our drug candidates, our ability to supply comparator drugs for our clinical trials, 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.
For our available-for-sale securities, we have significant concentrations of issuers in the banking and financial services industry. While our investment policy requires that we only invest in highly-rated securities and limit our exposure to any single issuer, a deterioration in this industry could have a material effect on our results of operations and financial position. Additionally, pursuant to our investment policy, we may sell securities before maturity if the issuer’s credit rating has been downgraded below our minimum credit rating requirements, which may result in a loss on the sale. Accordingly, if factors, including the effects of the COVID-19 pandemic, result in downgrades below our minimum credit rating requirements and if we decide to sell these securities, we may experience losses on such sales.
We enter into collaboration arrangements with pharmaceutical and biotechnology collaboration partners, under which we may grant licenses to our collaboration partners to further develop and commercialize one of our proprietary drug candidates, either alone or in combination with the collaboration partners’ compounds, or grant licenses to partners to use our technology to research and develop their own proprietary drug candidates. We may also perform research, development, manufacturing and supply activities under our collaboration agreements. Consideration under these contracts may include an upfront payment, development and regulatory milestones and other contingent payments, expense reimbursements, royalties based on net sales of approved drugs, and commercial sales milestone payments. Additionally, these contracts may provide options for the customer to
purchase our proprietary PEGylation materials, drug candidates or additional contract research and development services under separate contracts.
When we enter into collaboration agreements, we assess whether the arrangements fall within the scope of ASC 808, Collaborative Arrangements (ASC 808) based on whether the arrangements involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards of the arrangement. To the extent that the arrangement falls within the scope of ASC 808, we assess whether the payments between us and our collaboration partner fall within the scope of other accounting literature. If we conclude that payments from the collaboration partner to us represent consideration from a customer, such as license fees and contract research and development activities, we account for those payments within the scope of ASC 606, Revenue from Contracts with Customers (ASC 606). However, if we conclude that our collaboration partner is not a customer for certain activities and associated payments, such as for certain collaborative research, development, manufacturing and commercial activities, we present such payments as a reduction of research and development expense or general and administrative expense, based on where we present the underlying expense.
For elements of those arrangements that we determine should be accounted for under ASC 606, we assess which activities in our collaboration agreements are performance obligations that should be accounted for separately and determine the transaction price of the arrangement, which includes the assessment of the probability of achievement of future milestones and other potential consideration. For arrangements that include multiple performance obligations, such as granting a license or performing contract research and development activities or participation on joint steering or other committees, we allocate upfront and milestone payments under a relative standalone selling price method. Accordingly, we develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. These key assumptions may include revenue forecasts, clinical development timelines and costs, discount rates and probabilities of clinical and regulatory success.
Product sales are primarily derived from manufacturing and supply agreements with our customers. We have assessed our current manufacturing and supply arrangements and have generally determined that they provide the customer an option to purchase our proprietary PEGylation materials. Accordingly, we treat each purchase order as a discrete exercise of the customer’s option (i.e. a separate contract) rather than as a component of the overall arrangement. The pricing for the manufacturing and supply is generally at a fixed price and may be subject to annual producer price index adjustments. We invoice and recognize product sales when title and risk of loss pass to the customer, which generally occurs upon shipment. Customer payments are generally due 30 days from receipt of invoice. We test our products for adherence to technical specifications before shipment; accordingly, we have not experienced any significant returns from our customers.
Generally, for our collaboration arrangements that include sales-based royalties, we have granted our collaboration partner a license to our intellectual property. Pursuant to these arrangements, our collaboration partners are typically obligated to pay a royalty that is based on the net sales of their approved drugs that are sold in the countries where we have intellectual property rights covering their drugs. As of December 30, 2020, we have sold our rights to receive sales-based royalties for CIMZIA®, MIRCERA®, MOVANTIK®, ADYNOVATE® and REBINYN® as further described in Note 5. For collaboration arrangements that include sales-based royalties, we have concluded that the license is the predominant item to which the royalties relate, which include commercial milestone payments based on the level of sales. Accordingly, we recognize royalty revenue, including for our non-cash royalties, when the underlying sales occur based on our best estimates of sales of the drugs. Our partners generally pay royalties or commercial milestones after the end of the calendar quarter in accordance with contractual terms.
License, Collaboration and other Revenue
License Grants: For collaboration arrangements that include a grant of a license to our intellectual property, we consider whether the license grant is distinct from the other performance obligations included in the arrangement. Generally, we would conclude that the license is distinct if the customer is able to benefit from the license with the resources available to it. For licenses that are distinct, we recognize revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and we have provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement.
Milestone Payments: At the inception of the arrangement and at each reporting date thereafter, we assess whether we should include any milestone payments or other forms of variable consideration in the transaction price, based on whether a significant reversal of revenue previously recognized is not probable upon resolution of the uncertainty. Since milestone payments may become payable to us upon the initiation of a clinical study, filing for or receipt of regulatory approval or the first commercial sale of a product, we review the relevant facts and circumstances to determine when we should update the transaction price, which may occur before the triggering event. When we do update the transaction price for milestone payments, we allocate it on a relative standalone selling price basis and record revenue on a cumulative catch-up basis, which results in recognizing revenue for previously satisfied performance obligations in such period. If we update the transaction price before the triggering event, we recognize the increase in the transaction price as a contract asset. Our partners generally pay development milestones after achievement of the triggering event.
Research and Development Services: For amounts allocated to our research and development obligations in a collaboration arrangement, we recognize revenue over time using a proportional performance model, representing the transfer of goods or services as we perform activities over the term of the agreement.
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 joint development collaboration, such as our collaboration with BMS, 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 an accrued expense 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 estimated activities performed by third parties. We may also accrue expenses based on the total estimated cost of the treatment phase on a per patient basis and 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.
We record an accrued expense for the estimated costs of our contract manufacturing 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 include upfront payments and milestone payments, which depend on factors such as the achievement of the completion of certain stages of the manufacturing process. For purposes of recognizing expense, we assess whether we consider the production process is sufficiently defined such that the resulting product can be considered the delivery of a good, as evidenced by predictive or contractually required yields in the production process or payment terms based on the actual yield, or the delivery of a service, where processes and yields are developing and less certain. If we consider the process to be the delivery of a good, we recognize expense when the drug product is delivered, or we otherwise bear risk of loss. If we consider the process to be the delivery of a service, we recognize expense based on our best estimates of the contract manufacturer’s progress towards completion of the stages in the contracts. We recognize and amortize upfront payments and accrue liabilities based on the specific terms of each arrangement. Certain arrangements may provide upfront payments for certain stages of the arrangement and milestone payments for the completion of certain stages, and, accordingly, we may record advance payments for services that have not been completed or goods not delivered and liabilities for stages where the contract manufacturer is entitled to a milestone payment.
We capitalize advance payments for goods or services that will be used or rendered for future research and development activities and recognize expense as the related goods are delivered or services performed. We base our estimates on the best information available at the time. However, additional information may become available to us in the future 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. We generally consider such increases or decreases in cost as changes in estimates and reflect them in research and development expenses in the period identified.
Impairment of Assets and Other Costs for Terminated Program
On January 14, 2020, the joint FDA Anesthetic Drug Products Advisory Committee and Drug Safety and Risk Management Committee did not recommend approval of our New Drug Application (NDA) for NKTR-181. As a result, we withdrew our NDA and decided to make no further investments in this program. As a result, in the three months ended March 31, 2020, we wrote off $19.7 million of advance payments to contract manufacturers for commercial batches of NKTR-181. We also incurred $25.5 million of additional costs, primarily for non-cancellable commitments to our contract manufacturers and certain severance costs. We present these costs in the Impairment of assets and other costs for terminated program line in our Condensed Consolidated Statement of Operations.
For the three and six months ended June 30, 2021 and 2020, our income tax expense primarily results from taxable income in our Nektar India subsidiary. We have fully reserved our U.S. federal deferred tax assets generated from our net operating losses, as we believe it is not more likely than not that the benefit will be realized.
We currently have an effective shelf registration statement on Form S-3 (the 2021 Shelf Registration Statement) on file with the SEC, which expires in March 2024. The 2021 Shelf Registration Statement currently permits the offering, issuance and sale by us of up to an aggregate offering price of $300.0 million of common stock, preferred stock, debt securities and warrants in one or more offerings and in any combination, all of which may be offered, issued and sold in “at-the-market” sales pursuant to an equity distribution agreement with Cowen and Company, LLC (the Equity Distribution Agreement). No securities have been sold under the 2021 Shelf Registration Statement or the Equity Distribution Agreement.
Note 2 — Cash and Investments in Marketable Securities
Cash and investments in marketable securities, including cash equivalents, are as follows (in thousands):
|Estimated Fair Value at|
|June 30, 2021||December 31, 2020|
|Cash and cash equivalents||$||152,345 ||$||198,955 |
|Short-term investments||847,720 ||862,941 |
|Long-term investments||57,397 ||136,662 |
|Total cash and investments in marketable securities||$||1,057,462 ||$||1,198,558 |
We invest in liquid, high quality debt securities. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in securities with maturities of two years or less and maintain a weighted average maturity of one year or less. As of June 30, 2021 and December 31, 2020, all of our long-term investments had maturities between and two years.
Our portfolio of cash and investments in marketable securities includes (in thousands):
|June 30, 2021||December 31, 2020|
|Amortized Cost||Gross Unrealized Gains||Gross Unrealized Losses||Fair Value||Fair Value|
|Corporate notes and bonds||$||403,490 ||$||152 ||$||(91)||$||403,551 ||$||687,469 |
|Corporate commercial paper||487,414 ||51 ||(35)||487,430 ||313,497 |
|Obligations of U.S. government agencies||5,880 ||2 ||(1)||5,881 ||2,382 |
|Available-for-sale investments||$||896,784 ||$||205 ||$||(127)||$||896,862 ||$||1,003,348 |
|Money market funds||138,289 ||179,302 |
|Certificates of deposit||8,255 ||9,623 |
|Cash||14,056 ||6,285 |
|Total cash and investments in marketable securities||$||1,057,462 ||$||1,198,558 |
At December 31, 2020, our gross unrealized gains and losses totaled $1.1 million and $0.2 million, respectively.
Note 3 — Inventory
Inventory consists of the following (in thousands):
|June 30, 2021||December 31, 2020|
|Raw materials||$||1,996 ||$||2,422 |
|Work-in-process||9,753 ||10,703 |
|Finished goods||2,867 ||2,167 |
|Total inventory||$||14,616 ||$||15,292 |
We manufacture finished goods inventory upon receipt of firm purchase orders, and we may manufacture certain intermediate work-in-process materials and purchase raw materials based on purchase forecasts from our collaboration partners. We include direct materials, direct labor, and manufacturing overhead in inventory and determine cost on a first-in, first-out basis for raw materials and on a specific identification basis for work-in-process and finished goods. We value inventory at the lower of cost or net realizable value, and we write down defective or excess inventory to net realizable value based on historical experience or projected usage. We expense inventory related to our research and development activities as manufactured by us or when purchased. Before the regulatory approval of our drug candidates, we recognize research and development expense for the manufacture of drug products that could potentially be available to support the commercial launch of our drug candidates, if approved.
Note 4 — Co-Development Agreement with SFJ Pharmaceuticals and Development Derivative Liability
On February 12, 2021, we entered into a co-development agreement (the SFJ Agreement) with SFJ Pharmaceuticals XII, L.P., a SFJ Pharmaceuticals Group company (SFJ), pursuant to which SFJ will pay up to $150.0 million in committed funding to support a Phase 2/3 study of bempegaldesleukin in combination with Keytruda® (pembrolizumab) for first-line treatment of patients with metastatic or unresectable recurrent squamous cell carcinoma of the head and neck (the SCCHN Clinical Trial) whose tumors express PD-L1 (the SCCHN Indication). SFJ Pharmaceuticals is a global drug development company backed by Blackstone Life Sciences and Abingworth. On February 11, 2021, we entered into a collaboration agreement with MSD International GmbH (MSD), an affiliate of Merck, Sharp & Dohme, pursuant to which MSD will provide Keytruda® at no cost for use in the SCCHN Clinical Trial but will not bear any other costs of the trial.
SFJ will have primary responsibility for the clinical trial management of the SCCHN Clinical Trial, and we will be the sponsor of the SCCHN Clinical Trial and will also have sole responsibility for regulatory interactions and filings for bempegaldesleukin. The SCCHN Clinical Trial provides for an interim futility analysis, and unless the futility criteria are met, SFJ is required to complete the SCCHN Trial, but if the futility criteria are met, SFJ has the responsibility to wind down the SCCHN Clinical Trial at its sole cost. We and BMS, pursuant to the BMS Collaboration Agreement, remain solely responsible for conducting the Phase 3 clinical trials of bempegaldesleukin in combination with Opdivo®, including the treatment of previously untreated unresectable or metastatic melanoma (the “Melanoma Indication” and the “Melanoma Clinical Trial”).
Other than the opportunity to receive Success Payments as outlined below, SFJ has no right to reimbursement of costs incurred by SFJ for the SCCHN Clinical Trial in the event that the Melanoma Clinical Trial and the SCCHN Clinical Trial do not achieve FDA approval. We will pay SFJ a series of success-based annual payments (collectively, the Success Payments) in the event of FDA approval of bempegaldesleukin for the Melanoma Indication, the SCCHN Indication, or both, and in the event of FDA approval of one additional bempegaldesleukin indication. The Success Payments do not begin until the substantial completion of the SCCHN Clinical Trial. The total success-based annual payments for the first indication approved by FDA, whether for the Melanoma Indication or the SCCHN Indication, is an aggregate of $450.0 million, paid in annual contractual payments over five years, with the first payment being $30.0 million, with the earliest possible payment expected to occur in late 2024 or early 2025, subject to the substantial completion of the SCCHN Clinical Trial. The total success-based payments for the second indication approved by FDA, whether for the Melanoma Indication or the SCCHN Indication, is an aggregate of $150.0 million, paid in annual contractual payments over seven years. Finally, in the event of FDA approval for bempegaldesleukin for any indication other than the Melanoma Indication or the SCCHN Indication, we will make a one-time payment of $37.5 million to SFJ. If the success criterion for the interim futility analysis is not met and SFJ winds down the SCCHN Clinical Trial, then the Success Payments, if any, for the Melanoma Indication and/or the additional bempegaldesleukin indication are reduced pro rata based on the costs incurred by SFJ for the SCCHN Clinical Trial over the aggregate commitment of $150.0 million.
The SFJ Agreement provides for certain positive and negative covenants, including restrictions on our ability to incur liens on our intellectual property related to bempegaldesleukin (the bempegaldesleukin IP), or assign or convey any right to receive income with respect to the bempegaldesleukin IP (other than royalty and other license fee obligations to licensors), except for the issuance of senior secured debt secured by all or substantially all of our assets, including the bempegaldesleukin IP.
The SFJ Agreement expires upon the payment of all Success Payments to SFJ, unless earlier terminated as provided under the SFJ Agreement. The SFJ Agreement may be terminated by either party for a safety or health concern for the patients, whether by the independent data monitoring company or by mutual agreement of both parties. The SFJ Agreement may also be terminated by either party for material breach or insolvency of the counterparty.
We present the SFJ Agreement as development derivative liability in our Condensed Consolidated Balance Sheets, which we remeasure to fair value at each reporting date. As SFJ conducts the SCCHN Clinical Trial, we record non-cash research and development expense with a corresponding increase to the development derivative liability, and as SFJ remits funding to us to support our internal costs of conducting the trial, we also record a corresponding increase to the development derivative liability. We present the gain (loss) from the remeasurement as Change in fair value of development derivative liability in our Condensed Consolidated Statement of Operations. The following table presents the changes in the development derivative liability for the three and six months ended June 30, 2021:
|Three Months Ended June 30, 2021||Six Months Ended June 30, 2021|
|Fair value at beginning of period||$||4,597 ||$||— |
|Non-cash research and development expense||3,547 ||5,795 |
|Cash receipts from SFJ||750 ||1,500 |
|Change in the fair value of development derivative liability||2,713 ||4,312 |
|Fair value at end of period||$||11,607 ||$||11,607 |
We valued the derivative using a scenario-based discounted cash flow method, whereby each scenario makes assumptions about the probability and timing of cash flows, and we discount such cash flows to present value using a risk-adjusted rate. The key inputs to the valuation include our estimates of the following: (i) the probability and timing of achieving FDA approval in the Melanoma Indication, the SCCHN Indication and any other bempegaldesleukin indication, (ii) the timing of the substantial completion of the SCCHN Clinical Trial that SFJ must achieve before receiving a Success Payment, (iii) the probability of termination of the study due to meeting the interim futility criteria, (iv) the amount of costs incurred by SFJ if the success criterion for the interim futility analysis is not met, (v) SFJ’s cost of borrowing (1.0%), and (vi) the Company’s imputed cost of borrowing for debt with similar terms (12.2%).
Note 5 — Liability Related to Sale of Future Royalties
On February 24, 2012, we entered into a purchase and sale agreement (the 2012 Purchase and Sale Agreement) with RPI Finance Trust (RPI), an affiliate of Royalty Pharma, pursuant to which we sold to RPI our right to receive royalty payments (the 2012 Transaction Royalties) 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, 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 sale of the 2012 Transaction Royalties. As part of this sale, we incurred approximately $4.4 million in transaction costs, which are amortized to interest expense over the estimated life of the 2012 Purchase and Sale Agreement. Although we sold all of our rights to receive royalties from the CIMZIA® and MIRCERA® products, as a result of our ongoing manufacturing and supply obligations related to the generation of these royalties, we continue to account for these royalties as revenue. We recorded the $124.0 million in proceeds from this transaction as a liability (the 2012 Royalty Obligation) that is amortized using the interest method over the estimated life of the 2012 Purchase and Sale Agreement as royalties from the CIMZIA® and MIRCERA® products are remitted directly to RPI.
On December 16, 2020, we entered into a purchase and sale agreement (the 2020 Purchase and Sale Agreement) with entities managed by Healthcare Royalty Management, LLC (collectively, HCR). Pursuant to the 2020 Purchase and Sale Agreement, we sold to HCR certain of our rights to receive royalty payments (the 2020 Transaction Royalties) arising from the worldwide net sales, from and after October 1, 2020 until certain aggregate royalty payment thresholds are met, as described below, of (a) MOVANTIK® under that certain License Agreement, dated September 20, 2009, by and between Nektar and AstraZeneca AB (AstraZeneca), as amended, (b) ADYNOVATE® under that certain Exclusive Research, Development, License and Manufacturing and Supply Agreement, dated September 26, 2005, by and among Nektar, Baxalta US Inc. and Baxalta GmbH, as amended, (c) REBINYN® under that certain Settlement and License Agreement, dated December 21, 2016, by and among Nektar, Novo Nordisk Inc., Novo Nordisk A/S and Novo Nordisk A/G (collectively, Novo Nordisk) and (d) licensed products under that certain Right to Sublicense Agreement, dated October 27, 2017, by and among Nektar, Baxter Incorporated, Baxalta US Inc. and Baxalta GmbH.
The 2020 Purchase and Sale Agreement will automatically expire, and the payment of the 2020 Transaction Royalties to HCR will cease, when HCR has received payments of the 2020 Transaction Royalties equal to $210.0 million (the 2025 Threshold), if the 2025 Threshold is achieved on or prior to December 31, 2025, or $240.0 million, if the 2025 Threshold is not achieved on or prior to December 31, 2025 (or, if earlier, the date on which the last royalty payment under the relevant license agreements is made). If HCR has received payments of the 2020 Transaction Royalties equal to at least $208.0 million on or prior to December 31, 2025, we have the option to pay the difference between the 2025 Threshold and such 2020 Transaction Royalties, and the 2025 Threshold will be met and the 2020 Purchase and Sale Agreement will expire. After the 2020 Purchase and Sale Agreement expires, all rights to receive the 2020 Transaction Royalties return to Nektar.
On December 30, 2020, we received aggregate cash proceeds of $150.0 million for the sale of the 2020 Transaction Royalties. As part of the sale, we incurred approximately $3.8 million in transaction costs, which are amortized to interest expense over the estimated life of the 2020 Purchase and Sale Agreement. Although we sold all of our rights to receive royalties from these products, as a result of the limits on the 2020 Transaction Royalties to be received by HCR and our ongoing manufacturing and supply obligations related to the generation of these royalties, we will continue to account for these non-cash royalties as revenue, commencing with royalties for the three months ended December 31, 2020, which HCR received in the three months ended March 31, 2021. We recorded the $150.0 million in proceeds from this transaction as a liability (the 2020 Royalty Obligation) that will be amortized using the effective interest method over the estimated life of the 2020 Purchase and Sale Agreement.
As royalties are remitted to RPI and HCR by our licensees, the balances of the respective Royalty Obligations will be effectively repaid over the lives of the agreements. To determine the amortization of the Royalty Obligations, we are required to estimate the total amount of future royalty payments to be received by RPI and HCR, respectively. The sum of these amounts less the net proceeds we received will be recorded as non-cash interest expense over the lives of the respective Royalty Obligations. We periodically assess the estimated royalty payments to RPI and HCR from our licensees and to the extent the amount or timing of such payments is materially different than our original estimates, we will prospectively adjust the imputed interest rate and the related amortization of the applicable Royalty Obligation.
The following table presents our estimates of the annual interest rates over the lives of the agreements and the resulting prospective interest rates used to recognize non-cash interest expense for the three and six months ended June 30, 2021 and 2020.
|2012 Purchase and Sale Agreement||2020 Purchase and Sale Agreement|
|Three and six months ended June 30,||Three and six months ended June 30,|
|Interest rates - end of period presented|
|Implicit interest rate over the life of the agreement||20.2 ||%||19.5 ||%||16.0 ||%|
|Prospective effective interest rate||48.0 ||%||38.0 ||%||16.0 ||%|
In addition, the 2012 and 2020 Purchase and Sale Agreements grant RPI and HCR, respectively, the right to receive certain reports and other information relating to the 2012 and 2020 Transaction Royalties, respectively, and contain other representations and warranties, covenants and indemnification obligations that are customary for transactions of this nature. To our knowledge, we are currently in compliance with these provisions of the 2012 and 2020 Purchase and Sale Agreements; however, if we were to breach our obligations, we could be required to pay damages to RPI and HCR, respectively, that are not limited to the purchase prices we received in the sale transactions. However, the time limitation we have to indemnify RPI with respect to any breach of these intellectual property-based representations and warranties has passed.
Note 6 — Commitments and Contingencies
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.
In October 2018, we and certain of our executives were named in a putative securities class action complaint filed in the U.S. District Court for the Northern District of California (Case No. 18-cv—66-7-HSG, which we refer to as the Mulquin action). The Mulquin plaintiffs have challenged public statements Nektar made, between January 2017 and June 2018, about the clinical trials of bempegaldesleukin. The Mulquin complaint was amended in May 2019. The defendants moved to dismiss and the court granted the motion without prejudice in July 2020. The Mulquin plaintiffs again amended their complaint and the defendants again moved to dismiss. In December 2020, the court dismissed the action with prejudice. The plaintiffs filed a notice of appeal in January 2021 and appellate briefing in the U.S. Court of Appeals for the Ninth Circuit is expected to be completed by September 2021.
A second putative securities class action was filed against the Company and certain of our executives in the U.S. District Court for the Northern District of California in August 2019 (Case No. 4-19-cv-05173, which we refer to as the Damiba action). The Damiba plaintiffs challenged public statements Nektar made, between February 2019 and May 2019, about its bempegaldesleukin clinical trials and collaboration with Bristol-Myers Squibb. After the Damiba plaintiffs filed an amended complaint and the defendants moved to dismiss, the court dismissed the action without prejudice in January 2021. The Damiba plaintiffs subsequently voluntarily dismissed the action, with prejudice, in March 2021.
In addition to the two securities actions (the Mulquin action and the Damiba action), three sets of derivative actions have been filed against certain of the Company’s current and former officers and directors, purportedly on the Company’s behalf. These derivative actions are based on the allegations in the securities actions and on the premise that the Company’s officers and directors breached their fiduciary duties by exposing the Company to one or both of the securities actions. The first derivative action was filed in the U.S. District Court for the District of Delaware in February 2019 (Case No. 1:19-cv-00322-MN-JLH). After amending their complaint several times, the plaintiffs in that action voluntarily dismissed their claims without prejudice in April 2021.
A second set of derivative actions was filed in February 2020 in the U.S. District Court for the Northern District of California (Case No. 4:20-cv-01088-JSW). The derivative actions in California have been consolidated and the Company has moved to dismiss on the basis that the plaintiffs have neither made a demand on the Company’s board of directors nor shown that a demand would be futile. The Company’s motion to dismiss has been under submission since December 2020.
A third derivative complaint was filed in February 2021 in the Court of Chancery of the State of Delaware (C.A. No. 2021-0118-PAF). The parties agreed to stay further proceedings in this action until thirty days after the U.S. Court of Appeals for the Ninth Circuit's final resolution of the appeal in the Mulquin action.
Given the nature and status of these securities class action lawsuits and derivative complaints, we cannot reasonably estimate a potential future loss or a range of potential future losses. However, an unfavorable resolution could potentially have a material adverse effect on our business, financial condition, and results of operations or prospects, and potentially result in paying monetary damages. We have recorded no liability for these matters in our Condensed Consolidated Balance Sheets at either June 30, 2021 or December 31, 2020.
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 and PEGylation materials 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, including our obligation to RPI described in Note 5. In the event it is determined that we breached certain of the representations and warranties or covenants made by us in any such agreements, we could incur substantial indemnification liabilities depending on the timing, nature, and amount of any such claims.
To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification obligations, representations or warranties. Because the aggregate amount of any potential indemnification obligation is not a stated amount, we cannot reasonably estimate the overall maximum amount of any such obligations. We have recorded no liabilities for these obligations in our Condensed Consolidated Balance Sheets at either June 30, 2021 or December 31, 2020.
Note 7 — Fair Value Measurement
The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis and indicates the level of the fair value hierarchy and the valuation techniques we utilized to determine such fair value:
|As of June 30, 2021|
|Level 1||Level 2||Level 3||Total|
|Corporate notes and bonds||$||— ||$||403,551 ||$||— ||$||403,551 |
|Corporate commercial paper||— ||487,430 ||— ||487,430 |
|Obligations of U.S. government agencies||— ||5,881 ||— ||5,881 |
|Money market funds||138,289 ||— ||— ||138,289 |
|Total assets||$||138,289 ||$||896,862 ||$||— ||$||1,035,151 |
|Development derivative liability||$||— ||$||— ||$||11,607 ||$||11,607 |
|As of December 31, 2020|
|Level 1||Level 2||Level 3||Total|
|Corporate notes and bonds||$||— ||$||687,469 ||$||— ||$||687,469 |
|Corporate commercial paper||— ||313,497 ||— ||313,497 |
|Obligations of U.S. government agencies||— ||2,382 ||— ||2,382 |
|Money market funds||179,302 ||— ||— ||179,302 |
|Total assets||179,302 ||$||1,003,348 ||$||— ||$||1,182,650 |
|Development derivative liability||$||— ||$||— ||$||— ||$||— |
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 for identical or similar assets or liabilities 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.
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 represents quoted prices for similar assets in active markets or has been derived from observable market data. For the six months ended June 30, 2021, there were no transfers between Level 1 and Level 2 of the fair value hierarchy.
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. For the reconciliation of the changes in the development derivative liability and the description of the significant inputs used in estimating its fair value, see Note 4.
Note 8 — 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 reimbursement for research and development activities. We generally include our costs of performing these services in research and development expense, except for costs for product sales to our collaboration partners which we include in cost of goods sold. We analyze our agreements to determine whether we should account for the agreements within the scope of ASC 808, and, if so, we analyze whether we should account for any elements under ASC 606.
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,|
Drug or Drug Candidate
Bristol-Myers Squibb Company
|Bempegaldesleukin||$||— ||$||25,000 ||$||— ||$||50,000 |
Eli Lilly and Company
|— ||— ||— ||1,259 |
|Other||28 ||1,275 ||82 ||2,531 |
|Total license, collaboration and other revenue||$||28 ||$||26,275 ||$||82 ||$||53,790 |
During the three and six months ended June 30, 2021, we recognized $20.5 million and $39.3 million, respectively, of revenue for performance obligations that we had satisfied in prior periods. During the three and six months ended June 30, 2020, we recognized $42.1 million and $86.7 million, respectively, of revenue for performance obligations that we had satisfied in prior periods. These amounts include all of our royalty revenue and non-cash royalty revenue, as well as the $25.0 million and $50.0 million in milestones, respectively, recognized under our BMS Collaboration Agreement during the three and six months ended June 30, 2020, as further described below, because we had previously completed our performance obligations of granting the licenses.
As of June 30, 2021, our collaboration agreements with partners included potential future payments for development and regulatory milestones totaling approximately $1.7 billion, including amounts from our agreements with BMS and Eli Lilly and Company described below. In addition, under our collaboration agreements we are entitled to receive contingent sales milestone payments, other contingent payments and royalty payments, as described below.
There have been no material changes to our collaboration agreements in the three and six months ended June 30, 2021.
Bristol-Myers Squibb Company (BMS): Bempegaldesleukin, also referred to as NKTR-214
On February 13, 2018, we entered into a Strategic Collaboration Agreement (the BMS Collaboration Agreement) and a Share Purchase Agreement with BMS, both of which became effective on April 3, 2018. Pursuant to the BMS Collaboration Agreement, we and BMS are jointly developing bempegaldesleukin, including, without limitation, in combination with BMS’s Opdivo® (nivolumab), and other compounds of BMS, ours or any third party. The parties have agreed to jointly commercialize bempegaldesleukin on a worldwide basis. We retained the right to record all worldwide sales for bempegaldesleukin. We will share global commercialization profits and losses with BMS for bempegaldesleukin, with Nektar sharing 65% and BMS sharing 35% of the net profits and losses. The parties share the internal and external development costs for bempegaldesleukin in combination regimens based on each party’s relative ownership interest in the compounds included in the regimens. In accordance with the BMS Collaboration Agreement, the parties share development costs for bempegaldesleukin in combination with Opdivo®, 67.5% of costs to BMS and 32.5% to Nektar. The parties share costs for the manufacturing of bempegaldesleukin, 35% of costs to BMS and 65% to Nektar.
In April 2018, BMS paid us a non-refundable upfront cash payment of $1.0 billion. We are eligible to receive additional cash payments up to a total of approximately $1.455 billion (including the milestones which we have received under Amendment No. 1 described below) upon the achievement of certain development and regulatory milestones, and up to a total of $350.0 million upon the achievement of certain sales milestones. In April 2018, BMS also purchased 8,284,600 shares of our common stock pursuant to the Share Purchase Agreement for total additional cash consideration of $850.0 million.
We determined that the BMS Collaboration Agreement falls within the scope of ASC 808, and we analogized to ASC 606 for the accounting for our performance obligation of the delivery of the licenses to develop and commercialize bempegaldesleukin.
During 2018, we aggregated the total consideration of $1.85 billion received under the agreements and allocated it between the stock purchase and the revenue-generating elements, because we and BMS negotiated the agreements together and the effective date of the BMS Collaboration Agreement was dependent upon the effective date of the Share Purchase Agreement. We recorded the estimated fair value of the shares of $790.2 million in stockholders’ equity. We allocated the remaining $1,059.8 million to the transaction price of the collaboration agreement, which we recognized in 2018. We consider the future potential development, regulatory and sales milestones to be variable consideration.
On January 9, 2020, we and BMS entered into Amendment No. 1 (the Amendment) to the BMS Collaboration Agreement. Pursuant to the Amendment, we and BMS agreed to update the Collaboration Development Plan under which we are collaborating and developing bempegaldesleukin. The cost sharing under the BMS Collaboration Agreement remains unchanged. We received a non-refundable, creditable milestone payment of $25.0 million for the achievement of the first patient, first visit in the registrational muscle-invasive bladder cancer trial on January 30, 2020, which we recognized in the three months ended March 31, 2020. We also received a non-refundable, non-creditable milestone payment of $25.0 million for the achievement of the first patient, first visit in the registrational adjuvant melanoma trial on July 27, 2020, which we recognized in the three months ended June 30, 2020, because we concluded that, as of June 30, 2020, a significant reversal of this revenue was not probable. For the creditable milestone, BMS is entitled to deduct the amount paid from future development milestones due to us under the original agreement.
Other than these two milestones which we recognized during 2020, we continue to exclude the other milestones of up to $1.8 billion from the transaction price as of June 30, 2021 due to the significant uncertainties involved with clinical development and regulatory approval. We re-evaluate the transaction price at each reporting period and as uncertain events are resolved or other changes in circumstances occur.
As mentioned above, BMS shares certain percentages of development costs incurred by us and we share certain percentages of development costs incurred by BMS. We consider these activities to represent collaborative activities under ASC 808, and we recognize such cost sharing proportionately with the performance of the underlying services. We recognize BMS’ reimbursement of our costs as a reduction of research and development expense and our reimbursement of BMS’ costs as research and development expense. During the three and six months ended June 30, 2021, we recorded $24.8 million and $51.4 million, respectively, as a reduction of research and development expense for BMS’ share of our expenses, net of our share of BMS’ expenses. During the three and six months ended June 30, 2020, we recorded $33.9 million and $65.1 million, respectively, as a reduction of research and development expense for BMS’ share of our expenses, net of our share of BMS’ expenses. As of June 30, 2021, we have recorded an unbilled receivable of $25.0 million from BMS in accounts receivable in our Condensed Consolidated Balance Sheet.
Eli Lilly and Company (Lilly): NKTR-358
On July 23, 2017, we entered into a worldwide license agreement (the Lilly Agreement) with Eli Lilly and Company (Lilly), which became effective on August 23, 2017, to co-develop NKTR-358, a novel immunological drug candidate that we invented. Under the terms of the Lilly Agreement, we (i) received an initial payment of $150.0 million in September 2017 and are eligible for up to $250.0 million in additional development and regulatory milestones, (ii) will co-develop NKTR-358 with Lilly, for which we were responsible for completing Phase 1 clinical development and certain drug product development and supply activities, (iii) share with Lilly Phase 1B and 2 development costs with 75% of those costs borne by Lilly and 25% of the costs borne by us, (iv) will have the option to contribute funding to Phase 3 development on an indication-by-indication basis ranging from zero to 25% of development costs, and (v) will have the opportunity to receive a royalty rate up to the low twenties based upon our Phase 3 development cost contribution and the level of annual global 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. A portion of the development milestones may be reduced by 50% under certain conditions, related to the final formulation of the approved product and the timing of prior approval (if any) of competitive products with a similar mechanism of action, which could reduce these milestone payments by 75% if both conditions occur.
The Lilly Agreement will continue until Lilly no longer has any royalty payment obligations or, if earlier, the termination of the agreement in accordance with its terms. The Lilly Agreement may be terminated by Lilly for convenience, and may also be terminated under certain other circumstances, including material breach.
We identified our license grant to Lilly, our Phase 1 clinical development obligation and our drug product development obligation as the significant performance obligations in the arrangement. Based on our estimates of the standalone selling prices of the performance obligations, we allocated the $150.0 million upfront payment as $125.9 million to the license, $17.6 million to our portion of the Phase 1 clinical development and $6.5 million to the drug product development. We recognized the revenue allocated to the license upon the effective date of the Lilly Agreement in August 2017. We recognized revenue for our performance obligations for Phase 1 clinical development and drug product development through March 31, 2020.
Although we are entitled to significant development milestones under this arrangement, through June 30, 2021, we have excluded such milestones from the transaction price due to the significant uncertainties involved with clinical development. We re-evaluate the transaction price at each reporting period and as uncertain events are resolved or other changes in circumstances occur.
We have other collaboration agreements that have resulted in commercialized products for our collaborations partners. Under these agreements, we may sell our proprietary PEGylation materials for use in these products, and we are entitled to receive royalties based on net sales of these products as well as sales milestones. As discussed in Note 5, in 2012, we sold all of our rights to receive royalties for CIMZIA® under our collaboration with UCB Pharma and MIRCERA® under our collaboration agreement with Roche. Additionally, in 2020, we sold our rights to receive royalties for ADYNOVATE® under our collaboration with Baxalta (a subsidiary of Takeda Pharmaceutical Company Ltd.), MOVANTIK® under our collaboration with AstraZeneca and REBINYN® under license agreement with Novo Nordisk. The 2020 Purchase and Sale Agreement provides for a cap on the amount of 2020 Transaction Royalties to be paid to HCR, such that, if the cap is achieved, future royalties on these products will return to us. See Note 5 for additional information regarding these agreements.
Additionally, we have collaboration agreements for products under development, under which we are entitled to up to a total of $40.0 million of development milestones, as well as sales milestones upon achievement of annual sales targets and royalties based on net sales of commercialized products, if any. However, given the current phase of development of the potential products under these collaboration agreements, we cannot estimate the probability or timing of achieving these milestones, and, therefore, have excluded all development milestones from the respective transaction prices for these agreements.
Note 9 — Stock-Based Compensation
We recognized total stock-based compensation expense in our Condensed Consolidated Statements of Operations as follows (in thousands):
|Three months ended June 30,|| Six months ended June 30,|
Cost of goods sold
|$||716 ||$||664 ||$||1,443 ||$||1,424 |
Research and development
|13,479 ||14,161 ||27,641 ||29,614 |
General and administrative
|9,519 ||8,546 ||18,528 ||16,544 |
|Impairment of assets and other costs for terminated program||— ||— ||— ||1,025 |
|Total stock-based compensation||$||23,714 ||$||23,371 ||$||47,612 ||$||48,607 |
The stock-based compensation expense reported in impairment of assets and other costs for terminated program resulted from executive severance. We accounted for this as a liability award as of March 31, 2020, which we reclassified into equity in three months ended June 30, 2020.
We issued stock-based awards and resulting shares of our common stock as follows (shares in thousands):
|Three months ended June 30,|| Six months ended June 30,|
|157 ||— ||278 ||49 |
Weighted-average grant-date fair value of options granted
|$||9.78 ||$||— ||$||10.23 ||$||11.88 |
|520 ||275 ||887 ||520 |
Weighted-average grant-date fair value of RSUs granted
|$||18.20 ||$||21.65 ||$||19.21 ||$||20.36 |
Shares issued under equity compensation plans
|1,483 ||947 ||3,682 ||2,305 |
On June 10, 2021, the stockholders of Nektar approved an amendment to the Amended and Restated 2017 Performance Incentive Plan to increase the aggregate number of shares of Common Stock authorized for issuance thereunder by 5,000,000 shares.
Note 10 — Net Loss Per Share
We calculate basic net loss per share based on the weighted-average number of common shares outstanding during the periods presented and calculate diluted net loss per share based on the weighted-average number of shares of common stock outstanding, including potentially dilutive securities. For all periods presented in the accompanying Condensed Consolidated Statements of Operations, our net loss available to common stockholders equals the reported net loss.
For the three and six months ended June 30, 2021 and 2020, basic and diluted net loss per share are the same due to our net losses and the requirement to exclude potentially dilutive securities which would have an antidilutive effect on net loss per share. During the three and six months ended June 30, 2021 and 2020, potentially dilutive securities consisted of weighted-average common shares underlying outstanding stock options and RSUs as follows (in thousands):
|Three months ended June 30,|| Six months ended June 30,|
|Potentially dilutive securities||18,352 ||17,115 ||18,870 ||17,966 |
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. See the section entitled "Forward-Looking Statements" that appears at the beginning of this report. 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.”
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 potential therapies for oncology, immunology and virology. 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 long-term stockholder value.
In oncology, we focus on developing medicines in the area of immuno-oncology (I-O), which is a therapeutic approach based on targeting biological pathways that stimulate and sustain the body’s immune response in order to fight cancer. In the I-O area, we are executing a clinical development program evaluating bempegaldesleukin (previously referred to as NKTR-214) in combination with Opdivo®, in collaboration with Bristol-Myers Squibb Company (BMS) as well as other independent development work evaluating bempegaldesleukin in combination with other checkpoint inhibitors and agents with potential complementary mechanisms of action. We announced in August of 2019 that the FDA granted a Breakthrough Therapy designation for bempegaldesleukin in combination with Opdivo® for the treatment of patients with untreated unresectable or metastatic melanoma. We expect our research and development expense to continue to grow over the next few years as we expand and execute our broad clinical development program for bempegaldesleukin.
On January 9, 2020, we and BMS entered into Amendment No. 1 (the Amendment) to the February 13, 2018, Strategic Collaboration Agreement (the BMS Collaboration Agreement). Pursuant to the Amendment, we and BMS agreed to update the Collaboration Development Plan under which we are collaborating and developing bempegaldesleukin. Specifically, pursuant to the updated Collaboration Development Plan, bempegaldesleukin in combination with Opdivo® is currently being evaluated in ongoing registrational trials in first-line metastatic melanoma, first-line cisplatin ineligible, PD-L1 low, locally advanced or metastatic urothelial cancer, first-line metastatic renal cell carcinoma (RCC), muscle-invasive bladder cancer, and adjuvant melanoma, as well as a Phase 1/2 dose escalation and expansion study to evaluate bempegaldesleukin plus Opdivo® in combination with either axitinib or cabozantinib in first line RCC in order to support a future Phase 3 registrational trial. Several other registrational-supporting pediatric and safety studies for the combination of bempegaldesleukin and Opdivo® are currently underway.
Under the BMS Collaboration Agreement, we and BMS share development costs based on each party’s relative ownership interest in the compounds included in the regimen. For example, we share clinical development costs for bempegaldesleukin in combination with Opdivo®, BMS 67.5% and Nektar 32.5%. For costs of manufacturing bempegaldesleukin, however, BMS is responsible for 35% and Nektar is responsible for 65% of costs. BMS supplies Opdivo® free of charge. We also share commercialization related costs, 35% BMS and 65% Nektar, which we present in general and administrative expense. Our share of development costs is limited to an annual cap of $125.0 million. To the extent this annual cap is exceeded, BMS reimburses us for the excess, but we recognize our full share of the research and development expense and recognize the reimbursement as a liability. We repay the liability to the extent that our share of development costs is less than the annual cap in a future year, or by reducing a portion of our share of net profits following the first commercial sale of bempegaldesleukin, if approved.
The BMS Collaboration Agreement entitles Nektar to receive up to $1.455 billion of clinical, regulatory and commercial launch milestones. Of these milestones, we received a non-refundable, creditable milestone payment of $25.0 million for the first patient, first visit in the registrational muscle-invasive bladder cancer trial, which was achieved on January 30, 2020, and also received a non-refundable, non-creditable milestone payment of $25.0 million for the first patient, first visit in the registrational adjuvant melanoma trial, which we achieved on July 27, 2020. Of the remaining milestones, $625.0 million are associated with the approval and launch of bempegaldesleukin in its first indication in the U.S., European Union (EU) and Japan (which reflects the reduction for the $25.0 million non-refundable, creditable milestone for the first patient, first visit in the muscle-invasive bladder cancer trial). As a result, whether and when bempegaldesleukin is approved in any indication will have a significant impact on our future results of operations and financial condition.
Outside of the Collaboration Development Plan with BMS, we are conducting and pursuing additional I-O research and development activities evaluating bempegaldesleukin in combination with other agents that have potential complementary mechanisms of action. For example, we are independently studying bempegaldesleukin in combination with Keytruda® in a non-small cell lung cancer (NSCLC) Phase 1/2 trial. In addition, on February 12, 2021, we entered into a financing and co-development collaboration with SFJ Pharmaceuticals to support a Phase 2/3 registrational clinical study of bempegaldesleukin plus Keytruda® in patients with head and neck cancer whose tumors express PD-L1. Our strategic objective is to establish bempegaldesleukin as a key component of many I-O combination regimens with the potential to enhance the standard of care in multiple oncology settings. As a result, we expect to continue to make significant and increasing investments exploring the potential of bempegaldesleukin with mechanisms of action that we believe are synergistic with bempegaldesleukin based on emerging clinical development outcomes, scientific findings in cancer biology and preclinical development work.
With our non-BMS clinical collaborations for bempegaldesleukin, generally each party supports the collaboration based on its expertise and resources. For example, our co-development collaboration agreement with SFJ includes both financial support from SFJ in the form of up to $150.0 million to fund the Phase 2/3 registrational clinical study of bempegaldesleukin plus Keytruda® in head and neck cancer, as well as operational support from SFJ in managing the clinical trial. In addition, we announced on February 17, 2021, that we had entered into a clinical trial collaboration and supply agreement with Merck wherein we will receive supplies of Keytruda® at no cost to us.
We are also conducting studies of bempegaldesleukin in combination with NKTR-262. NKTR-262 is a small molecule agonist that targets toll-like receptors found on innate immune cells in the body. NKTR-262 is designed to stimulate the innate immune system and promote maturation and activation of antigen-presenting cells, such as dendritic cells, which are critical to induce the body’s adaptive immunity and create antigen-specific cytotoxic T cells. NKTR-262 is being developed as an intra-tumoral injection in combination with systemic bempegaldesleukin to induce an abscopal response and achieve the goal of tumor regression in cancer patients treated with both therapies. The Phase 1/2 dose-escalation and expansion trial in patients with solid tumors is currently ongoing.
Our next most advanced I-O program is NKTR-255. NKTR-255 is a biologic that targets the IL-15 pathway in order to activate the body’s innate and adaptive immunity. Activation of the IL-15 pathway enhances the survival and function of natural killer (NK) cells and induces survival of both effector and CD8+ memory T cells. Recombinant human IL-15 is rapidly cleared from the body and must be administered frequently and in high doses limiting its utility due to toxicity. Through optimal engagement of the IL-15 receptor complex, NKTR-255 is designed to enhance functional NK cell populations and formation of long-term immunological memory, which may lead to sustained and durable anti-tumor immune response. Preclinical findings suggest NKTR-255 has the potential to synergistically combine with antibody-dependent cellular toxicity molecules as well as to enhance CAR-T therapies. We have initiated a Phase 1 dose escalation and expansion clinical study of NKTR-255 in adults with relapsed or refractory non-Hodgkin lymphoma or multiple myeloma, as well as a Phase 1/2 clinical study of NKTR-255 in patients with relapsed or refractory head and neck squamous cell carcinoma or colorectal cancer. At the 2020 Society for Immunotherapy of Cancer Annual Meeting, we reported early findings from the Phase 1 dose escalation study that demonstrated expansion of NK and CD8+ T cells in patients with multiple myeloma and non-Hodgkin lymphoma.
In immunology, we are developing NKTR-358, which is designed to correct the underlying immune system imbalance in the body that occurs in patients with autoimmune disease. NKTR-358 is designed to optimally target the IL-2 receptor complex in order to stimulate proliferation and growth of regulatory T cells. NKTR-358 is being developed as a once or twice monthly self-administered injection for a number of autoimmune diseases. In 2017, we entered into a worldwide license agreement with Eli Lilly and Company (Lilly) to co-develop NKTR-358. We received an initial payment of $150.0 million in September 2017 and are eligible for up to an additional $250.0 million for development and regulatory milestones. We were responsible for completing Phase 1 clinical development and certain drug product development and supply activities. We also share Phase 2 development costs with Lilly, with Lilly responsible for 75% and Nektar responsible for 25% of these costs. We will have the option to contribute funding to Phase 3 development on an indication-by-indication basis, ranging from zero to 25% of the Phase 3 development costs and receive a royalty rate on global NKTR-358 sales up to the low twenties based upon our Phase 3 development cost contribution and the level of annual global 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.
We have completed a Phase 1 dose-finding trial of NKTR-358 to evaluate single-ascending doses of NKTR-358 in approximately 100 healthy patients. Results from this study demonstrated a multiple-fold increase in regulatory T cells with no change in CD8+ or NK cell levels and no dose-limiting toxicities were observed. We also completed treatment of a Phase 1 multiple-ascending dose trial to evaluate NKTR-358 in patients with systemic lupus erythematosus (SLE). Lilly is conducting two Phase 1b studies in patients with psoriasis and atopic dermatitis, and initiated a Phase 2 study in SLE in October 2020 and a Phase 2 study in ulcerative colitis in March 2021. In addition, Lilly is planning to initiate two new Phase 2 studies in two different immune-mediated diseases.
In virology, we received on October 22, 2020, FDA clearance for an Investigational New Drug application for bempegaldesleukin to be evaluated in a Phase 1b clinical study in adult patients who have been diagnosed with mild COVID-19 infection. The study design allows us to evaluate whether bempegaldesleukin’s adaptive immune-stimulating mechanism to promote priming and proliferation of T cells and NK cells could be useful in the emerging treatment options for COVID-19. Enrollment in the Phase 1b randomized, double-blind, placebo-controlled trial began in November 2020. We have also entered into a preclinical research collaboration with Gilead to test the combination of NKTR-255 with therapies in Gilead’s antiviral portfolio.
The level of our future research and development investment will depend on a number of trends and uncertainties including clinical study 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. Over the next several years, we plan to continue to make significant investments to advance our early drug candidate pipeline.
We have historically derived all of our revenue and substantial amounts of operating capital from our collaboration agreements including the BMS Collaboration Agreement, pursuant to which we have recognized $1.11 billion in revenue and recorded $790.2 million in additional paid in capital for shares of our common stock issued in the transaction. While in the near-term we continue to expect to generate substantially all of our revenue from collaboration arrangements, including the potential remaining $1.405 billion in development and regulatory milestones under the BMS collaboration, in the medium- to long-term, our plan is to generate significant commercial revenue from proprietary products, the first of which being bempegaldesleukin, if approved. Since we do not have experience commercializing products or an established commercialization organization, there will be substantial risks and uncertainties in future years as we build commercial, organizational, and operational capabilities.
Up until September 30, 2020, we received royalties and milestones from two approved drugs: MOVANTIK®, for which we have a collaboration with AstraZeneca; and ADYNOVATE®, for which we have a collaboration agreement with Baxalta(a wholly owned-subsidiary of Takeda Pharmaceutical Company Ltd.). MOVANTIK® is an oral, peripherally-acting mu-opioid antagonist for the treatment of opioid-induced constipation in adult patients with non-cancer pain which was approved by the FDA and subsequently launched in March 2015 (wherein in the EU, MOVANTIK® is sold as MOVENTIG® and is indicated for the treatment of opioid-induced constipation in adult patients who have an inadequate response to laxatives, which was approved by health authorities in the EU and many other countries beginning in 2014). ADYNOVATE®, a half-life extension product of Factor VIII was approved by the FDA in late 2015 for use in adults and adolescents, aged 12 years and older, who have Hemophilia A (wherein in the EU, ADYNOVATE® is sold as ADYNOVI® and was approved by health authorities in the EU in January 2018, and has also been approved in many other countries).
Beginning on October 1, 2020, our rights to receive royalties arising from the worldwide net sales of MOVANTIK®/MOVANTIG® and ADYNOVATE®/ADYNOVI®, as well as REBINYN® and specified licensed products under a Right to Sublicense Agreement, dated October 27, 2017, were sold for $150.0 million pursuant to a capped return sale arrangement to entities managed by Healthcare Royalty Management, LLC (collectively, HCR) under a purchase and sale agreement (the 2020 Purchase and Sale Agreement) entered into on December 16, 2020. With regard to the capped return sale arrangement, the 2020 Purchase and Sale Agreement will automatically expire, and HCR’s right to receive the sold royalties, will cease when HCR has received payments equaling $210.0 million (the 2025 Threshold), if the 2025 Threshold is achieved on or prior to December 31, 2025, or $240.0 million, if the 2025 Threshold is not achieved on or prior to December 31, 2025 (or, if earlier, the date on which the last royalty payment under the relevant license agreements is made). After the 2020 Purchase and Sale Agreement expires, all rights to receive these royalties return to Nektar.
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 collaboration partners, 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 key risks and uncertainties affecting our business, see 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. 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 I-O, immunology, and other therapeutic indications. 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 with a high risk of failure at every stage prior to approval. 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.
Effects of the COVID-19 Pandemic
In March 2020, COVID-19, the disease resulting from a novel strain of coronavirus infection, was declared a global pandemic. Many countries, including the United States and India, initially took steps such as restricting travel, closing schools, and issuing shelter-in-place orders to slow or moderate the spread of the virus. More recently, states and countries have adopted individualized approaches to respond to the COVID-19 pandemic. In particular, the emergence of new variants of the coronavirus, such as the Delta variant, and local resurgences in number and rates of infections, and the further spread of the virus may result in the return of prior restrictions or the institution of restrictions in the affected areas, which could have an adverse effect on our business, including our clinical trial timelines. Although vaccines intended to reduce the incidence and severity of infection are available pursuant to an Emergency Use Authorization granted by the FDA in the U.S. (and under similar authorizations by other health authorities in our countries), it remains unclear how long the negative impacts caused by the coronavirus will continue into the future.
Currently, our operations in research, manufacturing and maintenance that occur within our facilities are continuing in accordance with applicable guidelines and orders. Across all our locations, we have instituted a temporary work from home policy for office personnel who do not need to work on site to maintain productivity. We have recently allowed these employees to voluntarily return to work on site with appropriate health and safety measures.
The safety and well-being of our employees, and the patients and healthcare providers in our clinical trial programs, are of first and foremost importance to us. We believe that the safety measures we are taking and instructing our contractors to take in response to the COVID-19 pandemic meet or exceed the guidance and requirements issued from government and public health officials. We continue to monitor our operations and applicable government recommendations in light of new developments in the ongoing COVID-19 pandemic.
We and our partners are currently engaged in the clinical testing of our proprietary drug candidates and the COVID-19 pandemic introduces significant challenges to our clinical development programs which are central to our business. The evolving situation around the COVID-19 pandemic, along with the resulting public health guidance measures that have been put into place, have thus far had varying impacts on the clinical testing of our proprietary drug candidates depending on the therapeutic indication, geographic distribution of clinical trial sites, the clinical trial stage, and, in certain cases, our partners’ general corporate approach to the COVID-19 pandemic. The rapid development and fluidity of the COVID-19 pandemic precludes any firm estimates as to the ultimate effect this disease will have on our clinical trials, our operations and our business. As a result, any current assessment of the effects of the COVID-19 pandemic, including the impact of this disease on our specific clinical programs as discussed below, is difficult to predict and subject to change.