UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________________________________________
FORM 10-Q
_______________________________________________________________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 2022
or
| TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 0-24006
_______________________________________________________________________
(Exact name of registrant as specified in its charter)
_______________________________________________________________________
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
(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 | ||||||
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.
| ☒ | 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 187,404,772 on July 29, 2022.
NEKTAR THERAPEUTICS
INDEX
| 6 | ||||||||
Item 3. | ||||||||
2
Forward-Looking Statements
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 related to our strategic reorganization and cost restructuring plans, any statements regarding potential future financing alternatives, any statements concerning proposed drug candidates and our future research and development plans, 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, commercialization activities 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 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 I, Item 1A “Risk Factors” below and for the reasons described elsewhere in this Quarterly Report on Form 10-Q. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof and we do not intend to update any forward-looking statements except as required by law or applicable regulations. Except where the context otherwise requires, in this Quarterly Report on Form 10-Q, the “Company,” “Nektar,” “we,” “us,” and “our” refer to Nektar Therapeutics, a Delaware corporation, and, where appropriate, its subsidiaries.
Trademarks
The Nektar brand and product names, including but not limited to Nektar®, contained in this document are trademarks and registered trademarks of Nektar Therapeutics in the United States (U.S.) and certain other countries. This document also contains references to trademarks and service marks of other companies that are the property of their respective owners.
3
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:
◦clinical drug development is a lengthy and uncertain process and we may not be able to generate and develop successful drug candidates for commercial use;
◦we are highly dependent on the success of NKTR-358 and NKTR-255 and our business will be significantly harmed if either NKTR-358 or NKTR-255 do not continue to advance in clinical studies;
◦the outcomes from competitive oncology and immunology therapy clinical trials, and the discovery and development of new potential oncology and immunology therapies could have a material and adverse impact on the value of our pipeline;
◦significant competition for our polymer conjugate chemistry technology platforms and our 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 Financial Condition and Capital Requirements:
◦we are implementing a strategic reorganization plan focused on prioritizing key research and development efforts, as well as a cost restructuring plan, and our business will be significantly harmed if either of these plans is unsuccessful;
◦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;
◦our revenue is exclusively derived from our collaboration agreements. If we are unable to establish and maintain collaboration partnerships with attractive commercial terms, including significant development milestones and research and development cost-sharing, our business, results of operations and financial condition could suffer; and
◦we expect to continue to incur substantial net losses from operations and may not achieve or sustain profitability in the future.
•Risks Related to our Collaboration Partners:
◦we are highly dependent on Eli Lilly and Company, our collaboration partner for NKTR-358, our lead drug candidate, to initiate, properly conduct and prioritize clinical trials for NKTR-358 and to perform important additional development and commercialization activities, and our business will be significantly harmed if our partner’s actions deprioritize or otherwise harm the prospects of NKTR-358; 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 the COVID-19 Pandemic:
4
◦our business could be adversely affected by the effects of health epidemics, including the ongoing 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 and resurgences in the number and rates of infections, and shortages in raw materials and equipment and other supply chain disruptions, 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 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 Intellectual Property, Litigation and Regulatory Concerns:
◦we or our partners may not obtain regulatory approval for our drug candidates on a timely basis, or at all;
◦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; and
◦from time to time, we are involved in legal proceedings and may incur substantial litigation costs and liabilities that could adversely affect our business, financial condition and results of operations.
In addition to the above-mentioned risks, our business is subject to a number of additional risks faced by businesses generally.
5
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements—Unaudited:
NEKTAR THERAPEUTICS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
| June 30, 2022 | December 31, 2021 | ||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Short-term investments | |||||||||||
Accounts receivable | |||||||||||
Inventory | |||||||||||
Other current assets | |||||||||||
Total current assets | |||||||||||
Long-term investments | |||||||||||
Property, plant and equipment, net | |||||||||||
Operating lease right-of-use assets | |||||||||||
Goodwill | |||||||||||
| Other assets | |||||||||||
Total assets | $ | $ | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | $ | |||||||||
Accrued compensation | |||||||||||
Accrued clinical trial expenses | |||||||||||
Other accrued expenses | |||||||||||
Operating lease liabilities, current portion | |||||||||||
Total current liabilities | |||||||||||
Operating lease liabilities, less current portion | |||||||||||
| Development derivative liability | |||||||||||
| Liabilities related to the sales of future royalties, net | |||||||||||
| Other long-term liabilities | |||||||||||
Total liabilities | |||||||||||
Commitments and contingencies | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
Capital in excess of par value | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
Accumulated deficit | ( | ( | |||||||||
Total stockholders’ equity | |||||||||||
Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
NEKTAR THERAPEUTICS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
(Unaudited)
| Three Months ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Revenue: | |||||||||||||||||||||||
Product sales | $ | $ | $ | $ | |||||||||||||||||||
| Non-cash royalty revenue related to the sales of future royalties | |||||||||||||||||||||||
License, collaboration and other revenue | |||||||||||||||||||||||
Total revenue | |||||||||||||||||||||||
Operating costs and expenses: | |||||||||||||||||||||||
Cost of goods sold | |||||||||||||||||||||||
Research and development | |||||||||||||||||||||||
General and administrative | |||||||||||||||||||||||
| Restructuring, impairment and other costs of terminated program | |||||||||||||||||||||||
Total operating costs and expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
Non-operating income (expense): | |||||||||||||||||||||||
| Change in fair value of development derivative liability | ( | ( | |||||||||||||||||||||
| Non-cash interest expense on liabilities related to the sales of future royalties | ( | ( | ( | ( | |||||||||||||||||||
Interest income and other income (expense), net | |||||||||||||||||||||||
Total non-operating income (expense), net | ( | ( | ( | ||||||||||||||||||||
| Loss before provision for income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Basic and diluted net loss per share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average shares outstanding used in computing basic and diluted net loss per share | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
NEKTAR THERAPEUTICS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
| Three Months ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Net unrealized gain (loss) on available-for-sale investments | ( | ( | ( | ( | |||||||||||||||||||
| Net foreign currency translation gain (loss) | ( | ( | ( | ( | |||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
NEKTAR THERAPEUTICS
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| Common Shares | Par Value | Capital in Excess of Par Value | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Shares issued under equity compensation plans | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Shares issued under equity compensation plans | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Common Shares | Par Value | Capital in Excess of Par Value | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Shares issued under equity compensation plans | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Shares issued under equity compensation plans | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
NEKTAR THERAPEUTICS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Non-cash royalty revenue related to the sales of future royalties | ( | ( | |||||||||
| Non-cash interest expense on liabilities related to the sales of future royalties | |||||||||||
| Change in fair value of development derivative liability | ( | ||||||||||
| Non-cash research and development expense | |||||||||||
| Stock-based compensation | |||||||||||
| Depreciation and amortization | |||||||||||
| Impairment of right-of-use assets and property, plant and equipment | |||||||||||
| Amortization of premiums (discounts), net and other non-cash transactions | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Inventory | ( | ||||||||||
| Operating leases, net | |||||||||||
| Other assets | |||||||||||
| Accounts payable | ( | ||||||||||
| Accrued compensation | |||||||||||
| Other accrued expenses | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of investments | ( | ( | |||||||||
| Maturities of investments | |||||||||||
| Sales of investments | |||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||
| Net cash provided by investing activities | |||||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from shares issued under equity compensation plans | |||||||||||
| Cash receipts from development derivative liability | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of foreign exchange rates on cash and cash equivalents | ( | ( | |||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Operating lease right-of-use asset recognized in exchange for lease liabilities | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10
NEKTAR THERAPEUTICS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
Note 1 — Organization and Summary of Significant Accounting Policies
Organization
We are a research-based biopharmaceutical company headquartered in San Francisco, California and incorporated in Delaware. We (individually or with a partner) are developing a pipeline of drug candidates that utilize our advanced polymer conjugate technology platforms, which are designed to enable the development of new molecular entities that target known mechanisms of action. Our research and development pipeline of new investigational drugs includes investigational treatments in oncology and immunology.
Results of Bempegaldesleukin Program and the Restructuring Plan
In March and April 2022, we announced the unsuccessful results from our clinical trials studying bempegaldesleukin in combination with Opdivo® under our Strategic Collaboration Agreement with Bristol-Myers Squibb Company (BMS). Based on these results, we decided to discontinue all of our ongoing clinical trials of bempegaldesleukin in combination with checkpoint inhibitors and tyrosine kinase inhibitors. In April 2022, we also announced new strategic reorganization and cost restructuring plans for the Company’s future:
•On March 14, 2022, BMS and we announced that the registrational trial for bempegaldesleukin in combination with Opdivo® in metastatic melanoma did not meet its primary endpoints and that BMS and we decided to discontinue the registrational trials in metastatic melanoma and adjuvant melanoma. See Note 7 for additional information on our BMS Collaboration Agreement.
•On April 14, 2022, we announced that each of our registrational trials for bempegaldesleukin in combination with Opdivo® in renal cell carcinoma and in cisplatin-ineligible, locally advanced or metastatic urothelial cancer did not meet their respective primary endpoints. Due to these results, BMS and we decided to discontinue these studies and all other ongoing studies for bempegaldesleukin in combination with Opdivo®.
•On April 14, 2022, we announced that, in consultation with SFJ Pharmaceuticals and based upon a recommendation from an independent Data Monitoring Committee, we decided to discontinue our Phase 2/3 study in bempegaldesleukin in combination with Keytruda® in patients with metastatic or unresectable recurrent squamous cell cancer of the head and neck under our Co-Development Agreement with SFJ Pharmaceuticals. See Note 4 for additional information regarding our Co-Development Agreement with SFJ Pharmaceuticals.
•We also announced on April 14, 2022, the discontinuation of our Phase 1/2 PROPEL study of bempegaldesleukin in combination with Keytruda® in locally advanced or metastatic solid tumors, including non-small cell lung cancer. With these announcements on April 14, 2022, subject to activities required for an orderly wind down of the studies, there will be no ongoing clinical development activities of bempegaldesleukin.
•On April 25, 2022, we announced our strategic reorganization and cost restructuring plans (together, the Restructuring Plan), which were reviewed and approved by our Board of Directors on April 14, 2022. Pursuant to the Restructuring Plan, on April 26, 2022, our duly authorized officers implemented certain strategic, operational and organizational steps, including the prioritization of key Phase 2 development programs to advance our early stage research pipeline. In addition, we announced our plan to reduce our workforce by approximately 70 % and to close our research facility in India.
We have incurred and expect to incur significant costs resulting from these decisions and plans. See Note 8 for additional information on the effect on our Condensed Consolidated Financial Statements.
11
Basis of Presentation and Principles of Consolidation
Our Condensed Consolidated Financial Statements include the financial position, results of operations and cash flows of Nektar Therapeutics and our wholly-owned subsidiaries. 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 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 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, 2022 and 2021.
The accompanying Condensed Consolidated Financial Statements are unaudited. The Condensed Consolidated Balance Sheet data as of December 31, 2021 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, 2021 filed with the SEC on March 1, 2022. 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.
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 U.S. generally accepted accounting principles (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 estimates each period, update them to reflect current information, and generally reflect any changes in estimates in the period first identified.
12
Restructuring
We recognize restructuring charges related to reorganization plans that have been committed to by management when liabilities have been incurred. In connection with these activities, we record restructuring charges at fair value for:
•contractual employee termination benefits provided that the obligations result from services already rendered based on vested rights to such benefits when the payment of benefits becomes probable and the amount can be reasonably estimated,
•one-time employee termination benefits on the communication date from management to the employees provided that management has committed to a plan of termination, the plan identifies the employees and their expected termination dates, the details of termination benefits are complete, and it is unlikely that changes to the plan will be made or the plan will be withdrawn,
•contract termination costs when we cancel the contract in accordance with its terms, and
•costs to be incurred over the remaining contract term without economic benefit to us at the cease-use date.
For one-time employee terminations benefits, we recognize the liability in full on the communication date when future services are not required or amortize the liability ratably over the service period, if required. The fair value of termination benefits reflects our estimates of expected utilization of certain Company-funded post-employment benefits.
See Note 8 for additional information on the severance expense that we recognized for employees terminated in connection with our reduction-in-force.
Long-Lived Asset Impairment
We assess the impairment of long-lived assets whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. In the case of property, plant and equipment and right-of-use assets for our leases, we determine whether there has been an impairment by comparing the carrying value of the asset to the anticipated undiscounted net cash flows associated with the asset. If such cash flows are less than the carrying value, we write down the asset to its fair value, which may be measured as anticipated net cash flows associated with the asset, discounted at a rate that we believe a market participant would utilize to reflect the risks associated with the cash flows, such as credit risk. See Note 8 for additional information regarding the impairment charge we recorded in connection with our leased facilities and certain property and equipment.
Note 2 — Cash and Investments in Marketable Securities
| Estimated Fair Value at | |||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Long-term investments | |||||||||||
| Total cash and investments in marketable securities | $ | $ | |||||||||
We invest in liquid, high quality debt securities which 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, 2022 and December 31, 2021, all of our long-term investments had maturities between and two years
13
| Fair Value Hierarchy Level | June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Fair Value | ||||||||||||||||||||||||||||||||||
| Corporate notes and bonds | 2 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||
| Corporate commercial paper | 2 | ( | ||||||||||||||||||||||||||||||||||||
| Obligations of U.S. government agencies | 2 | ( | ||||||||||||||||||||||||||||||||||||
| Available-for-sale investments | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
| Money market funds | 1 | |||||||||||||||||||||||||||||||||||||
| Certificates of deposit | 2 | |||||||||||||||||||||||||||||||||||||
| Cash | N/A | |||||||||||||||||||||||||||||||||||||
| Total cash and investments in marketable securities | $ | $ | ||||||||||||||||||||||||||||||||||||
For the three and six months ended June 30, 2022 and 2021, there were no transfers between Level 1 and Level 2 of the fair value hierarchy. At December 31, 2021, our gross unrealized losses totaled $0.7 million, and our gross unrealized gains were insignificant.
Note 3 — Inventory
| June 30, 2022 | December 31, 2021 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Total inventory | $ | $ | |||||||||
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.
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 would 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 has primary responsibility for the clinical trial management of the SCCHN Clinical Trial, and we are the sponsor of the SCCHN Clinical Trial. The SFJ Agreement provided for us to pay up to $637.5 million in Success Payments in the event of FDA approval of bempegaldesleukin for the metastatic melanoma, the SCCHN Indication, or both, and in the event of FDA approval of one additional bempegaldesleukin indication.
As of March 31, 2022, due to the negative results of the metastatic melanoma trial and initial discussions with SFJ, we concluded that it was remote that SFJ and we would continue the SCCHN Clinical Trial. Accordingly, the fair value of the development derivative liability was reduced to $0 as of March 31, 2022, and we recognized a corresponding gain in the Change in fair value of development derivative liability. As discussed in Note 1, on April 14, 2022, BMS and we decided to end the development for bempegaldesleukin in combination with Opdivo® and that all other ongoing studies in the bempegaldesleukin program would be discontinued. We also announced that SFJ and we agreed to discontinue the SCCHN Clinical Trial.
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Accordingly, SFJ will not be entitled to any Success Payments, and SFJ has the responsibility to wind down the SCCHN Clinical Trial at its sole cost. SFJ has no right to seek reimbursement from us for any costs incurred for the SCCHN Clinical Trial.
We presented the SFJ Agreement as a Development derivative liability in our Condensed Consolidated Balance Sheets, which we remeasured to fair value at each reporting date. As SFJ conducted the SCCHN Clinical Trial, we recorded non-cash research and development expense with a corresponding increase to the development derivative liability, and as SFJ remitted funding to us to support our internal costs of conducting the trial, we also recorded a corresponding increase to the development derivative liability. We presented the gain (loss) from the remeasurement as change in fair value of development derivative liability in our Condensed Consolidated Statements of Operations.
The following table presents the changes in the development derivative liability:
| Three months ended | ||||||||||||||||||||
| Fair Value Hierarchy Level | June 30, 2022 | June 30, 2021 | ||||||||||||||||||
| Fair value as of March 31, 2022 and 2021, respectively | 3 | $ | $ | |||||||||||||||||
| Non-cash research and development expense | ||||||||||||||||||||
| Cash receipts from SFJ | ||||||||||||||||||||
| Change in the fair value of development derivative liability | ||||||||||||||||||||
| Fair value at end of period | 3 | $ | $ | |||||||||||||||||
| Six months ended | ||||||||||||||||||||
| Fair Value Hierarchy Level | June 30, 2022 | June 30, 2021 | ||||||||||||||||||
| Fair value as of December 31, 2021 and February 12, 2021 (inception), respectively | 3 | $ | $ | |||||||||||||||||
| Non-cash research and development expense | ||||||||||||||||||||
| Cash receipts from SFJ | ||||||||||||||||||||
| Change in the fair value of development derivative liability | ( | |||||||||||||||||||
| Fair value at end of period | 3 | $ | 0 | $ | ||||||||||||||||
Note 5 — Liabilities Related to Sales of Future Royalties
In 2012 and 2020, we sold to RPI Finance Trust (RPI) and entities managed by Healthcare Royalty Management, LLC (collectively, HCR), respectively, our rights to receive royalties under our license and manufacturing agreements with certain pharmaceutical partners as summarized below under the 2012 Purchase and Sale Agreement and the 2020 Purchase and Sale Agreement, respectively:
| Drug | Manufacturer | Counterparty under Purchase and Sale Agreement | Date Sold | |||||||||||||||||
ADYNOVATE® and ADYNOVI® (brand name for ADYNOVATE® in Europe) | Takeda Pharmaceutical Company Limited | Healthcare Royalty Management, LLC | December 16, 2020 | |||||||||||||||||
MOVANTIK® (naloxegol tablets) and MOVENTIG® (brand name for MOVANTIK® in Europe) | AstraZeneca AB | Healthcare Royalty Management, LLC | December 16, 2020 | |||||||||||||||||
REBINYN® | Novo Nordisk Inc., Novo Nordisk A/S and Novo Nordisk A/G | Healthcare Royalty Management, LLC | December 16, 2020 | |||||||||||||||||
CIMZIA® (certolizumab pegol) | UCB Pharma | RPI Finance Trust | February 24, 2012 | |||||||||||||||||
MIRCERA® (Continuous Erythropoietin Receptor Activator) | F. Hoffmann-La Roche Ltd | RPI Finance Trust | February 24, 2012 | |||||||||||||||||
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Due to our ongoing manufacturing obligations in both arrangements, we account for the proceeds as imputed debt (Royalty Obligations) and therefore continue to recognize these non-cash royalties as revenue. 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. Additionally, to the extent that the amount or timing of the royalty payments is materially different from our original estimates, we will prospectively adjust the imputed interest rate and the related amortization of the applicable Royalty Obligation. As of June 30, 2022, our imputed interest rates for the arrangements with RPI and HCR were 16 % and 15 %, respectively.
The following table shows the activity within the liability account of each arrangement (in thousands):
| Period from inception to June 30, 2022 | |||||||||||||||||
| 2012 Purchase and Sale Agreement | 2020 Purchase and Sale Agreement | Total | |||||||||||||||
| Royalty monetization proceeds | $ | $ | $ | ||||||||||||||
| Non-cash royalty revenue | ( | ( | ( | ||||||||||||||
| Non-cash interest expense | |||||||||||||||||
| Payments to RPI | ( | ( | |||||||||||||||
| Loss on revaluation of liability related to the sale of future royalties (1) | |||||||||||||||||
| Liabilities related to the sales of future royalties – ending balance | |||||||||||||||||
| Less: unamortized transaction costs | ( | ( | |||||||||||||||
| Liabilities related to the sales of future royalties, net | $ | $ | $ | ||||||||||||||
| (1) Loss recognized from Settlement Agreement to resolve UCB’s challenges to our patents, as agreed to by UCB, RPI and us, on October 13, 2021. | |||||||||||||||||
Note 6 — Commitments and Contingencies
Legal Matters
From time to time, we are involved in lawsuits, arbitrations, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions are reviewed at least quarterly and adjusted to reflect the impact of settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. If any unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of our operations for 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-06607, 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 was completed in September 2021. Oral argument occurred on December 10, 2021. On May 19, 2022, the Ninth Circuit affirmed the district court's dismissal of all claims against the defendants.
A derivative action was also filed against certain of the Company’s current and former officers and directors, purportedly on the Company’s behalf. This derivative action is based on the allegations in the Mulquin action and on the premise that the Company’s officers and directors breached their fiduciary duties to the Company. The complaint for this derivative action was filed in February 2021 in the Court of Chancery of the State of Delaware (C.A. No. 2021-0118-PAF). Following a stay in the proceedings during the pendency of the appeal in the Mulquin action, the Company received an amended complaint on July 29, 2022, and the defendants will have until September 12, 2022 to respond to the amended complaint. Given the nature and status of the derivative action, 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
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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 commencing 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. For example, we made certain intellectual property representations in connection with our RPI and HCR 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. In the event it is determined that we breached certain of the representations and warranties or covenants made by us in any such agreements or certain express indemnification provisions are applicable, we could incur substantial indemnification liabilities depending on the timing, nature, and amount of any such claims.
Note 7 — 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.
There have been no material changes to our collaboration agreements in the three and six months ended June 30, 2022, other than as described below for our Strategic Collaboration Agreement with BMS and Note 4 regarding SFJ.
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 have jointly developed bempegaldesleukin in combination with BMS’s Opdivo®. 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 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 and commercialization of bempegaldesleukin, 35 % of the costs to BMS and 65 % to Nektar.
Upon the effective date of the BMS Collaboration Agreement in April 2018, BMS paid us a non-refundable upfront cash payment of $1.0 billion and purchased 8,284,600 shares of our common stock pursuant to the Share Purchase Agreement for total additional cash consideration of $850.0 million. In 2020, we received non-refundable milestone payments of $50.0 million in aggregate for the first patient, first visit in the registrational trials in muscle-invasive bladder cancer and adjuvant melanoma.
As discussed in Note 1, on March 14, 2022, we announced our registrational trial in metastatic melanoma did not meet its primary endpoints and that BMS and we decided to discontinue the trials in metastatic melanoma and adjuvant melanoma. On April 14, 2022, we announced that our registrational trials in each of renal cell carcinoma and cisplatin-ineligible, locally advanced or metastatic urothelial cancer did not meet their respective primary endpoints. Due to these results, BMS and we decided that these studies and all other ongoing studies in the program will be discontinued. The decision to terminate the program does not affect the cost-sharing provisions under the BMS Collaboration Agreement. However, without further development of bempegaldesleukin, we will no longer be eligible for the development, regulatory and sales milestones under the arrangement.
We determined that the BMS Collaboration Agreement falls within the scope of ASC 808. As mentioned above, BMS shares certain percentages of development costs incurred by us and we share certain percentages of development costs incurred by
17
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 recognized BMS’ reimbursement of our expenses as a reduction of research and development expense and our reimbursement of BMS’ expenses as research and development expense. As discussed in Note 8, beginning in the three months ended June 30, 2022, we began reporting clinical trial, other third-party costs and employee costs for the bempegaldesleukin program in Restructuring, impairment and other costs of program. Accordingly, during the three months ended June 30, 2022, we recorded $7.6 24.9 million as a reduction of research and development expense for the net reimbursement from BMS, reflecting the reimbursement recorded in the three months ended March 31, 2022. For 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 the net reimbursement from BMS. As of June 30, 2022, we have recorded an unbilled receivable of $7.4 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) to co-develop NKTR-358, a novel immunological drug candidate that we invented, pursuant to which we received an initial payment of $150.0 million and are eligible for up to $250.0 million in additional development and regulatory milestones. We are currently in Phase 1B and Phase 2 development, where we share costs with 75 % of the costs borne by Lilly and 25 % of the costs borne by us. Lilly is responsible for the costs of Phase 3 development, but we retain the option to contribute up to 25 % of the costs of Phase 3 development on an indication-by-indication basis in order for us to achieve the maximum royalty level under the Lilly Agreement, and further, if approved, we 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.
Although we are entitled to significant development milestones under this arrangement, through June 30, 2022, 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.
Other
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, we have sold our rights to receive royalties from these other collaboration agreements. Our non-cash royalty revenue which totaled $16.3 million and $33.8 million for the three and six months ended June 30, 2022 and totaled $20.5 million and $39.3 million for the three and six months ended June 30, 2021, respectively, represents revenue for granting licenses which we had satisfied in prior periods.
Additionally, we have a collaboration agreement for a product under development, under which we are entitled to up to a total of $40.0 million of regulatory 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 product under this collaboration agreement, we cannot estimate the probability or timing of achieving these milestones, and, therefore, have excluded all development milestones from the transaction price for this agreement.
Note 8 — Restructuring, Impairment and Other Costs of Terminated Program
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•Clinical trial expense, other third-party costs and employee costs for the wind down of the bempegaldesleukin program, net of the reimbursement from BMS;
•Severance and related benefit costs pursuant to the Restructuring Plan;
•Impairment of right-of-use assets and property, plant and equipment resulting from the Restructuring Plan, primarily reflecting excess office and laboratory leased spaces in San Francisco, CA; and
•Contract termination and other costs associated with these plans. Previously, during the three months ended March 31, 2022, we recognized an initial $1.5 million in cancellation fees related to certain manufacturing activities for bempegaldesleukin.
In prior periods, we reported the clinical trial costs, other third-party costs and employee costs related to the bempegaldesleukin primarily in research and development expense.
| Three months ended | Six months ended | |||||||||||||
| June 30, 2022 | ||||||||||||||
| Clinical trial expense, other third-party and employee costs for the wind down of the bempegaldesleukin program | $ | $ | ||||||||||||
| Severance and benefit expense | ||||||||||||||
| Impairment of right-of-use assets and property, plant and equipment | ||||||||||||||
| Contract termination and other restructuring costs | ||||||||||||||
| Restructuring, impairment and other costs of terminated program | $ | $ | ||||||||||||
The clinical trial expense, other third-party and employee costs for the wind down of the bempegaldesleukin program for the three and six months ended June 30, 2022 includes a reduction of $7.6
Severance and Benefit Expense
Employees affected by the reduction in force under our Restructuring Plan are entitled to receive severance payments and certain Company funded benefits. We recognized severance and benefit expense in full for employees who were notified of their termination in April 2022 and have no requirements for future service, and we are recognizing expense for employees who are required to render services to receive their severance and benefits over the service period ratably over the service period. This service period began in April 2022 and all will end during 2022. The following table provides details regarding the severance and other termination benefit expense and a reconciliation of such liability for the three months ended June 30, 2022, which we report within Accrued compensation on our Condensed Consolidated Balance Sheet (in thousands):
| For the three months ended June 30, 2022 | ||||||||||||||||||||
| No service period | Service period required | Total | ||||||||||||||||||
| Total severance and other termination benefits, at fair value | $ | $ | $ | |||||||||||||||||
| Liability balance as of March 31, 2022 | $ | $ | $ | |||||||||||||||||
| Expense recognized during the period | ||||||||||||||||||||
| Payments during the period | ( | ( | ||||||||||||||||||
| Liability balance as of June 30, 2022 | $ | $ | $ | |||||||||||||||||
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The liability as of June 30, 2022 for employees terminated with no requirements for future service primarily relates to final severance paid in July 2022. We may record adjustments to severance and benefit expense in future periods as our estimates of the costs of benefits change or when an employee terminates before the end of their requisite service period. However, we do not expect that such adjustments will have a material effect on our results of operations or financial condition.
Impairment of Right-of-Use Assets and Property, Plant and Equipment
In connection with our Restructuring Plan, we have consolidated our operations by exiting all of the office space from our leased facility at 360 Third St. and certain laboratory and office spaces at our leased facility at 455 Mission Bay Blvd. South, both in San Francisco, CA. We are seeking to sublease these spaces, while still maintaining sufficient office and laboratory space to allow our team to develop our proprietary programs. We have also terminated all research and development activities at our owned facility in India, which we plan to sell.
As a result of these plans, we reviewed each of our excess spaces for impairment as of May 31, 2022, when management had determined which spaces we would retain and which spaces we may sublease. As part of our impairment evaluation of each excess space, we separately compared the estimated undiscounted income for each sublease to the net book value of the related long-term assets, which include right-of-use assets and certain property, plant and equipment, primarily for leasehold improvements (collectively, sublease assets). We estimated sublease income using market participant assumptions, including the length of time to enter into a sublease and lease payments, which we evaluated using current real estate trends and market conditions. If such income exceeded the net book value of the related assets, we did not record an impairment charge. Otherwise, we recorded an impairment charge by reducing the net book value of the assets to their estimated fair value, which we determined by discounting the estimated sublease income using the estimated borrowing rate of a market participant subtenant, which we estimated to be 6.4%. For our India site, we recorded no impairment charge because the estimated net proceeds from the sale exceed the net book value of the site. We have classified the India facility as an asset held for sale as of June 30, 2022 and report this in other current assets in our Condensed Consolidated Balance Sheet. Additionally, we recorded an impairment expense primarily for software which we plan to abandon and certain excess equipment based on the estimated income from selling such assets. We recorded impairment charges as follows (in thousands):
| Three months ended June 30, 2022 | |||||||||||||||||
| Property, Plant and Equipment | Operating Lease Right-of-Use Assets | Total | |||||||||||||||
| Net book value of impaired facilities before write-off | $ | $ | $ | ||||||||||||||
| Less: Fair value of impaired facilities — Level 3 of Fair Value Hierarchy | ( | ( | ( | ||||||||||||||
| Impairment expense for facilities | |||||||||||||||||
| Impairment of other property, plant and equipment | — | ||||||||||||||||
| Total impairment of right-of-use assets and property, plant and equipment | $ | $ | $ | ||||||||||||||
The following table presents our property, plant and equipment as of June 30, 2022 and December 31, 2021, reflecting the effects of the impairment charges and held-for-sale reclassification.
| June 30, 2022 | December 31, 2021 | ||||||||||
| Building and leasehold improvements | $ | $ | |||||||||
| Laboratory equipment | |||||||||||
| Computer equipment and software | |||||||||||
| Manufacturing equipment | |||||||||||
| Furniture, fixtures, and other | |||||||||||
| Depreciable property, plant and equipment at cost | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Depreciable property, plant and equipment, net | |||||||||||
| Construction-in-progress | |||||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
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Note 9 — Stock-Based Compensation
On June 8, 2022, 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.
In connection with our Restructuring Plan, we recorded the benefit for the forfeitures of stock awards from employees who were terminated as part of our reduction-in-force during the three months ended June 30, 2022. 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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Cost of goods sold | $ | $ | $ | $ | |||||||||||||||||||
Research and development | $ | ||||||||||||||||||||||
General and administrative | $ | ||||||||||||||||||||||
| Restructuring, impairment and other costs of terminated program | $ | $ | |||||||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Options granted | $ | $ | |||||||||||||||||||||
Weighted-average grant-date fair value of options granted | $ | $ | $ | $ | |||||||||||||||||||
RSUs granted | |||||||||||||||||||||||
Weighted-average grant-date fair value of RSUs granted | $ | $ | $ | $ | |||||||||||||||||||
| Shares issued under equity compensation plans | |||||||||||||||||||||||
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.
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. 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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Potentially dilutive securities | |||||||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to those discussed in this section as well as factors described in Part II, Item 1A “Risk Factors.”
Overview
Strategic Direction of Our Business
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 and immunology. 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 new drug discovery and advancing our pipeline of 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 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 executed a broad clinical development program to develop bempegaldesleukin (previously referred to as NKTR-214) in combination with Opdivo® (nivolumab) in collaboration with Bristol-Myers Squibb Company (BMS) under our Strategic Collaboration Agreement. We also conducted independent development work evaluating bempegaldesleukin in combination with other checkpoint inhibitors and agents with potential complementary mechanisms of action, including studies evaluating bempegaldesleukin combination with Keytruda® (pembrolizumab). In April 2022, we and BMS jointly announced that the companies would be ending the global clinical development program for bempegaldesleukin in combination with Opdivo® and discontinue all ongoing studies in our collaboration with BMS. We also decided to discontinue all studies of bempegaldesleukin in combination with Keytruda®, as well as our studies of NKTR-262, which was being evaluated in combination with bempegaldesleukin.
In April 2022, we announced new strategic reorganization and cost restructuring plans (together, the Restructuring Plan) focused on prioritizing key research and development efforts that will be most impactful to the Company’s future, including our NKTR-255 and NKTR-358 programs and several core research programs.
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 cytotoxicity 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. We are also continuing our oncology clinical collaboration with Merck KGaA and Pfizer Inc. to evaluate the maintenance regimen of NKTR-255 in combination with avelumab, a PD-L1 inhibitor, in patients with locally advanced or metastatic urothelial carcinoma in the Phase II JAVELIN Bladder Medley study. We are also currently designing a Nektar-sponsored comparative study, which we aim to initiate in the second half of 2022.
In immunology, NKTR-358 targets 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 develop and commercialize NKTR-358, pursuant to which we received an initial payment of $150.0 million and are eligible for up to an additional $250.0 million for development and regulatory milestones. We have completed our responsibilities for 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. Lilly is responsible for the costs of Phase 3 development, but we retain the option to contribute up to 25% of the costs of Phase 3 development on an indication-by-indication basis in order for us to achieve the maximum royalty level under the Lilly Agreement, and further, if approved, we 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.
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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. 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 based on positive interim Phase 1b results in atopic dermatitis announced in December 2021, Lilly is planning to initiate a Phase 2 study in atopic dermatitis. Lilly also initiated a Phase 2 study in SLE in October 2020 and a Phase 2 study in ulcerative colitis in March 2021. In April 2022, we announced that Lilly had informed us that an interim analysis in the Phase 2 study in ulcerative colitis led to the discontinuation of further development in this indication. Lilly also plans to initiate another Phase 2 study in another immune-mediated disease to potentially start in 2023.
We have historically derived all of our revenue and substantial amounts of operating capital from our collaboration agreements. In addition to our collaborations with BMS and Lilly, we have received upfront and milestone payments under a number of other previous collaboration agreements, several of which have resulted in approved drugs, for which we may continue to manufacture the polymer reagents used in the production of the drug products and may be entitled to royalties for net sales of these approved drugs. As of December 31, 2020, however, we have sold the majority of our rights to receive royalties under these arrangements, including:
•2012 Purchase and Sale Agreement: In 2012, we sold all of our rights to receive royalties from CIMZIA® (for the treatment of Crohn’s disease and other autoimmune indications) and MIRCERA® (for the treatment of anemia associated with chronic kidney disease) under our collaborations with UCB Pharma and F. Hoffmann-La Roche Ltd, respectively, to RPI Finance Trust (RPI), an affiliate of Royalty Pharma for $124.0 million.
•2020 Purchase and Sale Agreement: In December 2020, we sold our rights, subject to a cap, to receive royalties from MOVANTIK® / MOEVNTIG® (for the treatment of opioid-induced constipation), ADYNOVATE® / ADYNOVI® (a half-life extension product of Factor VIII) and other hemophilia products, under our arrangements with AstraZeneca AB, Baxalta, Inc. (a wholly owned-subsidiary of Takeda Pharmaceutical Company Ltd.), and Novo Nordisk A/S, respectively, for $150.0 million to entities managed by HealthCare Royalty Management (HCR) under a capped sale arrangement, such that all future royalties return to Nektar if HCR receives $210.0 million in royalties by December 31, 2025 (the 2025 Threshold) or $240.0 million if the 2025 Threshold is not met.
While in the near-term we continue to expect to generate substantially all of our revenue from collaboration arrangements, our long-term plan is to generate significant commercial revenue from proprietary products. Over the next several years, we plan to continue to make significant investments to advance our early drug candidate pipeline. We have several drug candidates in earlier stage clinical development or are being explored in research and that we are preparing to advance into clinical trials in future years. We are cultivating several research programs, including a collaboration with Biolojic Design to develop a unique bivalent antibody targeting TNFR2, as well as two Nektar-developed research programs focused in the areas of oncology and auto-immune disease. 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.
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. 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 opportunities. For a discussion of these and some of the other key risks and uncertainties affecting our business, see Item 1A “Risk Factors.”
Effects of the COVID-19 Pandemic
We continue to actively monitor the ongoing COVID-19 pandemic and applicable government recommendations in light of new developments. In particular, the emergence of new variants of the coronavirus 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. 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 and we allow 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 also continue to monitor our supply chains for any disruptions or constraints
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caused by the COVID-19 pandemic. To date, we have not experienced any significant impacts on our supply, but ongoing global shortages in labor, raw materials and equipment could limit our ability to manufacture our products or to supply drug candidates for our clinical trials, or delay our research and development efforts.
We and our partners are currently engaged in the clinical testing of our drug candidates and the COVID-19 pandemic introduces 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 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. Nektar’s Phase 1 clinical study of NKTR-255 in patients with relapsed/refractory hematologic malignancies has enrolled slower than anticipated due to the challenges caused by the COVID-19 pandemic. While we are not currently aware of significant delays by our partners and collaborators caused by the COVID-19 pandemic on clinical trials involving our drug candidates; however, the fluidity of the COVID-19 pandemic precludes any firm estimates as to the ultimate effect this disease will have on clinical trials. Any current assessments of the effects of the COVID-19 pandemic on our clinical programs are difficult to predict and subject to change and, with regard to individual clinical trial sites within these studies, will likely vary by the geographic region in which they are located.
In an effort to mitigate the negative effects of the COVID-19 pandemic on our clinical trials (both in terms of clinical trial timelines and integrity of clinical study data), we have taken steps to help our clinical trial investigators and their teams continue to provide care and uninterrupted access to their patients. Although these steps may have the benefit of mitigating some of the negative effects of the COVID-19 pandemic, these measures may be insufficient to fully address all of the challenges posed by the pandemic.
With respect to financing our near-term business needs, as set forth below in “Key Developments and Trends in Liquidity and Capital Resources,” we estimate we have working capital to fund our current business plans through at least the next twelve months.
Key Developments and Trends in Liquidity and Capital Resources
We estimate that we have working capital to fund our current business plans for at least the next twelve months from the date of filing. At June 30, 2022, we had approximately $628.2 million in cash and investments in marketable securities.
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Results of Operations
Three and Six Months Ended June 30, 2022 and 2021
Revenue (in thousands, except percentages)
| Three Months Ended June 30, | Increase/ (Decrease) 2022 vs. 2021 | Percentage Increase/ (Decrease) 2022 vs. 2021 | |||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
Product sales | $ | 5,312 | $ | 7,846 | $ | (2,534) | (32) | % | |||||||||||||||
| Non-cash royalty revenue related to sales of future royalties | 16,264 | 20,456 | (4,192) | (20) | % | ||||||||||||||||||
License, collaboration and other revenue | 9 | 28 | (19) | (68) | % | ||||||||||||||||||
| Total revenue | $ | 21,585 | $ | 28,330 | $ | (6,745) | (24) | % | |||||||||||||||
| Six Months Ended June 30, | Increase/ (Decrease) 2022 vs. 2021 | Percentage Increase/ (Decrease) 2022 vs. 2021 | |||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
Product sales | $ | 11,000 | $ | 12,641 | $ | (1,641) | (13) | % | |||||||||||||||
| Non-cash royalty revenue related to sales of future royalties | 33,825 | 39,254 | (5,429) | (14) | % | ||||||||||||||||||
License, collaboration and other revenue | 1,582 | 82 | 1,500 | >100% | |||||||||||||||||||
| Total revenue | $ | 46,407 | $ | 51,977 | $ | (5,570) | (11) | % | |||||||||||||||
Our revenue is derived from our collaboration agreements, under which we may receive product sales revenue, royalties, and license fees, as well as development and sales milestones and other contingent payments. We recognize revenue when we transfer promised goods or services to our collaboration partners. The amount of upfront fees received under our license and collaboration agreements allocated to continuing obligations, such as development or manufacturing and supply commitments, is generally recognized as we deliver products or provide development services. As a result, there may be significant variations in the timing of receipt of cash payments and our recognition of revenue. We make our best estimate of the timing and amount of products and services expected to be required to fulfill our performance obligations. Given the uncertainties in research and development collaborations, significant judgment is required to make these estimates.
Product Sales
Product sales include predominantly fixed price manufacturing and supply agreements with our collaboration partners and are the result of firm purchase orders from those partners. The timing of shipments is based solely on the demand and requirements of our collaboration partners and is not ratable throughout the year.
Product sales decreased for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 primarily due to a decrease in product demand from our collaboration partners. We expect product sales for the full year of 2022 to be marginally lower than 2021.
Non-cash Royalty Revenue Related to Sales of Future Royalties
For a discussion of our Non-cash royalty revenue, please see our discussion below in “Non-Cash Royalty Revenue and Non-Cash Interest Expense.”
License, Collaboration and Other Revenue
License, collaboration and other revenue includes the recognition of upfront payments, milestone and other contingent payments received in connection with our license and collaboration agreements and certain research and development activities. The level of license, collaboration and other revenue depends in part upon the estimated recognition period of the upfront payments allocated to continuing performance obligations, the achievement of milestones and other contingent events, the continuation of existing collaborations, the amount of research and development work, and entering into new collaboration agreements, if any. During the six months ended June 30, 2022, we recognized $1.5 million for a license agreement, under which
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we are entitled to no further consideration. As a result of the recognition of this revenue in the six months ended June 30, 2022, we expect license, collaboration and other revenue for 2022 to increase compared to 2021.