NEKTAR THERAPEUTICS 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 I, Item 1A - Risk Factors." Overview Strategic Direction of Our BusinessNektar Therapeutics is a research-based biopharmaceutical company that discovers and develops innovative new medicines in areas of high unmet medical need. Our research and development pipeline of new investigational drugs includes treatments for cancer, autoimmune disease and viral infections. 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 immuno-oncology (I-O), 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 52 -------------------------------------------------------------------------------- Table of Contents 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. OnJanuary 9, 2020 , we and BMS entered into Amendment No. 1 (the Amendment) to theFebruary 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. The Amendment did not alter the cost-sharing methodology under the BMS Collaboration Agreement. The parties 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 onJanuary 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 onJuly 27, 2020 . Of the remaining milestones,$625.0 million are associated with the approval and launch of bempegaldesleukin in its first indication in theU.S. , EU andJapan (which reflects the reduction for the$25.0 million nonrefundable, 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, onFebruary 12, 2021 , we entered into a financing and co-development collaboration withSFJ 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. In addition, we are independently studying bempegaldesleukin in combination with Keytruda® in a non-small cell lung cancer (NSCLC) Phase 1/2 trial. 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 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 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 in managing the clinical trial. In addition, we announced onFebruary 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. OnOctober 22, 2020 , we received 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 study is planned to start in early November. 53 -------------------------------------------------------------------------------- Table of Contents We are also combining bempegaldesleukin with NKTR-262. NKTR-262 is a small molecule agonist that targets toll-like receptors (TLRs) 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 (APCs), 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 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 anti-tumor immune response. Preclinical findings suggest NKTR-255 has the potential to synergistically combine with antibody-dependent cellular toxicity molecules as well as 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 2020Society for Immunotherapy of Cancer (SITC) Annual Meeting, we reported early findings from the Phase 1 dose escalation study that demonstrated expansion of lymphocytes, increases in 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 inSeptember 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 theU.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 subjects. Results from this study demonstrated a multiple-fold increase in regulatory T cells with no change in CD8 positive or natural killer 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 SLE. Lilly is conducting two Phase 1b studies in patients with psoriasis and atopic dermatitis and has initiated Phase 2 studies in SLE and ulcerative colitis. Under the terms of the agreement, Lilly is to initiate two additional Phase 2 studies in other auto-immune diseases. We were developing NKTR-181 for the treatment of chronic low back pain in adult patients and had submitted an NDA for NKTR-181. At the FDA advisory committee meeting held onJanuary 14, 2020 , the jointFDA Anesthetic Drug Products Advisory Committee andDrug Safety and Risk Management Committee did not recommend approval of NKTR-181, and, as a result, we withdrew the NDA and decided to make no further investment commitments to this program. The level of our future research and development investment will depend on a number of uncertainties including clinical outcomes, future studies required to advance programs to regulatory approval, and the economics related to potential future collaborations that may include up-front payments, development funding, milestones, and royalties. 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 our proprietary drugs including bempegaldesleukin. 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. 54 -------------------------------------------------------------------------------- Table of Contents Up untilSeptember 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 collaboration agreement with Baxalta Inc. (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 inMarch 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 theEuropean Union 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 inEurope inJanuary 2018 , and has also been approved in many other countries). Beginning onOctober 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, datedOctober 27, 2017 , were sold for$150.0 million pursuant to a capped sale arrangement to entities managed byHealthcare Royalty Management, LLC (collectively, HCR) pursuant to a purchase and sale agreement (the 2020 Purchase and Sale Agreement) entered into onDecember 16, 2020 . With regard to the capped 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 of equalling$210.0 million (the 2025 Threshold), if the 2025 Threshold is achieved on or prior toDecember 31, 2025 , or$240.0 million , if the 2025 Threshold is not achieved on or prior toDecember 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 clinical development and commercialization 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 InMarch 2020 , COVID-19, the disease resulting from a novel strain of coronavirus infection, was declared a global pandemic. Many countries, includingthe 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, 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. Although vaccines intended to reduce the incidence of infection are in development, it remains unclear how long the negative impacts caused by the coronavirus will continue into the future. Currently, with respect to the operation of our facilities, we are closely adhering to applicable guidelines and orders. Essential operations in research, manufacturing and maintenance that occur within our facilities are continuing in accordance with the permissions granted under government ordinances. Across all our locations, we have instituted a temporary work from home policy for all office personnel who do not need to work on site to maintain productivity. At this time, we have not identified a material change to our productivity as a result of these measures, but this could change, particularly if restricted travel, closed schools, and shelter-in-place orders are not removed or significantly eased in the areas in which we operate. 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 55 -------------------------------------------------------------------------------- Table of Contents take in response to the COVID-19 pandemic meet or exceed the guidance and requirements issued from government and public health officials. 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. Specifically, for the ongoing registrational clinical trials studying the combination of bempegaldesleukin and Opdivo® in cancer indications being led by Nektar (such as adjuvant melanoma, RCC and first-line cisplatin ineligible, PD-L1 low, locally advanced or metastatic urothelial cancer), although we have not seen evidence to date that the COVID-19 pandemic has had a significant impact on enrollment for these trials, the future impact of the COVID-19 pandemic on these trials is very difficult to predict and, with regard to individual clinical trial sites within these studies, will likely vary by the geographic region in which they are located. For Nektar's Phase 1/2 trial studying bempegaldesleukin and Keytruda® in NSCLC, although the COVID-19 pandemic delayed the initiation of certain investigator sites inEurope earlier in the trial, we currently expect to have initial safety as well as preliminary overall response rate data for the dose-escalation and 0.006 mg/kg NSCLC expansion cohorts of this study in the second half of 2021. With regard to Nektar's ongoing clinical study of NKTR-262 (the Phase 1/2 REVEAL study), this study has largely remained on track although we have experienced some challenges with new investigator site initiations. Nektar's Phase 1 clinical study of NKTR-255 in patients with relapsed/refractory hematologic malignancies has enrolled slower than anticipated due to challenges caused by the COVID-19 pandemic, and the dose-escalation monotherapy portion of the study is expected to be completed in the first half of 2021. For both of these Nektar-run clinical programs, the ongoing COVID-19 pandemic could still impact investigator site initiations and trial enrollment despite our mitigation efforts. For clinical studies of our proprietary drug candidates being run by our partners, BMS is enrolling patients in each of the BMS-led registration studies and has re-started initiation of new investigator sites in the third quarter of 2020 following a pause in the initiation of new investigator sites it instituted for all of its studies as a result of the COVID-19 pandemic. In the summer of 2020, BMS extended their timeline estimates by approximately six months for the first data read-outs for the first-line melanoma trial. We will continue to monitor the progress of enrollment of the BMS-led studies and projections for topline clinical outcome data. Our partner Lilly, which is running clinical trials of NKTR-358, has indicated it will likely have delays of at least three to six months following its temporary suspension of recruitment for the ongoing Phase 1b studies in atopic dermatitis and psoriasis as a result of the COVID-19 pandemic. Lilly recently started a Phase 2 study in moderate to severe lupus patients in October and has initiated an additional Phase 2 study in ulcerative colitis. The rapid development and fluidity of the COVID-19 pandemic preclude any firm estimates as to the ultimate effect this disease will have on our collaborators' clinical trials. As a result, there remains substantial uncertainty as to potential impacts on our collaboration partner studies. With regard to our IND-enabling research, although the COVID-19 pandemic has caused us to reduce the number of employees working at our sites, a subset of our research-based employees continues to conduct laboratory work in our research facilities (which is permitted under the applicable government ordinances). As a result, we continue to make progress in the identification of new drug candidates. 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. Particularly, in the context of our clinical trials directed to investigational cancer treatments, for example, we are actively working with our study sites to implement measures to prevent study protocol violations, to minimize any disruption of treatment visits, to accommodate for patient visit delays caused by limited access to healthcare facilities, to leverage alternative methods for maintaining clinical trial integrity, and to properly record patient event data that may be influenced by the COVID-19 pandemic. In addition, to the extent that the integrity of individual patient data is negatively affected by the COVID-19 pandemic, we will consider measures to maintain the integrity of the clinical study overall (such as over-enrolling patients into the study and removing all patients originating from an affected study site when performing statistical analyses of study endpoints). Although these measures may have the benefit of preserving the overall integrity of a clinical study, implementing these measures could result in a delay in completing the study. 56 -------------------------------------------------------------------------------- Table of Contents In this respect, we are also incorporating recent direction and flexibility provided by regulatory authorities, including the FDA in itsMarch 18, 2020 Guidance (most recently updatedJanuary 27, 2021 ) entitled "FDA Guidance on Conduct of Clinical Trials of Medicinal Products duringCOVID-19 Public Health Emergency." This Guidance is continually being updated by FDA and updates can be found on theFDA's website at www.fda.gov. In addition, we may refer to guidance documents from other regulatory agencies, such as, for example, theEuropean Medicines Agency's "Implications of coronavirus disease (COVID-19) on methodological aspects of ongoing clinical trials" found on www.ema.europa.eu, which are also continually being updated. 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. AtDecember 31, 2020 , we had approximately$1.2 billion in cash and investments in marketable securities. OnApril 13, 2020 , we repaid the principal and accrued interest of our senior notes totaling$254.8 million . See Note 5 to our Consolidated Financial Statements for additional information. Results of Operations Years EndedDecember 31, 2020 and 2019 Additional information required by Item 7 for the year endedDecember 31, 2018 can be found in Item 7 in our Annual Report on Form 10-K for the yearDecember 31, 2019 , filed with theSEC onFebruary 28, 2020 and is incorporated herein by reference. Revenue (in thousands, except percentages) Percentage Increase/ Increase/ Year Ended December 31, (Decrease) (Decrease) 2020 2019 2020 vs. 2019 2020 vs. 2019 Product sales$ 17,504 $ 20,117 $ (2,613) (13) % Royalty revenue 30,999 41,222 (10,223) (25) % Non cash royalty revenue related to sale of future royalties 48,563 36,303 12,260 34 % License, collaboration and other revenue 55,849 16,975 38,874 > 100% Total revenue$ 152,915 $ 114,617 $ 38,298 33 % 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 year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 due to decreased demand from our collaboration partners.
We expect product sales in 2021 to increase compared to 2020 due to increased demand from our collaboration partners.
57
--------------------------------------------------------------------------------
Table of Contents
Royalty revenue
As discussed in Note 7 to our Consolidated Financial Statements, on December
16, 2020 , we entered into the 2020 Purchase and Sale Agreement with entities
managed by Healthcare Royalty Management, LLC (collectively, HCR), under which
we agreed to sell to HCR certain of our rights to receive royalty payments
arising on worldwide net sales of MOVANTIK®, ADYNOVATE® and REBINYN® beginning
October 1, 2020 . As a result, we recognized royalty revenue for these products
only for the nine months ended September 30, 2020 , and recognized these
royalties as non-cash royalty revenue for the three months ended December 31,
2020 . Accordingly, royalty revenue decreased for the year ended December 31,
2020 as compared to the year ended December 31, 2019 . Please see Note 7 to our
Consolidated Financial Statements for additional information on the 2020
Purchase and Sale Agreement.
We do not expect to recognize any royalty revenue during 2021, because we will
recognize all such royalties as non-cash royalty revenue as a result of the 2020
Purchase and Sale Agreement.
Non-cash royalty revenue related to sale of future royalties
For a discussion of our Non-cash royalty revenue, please see our discussion below "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 year endedDecember 31, 2020 , pursuant to the BMS Collaboration Agreement, we recognized$25.0 million for the achievement of the first patient, first visit in the registrational muscle-invasive bladder cancer trial, which was achieved onJanuary 30, 2020 , and$25.0 million for the achievement of the first patient, first visit in the registrational adjuvant melanoma trial, which we achieved onJuly 27, 2020 . As a result of these milestones, license, collaboration and other revenue increased during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . We expect that our license, collaboration and other revenue will decrease in 2021 compared to 2020 as a result of the recognition of these milestones in 2020 under our BMS Collaboration Agreement. The timing and future success of our drug development programs and those of our collaboration partners are subject to a number of risks and uncertainties. See Item 1A. Risk Factors for discussion of the risks associated with the complex nature of our collaboration agreements. Revenue by geography (in thousands)
Revenue by geographic area is based on the headquarters or shipping locations of our partners. The following table sets forth revenue by geographic area:
Year Ended December 31,
2020 2019
United States $ 64,966 $ 27,093
Rest of World 87,949 87,524
Total revenue $ 152,915 $ 114,617 Revenue attributable to the
58
--------------------------------------------------------------------------------
Table of Contents
Cost of goods sold (in thousands, except percentages)
Percentage
Year Ended December 31, Increase/ Increase/
(Decrease) (Decrease)
2020 vs. 2020 vs.
2020 2019 2019 2019
Cost of goods sold $ 19,477 $ 21,374 $ (1,897) (9) %
Product gross profit (loss) $ (1,973) $ (1,257) $ (716) (57) %
Product gross margin (11) % (6) %
Our strategy is to manufacture and supply polymer reagents to support our
proprietary drug candidates or our third-party collaborators where we have a
strategic development and commercialization relationship or where we derive
substantial economic benefit. We have elected to only enter into and maintain
those manufacturing relationships associated with long-term collaboration
agreements which include multiple sources of revenue, which we view holistically
and in aggregate. We have a predominantly fixed cost base associated with our
manufacturing activities. As a result, our product gross profit and margin are
significantly impacted by the mix and volume of products sold in each period.
Product gross margin worsened for the year ended December 31, 2020 compared to
the year ended December 31, 2019 primarily due to a less favorable product mix
in 2020 compared to 2019. We have a manufacturing arrangement with a partner
that includes a fixed price which is less than the fully burdened manufacturing
cost for the reagent, and we expect this situation to continue with this partner
in future years. In addition to product sales from reagent materials supplied to
the partner where our sales are less than our fully burdened manufacturing cost,
we also receive royalty revenue from this collaboration. In the years ended
December 31, 2020 and 2019, the royalty revenue from this collaboration exceeded
the related negative gross profit.
We expect product gross margin to continue to fluctuate in future periods
depending on the level and mix of manufacturing orders from our customers. We
currently expect product gross margin to be negative in 2021 as a result of the
anticipated unfavorable product mix described above.
Research and development expense (in thousands, except percentages)
Percentage
Year Ended December 31, Increase/ Increase/
(Decrease) (Decrease)
2020 vs. 2020 vs.
2020 2019 2019 2019
Research and development expense $ 408,678 $ 434,566 $ (25,888) (6) %
Research and development expense consists primarily of clinical study costs,
contract manufacturing costs, direct costs of outside research, materials,
supplies, licenses and fees as well as personnel costs (including salaries,
benefits, and stock-based compensation). Research and development expense also
includes certain overhead allocations consisting of support and
facilities-related costs. Where we perform research and development activities
under a clinical joint development collaboration, such as our collaboration with
BMS, we record the expense reimbursement from our partners as a reduction to
research and development expense, and we record our share of our partners'
expenses as an increase to research and development expense.
Research and development expense decreased for the year ended December 31,
2020 compared to the year ended December 31, 2019 . The clinical trial costs for
our bempegaldesleukin, NKTR-255 and NKR-262 programs increased for the year
ended December 31, 2020 compared to the year ended December 31, 2019 . These
increased costs were offset by decreases in pre-commercial manufacturing costs
for NKTR-181 which we incurred during 2019, manufacturing costs for clinical
trials materials, and costs for our clinical development program for NKTR-358.
As discussed above, as a result of our decision to withdraw the NKTR-181 NDA in
January 2020 , we present all costs related to the wind-down of the NKTR-181
program, including pre-commercial manufacturing activities, in the Impairment of
assets and other costs related to terminated program line in our Consolidated
Statements of Operations for the year ended December 31, 2020 . The decrease in
NKTR-358 development costs reflects the completion of our Phase 1 clinical
development and drug product development deliverables, for which we were
responsible for 100% of costs, to the Phase 1b and Phase 2 development, for
which we are responsible for 25% of costs and Lilly is responsible for 75% of
costs. Additionally, during the years ended December 31, 2020 and 2019, we
recorded net reductions to research and development expense for BMS'
reimbursements of our costs of $128.2 million and $105.4 million ,
respectively. Under the BMS Collaboration Agreement, BMS generally bears 67.5%
of development costs for bempegaldesleukin in combination with Opdivo® and 35%
of costs for manufacturing bempegaldesleukin. Please see Note 10 to our
Consolidated Financial Statements for additional information regarding our BMS
Collaboration Agreement.
59--------------------------------------------------------------------------------
Table of Contents
We utilize our employee and infrastructure resources across multiple
development and research programs. The following table shows expenses incurred
for clinical and regulatory services, clinical supplies, and preclinical study
support provided by third parties as well as contract manufacturing costs for
each of our drug candidates. The table also presents other costs and overhead
consisting of personnel, facilities and other indirect costs (in thousands):
Clinical Year Ended December 31,
Study
Status(1) 2020 2019Bempegaldesleukin (CD122-preferential IL-2 pathway agonist)(2)
Phase 1/2/3 $ 131,900 $ 109,355
NKTR-358 (cytokine Treg stimulant) Phase 1/2 20,153 27,319
NKTR-255 (IL-15 receptor agonist) Phase 1 14,542 12,278
NKTR-262 (toll-like receptor agonist) Phase 1/2 8,928 11,379
ONZEALDTM (next-generation topoisomerase I inhibitor) Terminated 4,313 12,733
NKTR-181 (orally-available mu-opioid analgesic molecule) Terminated
1,931 29,830
Other drug candidates Various 13,332 18,585
Total clinical development, contract manufacturing and other third party costs
195,099 221,479
Personnel, overhead and other costs(3) 147,200 141,719
Stock-based compensation and depreciation 66,379 71,368
Research and development expense $ 408,678 $ 434,566 _______________________________________________________________
(1)Clinical Study Status definitions are provided in the chart found in Part I, Item 1. Business. (2)Development expenses for bempegaldesleukin include expenses under the BMS Collaboration Agreement, other collaboration agreements and our own independent studies. The amounts for the years endedDecember 31, 2020 and 2019 include net reductions of$90.4 million and$70.5 million , respectively, of development cost reimbursements from BMS under our collaboration, net of our share of BMS' costs. (3)The amounts for the year endedDecember 31, 2020 and 2019 include reductions of$37.8 million and$34.9 million of employee cost reimbursements from BMS under our collaboration. We expect research and development expense to increase for 2021 compared to 2020 primarily as a result of our continued development of bempegaldesleukin, including studies outside of the BMS Collaboration Agreement. In addition, we are collaborating with Lilly to develop NKTR-358, and Lilly will be conducting the recently started Phase 2 studies and other ongoing studies in 2021, for which we are responsible for 25% of costs. We are continuing to enroll patients in the expansion cohorts of the Phase 1/2 study for NKTR-262 in combination with bempegaldesleukin. We will continue our Phase 1/2 dose-escalation and expansion studies for NKTR-255 in multiple myeloma, non-Hodgkin lymphoma, relapsed or refractory head and neck squamous cell carcinoma, and colorectal cancer. The timing and amount of our future clinical investments will vary significantly based upon our evaluation of ongoing clinical results and the structure, timing, and scope of additional clinical development programs and potential clinical collaboration partnerships (if any) for these programs. In addition to our drug candidates that we plan to evaluate in clinical development during 2021 and beyond, we believe it is vitally important to continue our substantial investment in a pipeline of new drug candidates to continue to build the value of our drug candidate pipeline and our business. Our discovery research organization is identifying new drug candidates by applying our polymer conjugate technology platform to a wide range of molecule classes, including small molecules and large proteins, peptides and antibodies, across multiple therapeutic areas. We also plan from time to time to evaluate opportunities to in-license potential drug candidates from third parties to add to our drug discovery and development pipeline. We plan to continue to advance our most promising early research drug candidates into preclinical development with the objective to advance these early stage research programs to human clinical studies over the next several years. Our expenditures on current and future preclinical and clinical development programs are subject to numerous uncertainties in timing and cost to completion. In order to advance our drug candidates through clinical development, each drug candidate must be tested in numerous preclinical safety, toxicology and efficacy studies. We then conduct clinical studies for our drug candidates that take several years to complete. The cost and time required to complete clinical trials may vary significantly over the life of a clinical development program as a result of a variety of factors, including but not limited to: •the number of patients required for a given clinical study design; •the length of time required to enroll clinical study participants; •the number and location of sites included in the clinical studies; 60 -------------------------------------------------------------------------------- Table of Contents •the clinical study designs required by the health authorities (i.e. primary and secondary endpoints as well as the size of the study population needed to demonstrate efficacy and safety outcomes); •the potential for changing standards of care for the target patient population; •the competition for patient recruitment from competitive drug candidates being studied in the same clinical setting; •the costs of producing supplies of the drug candidates needed for clinical trials and regulatory submissions; •the safety and efficacy profile of the drug candidate; •the use of clinical research organizations to assist with the management of the trials; and •the costs and timing of, and the ability to secure, approvals from government health authorities. Furthermore, our strategy includes the potential of entering into collaborations with third parties to participate in the development and commercialization of some of our drug candidates such as those collaborations that we have already completed for bempegaldesleukin, NKTR-358, or clinical collaborations where we would share costs and operational responsibility with a partner. In certain situations, the clinical development program and process for a drug candidate and the estimated completion date will largely be under the control of that third party and not under our control. We cannot forecast with any degree of certainty which of our drug candidates will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements. As noted above, the evolving situation around the COVID-19 pandemic has 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 pandemic. We have experienced delays of approximately three months for some Nektar-run, earlier-stage clinical studies (such as the Phase 1/2 trial studying bempegaldesleukin and Keytruda® in NSCLC and the Phase 1 dose escalation trial studying NKTR-255 in patients with relapsed/refractory hematologic malignancies) and given the evolving situation around the COVID-19 pandemic it is possible there could be additional delays in the future. In addition, for certain clinical studies involving our proprietary drug candidates that are run by our partners, study timelines have been delayed at least three to six months, and, given the evolving situation around the COVID-19 pandemic, it is possible there could be additional delays in the future. As a result of these delays and potential delays, we may incur additional costs associated with these clinical trials. At this time, we cannot estimate if such increases would have a material effect on our results of operations or financial position. The risks and uncertainties associated with our research and development projects are discussed more fully in Item 1A. Risk Factors. As a result of the uncertainties discussed above, we are unable to determine with any degree of certainty the duration and completion costs of our research and development projects, anticipated completion dates or when and to what extent we will receive cash inflows from a collaboration arrangement or the commercialization of a drug candidate. General and administrative expense (in thousands, except percentages) Percentage Year Ended December 31, Increase/ Increase/ (Decrease) (Decrease) 2020 vs. 2020 vs. 2020 2019 2019 2019 General and administrative expense$ 104,682 $ 98,712 $ 5,970 6 % General and administrative expense includes the cost of administrative staffing, business development, marketing, finance, and legal activities. General and administrative expense increased for the year endedDecember 31, 2020 compared with the year endedDecember 31, 2019 primarily due to increased personnel costs as we begin a stage appropriate build of our commercial capability to co-commercialize bempegaldesleukin with BMS. We expect general and administrative expense to increase for 2021 compared to 2020, as we continue to build our commercial capabilities. Impairment of Assets and Other Costs for Terminated Program OnJanuary 14, 2020 , the jointFDA Anesthetic Drug Products Advisory Committee andDrug Safety and Risk Management Committee did not recommend approval of our NDA for NKTR-181. As a result, we withdrew our NDA and decided to make no further investments in this program. OnFebruary 26, 2020 , the Audit Committee of our Board of Directors approved management's plan for the wind-down of the NKTR-181 program. As a result, in the three months endedMarch 31, 2020 , we wrote off$19.7 million of advance payments to contract manufacturers for commercial batches of NKTR-181. We also incurred$25.5 million of additional costs, primarily for non-cancellable commitments to our contract manufacturers and severance costs. 61 -------------------------------------------------------------------------------- Table of Contents Interest expense (in thousands, except percentages) Increase/ Percentage Increase/ Year Ended December 31, (Decrease) (Decrease) 2020 vs. 2020 vs. 2020 2019 2019 2019 Interest expense$ 6,851 $ 21,310 $ (14,459) (68) % Interest expense decreased for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . InOctober 2015 , we issued$250.0 million in aggregate principal amount of 7.75% senior secured notes dueOctober 2020 . Interest on the 7.75% senior secured notes was calculated based on actual days outstanding over a 360 day year. OnApril 13, 2020 , we redeemed the senior secured notes at par and therefore repaid the principal of$250.0 million and accrued interest of$4.8 million . After the repayment, we incurred no interest expense. Non-Cash Royalty Revenue and Non-Cash Interest Expense (in thousands, except percentages) Increase/ Percentage Increase/ (Decrease) (Decrease) 2020 vs. 2020 vs. Year Ended December 31, 2019 2019 2020 2019 2012 Purchase and Sale Agreement: Non-cash royalty revenue related to sale of future royalties$ 37,938 $ 36,303 $ 1,635 5 % Non-cash interest expense on liability related to sale of future royalties$ 30,267 $ 25,044 $ 5,223 21 % Interest rates - end of period presented Implicit interest rate over the life of the agreement 20.2 % 19.5 % Prospective effective interest rate 48.0 % 38.0 % 2020 Purchase and Sale Agreement: Non-cash royalty revenue related to sale of future royalties$ 10,625 $ -$ 10,625 >100% Non-cash interest expense on liability related to sale of future royalties $ - $ - $ - - Interest rates - end of period presented Implicit interest rate over the life of the agreement 16.0 %
N/A
Prospective effective interest rate 16.0 %
N/A
Total non-cash royalty revenue related to sale of future royalties$ 48,563 $ 36,303 $ 12,260 34 % Total non-cash interest expense on liability related to sale of future royalties$ 30,267 $ 25,044 $ 5,223 21 % As discussed in Note 7 to our Consolidated Financial Statements, we continue to recognize non-cash royalty revenue for the 2012 Purchase and Sale Agreement and the 2020 Purchase and Sale Agreement (as defined in Note 7). 2012 Purchase and Sale Agreement Non-cash royalty revenue for the 2012 Purchase and Sale Agreement increased for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 due to increases in net sales of CIMZIA® and MIRCERA®. Non-cash interest expense for the 2012 Purchase and Sales Agreement increased for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 due to an increase in the estimated implicit interest rate over the life of the transaction, as disclosed above. When forecasted future revenues rise, this results in an increase to the estimated implicit interest rate over the life of the transaction, which, in turn, increases the prospective effective interest rate in the current and future periods. The increase in the estimated implicit rate from the year-endedDecember 31, 2019 to the year endedDecember 31, 2020 resulted from an increase in estimate future net sales of CIMZIA®. 62 -------------------------------------------------------------------------------- Table of Contents Over the term of this arrangement, the net proceeds of the transaction of$114.0 million , consisting of the original proceeds of$124.0 million , net of$10.0 million in payments from us to RPI, is amortized as the difference between the non-cash royalty revenue and the non-cash interest expense. To date, we have amortized$48.1 million of the net proceeds. We periodically assess future non-cash royalty revenues, and we may adjust the prospective effective interest rate based on our best estimates of future non-cash royalty revenue such that future non-cash interest expense will amortize the remaining$65.9 million of the net proceeds, since RPI (as defined in Note 7) receives all of the benefits of the increases in future royalties. There are a number of factors that could materially affect our estimated interest rate, in particular, the amount and timing of royalty payments from future net sales of CIMZIA® and MIRCERA®. As a result, future interest rates could differ significantly, and we will adjust any such change in our estimated interest rate prospectively. 2020 Purchase and Sale Agreement As discussed in Note 7 to the Consolidated Finance Statements and above under Royalty Revenue, we began recognizing non-cash royalty revenue for the 2020 Purchase and Sale Agreement in the three months endedDecember 31, 2020 and did not recognize any non-cash interest expense due to an immaterial amount of time to impute interest from closing toDecember 31, 2020 . Non-cash royalty revenue and non-cash interest expense will increase for 2021 as we will recognize them for the full year. Our estimate of the imputed interest rate reflects our estimates for sales of MOVANTIK®, ADYNOVATE® and REBINYN®, which result in meeting the 2025 Threshold (as defined in Note 7). Because the 2025 Threshold of$210.0 million and the increase in the threshold to$240.0 million (if the 2025 Threshold is not achieved) limit the amount of royalties payable to HCR, the potential for the implicit interest rate to vary is more limited. Instead, we will receive the benefit of net sales if they exceed the threshold, but do not bear risk of loss or payments to HCR if royalties are less than expected. Interest Income and Other Income (Expense), net (in thousands, except percentages) Percentage Increase/ Increase/ (Decrease) (Decrease) 2020 vs. 2020 vs. Year Ended December 31, 2019 2019 2020 2019 Interest income and other income (expense), net$ 18,282 $ 46,335 $ (28,053) (61) % Interest income and other income (expense), net decreased for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , primarily due to decreases in market interest rates and lower investment balances which have been utilized to fund our operations and the repayment of our senior notes onApril 13, 2020 . The effective interest rate earned on investments which we purchased after the COVID-19 pandemic began has been significantly lower than historical interest rates, and we expect this trend to continue. We expect that our interest income and other income (expense), net will decrease for 2021 compared to 2020 due to continued lower interest rates and lower investments balances as we fund our operations. Income Tax Expense (in thousands, except percentages) Percentage Increase/ Increase/ (Decrease) (Decrease) 2020 vs. 2020 vs. Year Ended December 31, 2019 2019 2020 2019 Provision for income taxes $ 493$ 613 $ (120) (20) %
For the years ended
Due to our expected net loss in 2021, we expect income tax expense to be
consistent with 2020 and reflect taxable income for our
We have financed our operations primarily through revenue from upfront and milestone payments under our strategic collaboration agreements, royalties and product sales, as well as public offering and private placements of debt and equity securities. AtDecember 31, 2020 , we had approximately$1.2 billion in cash and investments in marketable securities. As noted above, onApril 13, 2020 , we repaid the principal and accrued interest of our senior notes totaling$254.8 million . 63
--------------------------------------------------------------------------------
Table of Contents
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. We expect the clinical development of our proprietary drug candidates including bempegaldesleukin, NKTR-358, NKTR-262 and NKTR-255 will continue to require significant investment to continue to advance in clinical development with the objective of obtaining regulatory approval or entering into one or more collaboration partnerships. In the past, we have received a number of significant payments from collaboration agreements and other significant transactions. InApril 2018 , we received a total of$1.85 billion from BMS including a$1.0 billion upfront payment and an$850.0 million premium investment in our common stock. InJuly 2017 , we entered into a collaboration agreement for NKTR-358 with Lilly, under which we received a$150.0 million upfront payment. In the future, we expect to receive substantial payments from our collaboration agreements with BMS and Lilly. In particular, under the BMS Collaboration Agreement, we are entitled to approximately$1.455 billion of clinical, regulatory and commercial launch milestones (of which, we have received$50.0 million ). Of the remaining milestones,$625.0 million are associated with approval and launch of bempegaldesleukin in its first indication in theU.S. , EU andJapan (which reflects the reduction for the$25.0 million nonrefundable, creditable milestone for the first patient, first visit in the muscle-invasive bladder cancer trial that BMS paid to us inMarch 2020 ). As a result, whether and when bempegaldesleukin is approved in any indication will have a significant impact on our future liquidity and capital resources. We have no credit facility or any other sources of committed capital. OnFebruary 12, 2021 , we entered into a co-development agreement withSFJ Pharmaceuticals (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 pembrolizumab (Keytruda®) 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). In exchange for funding the SCCHN Clinical Trial, SFJ is entitled to a series of contingent success-based payments with the first payment due after substantial completion of the SCCHN Clinical Trial which we currently expect to occur in late 2024 or early 2025 as follows: (i) if bempegaldesleukin receives FDA approval for first line metastatic melanoma or the SCCHN Indication, we would pay SFJ$450.0 million over a series of five annual payments with the first annual payment being$30.0 million ; (ii) if bempegaldesleukin receives FDA approval in both first line metastatic melanoma and the SCCHN indication, we would pay SFJ an additional$150.0 million paid over a series of seven annual payments; and (iii) if bempegaldesleukin receives FDA approval in an indication other than first line metastatic melanoma or the SCCHN indication, a one-time payment of$37.5 million . See Note 14 to our Consolidated Financial Statements for additional information. In the short term, we do not anticipate that the effects of the COVID-19 pandemic will have a material effect on our results of operations or financial position since we do not generate significant cash flows from recurring revenues and our revenues are generally less affected by shelter-in place or similar orders. However, if delays caused by the COVID-19 pandemic in commencing and enrolling patients in our clinical trials or those run by our partners result in a delay in completing these trials, our ability to file for regulatory approval and commercialize these products (if approved) and receive associated milestone payments may also be delayed. Due to the potential for adverse developments in the credit markets, we may experience reduced liquidity with respect to some of our investments in marketable securities. These investments are generally held to maturity, which, in accordance with our investment policy, is less than two years. However, if the need arises to liquidate such securities before maturity, we may experience losses on liquidation. To date we have not experienced any liquidity issues with respect to these securities. We believe that, even allowing for potential liquidity issues with respect to these securities and the effect of the COVID-19 pandemic on the financial markets, our remaining cash and investments in marketable securities will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our current business plan is subject to significant uncertainties and risks as a result of, among other factors, clinical and regulatory outcomes for bempegaldesleukin, the sales levels of our products, if and when they are approved, the sales levels for those products for which we are entitled to royalties, clinical program outcomes, whether, when and on what terms we are able to enter into new collaboration transactions, expenses being higher than anticipated, unplanned expenses, cash receipts being lower than anticipated, and the need to satisfy contingent liabilities, including litigation matters and indemnification obligations. The availability and terms of various financing alternatives, if required in the future, substantially depend on many factors including the success or failure of drug development programs in our pipeline. The availability and terms of financing alternatives and any future significant payments from existing or new collaborations depend on the positive outcome of ongoing or planned clinical studies, whether we or our partners are successful in obtaining regulatory authority approvals in major markets, and if approved, the commercial success of these drugs, as well as general capital market conditions. We may pursue various financing alternatives to fund the expansion of our business as appropriate. 64 -------------------------------------------------------------------------------- Table of Contents Our only significant noncancellable contractual commitments relate to our leases. Please see Note 6 to our Consolidated Financial Statements for additional information. Cash flows from operating activities Cash flows used in operating activities for the year endedDecember 31, 2020 totaled$313.3 million , which includes$353.6 million of net operating cash uses and$9.7 million for interest payments on our senior secured notes, partially offset by a$50.0 million in milestones under the BMS Collaboration Agreement. Cash flows used in operating activities for the year endedDecember 31, 2019 totaled$328.7 million , which includes$319.5 million of net operating cash uses and$19.2 million for interest payments on our senior secured notes, partially offset by$10.0 million from our collaboration agreement with Baxalta. We expect that cash flows used in operating activities, excluding upfront, milestone and other contingent payments received, if any, will increase in 2021 compared to 2020 primarily as a result of increased research and development expenses and no offsetting collaboration milestone payments. Cash flows from investing activities We paid$7.3 million and$26.3 million to purchase or construct property, plant and equipment in the years endedDecember 31, 2020 and 2019, respectively. The significant decrease in capital expenditures from 2019 was primarily due to the construction of leasehold improvements in 2019 at ourThird Street facility as more fully described in Note 6 of our Consolidated Financial Statements. Cash flows from financing activities As described in Note 5 to our Consolidated Financial Statements, in the second quarter of 2020, we redeemed the senior secured notes at par and therefore repaid the principal of$250.0 million and accrued interest of$4.8 million . As described in Note 7 to our Consolidated Financial Statements and as described above, onDecember 16, 2020 , we entered into a purchase and sale agreement (the 2020 Purchase and Sale Agreement) with entities managed byHealthcare Royalty Management, LLC , pursuant to which we sold our rights to receive royalty payments arising from the worldwide net sales of MOVANTIK®, ADYNOVATE® and REBINYN®, beginning onOctober 1, 2020 . We received proceeds of$146.3 million , representing the sale of price$150.0 million , net of transaction costs. See Note 7 for additional details on the 2020 Purchase and Sale Agreement, including the capped nature of the arrangement. We received proceeds from issuance of common stock related to our employee option and stock purchase plans of$23.4 million and$23.4 million in the years endedDecember 31, 2020 and 2019, respectively. Critical Accounting Policies The preparation and presentation of financial statements in conformity withU.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 financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources and evaluate our estimates on an ongoing basis. Actual results may differ materially from those estimates under different assumptions or conditions. We have determined that for the periods in this report, the following accounting policies and estimates are critical in understanding our financial condition and the results of our operations. Collaborative Arrangements When we enter into collaboration agreements with pharmaceutical and biotechnology partners, we assess whether the arrangements fall within the scope of Accounting Standards Codification (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. 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 65 -------------------------------------------------------------------------------- Table of Contents 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. 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 record such payments as a reduction of research and development expense or general and administrative expense, based on where we record the underlying expense. Revenue Recognition We recognize license, collaboration and other research revenue based on the facts and circumstances of each contractual agreement and includes recognition of upfront fees and milestone payments. At the inception of each agreement, we determine which promises represent distinct performance obligations, for which management must use significant judgment. Additionally, at inception and at each reporting date thereafter, we must determine and update, as appropriate, the transaction price, which includes variable consideration such as development milestones. We must use judgment to determine when to include variable consideration in the transaction price such that inclusion of such variable consideration will not result in a significant reversal of revenue recognized when the contingency surrounding the variable consideration is resolved. We must also allocate the arrangement consideration to performance obligations based on their relative standalone selling prices, which we generally base on our best estimates and which require significant judgment. For example, in estimating the standalone selling prices for granting licenses for our drug candidates, our estimates may include revenue forecasts, clinical development timelines and costs, discount rates and probabilities of clinical and regulatory success. For performance obligations satisfied over time, we recognize revenue based on our estimates of expected future costs or other measures of progress. Accrued Clinical Trial Expenses We record an accrued expense for the estimated unbilled costs of our clinical study 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 our 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. Advance payments for goods or services that will be used or rendered for future research and development activities are capitalized as prepaid expenses and recognized as expense as the related goods are delivered or the related services are performed. We base our estimates on the best information available at the time. However, additional information may become available to us which may allow us to make a more accurate estimate in future periods. In this event, we may be required to record adjustments to research and development expenses in future periods when the actual level of activity becomes more certain. Such increases or decreases in cost are generally considered to be changes in estimates and will be reflected in research and development expenses in the period identified. Accrued Contract Manufacturing Expenses We record accruals for the estimated unbilled 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 sufficiently defined to be considered the delivery of a good, as evidenced by predictive or contractually required yields, 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 contract. We base our estimates on the best information available at the time. However, additional information may become available to us which may allow us to make a more accurate estimate in future periods. In this event, we may be required to record adjustments to research and development expenses in future periods when the actual level of activity becomes more certain. In certain circumstances, we may be entitled to reductions of amounts due under these arrangements if delivery is delayed or the yield from the production process is lower than expected. Given the uncertainties with such reductions, we may only recognize 66 -------------------------------------------------------------------------------- Table of Contents such decrease when the contract manufacturer agrees with such reduction. Such increases or decreases in cost are generally considered to be changes in estimates and will be reflected in research and development expenses in the period identified. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate and Market Risk The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, 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. A hypothetical 50 basis point increase in interest rates would result in an approximate$2.5 million decrease, less than 1%, in the fair value of our available-for-sale securities atDecember 31, 2020 . This potential change is based on sensitivity analyses performed on our investment securities atDecember 31, 2020 . Actual results may differ materially. The same hypothetical 50 basis point increase in interest rates would have resulted in an approximate$4.3 million decrease, less than 1%, in the fair value of our available-for-sale securities atDecember 31, 2019 . As ofDecember 31, 2020 , we held$1.0 billion of available-for-sale investments, excluding money market funds, with an average time to maturity of five months. To date we have not experienced any liquidity issues with respect to these securities, but should such issues arise, we may be required to hold some, or all, of these securities until maturity. We believe that, even allowing for potential liquidity issues with respect to these securities, our remaining cash, cash equivalents, and investments in marketable securities will be sufficient to meet our anticipated cash needs for at least the next twelve months. Based on our available cash and our expected operating cash requirements, we currently do not intend to sell these securities prior to maturity and it is more likely than not that we will not be required to sell these securities before we recover the amortized cost basis. Accordingly, we believe there are no other-than-temporary impairments on these securities and have not recorded any provisions for impairment. Foreign Currency Risk The majority of our revenue, expense, and capital purchasing activities are transacted inU.S. dollars. However, we have contracts with contract manufacturing organizations inEurope , transacted in the British pound sterling or Euros, and incur costs from sites in a variety of international locations which are compensated in their respective local currencies. Additionally, a portion of our operations consists of research and development activities outsidethe United States , with transactions in the Indian Rupee. Accordingly, we are subject to foreign currency exchange risk for these transactions. Our international operations are subject to risks typical of international operations, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. We do not utilize derivative financial instruments to manage our exchange rate risks. We do not believe that inflation has had a material adverse impact on our revenues or operations in any of the past three years. 67
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
