NEKTAR THERAPEUTICS The following discussion contains forward-looking statements that involve risks and uncertainties. See the section entitled "Forward-Looking Statements" that appears at the beginning of this report. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to those discussed in this section as well as factors described in Part II, Item 1A "Risk Factors." 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 potential therapies for oncology, immunology and virology. We leverage our proprietary and proven chemistry platform to discover and design new drug candidates. These drug candidates utilize our advanced polymer conjugate technology platforms, which are designed to enable the development of new molecular entities that target known mechanisms of action. We continue to make significant investments in building and advancing our pipeline of proprietary drug candidates as we believe that this is the best strategy to build long-term stockholder value. In oncology, we focus on developing medicines in the area of immuno-oncology (I-O), which is a therapeutic approach based on targeting biological pathways that stimulate and sustain the body's immune response in order to fight cancer. In the I-O area, we are executing a clinical development program evaluating bempegaldesleukin (previously referred to as NKTR-214) in combination with Opdivo®, in collaboration with Bristol-Myers Squibb Company (BMS) as well as other independent development work evaluating bempegaldesleukin in combination with other checkpoint inhibitors and agents with potential complementary mechanisms of action. We announced in August of 2019 that the FDA granted a Breakthrough Therapy designation for bempegaldesleukin in combination with Opdivo® for the treatment of patients with untreated unresectable or metastatic melanoma. We expect our research and development expense to continue to grow over the next few years as we expand and execute our broad clinical development program for bempegaldesleukin. 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. Under the BMS Collaboration Agreement, we and BMS share development costs based on each party's relative ownership interest in the compounds included in the regimen. For example, we share clinical development costs for bempegaldesleukin in combination with Opdivo®, BMS 67.5% and Nektar 32.5%. For costs of manufacturing bempegaldesleukin, however, BMS is responsible for 35% and Nektar is responsible for 65% of costs. BMS supplies Opdivo® free of charge. We also share commercialization related costs, 35% BMS and 65% Nektar, which we present in general and administrative expense. Our share of development costs is limited to an annual cap of$125.0 million . To the extent this annual cap is exceeded, BMS reimburses us for the excess, but we recognize our full share of the research and development expense and recognize the reimbursement as a liability. We repay the liability to the extent that our share of development costs is less than the annual cap in a future year, or by reducing a portion of our share of net profits following the first commercial sale of bempegaldesleukin, if approved. The BMS Collaboration Agreement entitles Nektar to receive up to$1.455 billion of clinical, regulatory and commercial launch milestones. Of these milestones, we received a non-refundable, creditable milestone payment of$25.0 million for the first patient, first visit in the registrational muscle-invasive bladder cancer trial, which was achieved 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. ,European Union (EU) andJapan (which reflects the reduction for the$25.0 million non-refundable, creditable milestone for the first patient, first visit in the muscle-invasive bladder cancer trial). As a result, whether and when bempegaldesleukin is approved in any indication will have a significant impact on our future results of operations and financial condition. 25 -------------------------------------------------------------------------------- Table of Contents Outside of the Collaboration Development Plan with BMS, we are conducting and pursuing additional I-O research and development activities evaluating bempegaldesleukin in combination with other agents that have potential complementary mechanisms of action. For example, we are independently studying bempegaldesleukin in combination with Keytruda® in a non-small cell lung cancer (NSCLC) Phase 1/2 trial. In addition, 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. Our strategic objective is to establish bempegaldesleukin as a key component of many I-O combination regimens with the potential to enhance the standard of care in multiple oncology settings. As a result, we expect to continue to make significant and increasing investments exploring the potential of bempegaldesleukin with mechanisms of action that we believe are synergistic with bempegaldesleukin based on emerging clinical development outcomes, scientific findings in cancer biology and preclinical development work. With our non-BMS clinical collaborations for bempegaldesleukin, generally each party supports the collaboration based on its expertise and resources. For example, our co-development collaboration agreement with SFJ includes both financial support from SFJ in the form of up to$150.0 million to fund the Phase 2/3 registrational clinical study of bempegaldesleukin plus Keytruda® in head and neck cancer, as well as operational support from SFJ in managing the clinical trial. In addition, we announced 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. We are also conducting studies of bempegaldesleukin in combination with NKTR-262. NKTR-262 is a small molecule agonist that targets toll-like receptors found on innate immune cells in the body. NKTR-262 is designed to stimulate the innate immune system and promote maturation and activation of antigen-presenting cells, such as dendritic cells, which are critical to induce the body's adaptive immunity and create antigen-specific cytotoxic T cells. NKTR-262 is being developed as an intra-tumoral injection in combination with systemic bempegaldesleukin to induce an abscopal response and achieve the goal of tumor regression in cancer patients treated with both therapies. The Phase 1/2 dose-escalation and expansion trial in patients with solid tumors is currently ongoing. Our next most advanced I-O program is NKTR-255. NKTR-255 is a biologic that targets the IL-15 pathway in order to activate the body's innate and adaptive immunity. Activation of the IL-15 pathway enhances the survival and function of natural killer (NK) cells and induces survival of both effector and CD8+ memory T cells. Recombinant human IL-15 is rapidly cleared from the body and must be administered frequently and in high doses limiting its utility due to toxicity. Through optimal engagement of the IL-15 receptor complex, NKTR-255 is designed to enhance functional NK cell populations and formation of long-term immunological memory, which may lead to sustained and durable anti-tumor immune response. Preclinical findings suggest NKTR-255 has the potential to synergistically combine with antibody-dependent cellular toxicity molecules as well as to enhance CAR-T therapies. We have initiated a Phase 1 dose escalation and expansion clinical study of NKTR-255 in adults with relapsed or refractory non-Hodgkin lymphoma or multiple myeloma, as well as a Phase 1/2 clinical study of NKTR-255 in patients with relapsed or refractory head and neck squamous cell carcinoma or colorectal cancer. At the 2020Society for Immunotherapy of Cancer Annual Meeting, we reported early findings from the Phase 1 dose escalation study that demonstrated expansion of NK and CD8+ T cells in patients with multiple myeloma and non-Hodgkin lymphoma. In addition, we announced onSeptember 21, 2021 , that we had entered into a new oncology clinical collaboration with Merck KGaA Darmstadt,Germany 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. 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 patients. Results from this study demonstrated a multiple-fold increase in regulatory T cells with no change in CD8+ or NK cell levels and no dose-limiting toxicities were observed. We also completed treatment of a Phase 1 multiple-ascending dose trial to evaluate NKTR-358 in patients with systemic lupus erythematosus (SLE). Lilly is conducting two 26 -------------------------------------------------------------------------------- Table of Contents Phase 1b studies in patients with psoriasis and atopic dermatitis, and initiated a Phase 2 study in SLE inOctober 2020 and a Phase 2 study in ulcerative colitis inMarch 2021 . In addition, Lilly is planning to initiate two new Phase 2 studies in two different immune-mediated diseases. In virology, we received onOctober 22, 2020 , FDA clearance for an Investigational New Drug application for bempegaldesleukin to be evaluated in a Phase 1b clinical study in adult patients who have been diagnosed with mild COVID-19 infection. The study design allows us to evaluate whether bempegaldesleukin's adaptive immune-stimulating mechanism to promote priming and proliferation of T cells and NK cells could be useful in the emerging treatment options for COVID-19. Enrollment in the Phase 1b randomized, double-blind, placebo-controlled trial began inNovember 2020 and has been completed. We have also entered into a preclinical research collaboration with Gilead to test the combination of NKTR-255 with therapies in Gilead's antiviral portfolio. The level of our future research and development investment will depend on a number of trends and uncertainties including clinical study outcomes, future studies required to advance programs to regulatory approval, and the economics related to potential future collaborations that may include up-front payments, development funding, milestones, and royalties. Over the next several years, we plan to continue to make significant investments to advance our early drug candidate pipeline. We have historically derived all of our revenue and substantial amounts of operating capital from our collaboration agreements including the BMS Collaboration Agreement, pursuant to which we have recognized$1.11 billion in revenue and recorded$790.2 million in additional paid in capital for shares of our common stock issued in the transaction. While in the near-term we continue to expect to generate substantially all of our revenue from collaboration arrangements, including the potential remaining$1.405 billion in development and regulatory milestones under the BMS collaboration, in the medium- to long-term, our plan is to generate significant commercial revenue from proprietary products, the first of which being bempegaldesleukin, if approved. Since we do not have experience commercializing products or an established commercialization organization, there will be substantial risks and uncertainties in future years as we build commercial, organizational, and operational capabilities. Up 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 a collaboration agreement with Baxalta (a wholly owned-subsidiary of Takeda Pharmaceutical Company Ltd.). MOVANTIK® is an oral, peripherally-acting mu-opioid antagonist for the treatment of opioid-induced constipation in adult patients with non-cancer pain which was approved by the FDA and subsequently launched 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 the EU and many other countries beginning in 2014). ADYNOVATE®, a half-life extension product of Factor VIII was approved by the FDA in late 2015 for use in adults and adolescents, aged 12 years and older, who have Hemophilia A (wherein in the EU, ADYNOVATE® is sold as ADYNOVI® and was approved by health authorities in the EU 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 return sale arrangement to entities managed byHealthcare Royalty Management, LLC (collectively, HCR) under a purchase and sale agreement (the 2020 Purchase and Sale Agreement) entered into onDecember 16, 2020 . With regard to the capped return sale arrangement, the 2020 Purchase and Sale Agreement will automatically expire, and HCR's right to receive the sold royalties, will cease when HCR has received payments equaling$210.0 million (the 2025 Threshold), if the 2025 Threshold is achieved on or prior 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 marketing efforts by our collaboration partners, uncertainties associated with obtaining and enforcing patents, the lengthy and expensive regulatory approval process and competition from other products. For a discussion of these and some of the other key risks and uncertainties affecting our business, see Item 1A "Risk Factors." While the approved drugs and clinical development programs described above are key elements of our future success, we believe it is critically important that we continue to make substantial investments in our earlier-stage drug candidate pipeline. We have several drug candidates in earlier stage clinical development or being explored in research that we are preparing to advance into the clinic in future years. We are also advancing several other drug candidates in preclinical development in the areas of I-O, immunology, and other therapeutic indications. We believe that our substantial investment in research and development has the potential to create significant value if one or more of our drug candidates demonstrates positive clinical results, receives 27 -------------------------------------------------------------------------------- Table of Contents 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 andIndia , initially took steps such as restricting travel, closing schools, and issuing shelter-in-place orders to slow or moderate the spread of the virus. More recently, states and countries have adopted individualized approaches to respond to the COVID-19 pandemic. In particular, the emergence of new variants of the coronavirus, such as the Delta variant, and local resurgences in number and rates of infections, and the further spread of the virus may result in the return of prior restrictions or the institution of restrictions in the affected areas, which could have an adverse effect on our business, including our clinical trial timelines. We have been monitoring our supply chains for any disruptions or constraints caused by the COVID-19 pandemic. To date, we have not experienced any 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. It remains unclear how long the negative impacts caused by the coronavirus will continue into the future. Currently, our operations in research, manufacturing and maintenance that occur within our facilities are continuing in accordance with applicable guidelines and orders. Across all our locations, we have instituted a temporary work from home policy for office personnel who do not need to work on site to maintain productivity. We have recently allowed these employees to voluntarily return to work on site with appropriate health and safety measures. The safety and well-being of our employees, and the patients and healthcare providers in our clinical trial programs, are of first and foremost importance to us. We believe that the safety measures we are taking and instructing our contractors to take in response to the COVID-19 pandemic meet or exceed the guidance and requirements issued from government and public health officials. We continue to monitor our operations and applicable government recommendations in light of new developments in the ongoing COVID-19 pandemic. We and our partners are currently engaged in the clinical testing of our proprietary drug candidates and the COVID-19 pandemic introduces significant challenges to our clinical development programs which are central to our business. The evolving situation around the COVID-19 pandemic, along with the resulting public health guidance measures that have been put into place, have thus far had varying impacts on the clinical testing of our proprietary drug candidates depending on the therapeutic indication, geographic distribution of clinical trial sites, the clinical trial stage, and, in certain cases, our partners' general corporate approach to the COVID-19 pandemic. The rapid development and fluidity of the COVID-19 pandemic precludes any firm estimates as to the ultimate effect this disease will have on our clinical trials, our operations and our business. As a result, any current assessment of the effects of the COVID-19 pandemic, including the impact of this disease on our specific clinical programs as discussed below, is difficult to predict and subject to change. 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 the COVID-19 pandemic has not had a significant impact on timelines 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 the combination of 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 Phase 1/2 clinical study of NKTR-262 in patients with solid tumors, this study has largely remained on schedule 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 quarter of 2022. 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. 28 -------------------------------------------------------------------------------- Table of Contents 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 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 its 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 has started a Phase 2 study in moderate to severe lupus patients and a 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, we have made and continue to make progress on identification of new drug candidates throughout the COVID-19 pandemic as a result of our research-based employees conducting laboratory work in our research facilities (which currently continues to be permitted under the applicable government ordinances). 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. 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. 29 -------------------------------------------------------------------------------- Table of Contents Key Developments and Trends in Liquidity and Capital Resources We estimate that we have working capital to fund our current business plans through at least the next twelve months. As ofSeptember 30, 2021 , we had approximately$955.3 million in cash and investments in marketable securities. Results of Operations Three and Nine Months EndedSeptember 30, 2021 and 2020 Revenue (in thousands, except percentages) Percentage Increase/ Increase/ Three Months Ended September (Decrease) (Decrease) 30, 2021 vs. 2020 2021 vs. 2020 2021 2020 Product sales$ 5,194 $ 5,691 $ (497) (9) % Royalty revenue - 12,289 (12,289) (100) % Non-cash royalty revenue related to sales of future royalties 19,413 10,422 8,991 86 % License, collaboration and other revenue 314 1,631 (1,317) (81) % Total revenue$ 24,921 $ 30,033 $ (5,112) (17) % Percentage Increase/ Increase/ (Decrease) (Decrease) Nine Months Ended September 30, 2021 vs. 2020 2021 vs. 2020 2021 2020 Product sales$ 17,835 $ 14,620 $ 3,215 22 % Royalty revenue - 31,411 (31,411) (100) % Non-cash royalty revenue related to sales of future royalties 58,667 28,001 30,666 >100% License, collaboration and other revenue 396 55,421 (55,025) (99) % Total revenue$ 76,898 $ 129,453 $ (52,555) (41) % 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 increased for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 primarily due to an increase in product demand from our collaboration partners. We expect product sales for the full year of 2021 to increase compared to 2020 due to increased demand from our collaboration partners. Royalty Revenue As discussed in Note 5 to our Condensed Consolidated Financial Statements, onDecember 16, 2020 , we entered into the 2020 Purchase and Sale Agreement with entities managed byHealthcare Royalty Management, LLC (collectively, HCR), under which we sold to HCR certain of our rights to receive royalty payments arising on worldwide net sales of MOVANTIK®, ADYNOVATE® and REBINYN® beginningOctober 1, 2020 . As a result, we recognized royalty revenue for these products for the three and nine months endedSeptember 30, 2020 , and recognized these royalties as non-cash royalty revenue for the three and 30 -------------------------------------------------------------------------------- Table of Contents nine months endedSeptember 30, 2021 . Please see Note 5 to our Condensed 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 Sales 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 three months endedMarch 31, 2020 , we recognized$25.0 million in license, collaboration and other revenue for the achievement of the first patient, first visit in the registrational muscle-invasive bladder cancer trial under the BMS Collaboration Agreement. During the three months endedJune 30, 2020 , we recognized$25.0 million in license, collaboration and other revenue for the milestone for the first patient, first visit in the registrational adjuvant melanoma trial, also under the BMS Collaboration Agreement. Accordingly, license, collaboration and other revenue decreased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 due to the recognition of these milestones. We expect that our license, collaboration and other revenue will decrease significantly for the full year of 2021 compared to 2020 as a result of the recognition of these milestones during 2020. The timing and future success of our drug development programs and those of our collaboration partners are subject to a number of risks and uncertainties. See Item 1A. Risk Factors for discussion of the risks associated with the complex nature of our collaboration agreements. Cost of Goods Sold and Product Gross Margin (in thousands, except percentages) Percentage Increase/ Increase/ (Decrease) (Decrease) Three Months Ended September 30, 2021 vs. 2020 2021 vs. 2020 2021 2020 Cost of goods sold$ 5,311 $ 5,570 $ (259) (5) % Product gross profit (1) (117) 121 (238) <(100%) Product gross margin (2) % 2 % Percentage Increase/ Increase/ (Decrease) (Decrease) Nine Months Ended September 30, 2021 vs. 2020 2021 vs. 2020 2021 2020 Cost of goods sold$ 18,734 15,154$ 3,580 24 % Product gross profit (1) (899) (534) (365) (68) % Product gross margin (5) %
(4) % (1) Percentage change represents a worsening, since the negative gross margin has increased.
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
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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 was negative for the three and nine months ended
September 30, 2021 and the nine months ended September 30, 2020 . 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 three and nine months ended September 30, 2021
and 2020, 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
manufacturing arrangement described above.
Research and Development Expense (in thousands, except percentages)
Percentage
Increase/ Increase/
(Decrease) (Decrease)
Three Months Ended September 30, 2021 vs. 2020 2021 vs. 2020
2021 2020
Research and development expense $ 103,738 $ 100,531 $ 3,207 3 %
Percentage
Increase/ Increase/
(Decrease) (Decrease)
Nine Months Ended September 30, 2021 vs. 2020 2021 vs. 2020
2021 2020
Research and development expense $ 300,655 $ 305,954 $ (5,299) (2) %
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 was generally consistent for the three and nine
months ended September 30, 2021 as compared to the three and nine months ended
September 30, 2020 , respectively. Research and development expense increased for
our independent development of bempegaldesleukin outside of the BMS
Collaboration Agreement, including our registrational Phase 2/3 trial in head
and neck cancer under our co-development agreement with SFJ and our Phase 1b
trial in COVID-19. Research and development expense decreased under our BMS
Collaboration Agreement because we have fully enrolled our registrational trials
in first-line cisplatin ineligible, PD-L1 low, locally advanced or metastatic
urothelial cancer and first-line metastatic renal cell carcinoma and because we
completed certain manufacturing activities for bempegaldesleukin in 2020. These
decreases were partially offset by an increase in expense for our Phase 3
adjuvant melanoma trial under the BMS Collaboration Agreement. 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. As a result of the decrease in expense under the BMS
Collaboration Agreement, the net reductions recorded to research and development
expense for BMS's reimbursements of our costs decreased from $29.2 million for
the three months ended September 30, 2020 to $24.3 million for the three months
ended September 30, 2021 , and from $93.8 million for the nine months ended
September 30, 2020 to $76.5 million for the nine months ended September 30,
2021 . Please see Note 8 to our Condensed Consolidated Financial Statements for
additional information regarding our BMS Collaboration Agreement.
Additionally, research and development expense increased for our development of
NKTR-255 in our Phase 1/2 studies in liquid and solid tumors, partially offset
by a decrease in development costs for NKTR-358. We completed certain Phase 1
clinical development and drug product development deliverables for NKTR-358 in
2020, for which we were responsible for 100% of costs. Phase 1B and Phase 2
development continues, for which we are responsible for 25% of costs and Lilly
is responsible for 75% of costs.
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We expect research and development expense for 2021 to slightly increase
compared to 2020. In addition to our studies of bempegaldesleukin both within
and outside of the BMS Collaboration Agreement, 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 are evaluating in clinical
development during 2021, 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 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;
•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 and 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
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.
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General and Administrative Expense (in thousands, except percentages)
Percentage
Increase/ Increase/
Three Months Ended September (Decrease) (Decrease)
30, 2021 vs. 2020 2021 vs. 2020
2021 2020
General and administrative expense $ 29,468 $ 26,982 $ 2,486 9 %
Percentage
Increase/ Increase/
Nine Months Ended September (Decrease) (Decrease)
30, 2021 vs. 2020 2021 vs. 2020
2021 2020
General and administrative expense $ 90,702 $ 77,546 $ 13,156 17 %
General and administrative expense includes the cost of administrative staffing,
commercial, finance and legal activities. General and administrative expense
increased during the three and nine months ended September 30, 2021 compared
with the three and nine months ended September 30, 2020 , primarily due to
increased personnel and third-party costs as we begin a stage-appropriate build
of our commercial capability to co-commercialize bempegaldesleukin with BMS. We
expect general and administrative expenses in the full year of 2021 to increase
compared to 2020 for the same reason.
Impairment of Assets and Other Costs for Terminated Program (in thousands,
except percentages)
Percentage
Increase/ Increase/
(Decrease) (Decrease)
Three Months Ended September 30, 2021 vs. 2020 2021 vs. 2020
2021 2020
Impairment of assets and other costs for
terminated program $ - $ - $ - - %
Percentage
Increase/ Increase/
(Decrease) (Decrease)
Nine Months Ended September 30, 2021 vs. 2020 2021 vs. 2020
2021 2020
Impairment of assets and other costs for
terminated program $ - $ 45,189 $ (45,189) (100) %
On January 14, 2020 , the joint FDA Anesthetic Drug Products Advisory Committee
and Drug Safety and Risk Management Committee did not recommend approval of our
NDA for NKTR-181. As a result, we withdrew our NDA and decided to make no
further investments in this program. As a result, in the three months ended
March 31, 2020 , we wrote off $19.7 million of advance payments to contract
manufacturers for commercial batches of NKTR-181. We also incurred $25.5 million
of additional costs, primarily for non-cancellable commitments to our contract
manufacturers and severance costs.
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Non-Cash Royalty Revenue and Non-Cash Interest Expense
Increase/ Percentage Increase/
Three Months Ended September (Decrease) (Decrease)
30, 2021 vs. 2020 2021 vs. 2020
2021 2020
2012 Purchase and Sale Agreement:
Non-cash royalty revenue related to sale of
future royalties $ 8,904 $ 10,422 $ (1,518) (15) %
Non-cash interest expense on liability
related to sale of future royalties $ 7,564 $ 8,425 $ (861) (10) %
2020 Purchase and Sale Agreement:
Non-cash royalty revenue related to sale of
future royalties $ 10,509 $ - $ 10,509 >100%
Non-cash interest expense on liability
related to sale of future royalties $ 5,237 $ - $ 5,237 >100%
Total non-cash royalty revenue related to
sale of future royalties $ 19,413 $ 10,422 $ 8,991 86 %
Total non-cash interest expense on
liability related to sale of future
royalties $ 12,801 $ 8,425 $ 4,376 52 %
Increase/ Percentage Increase/
(Decrease) (Decrease)
Nine Months Ended September 30, 2021 vs. 2020 2021 vs. 2020
2021 2020
2012 Purchase and Sale Agreement:
Non-cash royalty revenue related to sale of
future royalties $ 27,744 $ 28,001 $ (257) (1) %
Non-cash interest expense on liability
related to sale of future royalties $ 23,042 $ 22,084 $ 958 4 %
Interest rates - end of period presented
Implicit interest rate over the life of the
agreement 20.2 % 20.2 %
Prospective effective interest rate 48.0 % 48.0 %
2020 Purchase and Sale Agreement:
Non-cash royalty revenue related to sale of
future royalties $ 30,923 $ - $ 30,923 >100%
Non-cash interest expense on liability
related to sale of future royalties $ 16,144 $ - $ 16,144 >100%
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 $ 58,667 $ 28,001 $ 30,666 >100%
Total non-cash interest expense on
liability related to sale of future
royalties $ 39,186 $ 22,084 $ 17,102 77 %
As discussed in Note 5 to our Condensed Consolidated Financial Statements, we
recognize non-cash royalty revenue for the 2012 Purchase and Sale Agreement and
the 2020 Purchase and Sale Agreement.
2012 Purchase and Sale Agreement
Non-cash royalty revenue for the 2012 Purchase and Sale Agreement decreased for
the three months ended September 30, 2021 as compared to the three months ended
September 30, 2020 and is consistent between the nine months ended September 30,
2021 and September 30, 2020 . Non-cash interest expense for the 2012 Purchase and
Sales Agreement decreased for the three months ended September 30, 2021 compared
to the three months ended September 30, 2020 but increased for the nine months
ended September 30, 2021 as compared to the nine months ended September 30,
2020 . When forecasted future
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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 estimated
implicit rate increased from the six months ended June 30, 2020 to the three
months ended September 30, 2020 due to an increase in estimated future net sales
of CIMZIA®, which resulted in an increase in the prospective effective interest
rate that we use to recognized non-cash interest expense. We have not
subsequently adjusted the implicit or prospective interest rates since this
increase in the three months ended September 30, 2020 .
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 $52.8 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 $61.2 million of
the net proceeds, since RPI 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 5 to our Condensed Consolidated Finance Statements and
above under Royalty Revenue, we sold our rights to receive royalties for
MOVANTIK®, ADYNOVATE® and REBINYN® for sales beginning on October 1, 2020 , and
therefore we recognized non-cash royalty revenue and non-cash interest expense
for the three and nine months ended September 30, 2021 , but did not recognize
non-cash royalty revenue and non-cash interest expense for the three and nine
months ended September 30, 2020 . Similarly, non-cash royalty revenue and
non-cash interest expense will increase for 2021 compared to 2020. Our estimate
of the imputed interest rate reflects our estimates for sales of MOVANTIK®,
ADYNOVATE® and REBINYN®, which result in meeting the 2025 Threshold. Because the
2025 Threshold of $210.0 million and the increase in the threshold to $240.0
million (if the 2025 Threshold is not timely 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.
Change in fair value of development derivative liability
Increase/ Percentage Increase/
(Decrease) (Decrease)
Three Months Ended September 30, 2021 vs. 2020 2021 vs. 2020
2021 2020
Change in fair value of development
derivative liability $ 3,328 $ - $ 3,328 >100%
Increase/ Percentage Increase/
(Decrease) (Decrease)
Nine Months Ended September 30, 2021 vs. 2020 2021 vs. 2020
2021 2020
Change in fair value of development
derivative liability $ 7,640 $ - $ 7,640 >100%
As discussed in Note 4 to our Condensed Consolidated Financial Statements, we
remeasure the development derivative liability under our co-development
agreement with SFJ to fair value at each reporting date. The change in fair
value recorded for the three and nine months ended September 30, 2021 primarily
reflects the accretion of the scenario-based probability-adjusted discounted
cash flows of our obligation to potentially pay Success Payments to SFJ using
our imputed borrowing rate of 12.2%, net of the accretion of SFJ's obligation to
fund the SCCHN Clinical Trial, using SFJ's estimated borrowing rate of 1.0%. We
review our estimates at each reporting period, and, in particular, in future
periods, as information becomes available, such as the applicable clinical trial
results and FDA approval decisions, we will re-evaluate our probability of
success estimates related to achieving FDA approval for bempegaldesleukin in the
Melanoma Indication, the SCCHN Indication and one additional indication, and
will record a corresponding increase or decrease in the fair value of the
development derivative liability. Additionally, in future periods, we may adjust
our estimate of the probability of a successful interim futility analysis and we
will record a corresponding decrease or increase to the fair value of the
development derivative liability, reflecting the increase or decrease (as
applicable) in the likelihood of SFJ's resulting obligation to complete the full
SCCHN Clinical Trial. Such changes in the probabilities of success may result in
a material expense or benefit in the period when the information is received.
However,
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based on current clinical timelines, we do not expect material changes to our
probability of success assumptions during 2021, and, therefore, we expect to
recognize primarily the accretion expense on the discounted cash flows discussed
above. See Note 4 for additional information about the development derivative
liability.
Interest Income and Other Income (Expense), net (in thousands, except
percentages)
Percentage
Increase/ Increase/
(Decrease) (Decrease)
Three Months Ended September 30, 2021 vs. 2020 2021 vs. 2020
2021 2020
Interest income and other income (expense),
net $ 131 $ 2,910 $ (2,779) (95) %
Percentage
Increase/ Increase/
(Decrease) (Decrease)
Nine Months Ended September 30, 2021 vs. 2020 2021 vs. 2020
2021 2020
Interest income and other income (expense),
net $ 2,388 $ 16,453 $ (14,065) (85) %
Interest income and other income (expense) decreased for the three and nine
months ended September 30, 2021 compared to the three and nine months ended
September 30, 2020 due to lower investment balances which have been utilized to
fund our operations as well as decreases in market interest rates. 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 for these same
reasons.
Interest Expense (in thousands, except percentages)
Percentage
Increase/ Increase/
(Decrease) (Decrease)
Three Months Ended September 30, 2021 vs. 2020 2021 vs. 2020
2021 2020
Interest expense $ - $ - $ - - %
Percentage
Increase/ Increase/
(Decrease) (Decrease)
Nine Months Ended September 30, 2021 vs. 2020 2021 vs. 2020
2021 2020
Interest expense $ - $ 6,851 $ (6,851) (100) %
Interest expense during the nine months ended September 30, 2020 consisted of
interest from our senior secured notes. In October 2015 , we issued $250.0
million in aggregate principal amount of 7.75% senior secured notes, which we
repaid on April 13, 2020 . As a result, we incurred no interest expense after the
repayment date.
Liquidity and Capital Resources
We have financed our operations primarily through revenue from product sales,
royalties and strategic collaboration agreements, as well as public offering and
private placements of debt and equity securities. At September 30, 2021 , we had
approximately $955.3 million in cash and investments in marketable securities.
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 this Form 10-Q. 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. In April 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. In July 2017 , we entered into a collaboration
agreement for NKTR-358 with
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Lilly, under which we received a $150.0 million upfront payment. Pursuant to the
2020 Purchase and Sale Agreement, in December 2020 we received $150.0 million
from HCR in exchange for certain of our rights to receive royalty payments
arising in respect of worldwide net sales of specified products including
ADYNOVATE®, MOVANTIK®, and REBINYN®. 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 the U.S. , EU and Japan (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 in March 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.
On February 12, 2021 , we entered into a co-development agreement with SFJ
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 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). 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 the 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 , with the earliest
possible payment expected to occur in 2024, subject to the substantial
completion of the SCCHN Clinical Trial; (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 4 to our Condensed 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.
We currently have an effective shelf registration statement on Form S-3 (the
2021 Shelf Registration Statement) on file with the Securities and Exchange
Commission , which expires in March 2024 . The 2021 Shelf Registration Statement
currently permits the offering, issuance and sale by us of up to an aggregate
offering price of $300.0 million of common stock, preferred stock, debt
securities and warrants in one or more offerings and in any combination, all of
which may be offered, issued and sold in "at-the-market" sales pursuant to an
equity distribution agreement with Cowen and Company, LLC (the Equity
Distribution Agreement). No securities have been sold under the 2021 Shelf
Registration Statement or the Equity Distribution Agreement.
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Table of Contents Cash flows from operating activities Cash flows used in operating activities for the nine months endedSeptember 30, 2021 totaled$261.1 million . Cash flows used in operating activities for the nine months endedSeptember 30, 2020 totaled$214.7 million , which includes$255.0 million of net operating cash uses as well as$9.7 million for interest payments on our senior secured notes, partially offset by the$25.0 million milestone payment from BMS for the achievement of the first patient, first visit in the registrational muscle invasive bladder cancer trial and the$25.0 million milestone payment from BMS for the achievement of the first patient, first visit in the registrational adjuvant melanoma trial. We expect that cash flows used in operating activities, excluding upfront, milestone and other contingent payments received, will increase in the full year of 2021 compared to 2020 primarily as a result of increased research and development expenses. Cash flows from investing activities During the nine months endedSeptember 30, 2021 , the maturities and sales of our investments, net of purchases, totaled$91.7 million , which we used to fund our operations. During the nine months endedSeptember 30, 2020 , the maturities and sales of our investments, net of purchases, totaled$409.0 million , which we used to fund our operations and repay our senior notes. We paid$9.1 million and$5.5 million for the purchase or construction of property, plant and equipment in the nine months endedSeptember 30, 2021 and 2020, respectively. Cash flows from financing activities We received proceeds from issuance of common stock related to our employee option and stock purchase plans of$31.4 million and$20.7 million in the nine months endedSeptember 30, 2021 and 2020, respectively. Additionally, during the nine months endedSeptember 30, 2021 , we received$2.3 million from SFJ pursuant to our co-development agreement. As noted above, onApril 13, 2020 , we repaid the principal of our senior notes totaling$250.0 million . Critical Accounting Policies and Estimates 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. We evaluate our estimates on an ongoing basis. Actual results may differ from those estimates under different assumptions or conditions. Other than the development derivative liability under our co-development agreement with SFJ as described in Note 4 to our Condensed Consolidated Financial Statements, there have been no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 .
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