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 II, Item 1A "Risk Factors."
Overview
Strategic Direction of Our Business
Nektar Therapeutics is a research-based biopharmaceutical company that discovers and develops innovative new medicines in areas of high unmet medical need. Our research and development pipeline of new investigational drugs includes potential therapies for oncology and immunology. We leverage our proprietary and proven chemistry platform to discover and design new drug candidates. These drug candidates utilize our advanced polymer conjugate technology platforms, which are designed to enable the development of new molecular entities that target known mechanisms of action. We continue to make significant investments in new drug discovery and advancing our pipeline of drug candidates as we believe that this is the best strategy to build long-term stockholder value. In oncology, we focus on developing medicines in immuno-oncology (I-O), which is a therapeutic approach based on targeting biological pathways that stimulate and sustain the body's immune response in order to fight cancer. In the I-O area, we executed a broad clinical development program to develop bempegaldesleukin (formerly NKTR-214) in combination with Opdivo® (nivolumab) in collaboration with Bristol-Myers Squibb Company (BMS) under our Strategic Collaboration Agreement. We also conducted independent development work evaluating bempegaldesleukin in combination with other checkpoint inhibitors and agents with potential complementary mechanisms of action, including studies evaluating bempegaldesleukin combination with Keytruda® (pembrolizumab). InApril 2022 , we and BMS jointly announced that the companies would be ending the global clinical development program for bempegaldesleukin in combination with Opdivo® and discontinue all ongoing studies in our collaboration with BMS. We also decided to discontinue all studies of bempegaldesleukin in combination with Keytruda®, as well as our studies of NKTR-262, which was being evaluated in combination with bempegaldesleukin. InApril 2022 , we announced new strategic reorganization and cost restructuring plans (together, the Restructuring Plan) focused on prioritizing key research and development efforts that will be most impactful to the Company's future, including our NKTR-255 and rezpegaldesleukin (previously referred to as NKTR-358) programs and several core research programs. NKTR-255 is a biologic that targets the IL-15 pathway in order to activate the body's innate and adaptive immunity. Activation of the IL-15 pathway enhances the survival and function of natural killer (NK) cells and induces survival of both effector and CD8+ memory T cells. Recombinant human IL-15 is rapidly cleared from the body and must be administered frequently and in high doses limiting its utility due to toxicity. Through optimal engagement of the IL-15 receptor complex, NKTR-255 is designed to enhance functional NK cell populations and formation of long-term immunological memory, which may lead to sustained and durable anti-tumor immune response. Preclinical findings suggest NKTR-255 has the potential to synergistically combine with antibody-dependent cellular cytotoxicity molecules as well as to enhance CAR-T therapies. We have initiated a Phase 1 dose escalation and expansion clinical study of NKTR-255 in adults with relapsed or refractory non-Hodgkin lymphoma or multiple myeloma, as well as a Phase 1/2 clinical study of NKTR-255 in patients with relapsed or refractory head and neck squamous cell carcinoma or colorectal cancer. We are continuing our oncology clinical collaboration with Merck KGaA and Pfizer Inc. to evaluate the maintenance regimen of NKTR-255 in combination with avelumab, a PD-L1 inhibitor, in patients with locally advanced or metastatic urothelial carcinoma in the Phase II JAVELIN Bladder Medley study. We are also designing a Nektar-sponsored Phase 2/3 study to combine NKTR-255 with approved autologous CAR-T therapies in relapsed/refractory large B-cell lymphoma, to be initiated in the first quarter of 2023. In immunology, we recognize that a large number of diseases and conditions are caused by an imbalance in the body's immune system. Pharmaceutical agents designed to restore balance to the immune system can be used to help patients suffering from immunology-based conditions, such as autoimmune diseases and inflammatory diseases. Our drug candidate rezpegaldesleukin is being developed as a once or twice monthly self-administered injection for a number of autoimmune diseases and inflammatory diseasesis, and is designed to optimally target the IL-2 receptor complex in order to stimulate proliferation and growth of regulatory T cells. In 2017, we entered into a worldwide license agreement with Eli Lilly and Company (Lilly) to develop and commercialize rezpegaldesleukin, pursuant to which we received an initial payment of$150.0 million and are eligible for up to an additional$250.0 million for development and regulatory milestones. We have completed our responsibilities for Phase 1 clinical development and certain drug product development and supply activities. We also share Phase 2 development costs with Lilly, with Lilly responsible for 75% and Nektar responsible for 25% of these costs. Lilly is responsible for the costs of Phase 3 development, but we retain the option to contribute up to 25% of the costs of Phase 3 development on an indication-by-indication basis in order for us to achieve the maximum royalty level under the Lilly Agreement, and further, if approved, we will 23
--------------------------------------------------------------------------------
Table of Contents
have the opportunity to receive a royalty rate up to the low twenties percent based upon our Phase 3 development cost contribution and the level of annual global product sales. We have completed a Phase 1 dose-finding trial of rezpegaldesleukin to evaluate single-ascending doses of rezpegaldesleukin in approximately 100 healthy patients. We also completed treatment of a Phase 1 multiple-ascending dose trial to evaluate rezpegaldesleukin in patients with systemic lupus erythematosus (SLE). Lilly is conducting two Phase 1b studies in patients with psoriasis and atopic dermatitis, and based on positive interim Phase 1b results in atopic dermatitis announced inDecember 2021 , Lilly is planning to initiate a Phase 2 study in atopic dermatitis. Lilly also initiated a Phase 2 study in SLE inOctober 2020 and a Phase 2 study in ulcerative colitis inMarch 2021 . InApril 2022 , we announced that Lilly had informed us that an interim analysis in the Phase 2 study in ulcerative colitis led to the discontinuation of further development in this indication. Lilly also plans to initiate another Phase 2 study in another immune-mediated disease to potentially start in 2023. We have historically derived all of our revenue and substantial amounts of operating capital from our collaboration agreements. In addition to our collaborations with BMS and Lilly, we have received upfront and milestone payments under a number of other previous collaboration agreements, several of which have resulted in approved drugs, for which we may continue to manufacture the polymer reagents used in the production of the drug products and may be entitled to royalties for net sales of these approved drugs. As ofDecember 31, 2020 , however, we have sold the majority of our rights to receive royalties under these arrangements, including: •2012 Purchase and Sale Agreement: In 2012, we sold all of our rights to receive royalties from CIMZIA® (for the treatment of Crohn's disease and other autoimmune indications) and MIRCERA® (for the treatment of anemia associated with chronic kidney disease) under our collaborations withUCB Pharma andF. Hoffmann-La Roche Ltd , respectively, toRPI Finance Trust (RPI), an affiliate of Royalty Pharma for$124.0 million . •2020 Purchase and Sale Agreement: InDecember 2020 , we sold our rights, subject to a cap, to receive royalties from MOVANTIK® / MOVENTIG® (for the treatment of opioid-induced constipation), ADYNOVATE® / ADYNOVI® (a half-life extension product of Factor VIII) and other hemophilia products, under our arrangements withAstraZeneca AB ,Baxalta, Inc. (a wholly owned-subsidiary of Takeda Pharmaceutical Company Ltd.), and Novo Nordisk A/S, respectively, for$150.0 million to entities managed by HealthCare Royalty Management (HCR) under a capped sale arrangement, such that all future royalties return to Nektar if HCR receives$210.0 million in royalties byDecember 31, 2025 (the 2025 Threshold) or$240.0 million if the 2025 Threshold is not met. While in the near-term we continue to expect to generate substantially all of our revenue from collaboration arrangements, our long-term plan is to generate significant commercial revenue from proprietary products. Over the next several years, we plan to continue to make significant investments to advance our early drug candidate pipeline. We have several drug candidates in earlier stage clinical development or are being explored in research and that we are preparing to advance into clinical trials in future years. We are cultivating several research programs, including a collaboration with Biolojic Design to develop a unique bivalent antibody targeting TNFR2 and our NKTR-288 research program. NKTR-288 is a PEG conjugate of the protein interferon gamma that is designed utilizing a site-specific conjugation approach to modify binding of interferon gamma with one of its substrates and to optimize the pharmacodynamic duration of interferon gamma signaling. NKTR-288 has potential applications in a number of therapeutic indications in oncology and other infectious diseases. We believe that our substantial investment in research and development has the potential to create significant value if one or more of our drug candidates demonstrates positive clinical results, receives regulatory approval in one or more major markets and achieves commercial success. Our business is subject to significant risks, including the risks inherent in our development efforts, the results of our clinical trials, our dependence on the marketing efforts by our collaboration partners, uncertainties associated with obtaining and enforcing patents, the lengthy and expensive regulatory approval process and competition from other products. Drug research and development is an inherently uncertain process with a high risk of failure at every stage prior to approval. The timing and outcome of clinical trial results are extremely difficult to predict. Clinical development successes and failures can have a disproportionately positive or negative impact on our scientific and medical prospects, financial condition and prospects, results of operations and market opportunities. For a discussion of these and some of the other key risks and uncertainties affecting our business, see Item 1A "Risk Factors."
Effects of the COVID-19 Pandemic
We continue to actively monitor the ongoing COVID-19 pandemic and applicable
government recommendations in light of new developments. Currently, our
operations in research, manufacturing and maintenance that occur within our
facilities are continuing in accordance with applicable guidelines and orders.
Across all our locations, we have instituted a temporary work from home policy
for office personnel who do not need to work on site to maintain productivity
and we allow employees to voluntarily return to work on site with appropriate
health and safety measures. 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
24--------------------------------------------------------------------------------
Table of Contents
issued from government and public health officials. We also continue to monitor our supply chains for any disruptions or constraints caused by the COVID-19 pandemic. To date, we have not experienced any significant impacts on our supply, but ongoing global shortages in labor, raw materials and equipment could limit our ability to manufacture our products or to supply drug candidates for our clinical trials, or delay our research and development efforts. We and our partners are currently engaged in the clinical testing of our drug candidates and the COVID-19 pandemic introduces challenges to our clinical development programs which are central to our business. Nektar's Phase 1 clinical study of NKTR-255 in patients with relapsed/refractory hematologic malignancies has enrolled slower than anticipated due to the challenges caused by the COVID-19 pandemic. While we are not currently aware of significant delays by our partners and collaborators caused by the COVID-19 pandemic on clinical trials involving our drug candidates, any current assessments of the effects of the COVID-19 pandemic on our clinical programs are difficult to predict and subject to change and, with regard to individual clinical trial sites within these studies, will likely vary by the geographic region in which they are located.
We cannot predict what the overall impact the COVID-19 pandemic will be on our business and it could potentially adversely affect our business, financial condition, operations and prospects.
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. AtSeptember 30, 2022 , we had approximately$546.4 million in cash and investments in marketable securities. Results of Operations
Three and Nine Months Ended
Revenue (in thousands, except percentages)
Percentage
Increase/ Increase/
Three Months Ended September (Decrease) (Decrease)
30, 2022 vs. 2021 2022 vs. 2021
2022 2021
Product sales $ 4,969 $ 5,194 $ (225) (4) %
Non-cash royalty revenue related to sales of
future royalties 18,342 19,413 (1,071) (6) %
License, collaboration and other revenue 314 314 - - %
Total revenue $ 23,625 $ 24,921 $ (1,296) (5) %
Percentage
Increase/ Increase/
(Decrease) (Decrease)
Nine Months Ended September 30 2022 vs. 2021 2022 vs. 2021
2022 2021
Product sales $ 15,969 $ 17,835 $ (1,866) (10) %
Non-cash royalty revenue related to sales of
future royalties 52,167 58,667 (6,500) (11) %
License, collaboration and other revenue 1,896 396 1,500 >100%
Total revenue $ 70,032 $ 76,898 $ (6,866) (9) %
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
25--------------------------------------------------------------------------------
Table of Contents
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 nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 primarily due to a decrease in product demand from our collaboration partners. We expect product sales for the full year of 2022 to be marginally lower than 2021.
Non-cash Royalty Revenue Related to Sales of Future Royalties
For a discussion of our Non-cash royalty revenue, please see our discussion below in "Non-Cash Royalty Revenue and Non-Cash Interest Expense."
License, Collaboration and Other Revenue
License, collaboration and other revenue includes the recognition of upfront payments, milestone and other contingent payments received in connection with our license and collaboration agreements and certain research and development activities. The level of license, collaboration and other revenue depends in part upon the estimated recognition period of the upfront payments allocated to continuing performance obligations, the achievement of milestones and other contingent events, the continuation of existing collaborations, the amount of research and development work, and entering into new collaboration agreements, if any. During the nine months endedSeptember 30, 2022 , we recognized$1.5 million for a license agreement, under which we are entitled to no further consideration. As a result of the recognition of this revenue in the nine months endedSeptember 30, 2022 , we expect license, collaboration and other revenue for 2022 to increase compared to 2021. The timing and future success of our drug development programs and those of our collaboration partners are subject to a number of risks and uncertainties. See Item 1A. Risk Factors for a discussion of the risks associated with the complex nature of our collaboration agreements. Cost of Goods Sold and Product Gross Margin (in thousands, except percentages) Percentage Increase/ Increase/ (Decrease) (Decrease) Three Months Ended September 30, 2022 vs. 2021 2022 vs. 2021 2022 2021 Cost of goods sold$ 4,972 $ 5,311 $ (339) (6) % Product gross profit (1) (3) (117) 114 97 % Product gross margin - % (2) % Increase/ Percentage Increase/ Nine Months Ended (Decrease) (Decrease) September 30, 2022 vs. 2021 2022 vs. 2021 2022 2021
Cost of goods sold
(18) % Product gross profit (1) 567 (899) 1,466 >100% Product gross margin 4 % (5) %
(1) Percentage change represents an improvement in the gross margin.
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.
26--------------------------------------------------------------------------------
Table of Contents
Our product gross margin improved from the three and nine months endedSeptember 30, 2021 to the three and nine months endedSeptember 30, 2022 due to the mix of manufacturing orders from our customers. Product gross margin was negative for several of these periods. 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 to this partner, we also receive royalty revenue from this collaboration. In the three and nine months endedSeptember 30, 2022 and 2021, the royalty revenue from this collaboration exceeded the related negative gross profit for this customer.
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 expect product gross profit to be negative in 2022 as a result of the collaborative arrangement described above.
Research and Development Expense (in thousands, except percentages)
Percentage
Increase/ Increase/
Three Months Ended September (Decrease) (Decrease)
30, 2022 vs. 2021 2022 vs. 2021
2022 2021
Research and development expense $ 33,590 $ 103,738 $ (70,148) (68) %
Percentage
Increase/ Increase/
Nine Months Ended (Decrease) (Decrease)
September 30, 2022 vs. 2021 2022 vs. 2021
2022 2021
Research and development expense $ 183,583 $ 300,655 $ (117,072) (39) %
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 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. 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 discussed in Note 1, BMS and we have decided to discontinue development of
bempegaldesleukin in combination with Opdivo® and will wind down the various
clinical trials under the BMS Collaboration Agreement, and we have also decided
to discontinue all other development of bempegaldesleukin. The cost sharing
under the BMS Collaboration Agreement remains unchanged. Additionally, as
discussed in Note 8 to our Condensed Consolidated Financial Statements, we have
also implemented the Restructuring Plan to reduce our workforce by approximately
70%. As a result, beginning in the three months ended June 30, 2022 , we report
clinical trial expense, other third-party costs and employee costs for the
bempegaldesleukin program, net of the reimbursement from BMS, within
Restructuring, impairment and other costs of terminated program in our Condensed
Consolidated Statement of Operations. Because we no longer report these expenses
in research and development expense, research and development expense decreased
significantly for the three and nine months ended September 30, 2022 as compared
to the three and nine months ended September 30, 2021 , respectively, and we
expect this to continue for the remainder of 2022 as compared to 2021. During
the nine months ended September 30, 2022 , we recorded $24.9 million as a
reduction of research and development expense for the net reimbursement from
BMS, reflecting the reimbursement we recorded in the three months ended March
31, 2022 . For the three and nine months ended September 30, 2021 , we recorded
$24.3 million and $76.5 million , respectively, as a reduction of research and
development expense for the net reimbursement from BMS. Please see our
discussion below in Restructuring, impairment and other costs of terminated
program for additional information.
We incurred research and development expense in the three and nine months ended
September 30, 2022 and September 30, 2021 for development costs and
manufacturing activities for NKTR-255 and development costs for
rezpegaldesleukin as Lilly conducts its Phase 1B and Phase 2 studies, for which
we are responsible for 25% of costs and Lilly is responsible for 75% of costs,
and we will continue to incur these costs as the development of NKTR-255 and
rezpegaldesleukin continues.
The timing and amount of our future clinical trial expenses 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.
27--------------------------------------------------------------------------------
Table of Contents
In addition to our drug candidates that we plan to evaluate in clinical development during 2022 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 across 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;
•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 the collaboration that we have already completed for rezpegaldesleukin, 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.
General and Administrative Expense (in thousands, except percentages)
Percentage
Increase/ Increase/
Three Months Ended September (Decrease) (Decrease)
30, 2022 vs. 2021 2022 vs. 2021
2022 2021
General and administrative expense $ 22,534 $ 29,468 $ (6,934) (24) %
Percentage
Increase/ Increase/
Nine Months Ended (Decrease) (Decrease)
September 30, 2022 vs. 2021 2022 vs. 2021
2022 2021
General and administrative expense $ 70,394 $ 90,702 $ (20,308) (22) %
General and administrative expense includes the cost of administrative staffing,
commercial, finance and legal activities. As discussed in Note 8 to our
Condensed Consolidated Financial Statements, we have implemented a Restructuring
Plan to reduce our workforce by approximately 70%. As a result of our
Restructuring Plan, the commercial organization was eliminated and all other
bempegaldesleukin-related commercialization activities ceased. Accordingly,
general and administrative expense decreased for the three and nine months ended
September 30, 2022 compared with the three and nine months ended September 30,
2021 ,
28--------------------------------------------------------------------------------
Table of Contents
and we expect this trend to continue for the full year of 2022 as compared to 2021. Beginning in the three months endedJune 30, 2022 , we report third-party costs and employee compensation costs for the bempegaldesleukin program and severance and benefit costs in Restructuring, impairment and other costs for terminated program. Restructuring, Impairment and Other Costs of Terminated Program (in thousands, except percentages) Increase/ Percentage Increase/ Three Months Ended September (Decrease) (Decrease) 30, 2022 vs. 2021 2022 vs. 2021 2022 2021 Restructuring, impairment and other costs of terminated program$ 16,830 $ -$ 16,830 >100% Increase/ Percentage Increase/ Nine Months Ended (Decrease) (Decrease) September 30, 2022 vs. 2021 2022 vs. 2021 2022 2021 Restructuring, impairment and other costs of terminated program$ 124,350 $ -$ 124,350 >100% As discussed in Note 8 to our Condensed Consolidated Financial Statements, following the announcements in March andApril 2022 that our registrational trials in bempegaldesleukin failed to meet their primary endpoints, onApril 25, 2022 , we announced strategic reorganization and cost restructuring plans (together, the Restructuring Plan) to prioritize key Phase 2 development programs, to advance our early stage research pipeline and to reduce our workforce by approximately 70% from approximately 735 to approximately 225 employees. In connection with these events, we reported the following costs in Restructuring, impairment and other costs of terminated program:
•Clinical trial expense, other third-party costs and employee costs for the wind down of the bempegaldesleukin program, net of the reimbursement from BMS;
•Severance and related benefit costs pursuant to the Restructuring Plan;
•Impairment of right-of-use assets and property, plant and equipment resulting from the Restructuring Plan, primarily reflecting excess office and laboratory leased spaces inSan Francisco, CA ; and
•Contract termination and other costs associated with these plans.
The following table presents the components of Restructuring, impairment and
other costs of terminated program, as further described and disclosed in Note 8
to our Condensed Consolidated Financial Statements (in thousands):
Three Months Nine Months
Ended Ended
$ 8,530 $ 28,938 Severance and benefit expense 2,077 29,827
Impairment of right-of-use assets and property, plant and equipment
1,200 58,521
Contract termination and other restructuring costs 5,023 7,064
Restructuring, impairment and other costs of terminated program
29--------------------------------------------------------------------------------
Table of Contents
For the three and nine months endedSeptember 30, 2022 , we recorded reductions of expense of$8.3 million and$16.7 million , respectively, for the net reimbursement from BMS, primarily for clinical trial expense, other third-party and employee costs for the wind down of the bempegaldesleukin program. We will continue to recognize expenses in future periods for the winddown of the bempegaldesleukin program and related costs, of which we expect to recognize a significant portion in 2022. The ultimate amount of expense will be affected by the timing to complete the full wind down of the clinical trials run by BMS and us and whether or not we are able to enter into subleases and, if we do enter into subleases, the economic terms of those subleases. We will revise our estimates for the costs to wind down these studies for the bempegaldesleukin program, the amount of severance and benefits paid to employees, and our assessment of impairment charges as new information becomes available to us in future periods.
Change in Fair Value of Development Derivative Liability
Percentage
Increase/ Increase/
Three Months Ended September (Decrease) (Decrease)
30, 2022 vs. 2021 2022 vs. 2021
2022 2021
Change in fair value of development
derivative liability (1) $ - $ (3,328) $ 3,328 100 %
Increase/ Percentage Increase/
Nine Months Ended (Decrease) (Decrease)
September 30, 2022 vs. 2021 2022 vs. 2021
2022 2021
Change in fair value of development
derivative liability (1) $ 33,427 $ (7,640) $ 41,067 >100%
(1) Percentage change represents a reduction of the expense or change to income.
As discussed in Note 4 to our Condensed Consolidated Financial Statements, we remeasured the development derivative liability under our co-development agreement with SFJ to fair value at each reporting date. As discussed in Note 4, as ofMarch 31, 2022 , due to the results of the metastatic melanoma trial, we concluded that it was remote that SFJ and we would continue the clinical trial in head and neck cancer. Accordingly, we reduced the liability to$0 as ofMarch 31, 2022 and recognized a corresponding gain in the change in fair value of development derivative liability. As a result of the decision to discontinue the clinical trial in head and neck cancer, we do not expect to record any future significant adjustments for the change in fair value. The expense recorded for the change in fair value for the three and nine months endedSeptember 30, 2021 primarily reflected the accretion of our obligation to potentially pay Success Payments to SFJ using our imputed borrowing rate. 30
--------------------------------------------------------------------------------
Table of Contents
Non-Cash Royalty Revenue and Non-Cash Interest Expense
Percentage
Increase/ Increase/
Three Months Ended September (Decrease) (Decrease)
30, 2022 vs. 2021 2022 vs. 2021
2022 2021
Non-cash royalty revenue related to the
sales of future royalties $ 18,342 $ 19,413 $ (1,071) (6) %
Percentage
(Increase) / Increase/
Decrease (Decrease)
2022 vs. 2021 2022 vs. 2021
Non-cash interest expense on liability
related to the sales of future royalties $ (6,953) $ (12,801) $ 5,848 (46) %
Percentage
Increase/ Increase/
Nine Months Ended (Decrease) (Decrease)
September 30, 2022 vs. 2021 2022 vs. 2021
2022 2021
Non-cash royalty revenue related to the
sales of future royalties $ 52,167 $ 58,667 $ (6,500) (11) %
Percentage
(Increase) / Increase/
Decrease (Decrease)
2022 vs. 2021 2022 vs. 2021
Non-cash interest expense on liability
related to the sales of future royalties $ (21,710) $ (39,186) $ 17,476 (45) %
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.
Non-cash royalty revenue decreased for the three and nine months ended
September 30, 2022 as compared to the three and nine months ended September 30,
2021 . Non-cash interest expense decreased significantly for the three and nine
months ended September 30, 2022 as compared to the three and nine months ended
September 30, 2021 2012 Purchase and Sale Agreement
The decrease in the non-cash interest expense in 2022 resulted from the decrease in the interest rate from 48% in the three and nine months endedSeptember 30, 2021 to 16% for the three and nine months endedSeptember 30, 2022 as a result of the revaluation of the liability, which we recognized in the three months endedDecember 31, 2021 . To resolve UCB's challenges to our patents and their resulting obligation to pay us royalties on net sales of CIMZIA® which we had sold to RPI, RPI and UCB negotiated a reduction in the royalty term and decreased royalty rates over the remaining term, which was implemented through the Settlement Agreement between UCB and us. As a result of accounting for the Settlement Agreement as a debt modification during the three months endedDecember 31, 2021 , we remeasured the liability to fair value using a discount rate of 16%. The Settlement Agreement and revaluation do not affect our cash flows, and the net income statement effect over the term of 2012 Purchase and Sale Agreement remains unchanged. 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 sum of the non-cash interest expense and the loss on the revaluation of the liability. To date, we have amortized$51.4 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$62.6 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
To date, we have amortized$44.7 million of the 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$105.3 million . Our current estimate of the imputed interest rate 31
--------------------------------------------------------------------------------
Table of Contents
reflects that our estimates of sales of MOVANTIK®, ADYNOVATE® and REBINYN® will result in meeting the 2025 Threshold. Because the 2025 Threshold of$210.0 million and the increase in the threshold to$240.0 million (if the 2025 Threshold is not timely achieved) limit the amount of royalties payable to HCR, the potential for the implicit interest rate to vary is more limited. Instead, we will receive the benefit of net sales if they exceed the threshold, but do not bear risk of loss or payments to HCR if royalties are less than expected. Interest Income and Other Income (Expense), net (in thousands, except percentages) Increase/ Percentage Increase/ Three Months Ended September (Decrease) (Decrease) 30, 2022 vs. 2021 2022 vs. 2021 2022 2021 Interest income and other income (expense), net$ 2,050 $ 131 $ 1,919 >100% Percentage Increase/ Increase/ Nine Months Ended (Decrease) (Decrease) September 30, 2022 vs. 2021 2022 vs. 2021 2022 2021 Interest income and other income (expense), net$ 3,541 $ 2,388 $ 1,153 48 %
Interest income and other income (expense) increased for the three and nine
months ended
Liquidity and Capital Resources
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 and private placements of debt and equity securities. As ofSeptember 30, 2022 , we had approximately$546.4 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, which includes the payments for the winddown of the bempegaldesleukin program, as further disclosed in Note 8 to our Condensed Consolidated Financial Statements. We expect the clinical development of our drug candidates, including rezpegaldesleukin 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, including$1.9 billion in total consideration received under our arrangement with BMS, development cost reimbursements from BMS, and a$150.0 million upfront payment from Lilly for our collaboration agreement for rezpegaldesleukin. In the future, we have the opportunity to receive up to$250.0 million in milestone payments under our collaboration with Lilly. Our current business is subject to significant uncertainties and risks as a result of, among other factors, clinical and regulatory outcomes for rezpegaldesleukin and NKTR-255, the sales levels for those products (for both wholly owned products such as NKTR-255 and for licensed products such as rezpegaldesleukin for which we are entitled to royalties), if and when they are approved, 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. We have no credit facility or any other sources of committed capital. 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. 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 regulatory restrictions and guidelines that have been implemented in response to the pandemic. However, if delays caused by the COVID-19 pandemic in commencing and enrolling patients in our clinical trials or 32
--------------------------------------------------------------------------------
Table of Contents
those run by our partners result in a delay in completing these trials, our or our partner's 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 various conditions 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. We currently have an effective shelf registration statement on Form S-3 (the 2021 Shelf Registration Statement) on file with theSecurities and Exchange Commission , which expires inMarch 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 withCowen and Company, LLC (the Equity Distribution Agreement). No securities have been sold under the 2021 Shelf Registration Statement or the Equity Distribution Agreement.
Cash flows from operating activities
Cash flows used in operating activities for the nine months ended
We expect that cash flows used in operating activities, excluding upfront, milestone and other contingent payments received, if any, will decrease for 2022 as compared to 2021 as a result of the wind down of the bempegaldesleukin program and the various cost restructuring activities described above.
Cash flows from investing activities
During the nine months endedSeptember 30, 2022 and 2021, the maturities and sales of our investments, net of purchases, totaled$331.0 million and$91.7 million , respectively, which we used to fund our operations. Our maturities and sales of investments, net of purchases was lower during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2022 , because we purchased securities in early 2021, utilizing the$150.0 million in proceeds from the 2020 Purchase and Sale Agreement that were included in cash equivalents atDecember 31, 2020 .
We paid
Cash flows from financing activities
We received proceeds from issuance of common stock related to our employee option and stock purchase plans of$0.7 million and$31.4 million in the nine months endedSeptember 30, 2022 and 2021, respectively. Additionally, during the nine months endedSeptember 30, 2022 and 2021, we received$0.8 million and$2.3 million , respectively, from SFJ pursuant to our co-development agreement.
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. See Note 1 and Note 8 to our Condensed Consolidated Financial Statements for our accounting policies and estimates related to the severance and benefits and the impairment of right-of-use assets and property, plant and equipment. Other than these accounting policies and estimates, 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, 2021 . 33
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
