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| NKTR > SEC Filings for NKTR > Form 10-K on 6-Mar-2009 | All Recent SEC Filings |
6-Mar-2009
Annual Report
We Exited the Inhaled Insulin Drug Programs in 2008
In 1995, we entered into a collaborative development and licensing agreement
with Pfizer to develop and market dry powder inhaled insulin (Exubera) for
patients with diabetes. In 2006 and 2007, we entered into a series of interim
letter agreements with Pfizer to develop a next generation form of dry powder
inhaled insulin (NGI). In January 2006, Exubera received marketing approval in
the U.S. and EU. Under the collaborative development and licensing agreement,
Pfizer had sole responsibility for marketing and selling Exubera. We performed
all of the manufacturing of the bulk dry powder insulin, and through our third
party contract manufacturers Bespak Europe Ltd. and Tech Group North America,
Inc., we supplied Pfizer with the Exubera inhalers. Our total revenue from
Pfizer was nil, $189.1 million, and $139.9 million, representing 0%, 69%, and
64% of total revenue, for the years ended December 31, 2008, 2007, and 2006,
respectively.
On October 18, 2007, Pfizer announced that it was exiting the Exubera and
inhaled insulin development and gave notice of termination under our
collaborative development and licensing agreement. On November 9, 2007, we
entered into a termination agreement and mutual release with Pfizer. Under this
agreement we received a one-time payment of $135.0 million from Pfizer in
November 2007 in satisfaction of all outstanding contractual obligations under
our then-existing agreements relating to Exubera and NGI. All agreements between
Pfizer and us related to Exubera and NGI, other than the termination agreement
and mutual release and a related interim Exubera manufacturing maintenance
letter, terminated on November 9, 2007. In February 2008, we entered into a
manufacturing termination agreement with Bespak and Tech Group pursuant to which
we paid an aggregate of $39.9 million in satisfaction of outstanding accounts
payable and termination costs and expenses that were due to the contract
manufacturers under the Exubera inhaler contract manufacturing agreement. We
also entered into a maintenance agreement with both Pfizer and Tech Group to
preserve key personnel and manufacturing capacity to support potential future
Exubera manufacturing if we were successful in finding a new partner for the
inhaled insulin program.
On April 9, 2008, we announced that we had ceased all negotiations with
potential partners for Exubera and NGI as a result of new data analysis from
ongoing clinical trials conducted by Pfizer which indicated an increase in the
number of new cases of lung cancer in Exubera patients who were former smokers
as compared to patients in the control group who were not former smokers. In
April 2008, we ceased all spending associated with maintaining Exubera
manufacturing capacity and any further NGI development, including, but not
limited to, terminating the Exubera manufacturing capacity maintenance
arrangements with Pfizer and Tech Group.
We Completed the Sale of Certain Pulmonary Assets and Operations at the End of
2008
On December 31, 2008, we completed the sale of certain assets related to our
pulmonary business, associated technology and intellectual property to Novartis
Pharma AG and Novartis Pharmaceuticals Corporation (together referred to as
Novartis) for a purchase price of $115.0 million in cash (Novartis Pulmonary
Asset Sale). Pursuant to the asset purchase agreement entered between Novartis
and us, we transferred to Novartis assets and obligations which include certain
dry powder and liquid pulmonary formulation and manufacturing assets, including
capital equipment and manufacturing facility lease obligations, certain
intellectual property and manufacturing methods and associated information
systems related to the pulmonary business, and certain other interests in two
private companies, and Novartis hired approximately 140 of our pulmonary
personnel. In addition, we assigned our rights and obligations, other than
certain royalty rights, related to the Cipro Inhale partnered with Bayer
Schering Pharma AG to Novartis, and terminated our collaborative research,
development, and commercialization agreement related to the Tobramycin
inhalation powder (TIP) program with Novartis Vaccines and Diagnostics, Inc.
Pursuant to the asset purchase agreement, we retain our rights and obligations
under our co-development, license and co-promotion agreement with Bayer
Healthcare LLC related to BAY41-6551 (NKTR-061, Amikacin Inhale), our
development program related to NKTR-063 (Inhaled Vancomycin) and intellectual
property specific to inhaled insulin. Although we completed the Novartis
Pulmonary Asset Sale on December 31, 2008, we will pay approximately
$4.4 million in related transaction costs in the three months ended March 31,
2009, including legal fees, investment banker fees, and other costs.
Following the completion of the Novartis transaction, we expect our contract
research revenue and total revenue to significantly decline in 2009 due to the
termination of the inhaled TIP collaboration agreement with Novartis Vaccines
and Diagnostics, Inc. and our assignment and transfer of our inhaled Cipro
Inhale collaboration agreement with Bayer Schering Pharma AG to Novartis. Our
collaboration revenue related to TIP and Cipro Inhale was $13.7 million and
$11.7 million, or 15% and 13%, respectively, of our total revenue for the year
ended December 31, 2008. We will not receive any revenue from these programs in
2009. However, also following the Novartis transaction, we will no longer incur
expenses from the approximately 140 pulmonary personnel and the dedicated
pulmonary manufacturing facility, as well as certain other costs related to the
assets and obligations, transferred to Novartis. The only future research and
development obligations associated with the pulmonary assets that we retained in
relation to the Novartis transaction relate to BAY41-66551 and NKTR-063. Under
our collaboration agreement with Bayer Healthcare LLC, we are responsible for
the completion of final device development and have a reimbursement obligation
for up to $10.0 million of Phase 3 development costs incurred by Bayer
Healthcare LLC.
Key Developments and Trends in Liquidity and Capital Resources
At December 31, 2008, we had approximately $379.0 million in cash and cash
equivalents and $242.6 million in indebtedness. In the three months ended
December 31, 2008, we repurchased approximately $100.0 million in par value of
our 3.25% convertible subordinated notes for an aggregate purchase price of
$47.8 million. We may from time to time purchase or retire additional
convertible subordinated notes through cash purchase or exchanges for other
securities of the Company in open market or privately negotiated transactions,
depending on, among other factors, our levels of available cash and the price at
which such convertible notes are available for purchase. We will evaluate such
transactions, if any, in light of then-existing market conditions. These
transactions, individually or in the aggregate, may be material to our business.
We have financed our operations primarily through revenue from product sales and
royalties and research and development contracts and public and private
placements of debt and equity. To date we have incurred substantial debt as a
result of our issuances of subordinated notes that are convertible into our
common stock. Our substantial debt, the market price of our securities, and the
general economic climate, among other factors, could have material consequences
for our financial condition and could affect our sources of short-term and
long-term funding. Our ability to meet our ongoing operating expenses and repay
our outstanding indebtedness is dependent upon our and our partners' ability to
successfully complete clinical development of, obtain regulatory approvals for
and successfully commercialize new drugs. Even if we or our partners are
successful, we may require additional capital to continue to fund our operations
and repay our debt obligations as they become due. There can be no assurance
that additional funds, if and when required, will be available to us on
favorable terms, if at all.
For the year ended December 31, 2008, net cash used for our operating activities
was $145.8 million. During the year ended December 31, 2008, we made the
following payments, among others: (i) $39.9 million to Bespak Europe Ltd. and
Tech Group as payment for termination amounts due under our Exubera inhaler
manufacturing and supply agreement with those companies, all of which was
recorded as an expense in 2007, (ii) $6.8 million to maintain Exubera
manufacturing capacity through April 2008 and (iii) $5.4 million for severance,
employee benefits and outplacement services in connection with our workforce
reduction plans. We do not anticipate incurring any costs in 2009 associated
with inhaled insulin.
Our substantial investment in our preclinical and clinical research and any
potential new licensing or partnership agreements, if any, will be the key
drivers of our results of operations and financial position during 2009. One of
our collaboration partners has a one-time license extension option exercisable
in December 2009. If this partner elects to exercise this license extension
option right, we will receive a cash payment of $31.0 million in December 2009.
Results of Operations
Years Ended December 31, 2008, 2007, and 2006
Revenue (in thousands except percentages)
Percentage Percentage
Increase/ Increase/ Increase/ Increase/
Years ended December 31, (Decrease) (Decrease) (Decrease) (Decrease)
2008 2007 2006 2008 vs. 2007 2007 vs. 2006 2008 vs. 2007 2007 vs. 2006
Product sales and royalties $ 41,255 $ 180,755 $ 153,556 $ (139,500 ) $ 27,199 (77 )% 18 %
Collaboration and other 48,930 92,272 64,162 (43,342 ) 28,110 (47 )% 44 %
Total Revenue $ 90,185 $ 273,027 $ 217,718 $ (182,842 ) $ 55,309 (67 )% 25 %
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During the year ended December 31, 2008, the decrease in total revenue from the
year ended December 31, 2007 was primarily attributable to the termination of
our collaboration agreements with Pfizer related to Exubera and NGI, which
accounted for $182.4 million, or 67%, of our total revenue during the year ended
December 31, 2007. We had no revenue from Pfizer related to Exubera or NGI for
the year ended December 31, 2008. Four of our customers, Bayer (including Bayer
Healthcare LLC and Bayer Schering Pharma AG), UCB Pharma, Novartis, and Roche
represented 24%, 16%, 15%, and 14%, respectively, of our total revenue during
the year ended December 31, 2008.
In connection with the completion of the Novartis Pulmonary Asset Sale on
December 31, 2008, our collaboration agreement with Novartis Vaccines and
Diagnostics, Inc. for TIP was terminated and our collaboration agreement with
Bayer Schering Pharma AG for Cipro Inhale was assigned to Novartis.
Collaboration revenue related to TIP and Cipro Inhale was $13.7 million and
$11.7 million, or 15% and 13%, of our total revenue for the year ended
December 31, 2008. We will not receive any revenue related to these programs in
2009. While we may enter new collaboration or license agreements in 2009, we
expect revenue to decrease in 2009 as a result of the TIP agreement termination,
the assignment of the Cipro Inhale agreement, and lower product sales volumes
required by our licensing partners. In addition, if our collaboration partner
elects not to exercise its one-time license extension option in December 2009
and pay us the one-time $31.0 million license fee for such option, our revenue
would significantly decrease in 2009 as compared to the year ended December 31,
2008.
Product sales and royalties
For the year ended December 31, 2007, Exubera product sales to Pfizer accounted
for $132.9 million of our total revenue. We had no revenue from Pfizer related
to Exubera for the year ended December 31, 2008. Non-Exubera product sales and
royalties decreased by approximately $6.6 million, or 14%, for the year ended
December 31, 2008, compared to the year ended December 31, 2007. The decrease in
non-Exubera product sales and royalties is primarily attributable to the
November 30, 2007 sale of Aerogen Ireland Ltd., one of our former subsidiaries
that manufactured and supplied general purpose nebulizer devices, which
accounted for $5.5 million in revenue for the year ended December 31, 2007.
Product sales and royalties increased 18% to $180.8 million for the year ended
December 31, 2007 as compared to the year ended December 31, 2006. Exubera
product sales to Pfizer increased by approximately $32.0 million during the year
ended December 31, 2007 as compared to the year ended December 31, 2006. Exubera
commercial sales began in January 2006. During the year ended December 31, 2006,
we deferred recognition of all Exubera product sales until Pfizer's contractual
60-day right of return period lapsed. As a result, as of December 31, 2006, we
deferred $22.9 million in Exubera product sales and we recognized ten months of
product shipments in revenue. In January 2007, we began estimating product
warranty returns and recognizing Exubera product sales upon shipment. During the
year ended December 31, 2007, we recognized product sales through November 9,
2007, when our collaboration agreements with Pfizer terminated, as well as the
revenue deferred at December 31, 2006.
Royalty revenues were $3.5 million, $3.7 million, and $9.2 million for the years
ended December 31, 2008, 2007, and 2006, respectively.
Collaboration and other revenue
Collaboration and other revenue includes reimbursed research and development
expenses, amortization of deferred up-front signing and milestone payments
received from our collaboration partners, and intellectual property license fee
revenue. Collaboration revenue fluctuates from year to year, and therefore
future collaboration revenue cannot be predicted accurately. The level of
collaboration and other revenues depends in part upon the continuation of
existing collaborations, signing of new collaborations, the stage of program
development, and the achievement of milestones.
For the year ended December 31, 2007, collaboration and other revenue from
Pfizer related to Exubera and NGI accounted for $49.5 million of our
collaboration and other revenue. We had no collaboration and other revenue from
Pfizer related to Exubera or NGI for the year ended December 31, 2008. The
increase in non-Pfizer collaboration and other revenue of $6.1 million during
the year ended December 31, 2008 compared to the year ended December 31, 2007 is
primarily attributable to a new intellectual property license agreement we
entered into with F. Hoffmann-La Roche Ltd. For the year ended December 31,
2008, we have recognized increased collaboration and other revenue from Bayer
(including Bayer Healthcare LLC and Bayer Schering Pharma AG) of $12.3 million
under our collaboration agreements for BAY41-6551 (NKTR-061, Amikacin Inhale)
and Cipro Inhale. These increases are offset by decreased collaboration and
other revenue of $3.3 million from Novartis Vaccines and Diagnostics, Inc. under
our collaboration agreement for TIP and of $3.7 million from Solvay
Pharmaceuticals, Inc. and Zelos Therapeutics Inc. following the termination of
those collaboration agreements in 2008.
The increase in collaboration and other revenue for the year ended December 31,
2007 compared to the year ended December 31, 2006 is primarily attributable to
increased revenue from Pfizer of $15.8 million, which includes recognition of
$24.6 million in NGI up-front fees upon termination of the Pfizer Agreements.
Additionally, collaboration and other revenue from Novartis increased by
$8.5 million under our collaboration agreement for TIP, and Bayer (including
Bayer Healthcare LLC and Bayer Schering Pharma AG) increased by $3.2 million,
and $1.3 million, respectively, under our collaboration agreements for Cipro
Inhale and BAY41-6551, respectively. These increases in collaboration and other
revenue were partially offset by decreased revenue from Zelos of $4.2 million
under our collaboration agreement to develop Ostabolin-C.
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
"Part I, Item 1A-Risk Factors" for discussion of the risks associated with our
partnered research and development programs.
Revenue by geography
Revenue by geographic area is based on the shipping locations of our customers.
The following table sets forth revenue by geographic area (in thousands):
Years ended December 31,
2008 2007 2006
United States $ 30,800 $ 212,990 $ 182,959
European countries 59,385 60,037 33,471
All other countries - - 1,288
Total Revenue $ 90,185 $ 273,027 $ 217,718
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The decrease in revenue attributable to the United States for the year ended
December 31, 2008 compared to the year ended December 31, 2007 is primarily
attributable to our receipt of no revenue from Pfizer related to Exubera for the
year ended December 31, 2008.
The increase in revenue attributable to the United States for the year ended
December 31, 2007 compared to the year ended December 31, 2006 is primarily
attributable to the increase in revenue from Pfizer related to Exubera for the
year ended December 31, 2007. The increase in revenue attributable to European
countries for the year ended December 31, 2007 compared to the year ended
December 31, 2006 is primarily due to the increase in revenue from Novartis
under our collaborative agreement for TIP and from Bayer (including Bayer
Healthcare LLC and Bayer Schering Pharma AG) under our collaborative agreements
for BAY41-6551 and Cipro Inhale.
Cost of goods sold (in thousands except percentages)
Percentage Percentage
Increase/ Increase/ Increase/ Increase/
Years ended December 31, (Decrease) (Decrease) (Decrease) (Decrease)
2008 2007 2006 2008 vs. 2007 2007 vs. 2006 2008 vs. 2007 2007 vs. 2006
Cost of goods sold $ 28,216 $ 137,696 $ 113,921 $ (109,480 ) $ 23,775 (80 )% 21 %
Product gross margin 13,039 43,059 39,635 (30,020 ) 3,424 (70 )% 9 %
Product gross margin % 32 % 24 % 26 %
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The decrease in cost of goods sold and product gross margin during the year
ended December 31, 2008 compared to the year ended December 31, 2007 was
primarily due to the termination of our agreements with Pfizer related to
Exubera. During the year ended December 31, 2007, Exubera cost of goods sold
totaled $103.6 million and Exubera gross margin totaled $29.3 million. The
increase in product gross margin percentage is attributable to the change in
product mix with our product sales based on our PEGylation and advanced polymer
conjugate technologies which have a relatively higher gross margin.
Cost of goods sold during the year ended December 31, 2007 includes Exubera
manufacturing costs through the November 9, 2007 termination of the Pfizer
agreements. Costs related to our Exubera manufacturing operations after
November 9, 2007 are included in other cost of revenue.
The increase in cost of goods sold and product gross margin during the year
ended December 31, 2007 compared to the year ended December 31, 2006 is
consistent with the proportionate increase in Exubera product sales, which
contributed $19.5 million to our product gross margin during the year ended
December 31, 2006. The decrease in gross margin percentage during the year ended
December 31, 2007 compared to the year ended December 31, 2006 is primarily
attributable to product mix, the terms of our cost plus manufacturing
arrangement with Pfizer, and the decline in royalty revenue of $5.5 million
during 2007.
We expect Cost of goods sold and Product gross margin to decline in 2009 as
compared to the year ended December 31, 2008 in connection with the lower
manufacturing requirements forecasted by our licensing partners.
Cost of Workforce Reduction Plans (in thousands except percentages)
Percentage Percentage
Increase/ Increase/ Increase/ Increase/
Years ended December 31, (Decrease) (Decrease) (Decrease) (Decrease)
2008 2007 2006 2008 vs. 2007 2007 vs. 2006 2008 vs. 2007 2007 vs. 2006
Cost of goods sold, net
of change in inventory $ 148 $ 974 $ - $ (826 ) $ 974 (85 %) n/a
Other cost of revenue 1,221 - - 1,221 - n/a n/a
Research and development 3,087 5,791 - (2,704 ) 5,791 (47 %) n/a
General and
administrative 517 1,617 - (1,100 ) 1,617 (68 %) n/a
. . .
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