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| NKTR > SEC Filings for NKTR > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
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
We are a clinical-stage biopharmaceutical company developing a pipeline of drug candidates that utilize our PEGylation and advanced polymer conjugate technology platforms to improve the therapeutic benefits of drugs. Our proprietary product pipeline is comprised of drug candidates across a number of therapeutic areas, including oncology, pain, anti-infectives and immunology. We create our innovative product candidates by using our proprietary chemistry platform to modify the chemical structure of drugs using unique polymer conjugates. Additionally, we may utilize established pharmacologic targets to engineer a new drug candidate relying on a combination of the known properties of these targets and the attributes of our customized polymer chemistry. Our drug candidates are designed to correct deficiencies in the pharmacokinetics, half-life, oral bioavailability, metabolism or distribution of drugs to improve their therapeutic efficacy.
During 2009, we have continued to make substantial investments to advance our pipeline of drug candidates from early stage discovery research through clinical development. On March 2, 2009, we announced that we were terminating our Phase 2 clinical trial for Oral NKTR-118 (oral PEGylated naloxol) as a result of positive preliminary results and on September 20, 2009, we entered into a License Agreement with AstraZeneca (the "AstraZeneca License") for the worldwide development and commercialization of products based on NKTR-118 and NKTR-119 (a co-formulated product candidate including a long-acting opioid and NKTR-118). We also have several Phase 2 clinical trials for NKTR-102 (PEGylated irinotecan) directed at a number of different indications in the oncology therapeutic area that have been ongoing or scheduled to begin during 2009. In addition, on February 17, 2009, we announced that we had dosed the first patient in a Phase 1 clinical trial for NKTR-105 (PEGylated docetaxel) for patients with refractory solid tumors. We also have several other products in the early discovery or preclinical stage that we are preparing to move into clinical development.
Our focus on research and clinical development requires substantial investments that continue to increase as we advance each drug candidate through the development cycle. While we believe that our strategy has the potential to create significant value if one or more of our drug candidates demonstrates positive clinical results and/or receives regulatory approval in one or more major markets, drug development is an inherently uncertain process and there is a high risk of failure at every stage prior to approval and clinical results are very difficult to predict. Clinical development success and failures can have an unpredictable and disproportionate positive or negative impact on our scientific and medical prospects, financial prospects, financial condition, and market value.
Historically, we entered into a number of license and supply contracts under which we manufactured and supplied proprietary PEGylation reagents on a cost-plus or fixed price basis. Our current strategy is to manufacture and supply PEGylation reagents to support our proprietary drug candidates or for third party collaborators where we have a strategic development and commercialization relationship. As a result, whenever possible, we are renegotiating or not seeking renewal of legacy manufacturing supply arrangements that do not include a strategic development or commercialization component. While this will result in some revenue loss in the short-term, product sales from these legacy agreements is generally low-margin. Our strategy allows us to focus our proprietary manufacturing expertise and capacity on drugs and drug candidates where we have significant future economic opportunity.
We intend to decide on a product-by-product basis whether we wish to continue development into Phase 3 pivotal clinical trials and commercialize products on our own, or seek a partner, or pursue a combination of these approaches. Following completion of Phase 2 development, or earlier in the development cycle in certain circumstances, we will generally be seeking collaborations with one or more biotechnology or pharmaceutical companies to conduct Phase 3 clinical development, to be responsible for the regulatory approval process and, if such drug candidate is approved, to market and sell the drug in one or more world markets. The commercial terms of such future collaborations, if any, including, without limitation, upfront payments, development and sales milestone payments, and royalty rates, will be critical to the future prospects of our business and financial condition. For example, the success of our collaboration with AstraZeneca under the AstraZeneca License, which includes an upfront payment of $125.0 million that we received from AstraZeneca in October 2009 and significant potential development milestones, sales milestones and royalties on commercial sales for each of NKTR-118 and NKTR-119, will impact our financial condition. There can be no assurance that any future collaborations will be available to us on favorable terms.
We have a number of existing license and collaboration agreements with third parties who have licensed our proprietary technologies for drugs that have either received regulatory approval in one or more markets or drug candidates that are still in the clinical development stage. For example, the future clinical and commercial success of Bayer's Amikacin Inhale (BAY41-6551 or NKTR-061), AstraZeneca's development and commercialization of NKTR-118 and NKTR-119, UCB's CIMZIA™, Roche's MIRCERA and Affymax's Hematide, among others, will together have a material impact on our long-term revenue prospects, as will the success of Bayer's Cipro Inhale program, in relation to which we have certain royalty rights. Because drug development and commercialization is subject to a number of risks and uncertainties, there is a risk that our future revenue from one or more of these agreements will be less than we anticipate.
Key Developments and Trends in Liquidity and Capital Resources
At September 30, 2009, we had approximately $275.7 million in cash, cash equivalents, and short-term investments and $241.0 million in indebtedness. We may from time to time purchase or retire 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. For instance, in the fourth quarter of 2008, we repurchased $100.0 million of the principal amount of our 3.25% convertible subordinated notes. We will evaluate similar future 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. In October 2009, we received a payment of $125.0 million from AstraZeneca under the AstraZeneca License as an upfront payment for the worldwide rights to further develop and commercialize NKTR-118 and NKTR-119. 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.
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
Three Months and Nine Months Ended September 30, 2009 and 2008
Revenue (in thousands, except percentages)
Percentage
Three months Three months Increase / Increase /
ended ended (Decrease) (Decrease)
September 30, 2009 September 30, 2008 2009 vs. 2008 2009 vs. 2008
Product sales and royalties $ 7,461 $ 9,474 $ (2,013 ) (21 )%
Collaboration and other 2,762 11,965 (9,203 ) (77 )%
Total revenue $ 10,223 $ 21,439 $ (11,216 ) (52 )%
Percentage
Nine months Nine months Increase / Increase /
ended ended (Decrease) (Decrease)
September 30, 2009 September 30, 2008 2009 vs. 2008 2009 vs. 2008
Product sales and royalties $ 24,456 $ 28,855 $ (4,399 ) (15 )%
Collaboration and other 8,466 32,977 (24,511 ) (74 )%
Total revenue $ 32,922 $ 61,832 $ (28,910 ) (47 )%
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Our revenue is derived from our collaboration agreements, under which we may receive contract research payments, milestone payments based on clinical progress, regulatory progress or net sales achievements, royalties or product sales revenue. Significant variations in the timing of receipt of cash payments and our recognition of revenue can result from the nature of significant milestone payments based on the execution of new collaboration agreements, the timing of clinical, regulatory or sales events which often result in single milestone payments and the timing and success of the commercial launch of new drugs by our collaboration partners.
The decrease in total revenue for the three months and nine months ended September 30, 2009 compared to the three months and nine months ended September 30, 2008, is primarily attributable to lower product sales to our collaboration partners, the termination of our Tobramycin Inhalation Powder ("TIP") collaboration agreement with Novartis Vaccines and Diagnostics Inc., and the assignment of our Cipro Inhale collaboration agreement with Bayer Schering Pharma AG to Novartis. Pursuant to the terms of the transaction in which we assigned this collaboration agreement to Novartis, we maintain the right to receive certain potential royalties in the future based on net product sales if Cipro Inhale receives regulatory approval and is successfully commercialized.
In October 2009, we received a $125.0 million upfront payment from AstraZeneca in connection with the AstraZeneca License for NKTR-118 and NKTR-119. We will begin amortizing the $125.0 million upfront payment in the fourth quarter of 2009 over our estimated performance period.
In December, if one of our collaboration partners elects to exercise a one-time license extension option, we would receive a $31.0 million payment and we would expect to recognize the revenue over our estimated performance obligation period of the agreement.
Product sales and royalties
The decrease in product sales and royalties for the three months and nine months ended September 30, 2009 compared to the three months and nine months ended September 30, 2008 is primarily attributable to lower product sales volumes to our collaboration partners. We expect product sales and royalties in the last quarter of 2009 to remain at a consistent level as the three months ended September 30, 2009.
Collaboration and other
Collaboration and other revenue includes reimbursed research and development expenses, amortization of deferred upfront payments 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 revenue depends in part upon the continuation of existing collaborations, the stage of program development, and the achievement of milestones. The timing and future success of our product development programs are subject to a number of risks and uncertainties.
The decrease in collaboration and other revenue for the three months and nine months ended September 30, 2009 compared to the three months and nine months ended September 30, 2008 is primarily attributable to the termination of our TIP collaboration agreement and the assignment of the Cipro Inhale collaboration agreement as part of the Novartis asset sale transaction, which. These agreements accounted for approximately $5.6 million and $19.3 million of collaboration and other revenue, respectively, for the three months and nine months ended September 30, 2008. We do not expect to recognize any revenue related to these two agreements in 2009. Additionally, milestone revenue recognized from Bayer under our collaborative agreement for Amikacin Inhale decreased by $4.0 million and $4.5 million, respectively, for the three months and nine months ended September 30, 2009 compared to the same periods in 2008 due to changes in our estimates of clinical development progress for this program.
Cost of Goods Sold and Product Gross Margin (in thousands, except percentages)
Percentage
Three months Three months Increase / Increase /
ended ended (Decrease) (Decrease)
September 30, 2009 September 30, 2008 2009 vs. 2008 2009 vs. 2008
Cost of goods sold $ 5,691 $ 5,349 $ 342 6 %
Product gross profit $ 1,770 $ 4,125 $ (2,355 ) (57 )%
Product gross margin 24 % 44 %
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Percentage
Nine months Nine months Increase / Increase /
ended ended (Decrease) (Decrease)
September 30, 2009 September 30, 2008 2009 vs. 2008 2009 vs. 2008
Cost of goods sold $ 21,021 $ 18,020 $ 3,001 (17 )%
Product gross profit $ 3,435 $ 10,835 $ (7,400 ) (68 )%
Product gross margin 14 % 38 %
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For the three months and nine months ended September 30, 2009 compared to the three months and nine months ended September 30, 2008, the decrease in product gross margin is primarily attributable to a shift in product mix and decreased manufacturing volume; the decreased manufacturing volume resulted in increased unabsorbed manufacturing overhead that was recognized as cost of goods sold. Additionally, for the nine months ended September 30, 2009, product gross margin decreased primarily due to a $2.1 million payment that became due during the first quarter of 2009 to one of our former consulting firms as the final payment under the agreement.
As a result of the fixed cost base associated with our manufacturing activities, we expect product gross margin to fluctuate in future periods depending on the level of manufacturing orders from our customers.
Other Cost of Revenue (in thousands, except percentages)
Other cost of revenue of $6.8 million for the nine months ended September 30, 2008 includes the costs of maintaining our Exubera manufacturing capacity after the termination of the Pfizer agreements on November 9, 2007 through the termination of our inhaled insulin programs in April 2008. There were no such costs in 2009.
Research and Development Expense (in thousands, except percentages)
Percentage
Three months Three months Increase / Increase /
ended ended (Decrease) (Decrease)
September 30, 2009 September 30, 2008 2009 vs. 2008 2009 vs. 2008
Research and development expense $ 23,474 $ 38,265 $ (14,791 ) (39 )%
Percentage
Nine months Nine months Increase / Increase /
ended ended (Decrease) (Decrease)
September 30, 2009 September 30, 2008 2009 vs. 2008 2009 vs. 2008
Research and development expense $ 71,514 $ 109,138 $ (37,624 ) (34 )%
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Research and development expenses consist primarily of personnel costs, including salaries, benefits, and stock-based compensation, clinical studies performed by contract research organizations (CROs), materials and supplies, licenses and fees, and overhead allocations consisting of various support and facilities related costs.
The decrease in research and development expense for the three months and nine months ended September 30, 2009 compared to the three months and nine months ended September 30, 2008, is primarily attributable to the completion of the sale of certain assets related to our pulmonary business, associated property, and intellectual property to Novartis on December 31, 2008 (referred to as the "Novartis Pulmonary Asset Sale") and the workforce reduction executed in February 2008. As part of the Novartis Pulmonary Asset Sale, we transferred approximately 140 of our personnel dedicated to our pulmonary operations and our San Carlos research and manufacturing facility to Novartis. In addition, we ceased research activities on the TIP research and development program, the Cipro Inhale program and certain other proprietary pulmonary development programs, resulting in a decrease in outside direct costs of $2.0 million and $4.3 million, respectively, for the three months and nine months ended September 30, 2009 compared to the corresponding periods of 2008. For the three months and nine months ended September 30, 2009 compared to the three months and nine months ended September 30, 2008, personnel costs decreased by approximately $6.3 million and $22.3 million, respectively, and facilities costs decreased by approximately $3.2 million and $9.6 million, respectively.
General and Administrative Expense (in thousands, except percentages)
Percentage
Three months Three months Increase / Increase /
ended ended (Decrease) (Decrease)
September 30, 2009 September 30, 2008 2009 vs. 2008 2009 vs. 2008
General and administrative expense $ 9,917 $ 12,386 $ (2,469 ) (20 )%
Percentage
Nine months Nine months Increase / Increase /
ended ended (Decrease) (Decrease)
September 30, 2009 September 30, 2008 2009 vs. 2008 2009 vs. 2008
General and administrative expense $ 30,024 $ 37,661 $ (7,637 ) (20 )%
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General and administrative expense is associated with administrative staffing, business development and marketing. For the three months and nine months ended September 30, 2009 compared to the three months and nine months ended September 30, 2008, personnel costs decreased by approximately $1.0 million and $3.8 million, respectively, primarily due to headcount reductions made as part of our February 2008 workforce reductions and other operating efficiencies achieved after the Novartis Pulmonary Asset Sale, marketing costs decreased by approximately $0.2 million and $1.2 million, respectively, professional outside service costs decreased by approximately $0.5 million and $1.3 million, respectively, and travel, lodging and meals decreased by $0.2 million and $0.7 million, respectively.
Interest Income and Interest Expense (in thousands, except percentages)
Percentage
Three months Three months Increase / Increase /
ended ended (Decrease) (Decrease)
September 30, 2009 September 30, 2008 2009 vs. 2008 2009 vs. 2008
Interest income $ 560 $ 2,375 $ (1,815 ) (76 )%
Interest expense $ (2,928 ) $ (3,988 ) $ (1,060 ) (27 )%
Percentage
Nine months Nine months Increase / Increase /
ended ended (Decrease) (Decrease)
September 30, 2009 September 30, 2008 2009 vs. 2008 2009 vs. 2008
Interest income $ 3,160 $ 10,578 $ (7,418 ) (70 )%
Interest expense $ (9,213 ) $ (11,835 ) $ (2,622 ) (22 )%
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The decrease in interest income for the three months and nine months ended September 30, 2009, compared to the three months and nine months ended September 30, 2008, is primarily attributable to lower interest rates and a lower average balance of cash, cash equivalents, and short-term investments. The decrease in interest expense for the three months and nine months ended September 30, 2009, compared to the three months and nine months ended September 30, 2008, is primarily attributable to a lower average balance of convertible subordinated notes outstanding during 2009. We repurchased $100.0 million of the principal amount of our 3.25% convertible subordinated notes in the fourth quarter of 2008.
Liquidity and Capital Resources
We have financed our operations primarily through revenue from partner licensing, collaboration and manufacturing agreements, public and private placements of debt and equity securities, and financing of equipment acquisitions and certain tenant leasehold improvements.
We had cash, cash equivalents and short-term investments in marketable securities of $275.7 million and indebtedness of $241.0 million, including $215.0 million of 3.25% convertible subordinated notes due September 2012, $20.7 million in capital lease obligations, and $5.3 million in other liabilities as of September 30, 2009.
Due to the recent adverse developments in the credit markets, we may experience reduced liquidity with respect to some of our short-term investments. These investments are generally held to maturity, which is less than one year. However, if the need arose to liquidate such securities before maturity, we may experience losses on liquidation. At September 30, 2009, the average time to maturity of the investments held in our portfolio was approximately six months and the contractual maturity of any single investment did not exceed twelve months. To date we have not experienced any liquidity issues with respect to these securities, but should such issues arise, we may be required to hold some, or all, of these securities until maturity. We believe that, even allowing for potential liquidity issues with respect to these securities, our remaining cash, cash equivalents, and short-term investments will be sufficient to meet our anticipated cash needs for at least the next twelve months. Based on our available cash and our expected operating cash requirements we do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities before we recover the amortized cost basis. Accordingly, we believe there are no other-than-temporary impairments on these securities and have not recorded a provision for impairment.
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