In the absence of real news, biotech stocks can drift lower as impatient investors pursue names with more near-term excitement, and I’m not altogether surprised that Nektar (NKTR) shares are lower than when I last wrote on the company, though the nearly 20% decline seems a little overdone. Since then, the company has delivered a mildly positive update on its lupus program, while maintaining generally as-expected timelines for other key clinical read-outs.
The performance of Nektar’s shares over the next 12-18 months are still largely tied to updates on the performance of the company’s lead drug bempegaldesleukin (or “bempeg”) in a series of oncology trials, with the melanoma studies in particular looking like the biggest value-drivers to me. Success in melanoma alone could drive a substantially higher share price, while clinical trial failures would hammer the stock, even though there are valuable compounds in the pipeline beyond bempeg. As is, Nektar remains a virtually binary call, and one that I think is worth at least considering ahead of some data updates in November of this year and through 2021.
Fine On Cash Through 2022
With Nektar generating about $50M a quarter in revenue (likely to drop to around $25M/quarter next year), the quarterly financials here aren’t all that important beyond the company’s cash and cash burn. R&D expenses dipped a bit in the second quarter (down 10%), but are likely to average over $100M/qtr for all of 2020 and stay around $425M – $450M/year though 2025.
I still don’t expect Nektar to become free cash flow positive until 2025 at the earliest (and possibly not until 2026 or 2027), and I expect the company to burn through around $1.9 billion of cash before it turns FCF-positive. With a little more than $1 billion of cash on the books, Nektar should be fine into 2022, but will clearly need to raise cash at some point. If the currently-expected trial read-outs through 2021 are positive, Nektar will have little trouble raising cash, though prevailing market conditions will of course determine the terms.
Upcoming November Data Are Just The Appetizer
Nektar should report updates from three clinical programs at the November SITC meeting. While good news is always welcome, the relative importance of these updates is overshadowed by the updates expected in 2021.
The SITC meeting should see Nektar provide initial efficacy data on its REVEAL study of NKTR-262 and bempeg in relapsed/refractory melanoma, initial safety and efficacy data on NKTR-255 in multiple myeloma and non-Hodgkins lymphoma, and additional data on the PIVOT-02 study of bempeg and nivolumab (Bristol-Myers’ (BMY) Opdivo) in melanoma, possibly including progression-free survival numbers.
Given the importance of the melanoma programs and the ongoing uncertainty over whether bempeg is truly value-additive in melanoma treatment, I would argue almost any positive clinical efficacy update is meaningful for the stock. Likewise, with no information yet on the IL-15 drug NKTR-255, strong initial evidence of efficacy could lead to this drug getting a more meaningful weighting in valuation – given the lack of data and the historical likelihood of success for novel oncology agents, the drug is worth only about $1.50/share in my model today.
Outside of the SITC meeting, Nektar also expects to report initial ORR data on 10-20 patients in its PROPEL study of bempeg and Merck’s (MRK) Keytruda in first-line non-small cell lung cancer, with this update coming in the fourth quarter of 2020 or the first quarter of 2021. The development of bempeg for lung cancer has been even more challenging than for melanoma, so I do believe that a strong positive data set would be significant, but I can’t say I view that as a particularly likely outcome at this point.
2021 Could Be The Make-Or-Break Year
Nektar is expected to produce more significant clinical data on the bempeg program in 2021, with initial Phase III results from the PIVOT-IO study of bempeg and Opdivo in first-line melanoma expected around mid-year.
The company should also provide top-line data from its study of bempeg and nivo in first line bladder cancer in the second half of 2021. Given the equivocal results generated so far in other studies of PD-1/PD-L1 drugs in this indication, I’m not particularly optimistic about the outcome, and I don’t believe the Street is either. With that backdrop, a strong positive result would definite be a positive catalyst.
Nektar has other studies underway with bempeg, including a renal cell carcinoma combo study that should provide top-line data in the first quarter of 2022, but 2021 looks like the make-or-break year to me. There has been no small amount of controversy over the company’s efforts in melanoma with bempeg, but a definitive, statistically-significant positive outcome for ORR and/or PFS would unlock meaningful value.
The Autoimmune Platform Is Worth Watching
Nektar investors have also gotten their first look at data from NKTR-358, the company’s autoimmune compound licensed to Lilly (LLY). In a Phase I study of mild-to-moderate subcutaneous lupus erythematosus, safety issues were limited to Grade I and Grade II events, so the safety profile looks pretty clean so far. There weren’t any efficacy data available, but PK data did show a dose-dependent increase in regulatory T-cells (Tregs) relative to conventional T-cells, with an increase in the Treg/Tcon ratio of 12x at the first dose and 7x at the third dose. As Tregs promote “self-tolerance”, this is an encouraging, but certainly not definitive, sign that the drug could be effective.
Lilly is planning a Phase II study for the second half of 2020, and has also resumed enrollment in two Phase I studies in psoriasis and atopic dermatitis.
I’ve modestly raised my odds of success for the NKTR-358 program in lupus, but with the drug still sporting Phase I odds of success, the change doesn’t really drive a meaningful change in value (about $1/share). The key to unlocking more value at Nektar remains the clinical efficacy of bempeg, particularly in melanoma, but in other indications like bladder cancer, RCC, and lung cancer as well. NKTR-255 remains more of a low-probability wild card at this point absent any real data.
Success in melanoma could drive the shares to $50, with further contributions from bladder cancer, renal cancer, and lupus adding even more potential value. On the flip side, a definitive failure in melanoma could send the shares plummeting and force the company to raise more funds on highly dilutive terms.
The Bottom Line
Whether you should own Nektar depends greatly on your risk tolerance. The bempeg program has long been controversial, but the 2021 data readouts should answer the lingering questions as to whether the drug has real value. While I believe the risk/reward balance is favorable, and NKTR-358 could be an increasingly significant asset over time, there are no guarantees with biotechs and investors need to act accordingly.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.