EUR 850.00 For Business Accounts Only

Morningstar | Business as Usual for Nektar Before Upcoming Trial Readout at SITC; Maintaining $39 FVE

Nektar's third quarter was in line with our expectations as the firm reported a net loss of $96 million while funding research and development for its immuno-oncology candidates. The emerging biotech reported nearly $28 million in revenue, from smaller product sales and collaboration revenue, and reiterated full-year guidance. Nektar ended the quarter with $2 billion in cash and equivalents, thanks to the significant upfront payment of over $1 billion from Bristol Myers recognized in the second quarter. Management indicated that it expects research and development spending to ramp up in the fourth quarter because of continued trials of its pipeline candidates, which is in line with our expectations. We estimate that the clinical trials of Nektar's pipeline therapies will bring the firm's research and development spend to over $400 million by the end of the year. We are maintaining our fair value estimate of $39 per share and no-moat rating for Nektar.

In November, the firm announced a new collaboration with Pfizer, with plans to initiate trials of NKTR-214, a PEGylated IL-2 and Nektar's lead immuno-oncology candidate, in combinations of doublets and triplets with Pfizer's anti-PD-L1 (avelumab), PARP inhibitor (talazoparib), and androgen receptor inhibitor (enzalutamide) in metastatic castration-resistant prostate cancer (mCRPC) and squamous cell carcinoma of the head and neck (SCCHN). The financial details of the agreement were not disclosed, and this is the most recent of several collaborations to test NKTR-214 in combination with other oncology therapies, such as Takeda's dual SYK-FLT inhibitor (TAK-659) and Syndax's HDAC inhibitor, as well as cancer vaccines and checkpoint inhibitors. Most of these trials are due to initiate in 2019. While we are impressed with all of these collaborations for NKTR-214, we continue to believe that the available data leaves questions about the molecule's efficacy and safety. We currently weigh the total potential NKTR-214 sales with a less than 20% chance of approval.

Since the results for NKTR-214 and Opdivo in various indications presented last June at the American Society of Clinical Oncology's (ASCO) conference, both the investor and medical communities have been waiting for the next set of data from the combination of NKTR-214 and Bristol's anti-PD-L1, Opdivo. Nektar will present an update on the the Phase 1/2 study of the combination in melanoma at the upcoming Society for Immunotherapy of Cancer's meeting on Nov. 9, in addition to providing further details on the recently initiated Phase 3 study in melanoma. The abstract released earlier this month indicated a 50% overall response rate, unchanged since the data presented in June despite adding 10 more patients to the trial and longer duration. While we wait for more details at the company's presentation at SITC, we note that we are cautious of the unchanged overall response rate. NKTR-214 in combination with Opdivo would have to demonstrate significantly better efficacy than checkpoint inhibitors alone to gain significant share in the immuno-oncology space (if approved). The stock has sold off over 40% since its recent peak in September and about 60% from pre-ASCO levels, which we believe is a correction from the lofty levels it was previously trading at. We believe the stock is now fairly valued, with doubts about the combination's efficacy fully priced in. We look forward to hearing from the firm at SITC, where, in addition to an update on NKTR-214 and Opdivo in melanoma, the firm will also provide early data from the Phase 1 trial of NKTR-214 in combination with NKTR-262, a TLR 7/8 agonist.