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Morningstar | Maintaining $39 FVE for No-Moat Nektar After Fresh Look at the Emerging Immuno-Oncology Biotech

We have taken a fresh look at Nektar following new data and the recent addition of trials in new indications for lead drug candidate bempegaldesleukin (or bempeg). After some adjustments to our model, we are maintaining our fair value estimate of $39 per share for the emerging biotech, and we are maintaining our no-moat rating. Our valuation is extremely sensitive to our assumptions of probability-weighted sales for bempeg, the firm's leading immuno-oncology candidate, which we model to reach about $2.5 billion in probability-weighted sales by 2028.

The probability-weighted opportunity of bempeg in combination with Opdivo makes up about 70% of total probability-weighted bempeg revenue in our model, with the rest composed of opportunities such as monotherapy, a combination with NKTR-262, combinations with Merck's Keytruda or Roche's Tecentriq, and a combination with Takeda's TAK-659. These additional opportunities expand the total addressable market significantly, but as they are in early-stage trials, we assign a 10% probability of approval to the additional opportunities, compared with a probability of about 40% for the combination of bempeg and Opdivo in nine indications.

For the four indications where we've seen phase 1/2 data (non-small cell lung cancer, melanoma, kidney cancer, and bladder cancer), we give bempeg a 50% chance of approval. These are currently in phase 3 trials. For the other indications being tested (triple-negative breast cancer, small cell lung cancer, colorectal cancer, gastric cancer, and sarcoma), we give bempeg a lower chance of approval (20%) given the lack of data. We have assigned slightly higher share in melanoma and bladder cancer, where we think bempeg's early data looked strong compared with checkpoint inhibitors--with the important caveat that it is difficult to compare across trials, especially given the small number of patients. We've assigned lower patient share in kidney cancer, where combinations of checkpoint inhibitors and tyrosine kinase inhibitors look highly competitive, as well as non-small cell lung cancer, from which we've only seen bempeg data in five patients.

Nektar's portfolio of marketed and pipeline drugs is diversified but largely unproven. Having sold the rights to royalties of other drugs in order to fund drug discovery and clinical research, Nektar only receives royalties from two drugs, with royalties for Movantik for opioid-induced constipation and Adynovate for hemophilia contributing roughly $50 to $150 million in royalty revenue annually throughout our 10-year explicit forecast. Pipeline candidates outside of immuno-oncology include NKTR-181 for chronic pain (filed for approval with potential launch in late 2019), Onzeald for metastatic breast cancer (phase 3), PEGPH20 in solid tumors (phase 3; partnered with Halozyme), and NKTR-358 for lupus (phase 1b; partnered with Eli Lilly). Although the company's near-term focus will likely be constrained to the large phase 3 trials for bempegaldesleukin in combination with Opdivo, Nektar has two other immuno-oncology candidates that could bolster its competitive position in the future, NKTR-262 (phase 1) and NKTR-255 (pre-clinical). We like the recent focus on immuno-oncology, as expertise in the lucrative (albeit competitive) indication could help the firm carve out a moat in the future.