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Morningstar | Not Ruling Out Nektar's NKTR-214 Yet; Attractive Safety Profile, but Efficacy Leaves Us Wanting More

Nektar's presentation at the Society for Immunotherapy of Cancer meeting on Nov. 9 covered data from the phase 2 study of NKTR-214 and Opdivo in front-line melanoma as well as early data from the phase 1 study of NKTR-262 and NKTR-214 in solid tumors. The results for the NKTR-214 and Opdivo combination hint at solid efficacy and offer a very promising safety profile, but we still question whether it has potential to become a backbone of immunotherapy by surpassing the efficacy of Opdivo and Yervoy. We weigh the opportunity for the combination in melanoma with a 50% chance of approval, which we expect to maintain following this weekend's results. We are also maintaining our fair value estimate of $39 per share and no-moat rating for Nektar.

In the SITC abstract, Nektar reported a 50% overall response rate, or ORR, with a data cutoff of July 12, unchanged from the previously reported 50% overall response rate (data cutoff of May 29) despite adding 10 more patients to the study for a total of 38 patients. This incrementally improved to 53%, with one more patient showing response before the Oct. 1 cutoff for the presentation.

Early data for the combination resulted in an overall response rate of 64%, but only in 11 patients. While the investing community has been looking for a stronger response to the tune of those early results as an indicator of NKTR-214's success over other immunotherapies, comparing results from different trials is not an adequate measure of efficacy or indication of approval. Opdivo and Yervoy in phase 2 trials in front-line melanoma showed an overall response rate of 61%, and the efficacy held to about 58% in larger phase 3 trials. On the other hand, Incyte's epacadostat and Opdivo in front-line melanoma demonstrated a 65% overall response rate, but the response deteriorated when treatment moved to phase 3 trials. With the stock trading just below our fair value estimate, we believe that while some healthy skepticism is priced into the stock, the combination is far from ruled out at this point.

Nektar reported a complete response rate of 24% and less than 20% of patients experienced serious adverse effects, which were easily manageable and did not result in any discontinuations. Nektar has demonstrated that NKTR-214 in combination with Opdivo can produce a safe, durable response, and the complete response rate is comparable to that of Opdivo and Yervoy in phase 2 trials (22%). The main questions that remain is whether the response will hold as we move into phase 3 trials with significantly more patients (over 750 patients in the melanoma trial) and how it will measure up to the comparator arm of the trial, which is Opdivo monotherapy.

NKTR-214 in combination with Opdivo was more effective in PD-L1-positive patients (ORR 68%) than in PD-L1-negative patients (ORR 43%). We believe that NKTR-214's ability to gain share (if approved) over leading immunotherapies will depend on its potential to treat PD-L1-negative patients, in which checkpoint inhibitors are often less effective. While PD-L1 expression is not a perfect biomarker, this lower response in PD-L1-negative patients is disappointing and does not suggest a definitive advantage of NKTR-214 in this patient population, especially given that there were no confirmed complete responses in PD-L1-negative patients (although there were two unconfirmed complete responses and another patient exhibited 100% target lesion reduction). In phase 2 melanoma studies, Opdivo and Yervoy demonstrated a 55% overall response rate in PD-L1-negative patients. We'll be watching for results in these populations in upcoming readouts for indications outside of melanoma as well as phase 3 trials. The final analysis in melanoma is expected in the second half of 2020.