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
Nektar Therapeutics is a research-based biopharmaceutical company that discovers
and develops innovative new medicines in areas of high unmet medical need. Our
research and development pipeline of new investigational drugs includes
treatments for cancer and autoimmune disease. We leverage our proprietary and
proven chemistry platform to discover and design new drug candidates. These drug
candidates utilize our advanced polymer conjugate technology platforms, which
are designed to enable the development of new molecular entities that target
known mechanisms of action. We continue to make significant investments in
building and advancing our pipeline of proprietary drug candidates as we believe
that this is the best strategy to build long-term stockholder value.
In immuno-oncology (I-O), we are executing a clinical development program for
bempegaldesleukin (previously referred to as NKTR-214), in collaboration with
Bristol-Myers Squibb Company (BMS) as well as other independent development work
evaluating bempegaldesleukin in combination with other agents with potential
complementary mechanisms of action. We announced in August that the FDA granted
a Breakthrough Therapy designation for bempegaldesleukin in combination with
Opdivo® for the treatment of patients with untreated unresectable or metastatic
melanoma. We expect our research and development expense to continue to grow
over the next few years as we expand and execute our broad clinical development
program for bempegaldesleukin.
On January 9, 2020, we and BMS entered into an Amendment No. 1 (the Amendment)
to the Collaboration Agreement. dated February 13, 2018 (the BMS Collaboration
Agreement). Pursuant to the Amendment, we and BMS agreed to update the
Collaboration Development Plan under which we are collaborating and developing
bempegaldesleukin. Specifically, pursuant to the updated Collaboration
Development Plan, bempegaldesleukin in combination with Opdivo® is currently
being evaluated in ongoing registrational trials in first-line metastatic
melanoma, first-line cisplatin ineligible, PD-L1 low, locally advanced or
metastatic urothelial cancer, first-line metastatic renal cell carcinoma (RCC),
and muscle-invasive bladder cancer, and also includes an additional
registrational trial in adjuvant melanoma, as well as a Phase 1/2 dose
escalation and expansion study to evaluate bempegaldesleukin plus Opdivo® in
combination with axitinib in first line RCC in order to support a future Phase 3
registrational trial. Several other registrational-supporting pediatric and
safety studies for the combination of bempegaldesleukin and Opdivo® are either
currently underway or planned to begin in 2020. Also, as specifically allowed
under the BMS Collaboration Agreement, Nektar is independently studying
bempegaldesleukin and pembrolizumab in a non-small cell lung cancer (NSCLC)
Phase 1/2 trial, and BMS plans to independently study bempegaldesleukin and
Opdivo® in a NSCLC dose-optimization Phase 1/2 trial that BMS plans to begin in
2020.
The Amendment did not alter the cost-sharing methodology under the BMS
Collaboration Agreement. The parties share development costs based on each
party's relative ownership interest in the compounds included in the regimen.
For example, we share clinical development costs for bempegaldesleukin in
combination with Opdivo®, BMS 67.5% and Nektar 32.5%. For costs of manufacturing
bempegaldesleukin, however, BMS is responsible for 35% and Nektar is responsible
for 65% of costs. BMS supplies Opdivo® free of charge. We also share
commercialization related costs, 35% BMS and 65% Nektar, which we present in
general and administrative expense. Our share of development costs is limited to
an annual cap of $125.0 million. To the extent this annual cap is exceeded, we
will recognize our full share of the research and development expense and BMS
will reimburse us for the amount over the annual cap which will be recorded as a
contingent liability. This contingent liability will be paid to BMS only if
bempegaldesleukin is approved and solely by reducing a portion of our share of
net profits following the first commercial sale of bempegaldesleukin. The BMS
Collaboration Agreement entitles Nektar to receive up to $1.455 billion of
clinical, regulatory and commercial launch milestones, $650.0 million of which
are associated with approval and launch of bempegaldesleukin in its first
indication in the U.S., EU and Japan (subject to $100.0 million in creditable
milestone payments). As a result, whether and when bempegaldesleukin is approved
in any indication will have a significant impact on our future results of
operations and financial condition.
In addition, under the Amendment, we are entitled to an additional $25.0 million
non-refundable, non-creditable milestone payment following the achievement of
the first-patient, first-visit milestone in the registrational adjuvant melanoma
trial studying bempegaldesleukin and Opdivo®. We are also eligible to receive
non-refundable, creditable milestone payments of $25.0 million and $75.0 million
following the achievement of the first-patient, first-visit milestone in the
registrational muscle-
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invasive bladder cancer trial (achieved in January 2020) and the first-patient,
first-visit milestone in a registrational first-line non-small-cell lung cancer
trial, respectively, in each case studying the combination of bempegaldesleukin
and Opdivo®.
Outside of the collaboration development plan with BMS, we are conducting
additional research and development activities evaluating bempegaldesleukin in
combination with other agents that have potential complementary mechanisms of
action. Our strategic objective is to establish bempegaldesleukin as a key
component of many I-O combination regimens with the potential to enhance the
standard of care in multiple oncology settings. On November 6, 2018, we entered
into a clinical collaboration with Pfizer Inc. (Pfizer) to evaluate several
combination regimens in multiple cancer settings, including metastatic
castration-resistant prostate cancer and squamous cell carcinoma of the head and
neck. The combination regimens in this collaboration will evaluate
bempegaldesleukin with avelumab, a human anti-PD-L1 antibody in development by
Merck KGaA (Merck), and Pfizer; talazoparib, a poly (ADP-ribose) polymerase
(PARP) inhibitor developed by Pfizer; or enzalutamide, an androgen receptor
inhibitor in development by Pfizer and Astellas Pharma Inc. We are planning a
Phase 1 study this year in pancreatic cancer patients in collaboration with
BioXcel Therapeutics Inc. (BioXcel) to evaluate a triplet combination of
bempegaldesleukin, BXCL-701 (a small molecule immune-modulator, DPP 8/9), and
avelumab being supplied to BioXcel by Pfizer and Merck. We are also working in
collaboration with Vaccibody AS (Vaccibody) to evaluate in a Phase 1
proof-of-concept study combining bempegaldesleukin with Vaccibody's personalized
cancer neoantigen vaccine. With our non-BMS clinical collaborations for
bempegaldesleukin, we generally share clinical development costs on a
substantially pro-rata basis commensurate with our ownership interest in the
underlying compounds. We expect to continue to make significant and increasing
investments exploring the potential of bempegaldesleukin with mechanisms of
action that we believe are synergistic with bempegaldesleukin based on emerging
scientific findings in cancer biology and preclinical development work.
We are also advancing other molecules, including NKTR-262 and NKTR-255, in our
I-O portfolio. NKTR-262 is a small molecule agonist that targets toll-like
receptors (TLRs) found on innate immune cells in the body. NKTR-262 is designed
to stimulate the innate immune system and promote maturation and activation of
antigen-presenting cells (APCs), such as dendritic cells, which are critical to
induce the body's adaptive immunity and create antigen-specific cytotoxic T
cells. NKTR-262 is being developed as an intra-tumoral injection in combination
with systemic bempegaldesleukin in order to induce an abscopal response and
achieve the goal of tumor regression in cancer patients treated with both
therapies. The Phase 1/2 dose-escalation and expansion trial of NKTR-262 in
patients with solid tumors is currently ongoing. NKTR-255 is a biologic that
targets the interleukin-15 (IL-15) pathway in order to activate the body's
innate and adaptive immunity. Activation of the IL-15 pathway enhances the
survival and function of natural killer (NK) cells and induces survival of both
effector and CD8 memory T cells. Preclinical findings suggest NKTR-255 has the
potential to synergistically combine with antibody dependent cellular cytoxicity
molecules as well as enhance CAR-T therapies. We have initiated a Phase 1
clinical study of NKTR-255 in adults with relapsed or refractory non-Hodgkin
lymphoma or multiple myeloma. We are also designing other clinical trials in
both liquid and solid tumor settings.
In immunology, we are developing NKTR-358, which is designed to correct the
underlying immune system imbalance in the body that occurs in patients with
autoimmune disease. NKTR-358 is designed to optimally target the IL-2 receptor
complex in order to stimulate proliferation and growth of regulatory T cells.
NKTR-358 is being developed as a once or twice monthly self-administered
injection for a number of autoimmune diseases. In 2017, we entered into a
worldwide license agreement with Eli Lilly and Company (Lilly) to co-develop
NKTR-358. We received an initial payment of $150.0 million in September 2017 and
are eligible for up to an additional $250.0 million for development and
regulatory milestones. We are responsible for completing Phase 1 clinical
development and certain drug product development and supply activities. We also
share Phase 2 development costs with Lilly, with Lilly responsible for 75% and
Nektar responsible for 25% of these costs. We will have the option to contribute
funding to Phase 3 development on an indication-by-indication basis, ranging
from zero to 25% of the Phase 3 development costs. Lilly will be responsible for
all costs of global commercialization and we will have an option to co-promote
in the U.S. under certain conditions.
We have completed a Phase 1 dose-finding trial of NKTR-358 to evaluate
single-ascending doses of NKTR-358 in approximately 100 healthy patients.
Results from this study demonstrated a multiple-fold increase in regulatory T
cells with no change in CD8 positive or natural killer cell levels and no
dose-limiting toxicities were observed. We also completed treatment of a Phase 1
multiple-ascending dose trial to evaluate NKTR-358 in patients with systemic
lupus erythematosus (SLE). Lilly is expected to initiate a Phase 2 study in SLE
in mid-2020 and to start an additional Phase 2 study in another auto-immune
disease in 2020. These clinical studies are in addition to the two Phase 1b
studies in patients with psoriasis and atopic dermatitis being run by Lilly.
ONZEALD® (also known as NKTR-102, etirinotecan pegol) is a topoisomerase I
inhibitor proprietary drug candidate. A Phase 3 clinical study, which we called
the BEACON study, evaluated ONZEALD® as a single-agent therapy for women with
advanced metastatic breast cancer. In a top-line analysis of 852 patients from
the trial, ONZEALD® provided a 2.1 month improvement in median overall survival
over treatment of physician's choice (TPC), which did not achieve statistical
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significance. A significant overall survival benefit was observed in two
pre-specified subgroup populations-patients with a history of brain metastases
and patients with baseline liver metastases at study entry. We thereafter
initiated the ATTAIN study, a Phase 3 study comparing overall survival in
patients with advanced breast cancer and brain metastases who have been
previously treated with an anthracycline, a taxane and capecitabine. On February
27, 2020, we announced that there was no improvement in overall survival between
patients receiving ONZEALD® and patients receiving TPC, and, as a result, we
will wind down all development activities for ONZEALD®.
We were developing NKTR-181 for the treatment of chronic low back pain in adult
patients and had submitted an NDA for NKTR-181. At the FDA advisory committee
meeting held on January 14, 2020, the joint FDA Anesthetic Drug Products
Advisory Committee and Drug Safety and Risk Management Committee did not
recommend approval of NKTR-181, and, as a result, we withdrew the NDA and
decided to make no further investment commitments to this program.
The level of our future research and development investment will depend on a
number of trends and uncertainties including clinical outcomes, future studies
required to advance programs to regulatory approval, and the economics related
to potential future collaborations that may include up-front payments,
development funding, milestones, and royalties. Over the next several years, we
plan to continue to make significant investments to advance our early drug
candidate pipeline.
We have historically derived all of our revenue and substantial amounts of
operating capital from our collaboration agreements including the BMS
Collaboration Agreement, pursuant to which we recognized $1.06 billion in
revenue and recorded $790.2 million in additional paid in capital for shares of
our common stock issued in the transaction. While in the near-term we continue
to expect to generate substantially all of our revenue from collaboration
arrangements, including the potential $1.43 billion in development and
regulatory milestones under the BMS collaboration, in the medium- to long-term,
our plan is to generate significant commercial revenue from proprietary products
including bempegaldesleukin. Since we do not have experience commercializing
products or an established commercialization organization, there will be
substantial risks and uncertainties in future years as we build commercial,
organizational, and operational capabilities.
We also receive royalties and milestones from two approved drugs. We have a
collaboration with AstraZeneca for MOVANTIK®, an oral peripherally-acting
mu-opioid antagonist for the treatment of opioid-induced constipation in adult
patients with non-cancer pain which was approved by the FDA and subsequently
launched in March 2015 and MOVENTIG®, for the treatment of opioid-induced
constipation in adult patients who have an inadequate response to laxatives,
which was approved by health authorities in the European Union and many other
countries beginning in 2014. We also have a collaboration with Baxalta Inc. (a
wholly-owned subsidiary of Takeda Pharmaceutical Company Ltd.) for ADYNOVATE®,
that was approved by the FDA in late 2015 for use in adults and adolescents,
aged 12 years and older, who have Hemophilia A. ADYNOVI™ was approved by health
authorities in Europe in January 2018, and has also been approved in many other
countries.
Our business is subject to significant risks, including the risks inherent in
our development efforts, the results of our clinical trials, our dependence on
the marketing efforts by our collaboration partners, uncertainties associated
with obtaining and enforcing patents, the lengthy and expensive regulatory
approval process and competition from other products. For a discussion of these
and some of the other key risks and uncertainties affecting our business, see
Item 1A. Risk Factors.
While the approved drugs and clinical development programs described above are
key elements of our future success, we believe it is critically important that
we continue to make substantial investments in our earlier-stage drug candidate
pipeline. We have several drug candidates in earlier stage clinical development
or being explored in research that we are preparing to advance into the clinic
in future years. We are also advancing several other drug candidates in
preclinical development in the areas of I-O, immunology, and other therapeutic
indications. We believe that our substantial investment in research and
development has the potential to create significant value if one or more of our
drug candidates demonstrates positive clinical results, receives regulatory
approval in one or more major markets and achieves commercial success. Drug
research and development is an inherently uncertain process with a high risk of
failure at every stage prior to approval. The timing and outcome of clinical
trial results are extremely difficult to predict. Clinical development successes
and failures can have a disproportionately positive or negative impact on our
scientific and medical prospects, financial condition and prospects, results of
operations and market value.

Effects of the COVID-19 Pandemic
During the first quarter of 2020, a novel strain of coronavirus (SARS-CoV-2)
that was first identified in Wuhan, China spread to other countries. In March
2020, COVID-19, the disease resulting from coronavirus infection, was declared a
global pandemic. Many countries, including the United States and India, have
taken steps to slow or moderate the spread of the virus. These steps include,
among others, restricting travel, closing schools, and issuing shelter-in-place
orders. It remains unclear how long these measures will remain in place and
whether these measures will be effective.
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Currently, with respect to the operation of our facilities, we are closely
adhering to applicable guidelines and orders. Essential operations in research,
manufacturing and maintenance that occur within our facilities are continuing in
accordance with the permissions granted under government ordinances. Across all
our locations, we have instituted a temporary work from home policy for all
office personnel who do not need to work on site to maintain productivity. At
this time, we have not identified a material change to our productivity as a
result of these measures, but this could change, particularly if restricted
travel, closed schools, and shelter-in-place orders are not removed or
significantly eased.
The safety and well-being of our employees, and the patients and healthcare
providers in our clinical trial programs, are of first and foremost importance
to us. We believe that the safety measures we are taking and instructing our
contractors to take in response to the COVID-19 pandemic meet or exceed the
guidance and requirements issued from government and public health officials.
We and our partners are currently engaged in the clinical testing of our
proprietary drug candidates and the COVID-19 pandemic introduces significant
challenges to our clinical development programs which are central to our
business. The evolving situation around the COVID-19 pandemic, along with the
resulting public health guidance measures that have been put into place, have
thus far had varying impacts on the clinical testing of our proprietary drug
candidates depending on the therapeutic indication, geographic distribution of
clinical trial sites, the clinical trial stage, and, in certain cases, our
partners' general corporate approach to the COVID-19 pandemic. The rapid
development and fluidity of the COVID-19 pandemic precludes any firm estimates
as to the ultimate effect this disease will have on our clinical trials, our
operations and our business. As a result, any current assessment of the effects
of the COVID-19 pandemic, including the impact of this disease on our specific
clinical programs as discussed below, is difficult to predict and subject to
change.
Specifically, for the ongoing registrational clinical trials studying the
combination of bempegaldesleukin and Opdivo® in cancer indications being led by
Nektar (such as RCC and first-line cisplatin ineligible, PD-L1 low, locally
advanced or metastatic urothelial cancer), although we have not seen evidence to
date that the COVID-19 pandemic has had a significant impact on enrollment for
these trials, the future impact of the COVID-19 pandemic on these trials is very
difficult to predict and, with regard to individual clinical trial sites within
these studies, will likely vary by the geographic region in which they are
located.
For Nektar's Phase 1/2 trial studying bempegaldesleukin and pembrolizumab in
NSCLC, the COVID-19 pandemic has delayed the initiation of certain investigator
sites in Europe, which has been identified as an important location for
enrollment in this trial. Based on present estimates, we currently expect to
have initial safety as well as preliminary overall response rate data for an
initial set of patients in the dose-escalation and NSCLC cohorts of this study
by the end of 2020 or the first quarter of 2021.
With regard to Nektar's ongoing clinical studies of NKTR-262 (the Phase 1/2
REVEAL study) and NKTR-255, these studies have thus far largely remained on
track although we have experienced some challenges with new investigator site
initiations. Nonetheless, the ongoing COVID-19 pandemic could still impact the
timely completion of these studies by approximately three months.
For clinical studies of our proprietary drug candidates being run by our
partners, BMS has announced that, due to the COVID-19 pandemic, it has continued
enrolling at existing investigator sites but paused initiation of new
investigator sites for all of its studies, which include the first-line melanoma
study and the muscle-invasive bladder cancer study, both evaluating the
combination of bempegaldesleukin and Opdivo®. As a result, we expect the
COVID-19 pandemic to likely delay the projected study endpoints, study
enrollment rates and study starts for these BMS-led studies by between three to
six months if new investigator sites cannot be quickly initiated. Our partner
Lilly, which is running clinical trials of NKTR-358, temporarily suspended
recruitment for clinical trials during the COVID-19 pandemic. As a result, we
also expect the timelines for projected study endpoints, study enrollment rates
and study starts will have likely delays of between three to six months for
ongoing and additional NKTR-358 clinical studies if mitigation strategies (e.g.,
initiating new trial sites in low or minimally impacted COVID-19 pandemic areas)
are not successful.
With regard to our IND-enabling research, although the COVID-19 pandemic has
caused us to reduce the number of employees working at our sites, a subset of
our research-based employees continues to conduct laboratory work in our
research facilities (which is permitted under the applicable government
ordinances). As a result, we continue to make progress in the identification of
new drug candidates.
In an effort to mitigate the negative effects of the COVID-19 pandemic on our
clinical trials (both in terms of clinical trial timelines and integrity of
clinical study data), we have taken steps to help our clinical trial
investigators and their teams continue to provide care and uninterrupted access
to their patients. Particularly, in the context of our clinical trials directed
to investigational cancer treatments, for example, we are actively working with
our study sites to implement measures to prevent study protocol violations, to
minimize any disruption of treatment visits, to accommodate for patient visit
delays caused by limited access to healthcare facilities, to leverage
alternative methods for maintaining clinical trial integrity, and to properly
record patient event data that may be influenced by the COVID-19 pandemic.
In this respect, we are also incorporating recent direction and flexibility
provided by regulatory authorities, including the United States Food and Drug
Administration in its March 18, 2020 Guidance (updated April 16, 2020) entitled
"FDA Guidance on Conduct of Clinical Trials of Medicinal Products during
COVID-19 Pandemic." This Guidance is continually being updated by FDA and
updates can be found on the FDA's website at www.fda.gov. In addition, we may
refer to guidance documents from
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other regulatory agencies, such as, for example, the European Medicines Agency's
"Implications of coronavirus disease (COVID-19) on methodological aspects of
ongoing clinical trials" found on www.ema.europa.eu, which are also continually
being updated.
With respect to financing our near-term business needs, as set forth below in
"Key Developments and Trends in Liquidity and Capital Resources," we estimate we
have working capital to fund our current business plans through at least the
next twelve months.
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Key Developments and Trends in Liquidity and Capital Resources
We estimate that we have working capital to fund our current business plans
through at least the next twelve months. As of March 31, 2020, we had
approximately $1.5 billion in cash and investments in marketable securities. On
April 13, 2020, we repaid the principal and accrued interest of our senior notes
totaling $254.8 million. See Note 9 to our Condensed Consolidated Financial
Statements for additional information.
Results of Operations
Three Months Ended March 31, 2020 and 2019
Revenue (in thousands, except percentages)
                                                                                                             Increase/           Percentage Increase/
                                                                                                            (Decrease)                (Decrease)
                                              Three Months Ended March 31,                                 2020 vs. 2019             2020 vs. 2019
                                                 2020                 2019
Product sales                              $       3,444           $  4,398          $   (954)                        (22) %
Royalty revenue                                    9,719             11,390            (1,671)                        (15) %
Non-cash royalty revenue related to sale
of future royalties                                9,895              8,230             1,665                          20  %
License, collaboration and other revenue          27,515              4,204            23,311                       >100%
Total revenue                              $      50,573           $ 28,222          $ 22,351                          79  %


Our revenue is derived from our collaboration agreements, under which we may
receive product sales revenue, royalties, and license fees, as well as
development and sales milestones and other contingent payments. We recognize
revenue when we transfer promised goods or services to our collaboration
partners. The amount of upfront fees received under our license and
collaboration agreements allocated to continuing obligations, such as
development or manufacturing and supply commitments, is generally recognized as
we deliver products or provide development services. As a result, there may be
significant variations in the timing of receipt of cash payments and our
recognition of revenue. We make our best estimate of the timing and amount of
products and services expected to be required to fulfill our performance
obligations. Given the uncertainties in research and development collaborations,
significant judgment is required to make these estimates.
Product Sales
Product sales include predominantly fixed price manufacturing and supply
agreements with our collaboration partners and are the result of firm purchase
orders from those partners. The timing of shipments is based solely on the
demand and requirements of our collaboration partners and is not ratable
throughout the year.
Product sales decreased for the three months ended March 31, 2020 compared to
the three months ended March 31, 2019 primarily due to a decrease in product
demand from our collaboration partners. We expect product sales for the full
year of 2020 to be lower than 2019 due to this decrease in demand. At this time,
we do not anticipate that effects of the COVID-19 pandemic will impact our
product sales.
Royalty Revenue
We receive royalty revenue from certain of our collaboration partners based on
their net sales of commercial products. Royalty revenue for the three months
ended March 31, 2020 decreased as compared to the three months ended March 31,
2019 due to a decrease in net sales by our collaboration patners. At this time,
we cannot estimate the effects of the COVID-19 pandemic on the net sales of the
commercial products of our collaboration partners and our resulting royalty
revenues.
Non-cash Royalty Revenue Related to Sale of Future Royalties
For a discussion of our Non-cash royalty revenue, please see our discussion
below "Non-Cash Royalty Revenue and Non-Cash Interest Expense."
License, Collaboration and Other Revenue
License, collaboration and other revenue includes the recognition of upfront
payments, milestone and other contingent payments received in connection with
our license and collaboration agreements and certain research and development
activities.
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The level of license, collaboration and other revenue depends in part upon the
achievement of milestones and other contingent events, the continuation of
existing collaborations, the amount of our research and development services,
and entering into new collaboration agreements, if any.
License, collaboration and other revenue increased during the three months ended
March 31, 2020 compared to the three months ended March 31, 2019 due to the
recognition of the $25.0 million milestone for the first patient, first visit in
the registrational muscle invasive bladder cancer trial under our BMS
Collaboration Agreement. We expect that our license, collaboration and other
revenue will increase significantly in the full year of 2020 compared to 2019 as
a result of the recognition of this milestone and the potential recognition of
the $25.0 million milestone for the first patient, first visit in the
registrational adjuvant melanoma trial, both under our BMS Collaboration
Agreement.
The timing and future success of our drug development programs and those of our
collaboration partners are subject to a number of risks and uncertainties. See
Item 1A. Risk Factors for discussion of the risks associated with the complex
nature of our collaboration agreements.
Cost of Goods Sold and Product Gross Margin (in thousands, except percentages)
                                                                                                                 Increase/           Percentage Increase/
                                                                                                                (Decrease)                (Decrease)
                                                   Three Months Ended March 31,                                2020 vs. 2019             2020 vs. 2019
                                                      2020                 2019
Cost of goods sold                              $       3,811           $ 5,440          $ (1,629)                        (30) %
Product gross profit                                     (367)           (1,042)              675                         (65) %
Product gross margin                                      (11)  %           (24) %


Our strategy is to manufacture and supply polymer reagents to support our
proprietary drug candidates or our third-party collaborators where we have a
strategic development and commercialization relationship or where we derive
substantial economic benefit. We have elected to only enter into and maintain
those manufacturing relationships associated with long-term collaboration
agreements which include multiple sources of revenue, which we view holistically
and in aggregate. We have a predominantly fixed cost base associated with our
manufacturing activities. As a result, our product gross profit and margin are
significantly impacted by the mix and volume of products sold in each period.
Product gross margin was negative for the three months ended March 31, 2020 and
March 31, 2019. We have a manufacturing arrangement with a partner that includes
a fixed price which is less than the fully burdened manufacturing cost for the
reagent, and we expect this situation to continue with this partner in future
years. In addition to product sales from reagent materials supplied to the
partner where our sales are less than our fully burdened manufacturing cost, we
also receive royalty revenue from this collaboration. In the three months ended
March 31, 2020 and 2019, the royalty revenue from this collaboration exceeded
the related negative gross profit.
We expect product gross margin to continue to fluctuate in future periods
depending on the level and mix of manufacturing orders from our customers. We
currently expect product gross margin to be negative in 2020 as a result of the
manufacturing arrangement described above.
Research and Development Expense (in thousands, except percentages)
                                                                                                              Increase/           Percentage Increase/
                                                                                                             (Decrease)                (Decrease)
                                              Three Months Ended March 31,                                  2020 vs. 2019             2020 vs. 2019
                                                 2020                  2019
Research and development expense          $      108,987           $ 118,463          $ (9,476)                         (8) %


Research and development expense consists primarily of clinical study costs,
contract manufacturing costs, direct costs of outside research, materials,
supplies, licenses and fees as well as personnel costs (including salaries,
benefits, and stock-based compensation). Research and development expense also
includes certain overhead allocations consisting of support and
facilities-related costs. Where we perform research and development activities
under a clinical joint development collaboration, such as our collaboration with
BMS, we record the expense reimbursement from our partners as a reduction to
research and development expense, and we record our share of our partners'
expenses as an increase to research and development expense.
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Research and development expense decreased for the three months ended March 31,
2020 compared to the three months ended March 31, 2019 primarily due to
pre-commercial manufacturing costs for NKTR-181 that we incurred during the
three months ended March 31, 2019. Although we continued pre-commercial
manufacturing activities for NKTR-181 during 2019 and early 2020, we present the
costs of these activities for the three months ended March 31, 2020 in the
Impairment of assets and other costs related to terminated program line in our
Condensed Consolidated Statements of Operations as a result of our decision to
withdraw our NDA for NKTR-181. The costs of our clinical development program,
including bempegaldesleukin, NKTR-358, NKTR-262 and NKTR-255, were consistent
between the three months ended March 31, 2020 compared to the three months ended
March 31, 2019. During the three months ended March 31, 2020 and 2019, we
recorded net reductions to research and development expense for BMS's
reimbursements of our costs of $30.7 million and $28.8 million,
respectively. Under the BMS Collaboration Agreement, BMS generally bears 67.5%
of development costs for bempegaldesleukin in combination with Opdivo® and 35%
of costs for manufacturing bempegaldesleukin. Please see Note 6 to our Condensed
Consolidated Financial Statements for additional information regarding our BMS
Collaboration Agreement.
We expect research and development expense to increase for 2020 compared to 2019
primarily as a result of advancing development of bempegaldesleukin under the
BMS Collaboration Agreement. In addition, we are collaborating with Lilly to
develop NKTR-358, and Lilly is planning additional studies, which are expected
to begin in 2020, for which we are responsible for 25% of costs. We are
continuing to enroll patients in a dose-escalation Phase 1/2 study for NKTR-262
in combination with bempegaldesleukin. We are also continuing our Phase 1
dose-escalation studies for NKTR-255 in multiple myeloma and non-Hodgkin
lymphoma. The timing and amount of our future clinical investments will vary
significantly based upon our evaluation of ongoing clinical results and the
structure, timing, and scope of potential collaboration partnerships (if any)
for these programs.
In addition to our drug candidates that we plan to evaluate in clinical
development during 2020 and beyond, we believe it is vitally important to
continue our substantial investment in a pipeline of new drug candidates to
continue to build the value of our drug candidate pipeline and our business. Our
discovery research organization is identifying new drug candidates by applying
our polymer conjugate technology platform to a wide range of molecule classes,
including small molecules and large proteins, peptides and antibodies, across
multiple therapeutic areas. We plan to continue to advance our most promising
early research drug candidates into preclinical development with the objective
to advance these early stage research programs to human clinical studies over
the next several years.

Our expenditures on current and future preclinical and clinical development
programs are subject to numerous uncertainties in timing and cost to completion.
In order to advance our drug candidates through clinical development, each drug
candidate must be tested in numerous preclinical safety, toxicology and efficacy
studies. We then conduct clinical studies for our drug candidates that take
several years to complete. The cost and time required to complete clinical
trials may vary significantly over the life of a clinical development program as
a result of a variety of factors, including but not limited to:
•the number of patients required for a given clinical study design;
•the length of time required to enroll clinical study participants;
•the number and location of sites included in the clinical studies;
•the clinical study designs required by the health authorities (i.e. primary and
secondary endpoints as well as the size of the study population needed to
demonstrate efficacy and safety outcomes);
•the potential for changing standards of care for the target patient population;
•the competition for patient recruitment from competitive drug candidates being
studied in the same clinical setting;
•the costs of producing supplies of the drug candidates needed for clinical
trials and regulatory submissions;
•the safety and efficacy profile of the drug candidate;
•the use of clinical research organizations to assist with the management of the
trials; and
•the costs and timing of, and the ability to secure, approvals from government
health authorities.
Furthermore, our strategy includes the potential of entering into collaborations
with third parties to participate in the development and commercialization of
some of our drug candidates such as those collaborations that we have already
completed for bempegaldesleukin, NKTR-358 and MOVANTIK®. In certain situations,
the clinical development program and process for a drug candidate and the
estimated completion date will largely be under the control of that third party
and not under our control. We cannot forecast with any degree of certainty which
of our drug candidates will be subject to future collaborations or how such
arrangements would affect our development plans or capital requirements.
As noted above, the evolving situation around the COVID-19 pandemic has had
varying impacts on the clinical testing of our proprietary drug candidates
depending on the therapeutic indication, geographic distribution of clinical
trial sites, the clinical trial stage, and, in certain cases, our partners'
general corporate approach to the pandemic. We currently believe that we could
experience delays of approximately three months for earlier stage Nektar-run
clinical studies (such as the Phase 1/2 trial studying
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bempegaldesleukin and pembrolizumab in NSCLC). In addition, for clinical studies
involving our proprietary drug candidates that are run by our partners, we
currently expect adjustments of timelines for projected study endpoints, study
enrollment rates and study starts will likely be delayed from three to six
months. As a result of these delays and potential delays, we may incur
additional costs associated with these clinical trials. At this time, we cannot
estimate if such increases would have a material effect on our results of
operations or financial position.
The risks and uncertainties associated with our research and development
projects are discussed more fully in Item 1A. Risk Factors. As a result of the
uncertainties discussed above, we are unable to determine with any degree of
certainty the duration and completion costs of our research and development
projects, anticipated completion dates or when and to what extent we will
receive cash inflows from a collaboration arrangement or the commercialization
of a drug candidate.
General and Administrative Expense (in thousands, except percentages)
                                                                                                              Increase/           Percentage Increase/
                                                                                                             (Decrease)                (Decrease)
                                                Three Months Ended March 31,                                2020 vs. 2019             2020 vs. 2019
                                                   2020                 2019
General and administrative expense           $      26,217           $ 25,006          $ 1,211                           5  %


General and administrative expense includes the cost of administrative staffing,
commercial, finance and legal activities. General and administrative expense
increased marginally during the three months ended March 31, 2020 compared with
the three months ended March 31, 2019. We expect general and administrative
expenses in the full year of 2020 to increase compared to 2019, primarily due to
increased personnel costs as we begin a stage appropriate build of our
commercial capability to launch and co-commercialize bempegaldesleukin with BMS
as early as 2021. At this time, we do not anticipate that the effects of the
COVID-19 pandemic will materially affect our general and administrative expense.
Impairment of Assets and Other Costs for Terminated Program (in thousands,
except percentages)
                                                                                                         Increase/           Percentage Increase/
                                                                                                        (Decrease)                (Decrease)
                                            Three Months Ended March 31,                               2020 vs. 2019             2020 vs. 2019
                                               2020                2019
Impairment of assets and other costs for
terminated program                        $   45,189            $     -          $ 45,189                         100  %


On January 14, 2020, the joint FDA Anesthetic Drug Products Advisory Committee
and Drug Safety and Risk Management Committee did not recommend approval of our
NDA for NKTR-181. As a result, we withdrew our NDA and decided to make no
further investments in this program. On February 26, 2020, the Audit Committee
of our Board of Directors approved management's plan for the wind-down of
Inheris and the NKTR-181 program.
As a result, in the three months ended March 31, 2020, we wrote off $19.7
million of advance payments to contract manufacturers for commercial batches of
NKTR-181. We also incurred $25.5 million of additional costs, primarily for
non-cancellable commitments to our contract manufacturers and certain severance
costs.
Interest Expense (in thousands, except percentages)
                                                                                                              Increase/           Percentage Increase/
                                                                                                             (Decrease)                (Decrease)
                                                 Three Months Ended March 31,                               2020 vs. 2019             2020 vs. 2019
                                                    2020                 2019
Interest expense                              $       6,204           $ 5,226          $   978                          19  %


Interest expense during the three months ended March 31, 2020 and 2019 primarily
consists of interest from our senior secured notes. In October 2015, we issued
$250.0 million in aggregate principal amount of 7.75% senior secured notes due
October 2020. Interest on the 7.75% senior secured notes is calculated based on
actual days outstanding over a 360 day year. Interest expense for the three
months ended March 31, 2020 is consistent with interest expense for the three
months ended March 31, 2019. On April 13, 2020, we repaid the principal and
accrued interest of our senior notes totaling $254.8 million. As a result, we
will incur no interest expense after the repayment date.
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Non-Cash Royalty Revenue and Non-Cash Interest Expense
                                                                                                       Increase/            Percentage Increase/
                                                                                                       (Decrease)                (Decrease)
                                          Three Months Ended March 31,                               2020 vs. 2019              2020 vs. 2019
                                             2020                 2019
Non-cash royalty revenue related to
sale of future royalties               $       9,895           $ 8,230          $ 1,665                           20  %
Non-cash interest expense on liability
related to sale of future royalties            6,968             6,065              903                           15  %


For a discussion of the sale of future royalties for CIMZIA® and MIRCERA®, see
Note 4 to our Condensed Consolidated Financial Statements.
As discussed in Note 4, we continue to recognize non-cash royalty revenue, which
increased for the three months ended March 31, 2020 compared with the three
months ended March 31, 2019 due to increases in sales of CIMZIA® and MIRCERA®.
Non-cash interest expense increased for the three months ended March 31, 2020
compared with the three months ended March 31, 2019 due to an increase in the
estimated implicit interest rate over the life of the transaction. When
forecasted future revenues rise, this results in an increase to the estimated
implicit interest rate over the life of the transaction, which, in turn,
increases the prospective effective interest rate in the current and future
periods.
We recognized non-cash interest expense at an effective rate of 29% for the
three months ended March 31, 2019, reflecting the estimated implicit interest
rate over the life of the transaction of approximately 18.7%. During the fourth
quarter of 2019, due to sustained increases in the forecasted sales of CIMZIA®
and MIRCERA®, we increased our estimated implicit interest rate over the life of
the agreement from 18.7% to approximately 19.5%, which resulted in a prospective
interest rate of 38%. The rate remained unchanged during the three months ended
March 31, 2020.
Over the term of this arrangement, the net proceeds of the transaction of $114.0
million, consisting of the original proceeds of $124.0 million, net of $10.0
million in payments from us to RPI, is amortized as the difference between the
non-cash royalty revenue and the non-cash interest expense. To date, we have
amortized $43.4 million of the net proceeds. We periodically assess future
non-cash royalty revenues, and we may adjust the prospective effective interest
rate based on our best estimates of future non-cash royalty revenue such that
future non-cash interest expense will amortize the remaining $70.6 million of
the net proceeds. There are a number of factors that could materially affect our
estimated interest rate, in particular, the amount and timing of royalty
payments from future net sales of CIMZIA® and MIRCERA®. As a result, future
interest rates could differ significantly, and we will adjust any such change in
our estimated interest rate prospectively. At this time, we cannot estimate the
effects of the COVID-19 pandemic on net sales of CIMZIA® and MIRCERA® and the
resulting effects on our non-cash royalty revenue and potential effects on our
estimated implicit rate for non-cash interest expense.


Interest Income and Other Income (Expense), net (in thousands, except
percentages)
                                                                                                           Increase/           Percentage Increase/
                                                                                                          (Decrease)                (Decrease)
                                             Three Months Ended March 31,                                2020 vs. 2019             2020 vs. 2019
                                                2020                2019
Interest income and other income
(expense), net                            $      8,352           $ 12,483          $ (4,131)                        (33) %


Interest income and other income (expense) decreased for the three months ended
March 31, 2020 compared to the three months ended March 31, 2019 due to lower
investment balances which have been utilized to fund our operations as well as
decreases in market interest rates. We expect that our interest income and other
income (expense), net will decrease for 2020 compared to 2019 for these same
reasons, including lower investment balances due to our repayment of our senior
notes on April 13, 2020. Additionally, due to the COVID-19 pandemic, the
effective interest rate earned on new investments purchased as existing
securities in our portfolio mature may be lower than historical interest rates.
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Income Tax Expense
                                                                                                         Increase/           Percentage Increase/
                                                                                                        (Decrease)                (Decrease)
                                           Three Months Ended March 31,                                2020 vs. 2019             2020 vs. 2019
                                               2020                 2019
Provision for income taxes              $         200            $   137          $    63                          46  %


For the three months ended March 31, 2020 and 2019, our income tax expense
primarily resulted from taxable income in our Nektar India subsidiary. We have
fully reserved our U.S. federal deferred tax assets generated from our net
operating losses, as we believe it is not more likely than not that the benefit
will be realized.
Liquidity and Capital Resources
We have financed our operations primarily through revenue from product sales,
royalties and strategic collaboration agreements, as well as public offering and
private placements of debt and equity securities. At March 31, 2020, we had
approximately $1.5 billion in cash and investments in marketable securities. As
noted above, on April 13, 2020, we repaid the principal and accrued interest of
our senior notes totaling $254.8 million.
We estimate that we have working capital to fund our current business plans for
the next twelve months. We expect the clinical development of our proprietary
drug candidates including bempegaldesleukin, NKTR-358, NKTR-262 and NKTR-255
will continue to require significant investment to continue to advance in
clinical development with the objective of entering into a collaboration
partnership or obtaining regulatory approval. In the past, we have received a
number of significant payments from collaboration agreements and other
significant transactions. In April 2018, we received a total of $1.85 billion
from BMS including a $1.0 billion upfront payment and an $850.0 million premium
investment in our common stock. In July 2017, we entered into a collaboration
agreement for NKTR-358 with Lilly, under which we received a $150.0 million
upfront payment. In the future, we expect to receive substantial payments from
our collaboration agreements with BMS and Lilly and other existing and future
collaboration transactions if drug candidates in our pipeline achieve positive
clinical or regulatory outcomes. In particular, under the BMS Collaboration
Agreement, we are entitled to $1.45 billion of clinical, regulatory and
commercial launch milestones, $650.0 million of which are associated with
approval and launch of bempegaldesleukin in its first indication in the U.S., EU
and Japan (subject to $100.0 million in creditable payments based on clinical
milestones that could occur prior to the approval and launch of
bempegaldesleukin). As a result, whether and when bempegaldesleukin is approved
in any indication will have a significant impact on our future liquidity and
capital resources. We have no credit facility or any other sources of committed
capital.
In the short term, we do not anticipate that the effects of the COVID-19
pandemic will have a material effect on our results of operations or financial
position since we do not generate significant cash flows from recurring revenues
and our revenues are generally less affected by shelter-in place or similar
orders. However, if the effects of the COVID-19 pandemic delay the commencement
or enrollment of patients in our clinical trials, the completion of these trials
may also be delayed, which in turn may delay our ability to file for regulatory
approval and commercialize these products (if approved) or enter into
collaboration agreements.
Due to the potential for adverse developments in the credit markets, we may
experience reduced liquidity with respect to some of our investments in
marketable securities. These investments are generally held to maturity, which,
in accordance with our investment policy, is less than two years. However, if
the need arises to liquidate such securities before maturity, we may experience
losses on liquidation. At March 31, 2020, the average time to maturity of the
investments held in our portfolio was approximately six months. To date we have
not experienced any liquidity issues with respect to these securities. We
utilized proceeds of investments that had matured to repay $254.8 million for
our senior notes and accrued interest on April 13, 2020. We believe that, even
allowing for potential liquidity issues with respect to these securities and the
effect of the COVID-19 pandemic on the financial markets, our remaining cash and
investments in marketable securities will be sufficient to meet our anticipated
cash needs for at least the next twelve months.
Our current business plan is subject to significant uncertainties and risks as a
result of, among other factors, clinical and regulatory outcomes for
bempegaldesleukin, the sales levels of our products, if and when they are
approved, the sales levels for those products for which we are entitled to
royalties, clinical program outcomes, whether, when and on what terms we are
able to enter into new collaboration transactions, expenses being higher than
anticipated, unplanned expenses, cash receipts being lower than anticipated, and
the need to satisfy contingent liabilities, including litigation matters and
indemnification obligations.
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The availability and terms of various financing alternatives, if required in the
future, substantially depend on many factors including the success or failure of
drug development programs in our pipeline. The availability and terms of
financing alternatives and any future significant payments from existing or new
collaborations depend on the positive outcome of ongoing or planned clinical
studies, whether we or our partners are successful in obtaining regulatory
authority approvals in major markets, and if approved, the commercial success of
these drugs, as well as general capital market conditions. We may pursue various
financing alternatives to fund the expansion of our business as appropriate.
Cash flows from operating activities
Cash flows used in operating activities for the three months ended March 31,
2020 totaled $78.1 million, which includes $98.1 million of net operating cash
uses as well as $5.0 million for interest payments on our senior secured notes,
partially offset by the receipt of the $25.0 million milestone payment from BMS
for the achievement of the first patient, first visit in the registrational
muscle invasive bladder cancer trial.
Cash flows used in operating activities for the three months ended March 31,
2019 totaled $80.9 million, which includes $86.0 million of net operating cash
uses as well as $4.9 million for interest payments on our senior secured notes,
partially offset by the receipt of a $10.0 million sales milestone payment from
our collaboration agreement with Baxalta.
We expect that cash flows used in operating activities, excluding upfront,
milestone and other contingent payments received, will increase in the full year
of 2020 compared to 2019 primarily as a result of increased research and
development expenses.
Cash flows from investing activities
We paid $0.9 million and $5.6 million for the purchase or construction of
property, plant and equipment in the three months ended March 31, 2020 and 2019,
respectively. The decrease for the three months ended March 31, 2020 compared
with 2019 resulted from the construction of leasehold improvements at our
facilities lease on Third St. during 2019. We expect our capital expenditures in
the full year of 2020 to decrease significantly compared with 2019, primarily
due to the completion of the construction of these leasehold improvements.
Cash flows from financing activities
We received proceeds from issuance of common stock related to our employee
option and stock purchase plans of $11.1 million and $4.9 million in the three
months ended March 31, 2020 and 2019, respectively.
On April 13, 2020, we repaid the principal and accrued interest of our senior
notes totaling $254.8 million. See Note 9 to our Condensed Consolidated
Financial Statements for additional information.
Contractual Obligations
Other than the repayment of our senior notes, there were no material changes
outside the ordinary course of business during the three months ended March 31,
2020 to the summary of contractual obligations included in our Annual Report on
Form 10-K for the year ended December 31, 2019 on file with the SEC.
Off-Balance Sheet Arrangements
We do not utilize off-balance sheet financing arrangements as a source of
liquidity or financing.
Item 1A. Risk Factors
Investors in Nektar Therapeutics should carefully consider the risks described
below before making an investment decision. The risks described below may not be
the only ones relating to our company. This description includes any material
changes to and supersedes the description of the risk factors associated with
our business previously disclosed in Item 1A of our Annual Report on Form 10-K
for the year ended December 31, 2019. Additional risks that we currently believe
are immaterial may also impair our business operations. Our business, results of
operations, financial condition, cash flows and future prospects and the trading
price of our common stock and our ability to repay our senior secured notes
could be harmed as a result of any of these risks, and investors may lose all or
part of their investment. In assessing these risks, investors should also refer
to the other information contained or incorporated by reference in this
Quarterly Report on Form 10-Q and our Annual Report on Form 10-K
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for the year ended December 31, 2019, including our consolidated financial
statements and related notes, and our other filings made from time to time with
the SEC.
Risks Related to Our Business
We are highly dependent on the success of bempegaldesleukin, our lead I-O
candidate. We are executing a clinical development program for bempegaldesleukin
and clinical and regulatory outcomes for bempegaldesleukin, if not successful,
will significantly harm our business.
Our future success is highly dependent on our ability to successfully develop,
obtain regulatory approval for, and commercialize bempegaldesleukin. In general,
most investigational drugs, including I-O drug candidates such as
bempegaldesleukin, do not become approved drugs. Accordingly, there is a very
meaningful risk that bempegaldesleukin will not succeed in one or more clinical
trials sufficient to support one or more regulatory approvals. To date, reported
clinical outcomes from bempegaldesleukin have had a significant impact on our
market valuation, and business prospects and we expect this to continue in
future periods. If one or more clinical studies of bempegaldesleukin are delayed
(as a result of, for example, our collaboration partner causing a delay of the
initiation of one or more clinical trials for reasons outside of our control) or
not successful, it would materially harm our market valuation, prospects,
financial condition and results of operations. For example, under the BMS
Collaboration Agreement, we are entitled to up to $1.455 billion in development
milestone payments that are based upon clinical and regulatory successes from
the bempegaldesleukin development program. One or more failures in
bempegaldesleukin studies could jeopardize such milestone payments, and any
product sales or royalty revenue or commercial milestone payments that we would
otherwise be entitled to receive could be reduced, delayed or eliminated.
Delays in clinical studies are common and have many causes, and any significant
delay in clinical studies being conducted by us or our partners could result in
delay in regulatory approvals and jeopardize the ability to proceed to
commercialization.
We or our partners may experience delays in clinical trials of drug candidates.
We have ongoing trials evaluating bempegaldesleukin, including trials evaluating
bempegaldesleukin as a potential combination treatment with BMS's Opdivo® as
well as other ongoing and planned combination trials. Our partner Lilly has
initiated clinical Phase 1b studies of NKTR-358 for indications in systemic
lupus erythematosus, psoriasis and atopic dermatitis. We also continue to enroll
patients in a Phase 1/2 study evaluating bempegaldesleukin in combination with
NKTR-262 in patients with solid tumors. In addition, we have initiated a Phase 1
clinical study of NKTR-255 in adults with relapsed or refractory non-Hodgkin
lymphoma or multiple myeloma. These and other clinical studies may not begin on
time, enroll a sufficient number of patients or be completed on schedule, if at
all. Clinical trials for any of our product candidates could be delayed for a
variety of reasons, including:
•delays in obtaining regulatory authorization to commence a clinical study;
•delays in reaching agreement with applicable regulatory authorities on a
clinical study design;
•for product candidates (such as bempegaldesleukin and NKTR-358) partnered with
other companies, delays caused by our partner;
•imposition of a clinical hold by the FDA or other health authorities, which may
occur at any time including after any inspection of clinical trial operations or
trial sites;
•suspension or termination of a clinical study by us, our partners, the FDA or
foreign regulatory authorities due to adverse side effects of a drug on subjects
in the trial;
•delays in recruiting suitable patients to participate in a trial;
•delays in having patients complete participation in a trial or return for
post-treatment follow-up;
•clinical sites dropping out of a trial to the detriment of enrollment rates;
•delays in manufacturing and delivery of sufficient supply of clinical trial
materials;
•changes in regulatory authorities policies or guidance applicable to our drug
candidates;
•delays caused by changing standards of care or new treatment options; and
•delays caused by the COVID-19 pandemic (See also the risk factor in this Item
1A titled "Our business could be adversely affected by the effects of health
epidemics, including the recent COVID-19 pandemic").
If the initiation or completion of any of the planned clinical studies for our
drug candidates is delayed for any of the above or other reasons, the regulatory
approval process would be delayed and the ability to commercialize and commence
sales of these drug candidates could be materially harmed, which could have a
material adverse effect on our business, financial condition and results of
operations. Clinical study delays could also shorten any commercial periods
during which our products have patent protection and may allow our competitors
to bring products to market before we do, which could impair our ability to
successfully commercialize our product candidates and may harm our business and
results of operations.
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The outcomes from competitive I-O and combination therapy clinical trials, and
the discovery and development of new potential oncology therapies, could have a
material and adverse impact on the value of our I-O research and development
pipeline.
The research and development of I-O therapies is a very competitive global
segment in the biopharmaceutical industry attracting billions of dollars of
investment each year.  Our clinical trial plans for bempegaldesleukin, NKTR-262,
and NKTR-255 face substantial competition from other I-O combination regimens
already approved, and many more combination therapies that are either ahead of
or in parallel development in patient populations where we are studying our drug
candidates. As I-O combination therapies are relatively new approaches in cancer
treatment and few have successfully completed late stage development, I-O drug
development entails substantial risks and uncertainties that include rapidly
changing standards of care, patient enrollment competition, evolving regulatory
frameworks to evaluate combination regimens, and varying risk-benefit profiles
of competing therapies, any or all of which could have a material and adverse
impact on the probability of success of I-O drug candidates.
Drug development is a long and inherently uncertain process with a high risk of
failure at every stage of development.
We have a number of proprietary drug candidates and partnered drug candidates in
research and development ranging from the early discovery research phase through
preclinical testing and clinical trials. Preclinical testing and clinical
studies are long, expensive, difficult to design and implement and highly
uncertain as to outcome. It will take us, or our collaborative partners, many
years to conduct extensive preclinical tests and clinical trials to demonstrate
the safety and efficacy in humans of our product candidates. The start or end of
a clinical study is often delayed or halted due to changing regulatory
requirements, manufacturing challenges, required clinical trial administrative
actions, slower than anticipated patient enrollment, changing standards of care,
availability or prevalence of use of a comparator drug or required prior
therapy, clinical outcomes, or our and our partners' financial constraints.
Drug development is a highly uncertain scientific and medical endeavor, and
failure can unexpectedly occur at any stage of preclinical and clinical
development. Typically, there is a high rate of attrition for drug candidates in
preclinical and clinical trials due to scientific feasibility, safety, efficacy,
changing standards of medical care (including commercialization of a competing
therapy in the same or similar indication for which our drug candidate is being
studied) and other variables (such as commercial supply challenges). The risk of
failure increases for our drug candidates that are based on new technologies,
such as the application of our advanced polymer conjugate technology to
bempegaldesleukin, NKTR-358, NKTR-262, NKTR-255, and other drug candidates
currently in discovery research or preclinical development. The failure of one
or more of our drug candidates could have a material adverse effect on our
business, financial condition and results of operations.
Our business could be adversely affected by the effects of health epidemics,
including the recent COVID-19 pandemic.
Our business could be adversely affected by health epidemics in regions where we
have concentrations of clinical trial sites or other business operations, and
these health epidemics could cause significant disruption in the operations of
third-party manufacturers and CROs upon whom we rely. For example, in December
2019, a novel strain of coronavirus, SARS-CoV-2, causing a disease referred to
as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19
has spread to multiple countries, including the United States, India and all
European countries. In March 2020, the COVID-19 outbreak was declared a
pandemic. Further, the President of the United States declared the COVID-19
pandemic a national emergency, invoking powers under the Stafford Act, the
legislation that directs federal emergency disaster response. Similarly, the
State of California declared a state of emergency related to the spread of
COVID-19, and the San Francisco Department of Public Health announced aggressive
recommendations to reduce the spread of the disease. In addition, we have
implemented work from home policies for most employees. The effects of the
shelter-in-place order and our work from home policies may negatively impact
productivity, disrupt our business and delay our clinical programs and
timelines, the magnitude of which will depend, in part, on the length and
severity of the restrictions and other limitations on our ability to conduct our
business in the ordinary course. Although we have taken precautions to avoid the
spread of the coronavirus among our employees, it is possible one or more
members of our workforce will be diagnosed with COVID-19, which could adversely
impact our operations. These and similar disruptions in our operations could
negatively impact our business, operating results and financial condition.
Quarantines, shelter-in-place and similar government orders designed to slow or
moderate the spread of the coronavirus or other infectious diseases, and even
the perception that such orders, shutdowns or other restrictions on the conduct
of business operations could occur, could impact the availability and
productivity of personnel at third-party manufacturing facilities in the United
States and other countries, or the availability or cost of materials, any of
which could disrupt our supply chain. For example, any manufacturing or supply
chain interruptions of our proprietary drugs, or the comparator drugs used in
our clinical trials, could adversely affect our ability to conduct ongoing and
future clinical trials of our drug product candidates.
In addition, our clinical trials may be affected by the COVID-19 pandemic.
Clinical site initiation, patient screening and patient enrollment may be
delayed due to, for example, prioritization of hospital resources toward the
COVID-19 pandemic.
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Some patients who are successfully enrolled in clinical trials involving our
drug candidates may not be able to comply with clinical trial protocols due to,
for example, shelter-in-place orders impeding movement, disrupted healthcare
services, or health issues for suspected or confirmed COVID-19 status.
Similarly, our ability to recruit and retain patients and principal
investigators and site staff, all of whom may have heightened risk for COVID-19,
could adversely impact our clinical trial operations.
Although we are implementing measures to maintain the integrity of our clinical
trials, there is no guarantee that we will prevent all study protocol
violations, missed study treatment visits, and other influences that jeopardize
reliability and validity of our clinical trial data. If a regulatory authority
determines our clinical trial data lacks integrity, there is no guarantee that
we will have a remedy to correct or otherwise address the deficiency. Even if
such a remedy is identified, the cost for implementing the remedy could be
prohibitively expensive, time consuming, or both. As a consequence, a clinical
study of our proprietary drug candidate in which the integrity of the clinical
study is questioned or doubted may require lengthy and costly remediation
measures (such as, for example, repeating the study), thereby causing
substantial harm to our business.
Also, the COVID-19 pandemic could postpone necessary interactions with
regulators regarding our drug candidates in development and could delay review
or approval of our regulatory submissions.
As a result of the increase of telehealth, work from home, and virtual meetings
being necessitated by the COVID-19 pandemic, the risk for disruptions caused by
cyber attacks is increased. Safeguards such as firewalls and other security
measures that work well when employees are located within our facilities may not
work as effectively when those employees are working remotely, and there is no
guarantee that these and other cybersecurity safeguards will successfully
prevent all cyber attacks. If we, our partners, our suppliers, or our
contractors experience a cyberattack, experience data accessibility issues, or
encounter communication disruptions, our business may suffer as a result of the
loss or theft of our important data, and we may be liable for compromising the
protection of personal data.
The spread of COVID-19, which has caused a broad impact globally, may materially
affect us economically. While the potential economic impact brought by, and the
duration of, the COVID-19 pandemic is difficult to assess or predict, the
pandemic could result in significant disruption of global financial markets,
reducing our ability to access capital, which could in the future negatively
affect our liquidity. In addition, a recession or market correction resulting
from the spread of COVID-19 could materially affect our business and the value
of our common stock.
The rapid development and fluidity of the COVID-19 pandemic results in a
substantial number of individual variables that could cause a negative impact on
our operations and our business, thereby precluding useful predictions as to how
this pandemic will ultimately affect us. Thus, any current assessment of the
effects of the COVID-19 pandemic, including the impact of this disease on our
clinical trial timelines, is subject to change. We do not yet know the full
extent of potential impacts on our business, our clinical trials, healthcare
systems or the global economy as a whole. However, these effects could have a
material negative impact on our operations and our business.
We may not elect or be able to take advantage of any expedited development or
regulatory review and approval processes available to product candidates granted
breakthrough therapy by the FDA.
We intend to evaluate and continue ongoing discussions with the FDA on
regulatory strategies that could enable us to take advantage of expedited
development pathways for certain of our drug candidates, although we cannot be
certain that our drug candidates will qualify for any expedited development
pathways or that regulatory authorities will grant, or allow us to maintain, the
relevant qualifying designations.
Breakthrough therapy designation is intended to expedite the development and
review of drug candidates that are designed to treat serious or life-threatening
diseases when preliminary clinical evidence indicates that the drug may
demonstrate substantial improvement over existing therapies on one or more
clinically significant endpoints, such as substantial treatment effects observed
early in clinical development. The designation of a drug candidate as a
breakthrough therapy provides potential benefits that include more frequent
meetings with FDA to discuss the development plan for the drug candidate and
ensure collection of appropriate data needed to support approval; more frequent
written correspondence from FDA about such things as the design of the proposed
clinical trials and use of biomarkers; intensive guidance on an efficient drug
development program, beginning as early as Phase 1; organizational commitment
involving senior managers; and eligibility for rolling review and priority
review.
Although bempegaldesleukin in combination with Opdivo® received breakthrough
therapy designation for the treatment of patients with previously untreated
unresectable or metastatic melanoma, we may elect not to pursue breakthrough
therapy designation for our other drug candidates, and the FDA has broad
discretion whether or not to grant these designations.
    Accordingly, even if we believe a particular drug candidate is eligible for
breakthrough therapy, we cannot be assured that the FDA would decide to grant
it. Breakthrough therapy designation does not change the standards for drug
approval, and there is no assurance that such designation will result in
expedited review or approval or that the approved indication will not be
narrower than the indication covered by the breakthrough therapy designation.
Thus, even though we have received breakthrough
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therapy designation, we may not experience a faster development process or
review, and, upon any filing seeking regulatory approval, we may not obtain an
approval from the FDA.
The risk of clinical failure for any drug candidate remains high prior to
regulatory approval.
A number of companies have suffered significant unforeseen failures in clinical
studies due to factors such as inconclusive efficacy or safety, even after
achieving preclinical proof-of-concept or positive results from earlier clinical
studies that were satisfactory both to them and to reviewing regulatory
authorities. Clinical study outcomes remain very unpredictable and it is
possible that one or more of our clinical studies could fail at any time due to
efficacy, safety or other important clinical findings or regulatory
requirements. The results from preclinical testing or early clinical trials of a
product candidate may not predict the results that will be obtained in later
phase clinical trials of the product candidate. We, the FDA, an independent
Institutional Review Board (IRB), an independent ethics committee (IEC), or
other applicable regulatory authorities may suspend clinical trials of a product
candidate at any time for various reasons, including a belief that patients
participating in such trials are being exposed to unacceptable health risks or
adverse side effects. Similarly, an IRB or IEC may suspend a clinical trial at a
particular trial site. If one or more of our drug candidates fail in clinical
studies, it could have a material adverse effect on our business, financial
condition and results of operations.
If we or our contract manufacturers are not able to manufacture drugs or drug
substances in sufficient quantities that meet applicable quality standards, it
could delay clinical studies, result in reduced sales or constitute a breach of
our contractual obligations, any of which could significantly harm our business,
financial condition and results of operations.
If we or our contract manufacturers are not able to manufacture and supply
sufficient drug quantities meeting applicable quality standards required to
support large clinical studies or commercial manufacturing in a timely manner,
it could delay our or our collaboration partners' clinical studies or result in
a breach of our contractual obligations, which could in turn reduce the
potential commercial sales of our or our collaboration partners' products. As a
result, we could incur substantial costs and damages and any product sales or
royalty revenue that we would otherwise be entitled to receive could be reduced,
delayed or eliminated. In most cases, we rely on contract manufacturing
organizations to manufacture and supply drug product for our clinical studies
and those of our collaboration partners. The manufacturing of drugs involves
significant risks and uncertainties related to the demonstration of adequate
stability, sufficient purification of the drug substance and drug product, the
identification and elimination of impurities, optimal formulations, process and
analytical methods validations, and challenges in controlling for all of these
variables. These risks and uncertainties are compounded in the presence of the
COVID-19 pandemic wherein the facilities and employees responsible for
manufacturing drugs for use in clinical trials may be negatively impacted such
that there is an insufficient supply of study treatment drugs. We have faced and
may in the future face significant difficulties, delays and unexpected expenses
as we validate third party contract manufacturers required for drug supply to
support our clinical studies and the clinical studies and products of our
collaboration partners. Failure by us or our contract manufacturers to supply
API or drug products in sufficient quantities that meet all applicable quality
requirements could result in supply shortages for our clinical studies or the
clinical studies and commercial activities of our collaboration partners. Such
failures could significantly and materially delay clinical trials and regulatory
submissions or result in reduced sales, any of which could significantly harm
our business prospects, results of operations and financial condition.
Building and validating large scale clinical or commercial-scale manufacturing
facilities and processes, recruiting and training qualified personnel and
obtaining necessary regulatory approvals is complex, expensive and time
consuming. In the past, we have encountered challenges in scaling up
manufacturing to meet the requirements of large scale clinical trials without
making modifications to the drug formulation, which may cause significant delays
in clinical development. There continues to be substantial and unpredictable
risk and uncertainty related to manufacturing and supply until such time as the
commercial supply chain is validated and proven.
We purchase some of the starting material for drugs and drug candidates from a
single source or a limited number of suppliers, and the partial or complete loss
of one of these suppliers could cause production delays, clinical trial delays,
substantial loss of revenue and contract liability to third parties.
We often face very limited supply of a critical raw material that can only be
obtained from a single, or a limited number of, suppliers, which could cause
production delays, clinical trial delays, substantial lost revenue opportunities
or contract liabilities to third parties. For example, there are only a limited
number of qualified suppliers, and in some cases single source suppliers, for
the raw materials included in our PEGylation and advanced polymer conjugate drug
formulations. Any interruption in supply, diminution in quality of raw materials
supplied to us or failure to procure such raw materials on commercially feasible
terms could harm our business by delaying our clinical trials, impeding
commercialization of approved drugs or increasing our costs.
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Our manufacturing operations and those of our contract manufacturers are subject
to laws and other governmental regulatory requirements, which, if not met, would
have a material adverse effect on our business, results of operations and
financial condition.
We and our contract manufacturers are required in certain cases to maintain
compliance with current good manufacturing practices (cGMP), including cGMP
guidelines applicable to active pharmaceutical ingredients, and drug products,
and with laws and regulations governing manufacture and distribution of
controlled substances, and are subject to inspections by the FDA, the Drug
Enforcement Administration or comparable agencies in other jurisdictions
administering such requirements. We anticipate periodic regulatory inspections
of our drug manufacturing facilities and the manufacturing facilities of our
contract manufacturers for compliance with applicable regulatory requirements.
Any failure to follow and document our or our contract manufacturers' adherence
to such cGMP and other laws and governmental regulations or satisfy other
manufacturing and product release regulatory requirements may disrupt our
ability to meet our manufacturing obligations to our customers, lead to
significant delays in the availability of products for commercial use or
clinical study, result in the termination or hold on a clinical study or delay
or prevent filing or approval of marketing applications for our products.
Failure to comply with applicable laws and regulations may also result in
sanctions being imposed on us, including fines, injunctions, civil penalties,
failure of regulatory authorities to grant marketing approval of our products,
delays, suspension or withdrawal of approvals, license revocation, seizures,
administrative detention, or recalls of products, operating restrictions and
criminal prosecutions, any of which could harm our business. Regulatory
inspections could result in costly manufacturing changes or facility or capital
equipment upgrades to satisfy the FDA that our manufacturing and quality control
procedures are in substantial compliance with cGMP. Manufacturing delays, for us
or our contract manufacturers, pending resolution of regulatory deficiencies or
suspensions could have a material adverse effect on our business, results of
operations and financial condition.
If we or our partners do not obtain regulatory approval for our drug candidates
on a timely basis, or at all, or if the terms of any approval impose significant
restrictions or limitations on use, our business, results of operations and
financial condition will be negatively affected.
We or our partners may not obtain regulatory approval for drug candidates on a
timely basis, or at all, or the terms of any approval (which in some countries
includes pricing approval) may impose significant restrictions or limitations on
use. Drug candidates must undergo rigorous animal and human testing and an
extensive review process for safety and efficacy by the FDA and equivalent
foreign regulatory authorities. The time required for obtaining regulatory
decisions is uncertain and difficult to predict. For example, although the FDA
granted a Breakthrough Therapy designation to bempegaldesleukin in combination
with Opdivo® for the treatment of patients with previously untreated
unresectable or metastatic melanoma, there is no guarantee regulatory approval
will follow, if at all, for this or any indication of bempegaldesleukin on a
timely basis. The FDA and other U.S. and foreign regulatory authorities have
substantial discretion, at any phase of development, to terminate clinical
studies, require additional clinical development or other testing, delay or
withhold registration and marketing approval and mandate product withdrawals,
including recalls. Further, regulatory authorities have the discretion to
analyze data using their own methodologies that may differ from those used by us
or our partners, which could lead such authorities to arrive at different
conclusions regarding the safety or efficacy of a drug candidate. In addition,
undesirable side effects caused by our drug candidates could cause us or
regulatory authorities to interrupt, delay or halt clinical trials and could
result in a more restricted label or the delay or denial of regulatory approval
by regulatory authorities. For example, AstraZeneca is conducting a
post-marketing, observational epidemiological study comparing MOVANTIK® to other
treatments of opioid-induced constipation (OIC) in patients with chronic,
non-cancer pain and the results of this study could at some point in the future
negatively impact the labeling, regulatory status, and commercial potential of
MOVANTIK®.
Even if we or our partners receive regulatory approval of a product, the
approval may limit the indicated uses for which the drug may be marketed. Our
and our partnered drugs that have obtained regulatory approval, and the
manufacturing processes for these products, are subject to continued review and
periodic inspections by the FDA and other regulatory authorities. Discovery from
such review and inspection of previously unknown problems may result in
restrictions on marketed products or on us, including withdrawal or recall of
such products from the market, suspension of related manufacturing operations or
a more restricted label. The failure to obtain timely regulatory approval of
product candidates, any product marketing limitations or a product withdrawal
would negatively impact our business, results of operations and financial
condition.
Our results of operations and financial condition depend significantly on the
ability of our collaboration partners to successfully develop and market drugs
and they may fail to do so.
Under our collaboration agreements with various pharmaceutical or biotechnology
companies (other than Nektar-run trials under the BMS Collaboration Agreement),
our collaboration partner is generally solely responsible for:
•designing and conducting large scale clinical studies;
•preparing and filing documents necessary to obtain government approvals to sell
a given drug candidate; and/or
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•marketing and selling the drugs when and if they are approved.
Our reliance on collaboration partners poses a number of significant risks to
our business, including risks that:
•we have very little control over the timing and level of resources that our
collaboration partners dedicate to commercial marketing efforts such as the
amount of investment in sales and marketing personnel, general marketing
campaigns, direct-to-consumer advertising, product sampling, pricing agreements
and rebate strategies with government and private payers, manufacturing and
supply of drug product, and other marketing and selling activities that need to
be undertaken and well executed for a drug to have the potential to achieve
commercial success;
•collaboration partners with commercial rights may choose to devote fewer
resources to the marketing of our partnered drugs than they devote to their own
drugs or other drugs that they have in-licensed;
•we have very little control over the timing and amount of resources our
partners devote to development programs in one or more major markets;
•disagreements with partners could lead to delays in, or termination of, the
research, development or commercialization of product candidates or to
litigation or arbitration proceedings;
•disputes may arise or escalate in the future with respect to the ownership of
rights to technology or intellectual property developed with partners;
•we do not have the ability to unilaterally terminate agreements (or partners
may have extension or renewal rights) that we believe are not on commercially
reasonable terms or consistent with our current business strategy;
•partners may be unable to pay us as expected;
•partners may terminate their agreements with us unilaterally for any or no
reason, in some cases with the payment of a termination fee penalty and in other
cases with no termination fee penalty; and
•partners may respond to natural disasters, such as the COVID-19 pandemic, by
ceasing all or some of their development responsibilities (including the
responsibility to clinical develop our drug candidates).
Given these risks, the success of our current and future collaboration
partnerships is highly unpredictable and can have a substantial negative impact
on our business. If the approved drugs fail to achieve commercial success or the
drugs in development fail to have positive late stage clinical outcomes
sufficient to support regulatory approval in major markets, it could
significantly impair our access to capital necessary to fund our research and
development efforts for our proprietary drug candidates. If we are unable to
obtain sufficient capital resources to advance our drug candidate pipeline, it
would negatively impact the value of our business, results of operations and
financial condition.
We have substantial future capital requirements and there is a risk we may not
have access to sufficient capital to meet our current business plan. If we do
not receive substantial milestone or royalty payments from our existing
collaboration agreements, execute new high value collaborations or other
arrangements, or are unable to raise additional capital in one or more financing
transactions, we would be unable to continue our current level of investment in
research and development.
As of March 31, 2020, we had cash and investments in marketable securities
valued at approximately $1.5 billion and had debt of $250.0 million in principal
of senior secured notes. On April 13, 2020, we redeemed the notes at par and
therefore repaid the principal of $250.0 million and accrued interest of $4.8
million. While we believe that our cash position will be sufficient to meet our
liquidity requirements through at least the next 12 months, our future capital
requirements will depend upon numerous unpredictable factors, including:
•the cost, timing and outcomes of clinical studies and regulatory reviews of our
drug candidates -important examples include bempegaldesleukin and NKTR-358;
•if and when we receive potential milestone payments and royalties from our
existing collaborations if the drug candidates subject to those collaborations
achieve clinical, regulatory or commercial success;
•the progress, timing, cost and results of our clinical development programs;
•the success, progress, timing and costs of our efforts to implement new
collaborations, licenses and other transactions that increase our current net
cash, such as the sale of additional royalty interests held by us, term loan or
other debt arrangements, and the issuance of securities;
•the number of patients, enrollment criteria, primary and secondary endpoints,
and the number of clinical studies required by the regulatory authorities in
order to consider for approval our drug candidates and those of our
collaboration partners;
•our general and administrative expenses, capital expenditures and other uses of
cash;
•the sales levels of products marketed by our collaboration partners for which
we are entitled to royalties and sales milestone payments - importantly, the
levels of success in marketing and selling MOVANTIK® by RedHill Biopharma
pursuant to its sublicense from AstraZeneca in the U.S. and ADYNOVATE® by
Baxalta (a wholly
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owned subsidiary of Takeda) globally, as well as MOVENTIG® (the naloxegol brand
name in the EU) by Kirin in the EU; and
•disputes concerning patents, proprietary rights, or license and collaboration
agreements that negatively impact our receipt of milestone payments or royalties
or require us to make significant payments arising from licenses, settlements,
adverse judgments or ongoing royalties.
A significant multi-year capital commitment is required to advance our drug
candidates through the various stages of research and development in order to
generate sufficient data to enable high value collaboration partnerships with
significant upfront payments or to successfully achieve regulatory approval. In
the event we do not enter into any new collaboration partnerships with
significant upfront payments and we choose to continue our later stage research
and development programs, we may need to pursue financing alternatives,
including dilutive equity-based financings, such as an offering of convertible
debt or common stock, which would dilute the percentage ownership of our current
common stockholders and could significantly lower the market value of our common
stock. If sufficient capital is not available to us or is not available on
commercially reasonable terms, it could require us to delay or reduce one or
more of our research and development programs. If we are unable to sufficiently
advance our research and development programs, it could substantially impair the
value of such programs and result in a material adverse effect on our business,
financial condition and results of operations.
The commercial potential of a drug candidate in development is difficult to
predict. If the market size for a new drug is significantly smaller than we
anticipate, it could significantly and negatively impact our revenue, results of
operations and financial condition.
It is very difficult to estimate the commercial potential of product candidates
due to important factors such as safety and efficacy compared to other available
treatments, including potential generic drug alternatives with similar efficacy
profiles, changing standards of care, third party payer reimbursement standards,
patient and physician preferences, drug scheduling status, the availability of
competitive alternatives that may emerge either during the long drug development
process or after commercial introduction, and the availability of generic
versions of our product candidates following approval by regulatory authorities
based on the expiration of regulatory exclusivity or our inability to prevent
generic versions from coming to market by asserting our patents. If due to one
or more of these risks the market potential for a drug candidate is lower than
we anticipated, it could significantly and negatively impact the commercial
potential of the drug candidate, the commercial terms of any collaboration
partnership potential for such drug candidate, or if we have already entered
into a collaboration for such drug candidate, the revenue potential from royalty
and milestone payments could be significantly diminished and this would
negatively impact our business, financial condition and results of operations.
We also depend on our relationships with other companies for sales and marketing
performance and the commercialization of product candidates. Poor performance by
these companies, or disputes with these companies, could negatively impact our
revenue and financial condition.
If government and private insurance programs do not provide payment or
reimbursement for our partnered products or proprietary products, those products
will not be widely accepted, which would have a negative impact on our business,
results of operations and financial condition.
In both domestic and foreign markets, sales of our partnered and proprietary
products that have received regulatory approval will depend in part on market
acceptance among physicians and patients, pricing approvals by government
authorities and the availability of coverage and payment or reimbursement from
third-party payers, such as government programs, including Medicare and
Medicaid, managed care providers, private health insurers and other
organizations. However, eligibility for coverage does not necessarily signify
that a drug candidate will be adequately reimbursed in all cases or at a rate
that covers costs related to research, development, manufacture, sale, and
distribution. Third-party payers are increasingly challenging the price and cost
effectiveness of medical products and services. Therefore, significant
uncertainty exists as to the coverage and pricing approvals for, and the payment
or reimbursement status of, newly approved healthcare products. Further, due to
the COVID-19 pandemic, millions of individuals have lost or will be losing
employer-based insurance coverage, which may adversely affect our ability to
commercialize our product candidates even if there is adequate coverage and
reimbursement from third-party payers.
Moreover, legislation and regulations affecting the pricing of pharmaceuticals
may change before regulatory agencies approve our proposed products for
marketing and could further limit coverage or pricing approvals for, and
reimbursement of, our products from government authorities and third-party
payers. For example, Congress passed the Affordable Care Act in 2010 which
enacted a number of reforms to expand access to health insurance while also
reducing or constraining the growth of healthcare spending, enhancing remedies
against fraud and abuse, adding new transparency requirements for healthcare
industries, and imposing new taxes on fees on healthcare industry participants,
among other policy reforms. Federal agencies, Congress and state legislatures
have continued to show interest in implementing cost containment programs to
limit the growth of health care costs, including price controls, restrictions on
reimbursement and other fundamental changes to the healthcare delivery system.
In addition, in recent years, Congress has enacted various laws seeking to
reduce the federal debt level and contain healthcare
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expenditures, and the Medicare and other healthcare programs are frequently
identified as potential targets for spending cuts. New government legislation or
regulations related to pricing or other fundamental changes to the healthcare
delivery system as well as a government or third-party payer decision not to
approve pricing for, or provide adequate coverage or reimbursement of, our
products hold the potential to severely limit market opportunities of such
products.
If we are unable to establish and maintain collaboration partnerships on
attractive commercial terms, our business, results of operations and financial
condition could suffer.
We intend to continue to seek partnerships with pharmaceutical and biotechnology
partners to fund a portion of our research and development capital requirements.
The timing of new collaboration partnerships is difficult to predict due to
availability of clinical data, the outcomes from our clinical studies, the
number of potential partners that need to complete due diligence and approval
processes, the definitive agreement negotiation process and numerous other
unpredictable factors that can delay, impede or prevent significant
transactions. If we are unable to find suitable partners or negotiate
collaboration arrangements with favorable commercial terms with respect to our
existing and future drug candidates or the licensing of our intellectual
property, or if any arrangements we negotiate, or have negotiated, are
terminated, it could have a material adverse effect on our business, financial
condition and results of operations.
Our revenue is exclusively derived from our collaboration agreements, which can
result in significant fluctuation in our revenue from period to period, and our
past revenue is therefore not necessarily indicative of our future revenue.
Our revenue is exclusively derived from our collaboration agreements, from which
we receive upfront fees, contract research payments, milestone and other
contingent payments based on clinical progress, regulatory progress or net sales
achievements, royalties and product sales. Significant variations in the timing
of receipt of cash payments and our recognition of revenue can result from
payments based on the execution of new collaboration agreements, the timing of
clinical outcomes, regulatory approval, commercial launch or the achievement of
certain annual sales thresholds. The amount of our revenue derived from
collaboration agreements in any given period will depend on a number of
unpredictable factors, including our ability to find and maintain suitable
collaboration partners, the timing of the negotiation and conclusion of
collaboration agreements with such partners, whether and when we or our
collaboration partners achieve clinical, regulatory and sales milestones, the
timing of regulatory approvals in one or more major markets, reimbursement
levels by private and government payers, and the market introduction of new
drugs or generic versions of the approved drug, as well as other factors. Our
past revenue generated from collaboration agreements is not necessarily
indicative of our future revenue. If any of our existing or future collaboration
partners fails to develop, obtain regulatory approval for, manufacture or
ultimately commercialize any product candidate under our collaboration
agreement, our business, financial condition, and results of operations could be
materially and adversely affected.
We are a party to numerous collaboration agreements and other significant
agreements which contain complex commercial terms that could result in disputes,
litigation or indemnification liability that could adversely affect our
business, results of operations and financial condition.
We currently derive, and expect to derive in the foreseeable future,
substantially all of our revenue from collaboration agreements with
biotechnology and pharmaceutical companies. These collaboration agreements
contain complex commercial terms, including:
•clinical development and commercialization obligations that are based on
certain commercial reasonableness performance standards that can often be
difficult to enforce if disputes arise as to adequacy of our partner's
performance;
•research and development performance and reimbursement obligations for our
personnel and other resources allocated to partnered drug candidate development
programs;
•clinical and commercial manufacturing agreements, some of which are priced on
an actual cost basis for products supplied by us to our partners with
complicated cost allocation formulas and methodologies;
•intellectual property ownership allocation between us and our partners for
improvements and new inventions developed during the course of the
collaboration;
•royalties on drug sales based on a number of complex variables, including net
sales calculations, geography, scope of patent claim coverage, patent life,
generic competitors, bundled pricing and other factors; and
•indemnity obligations for intellectual property infringement, product liability
and certain other claims.
We are a party to numerous significant collaboration agreements and other
strategic transaction agreements (e.g., financings and asset divestitures) that
contain complex representations and warranties, covenants and indemnification
obligations. If we are found to have materially breached such agreements, it
could subject us to substantial liabilities and harm our financial condition.
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From time to time, we are involved in litigation matters involving the
interpretation and application of complex terms and conditions of our
agreements. One or more disputes may arise or escalate in the future regarding
our collaboration agreements, transaction documents, or third-party license
agreements that may ultimately result in costly litigation and unfavorable
interpretation of contract terms, which would have a material adverse effect on
our business, financial condition and results of operations.
If we, or our partners through our collaborations, are not successful in
recruiting sales and marketing personnel or in building a sales and marketing
infrastructure, we will have difficulty commercializing our products, which
would adversely affect our business, results of operations and financial
condition.
To the extent we rely on other pharmaceutical or biotechnology companies with
established sales, marketing and distribution systems to market our products, we
will need to establish and maintain partnership arrangements, and we may not be
able to enter into these arrangements on acceptable terms or at all. To the
extent that we enter into co-promotion or other arrangements, any revenue we
receive will depend upon the efforts of third parties, which may not be
successful and over which we have little or no control-important examples of
this risk include MOVANTIK® partnered with AstraZeneca and ADYNOVATE®
(previously referred to as BAX 855) partnered with Baxalta (a wholly-owned
subsidiary of Takeda). In the event that we market our products without a
partner, we would be required to build, either internally or through third-party
contracts, a sales and marketing organization and infrastructure, which would
require a significant investment, and we may not be successful in building this
organization and infrastructure in a timely or efficient manner.
If we are unable to create robust sales, marketing and distribution capabilities
or to enter into agreements with third parties to perform these functions, we
will be unable to commercialize our product candidates successfully.
We currently have no sales or distribution capabilities. To commercialize any of
our drugs that receive regulatory approval for commercialization, we must
develop robust internal sales, marketing and distribution capabilities, and
manage inventory, supply, labeling, storage, record keeping, and advertising and
promotion capabilities, which would be expensive and time consuming, or enter
into arrangements with third parties to perform these services. If we decide to
market our products directly, we must commit significant financial and
managerial resources to develop a marketing and sales force with technical
expertise and with supporting distribution, administration and compliance
capabilities. Factors that may inhibit our efforts to commercialize our products
directly or through partnerships include:
•our inability to recruit and retain adequate numbers of effective sales and
marketing personnel;
•the inability of sales personnel to obtain access to or successfully educate
adequate numbers of physicians about the potential benefits associated with the
use of, and to subsequently prescribe, our products;
•the lack of complementary products or multiple product pricing arrangements may
put us at a competitive disadvantage relative to companies with more extensive
product lines; and
•unforeseen costs and expenses associated with creating and sustaining an
independent sales and marketing organization.
We depend on third parties to conduct the clinical trials for our proprietary
product candidates and any failure of those parties to fulfill their obligations
could harm our development and commercialization plans.
We depend on independent clinical investigators, contract research organizations
and other third-party service providers to conduct clinical trials for our
proprietary product candidates. We rely heavily on these parties for the
successful execution of our clinical trials. Though we are ultimately
responsible for the results of their activities, many aspects of their
activities are beyond our control. For example, we are responsible for ensuring
that each of our clinical trials is conducted in accordance with the general
investigational plan and protocols for the trials, but the independent clinical
investigators may prioritize other projects over ours or communicate issues
regarding our products to us in an untimely manner. Third parties may not
complete activities on schedule or may not conduct our clinical trials in
accordance with regulatory requirements or our stated protocols. The early
termination of any of our clinical trial arrangements, the failure of third
parties to comply with the regulations and requirements governing clinical
trials or the failure of third parties to properly conduct our clinical trials
could hinder or delay the development, approval and commercialization of our
product candidates and would adversely affect our business, results of
operations and financial condition.
We expect to continue to incur substantial losses and negative cash flow from
operations and may not achieve or sustain profitability in the future.
For the three months ended March 31, 2020, we reported net loss of $138.7
million. If and when we achieve profitability depends upon a number of factors,
including the timing and recognition of milestone and other contingent payments
and royalties
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received, the timing of revenue under our collaboration agreements, the amount
of investments we make in our proprietary product candidates and the regulatory
approval and market success of our product candidates. We may not be able to
achieve and sustain profitability.
Other factors that will affect whether we achieve and sustain profitability
include our ability, alone or together with our partners, to:
•develop drugs utilizing our technologies, either independently or in
collaboration with other pharmaceutical or biotechnology companies;
•effectively estimate and manage clinical development costs, particularly the
cost of the clinical studies for bempegaldesleukin, NKTR-358, NKTR-262, and
NKTR-255;
•receive necessary regulatory and marketing approvals;
•maintain or expand manufacturing at necessary levels;
•achieve market acceptance of our partnered products;
•receive royalties on products that have been approved, marketed or submitted
for marketing approval with regulatory authorities; and
•maintain sufficient funds to finance our activities.
Significant competition for our polymer conjugate chemistry technology platforms
and our partnered and proprietary products and product candidates could make our
technologies, products or product candidates obsolete or uncompetitive, which
would negatively impact our business, results of operations and financial
condition.
Our advanced polymer conjugate chemistry platforms and our partnered and
proprietary products and product candidates compete with various pharmaceutical
and biotechnology companies. Competitors of our polymer conjugate chemistry
technologies include Biogen Inc., Horizon Pharma, Dr. Reddy's Laboratories Ltd.,
SunBio Corporation, Mountain View Pharmaceuticals, Inc., Novo Nordisk A/S
(formerly assets held by Neose Technologies, Inc.), and NOF Corporation. Several
other chemical, biotechnology and pharmaceutical companies may also be
developing polymer conjugation technologies or technologies that have similar
impact on target drug molecules. Some of these companies license or provide the
technology to other companies, while others are developing the technology for
internal use.
There are many competitors for our proprietary product candidates currently in
development. For bempegaldesleukin, there are numerous companies engaged in
developing immunotherapies to be used alone, or in combination, to treat a wide
range of oncology indications targeting both solid and liquid tumors. In
particular, we expect to compete with therapies with tumor infiltrating
lymphocytes, or TILS, chimeric antigen receptor-expressing T cells, or CAR-T,
cytokine-based therapies, and checkpoint inhibitors. Potential competitors in
the TIL and CAR-T space include Gilead Sciences, Inc. (through its acquisition
of Kite Pharma, Inc.)/NCI, Apeiron Biologics, Philogen S.p.A., Brooklyn
ImmunoTherapeutics LLC, Anaveon AG, Adaptimmune LLC, and Novartis AG, Alkermes
plc, Altor Bioscience, Roche, Sanofi SA (through its acquisition of Synthorx,
Inc.), and Eli Lilly & Co. (through its acquisition of Armo BioSciences) in the
cytokine-based therapies space, and GlaxoSmithKline plc (through its acquisition
of Tesaro, Inc.), Macrogenics, Inc., Merck, Bristol-Myers Squibb Company, and
Roche in the checkpoint inhibitor space. For NKTR-358, there are a number of
competitors in various stages of clinical development that are working on
programs which are designed to correct the underlying immune system imbalance in
the body due to autoimmune disease. In particular, we expect to compete with
therapies that could be cytokine-based therapies (Symbiotix, LLC, Janssen,
AstraZeneca, and Tizona Therapeutics), regulatory T cell therapies (Targazyme,
Inc., Caladrius BioSciences, Inc., and Tract Therapeutics, Inc.), or
IL-2-based-therapies (Amgen Inc., Celgene Corporation, and ILTOO Pharma). For
MOVANTIK®, there are currently several alternative therapies used to address
opioid-induced constipation (OIC) and opioid-induced bowel dysfunction (OBD),
including RELISTOR® (methylnaltrexone bromide), oral therapy AMITIZA®
(lubiprostone), and oral and rectal over-the-counter laxatives and stool
softeners such as docusate sodium, senna and milk of magnesia. For ADYNOVATE®,
there is substantial competition from Sanofi's Fc fusion protein ELOCTATE™ for
Hemophilia A treatment, JIVI® (antihemophilic factor (recombinant)
PEGylated-aucl), an extended half-life Factor VIII for Hemophilia A treatment,
approved in the U.S. in August 2018, and marketed by Bayer Healthcare, and, more
recently, an extended half-life product from Novo Nordisk. In addition,
technologies other than those based on Fc fusion and polymer conjugation
approaches (such as gene therapy approaches being developed by BioMarin
Pharmaceutical Inc. and others) are being pursued to treat patients with
Hemophilia A. There can be no assurance that we or our partners will
successfully develop, obtain regulatory approvals for and commercialize
next-generation or new products that will successfully compete with those of our
competitors. Many of our competitors have greater financial, research and
development, marketing and sales, manufacturing and managerial capabilities. We
face competition from these companies not just in product development but also
in areas such as recruiting employees, acquiring technologies that might enhance
our ability to commercialize products, establishing relationships with certain
research and academic institutions, enrolling patients in clinical trials and
seeking program partnerships and collaborations with larger pharmaceutical
companies. As a result, our competitors may succeed in developing competing
technologies, obtaining regulatory approval or gaining market acceptance for
products before we do. These developments could make our products or
technologies uncompetitive or obsolete.
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We may not be able to manage our growth effectively, which could adversely
affect our operations and financial performance.
The ability to manage and operate our business as we execute our development and
growth strategy will require effective planning. Significant rapid growth could
strain our management and internal resources, and other problems may arise that
could adversely affect our financial performance. We expect that our efforts to
grow will place a significant strain on personnel, management systems,
infrastructure and other resources. Our ability to effectively manage future
growth will also require us to successfully attract, train, motivate, retain and
manage new employees and continue to update and improve our operational,
financial and management controls and procedures. If we do not manage our growth
effectively, our operations and financial performance could be adversely
affected.
Our future depends on the proper management of our current and future business
operations and their associated expenses.
Our business strategy requires us to manage our business to provide for the
continued development and potential commercialization of our proprietary and
partnered drug candidates. Our strategy also calls for us to undertake increased
research and development activities and to manage an increasing number of
relationships with partners and other third parties, while simultaneously
managing the capital necessary to support this strategy. If we are unable to
manage effectively our current operations and any growth we may experience, our
business, financial condition and results of operations may be adversely
affected. If we are unable to effectively manage our expenses, we may find it
necessary to reduce our personnel-related costs through reductions in our
workforce, which could harm our operations, employee morale and impair our
ability to retain and recruit talent. Furthermore, if adequate funds are not
available, we may be required to obtain funds through arrangements with partners
or other sources that may require us to relinquish rights to certain of our
technologies, products or future economic rights that we would not otherwise
relinquish or require us to enter into other financing arrangements on
unfavorable terms.
Because competition for highly qualified technical personnel is intense, we may
not be able to attract and retain the personnel we need to support our
operations and growth.
We must attract and retain experts in the areas of clinical testing,
manufacturing, research, regulatory and finance, and may need to attract and
retain commercial, marketing and distribution experts and develop additional
expertise in our existing personnel. We face intense competition from other
biopharmaceutical companies, research and academic institutions and other
organizations for qualified personnel. Many of the organizations with which we
compete for qualified personnel have greater resources than we have. Because
competition for skilled personnel in our industry is intense, companies such as
ours sometimes experience high attrition rates with regard to their skilled
employees. Further, in making employment decisions, job candidates often
consider the value of the stock awards they are to receive in connection with
their employment. Our equity incentive plan and employee benefit plans may not
be effective in motivating or retaining our employees or attracting new
employees, and significant volatility in the price of our stock may adversely
affect our ability to attract or retain qualified personnel. If we fail to
attract new personnel or to retain and motivate our current personnel, our
business and future growth prospects could be severely harmed.
We are dependent on our management team and key technical personnel, and the
loss of any key manager or employee may impair our ability to develop our
products effectively and may harm our business, operating results and financial
condition.
Our success largely depends on the continued services of our executive officers
and other key personnel. The loss of one or more members of our management team
or other key employees could seriously harm our business, operating results and
financial condition. The relationships that our key managers have cultivated
within our industry make us particularly dependent upon their continued
employment with us. We are also dependent on the continued services of our
technical personnel because of the highly technical nature of our products and
the regulatory approval process. Because our executive officers and key
employees are not obligated to provide us with continued services, they could
terminate their employment with us at any time without penalty. We do not have
any post-employment noncompetition agreements with any of our employees and do
not maintain key person life insurance policies on any of our executive officers
or key employees.
The price of our common stock has, and may continue to fluctuate significantly,
which could result in substantial losses for investors and securities class
action and shareholder derivative litigation.
Our stock price is volatile. During the three months ended March 31, 2020, based
on closing prices on the NASDAQ Global Select Market, the closing price of our
common stock ranged from $14.47 to $27.96 per share. In response to volatility
in the price of our common stock in the past, Plaintiffs' securities litigation
firms have sought information from us and/or
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shareholders as part of their investigation into potential securities violations
and breaches of duties (among other corporate misconduct allegations). Following
their investigations, Plaintiffs' securities litigation firms have often
initiated legal action, including the filing of class action lawsuits,
derivative lawsuits, and other forms of redress. We expect our stock price to
remain volatile and we continue to expect the initiation of legal actions by
Plaintiffs' securities litigation firms following share price fluctuations.
•A variety of factors may have a significant effect on the market price of our
common stock, including the risks described in this section titled "Risk
Factors" and the following:
•announcements of data from, or material developments in, our clinical studies
and those of our collaboration partners, including data regarding efficacy and
safety, delays in clinical development, regulatory approval or commercial launch
- in particular, data from clinical studies of bempegaldesleukin has had a
significant impact on our stock price;
•announcements by collaboration partners as to their plans or expectations
related to drug candidates and approved drugs in which we have a substantial
economic interest;
•announcements regarding terminations or disputes under our collaboration
agreements;
•fluctuations in our results of operations;
•developments in patent or other proprietary rights, including intellectual
property litigation or entering into intellectual property license agreements
and the costs associated with those arrangements;
•announcements of technological innovations or new therapeutic products that may
compete with our approved products or products under development;
•announcements of changes in governmental regulation affecting us or our
competitors;
•litigation brought against us or third parties to whom we have indemnification
obligations;
•public concern as to the safety of drug formulations developed by us or others;
•our financing needs and activities; and
•general market conditions.
At times, our stock price has been volatile even in the absence of significant
news or developments. The stock prices of biotechnology companies and securities
markets generally have been subject to dramatic price swings in recent years.
We have implemented certain anti-takeover measures, which make it more difficult
to acquire us, even though such acquisitions may be beneficial to our
stockholders.
Provisions of our certificate of incorporation and bylaws, as well as provisions
of Delaware law, could make it more difficult for a third party to acquire us,
even though such acquisitions may be beneficial to our stockholders. These
anti-takeover provisions include:
•establishment of a classified board of directors such that not all members of
the board may be elected at one time;
•lack of a provision for cumulative voting in the election of directors, which
would otherwise allow less than a majority of stockholders to elect director
candidates;
•the ability of our board to authorize the issuance of "blank check" preferred
stock to increase the number of outstanding shares and thwart a takeover
attempt;
•prohibition on stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of stockholders;
•establishment of advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings; and
•limitations on who may call a special meeting of stockholders.
Further, provisions of Delaware law relating to business combinations with
interested stockholders may discourage, delay or prevent a third party from
acquiring us. These provisions may also discourage, delay or prevent a third
party from acquiring a large portion of our securities or initiating a tender
offer or proxy contest, even if our stockholders might receive a premium for
their shares in the acquisition over the then-current market prices. We also
have a change of control severance benefit plan, which provides for certain cash
severance, stock award acceleration and other benefits in the event our
employees are terminated (or, in some cases, resign for specified reasons)
following an acquisition. This severance plan could discourage a third party
from acquiring us.
Preliminary and interim data from our clinical studies that we announce or
publish from time to time are subject to audit and verification procedures that
could result in material changes in the final data and may change as more
patient data become available.
From time to time, we publish preliminary or interim data from our clinical
studies. Preliminary data remain subject to audit confirmation and verification
procedures that may result in the final data being materially different from the
preliminary
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data we previously published. Interim data are also subject to the risk that one
or more of the clinical outcomes may materially change as patient enrollment
continues and more patient data become available. As a result, preliminary and
interim data should be viewed with caution until the final data are available.
Material adverse changes in the final data could significantly harm our business
prospects.
We may not be able to obtain intellectual property licenses related to the
development of our drug candidates on a commercially reasonable basis, if at
all.
Numerous pending and issued U.S. and foreign patent rights and other proprietary
rights owned by third parties relate to pharmaceutical compositions, methods of
preparation and manufacturing, and methods of use and administration. We cannot
predict with any certainty which, if any, patent rights will be considered
relevant to our or our collaboration partners' technology or drug candidates by
authorities in the various jurisdictions where such rights exist, nor can we
predict with certainty which, if any, of these rights will or may be asserted
against us by third parties. In certain cases, we have existing licenses or
cross-licenses with third parties; however, the sufficiency of the scope and
adequacy of these licenses is very uncertain in view of the long development and
commercialization cycles for biotechnology and pharmaceutical products. There
can be no assurance that we can obtain a license to any technology that we
determine we need on reasonable terms, if at all, or that we could develop or
otherwise obtain alternate technology to avoid a need to secure a license. If we
are required to enter into a license with a third party, our potential economic
benefit for the products subject to the license will be diminished. If a license
is not available on commercially reasonable terms or at all, we may be prevented
from developing and commercializing the drug, which could significantly harm our
business, results of operations, and financial condition.
If any of our pending patent applications do not issue, or are deemed invalid
following issuance, we may lose valuable intellectual property protection.
The patent positions of pharmaceutical and biotechnology companies, such as
ours, are uncertain and involve complex legal and factual issues. We own more
than 290 U.S. and 1000 foreign patents and have a number of pending patent
applications that cover various aspects of our technologies. There can be no
assurance that patents that have issued will be held valid and enforceable in a
court of law. Even for patents that are held valid and enforceable, the legal
process associated with obtaining such a judgment is time consuming and
costly. Additionally, issued patents can be subject to opposition, inter partes
review or other proceedings that can result in the revocation of the patent or
maintenance of the patent in amended form (and potentially in a form that
renders the patent without commercially relevant and/or broad
coverage). Further, our competitors may be able to circumvent and otherwise
design around our patents. Even if a patent is issued and enforceable, because
development and commercialization of pharmaceutical products can be subject to
substantial delays, patents may expire prior to the commercialization of the
drug. Moreover, even if a patent encompassing a drug has not expired prior to
the drugs commercialization, the patent may only provide a short period of
protection following the commercialization of products.  In addition, our
patents may be subject to post grant or inter partes review before the U.S.
Patent and Trademark Office (or equivalent proceedings in other jurisdictions),
which could result in a loss of the patent and/or substantial cost to us.
We have filed patent applications, and plan to file additional patent
applications, covering various aspects of our PEGylation and advanced polymer
conjugate technologies and our proprietary product candidates. There can be no
assurance that the patent applications for which we apply will actually issue as
patents, or do so with commercially relevant and/or broad coverage. The coverage
claimed in a patent application can be significantly reduced before the patent
is issued. The scope of our claim coverage can be critical to our ability to
enter into licensing transactions with third parties and our right to receive
royalties from our collaboration partnerships. Since publication of discoveries
in scientific or patent literature often lags behind the date of such
discoveries, we cannot be certain that we were the first inventor of inventions
covered by our patents or patent applications. In addition, there is no
guarantee that we will be the first to file a patent application directed to an
invention.
An adverse outcome in any judicial proceeding involving intellectual property,
including patents, could subject us to significant liabilities to third parties,
require disputed rights to be licensed from or to third parties or require us to
cease using the technology in dispute. In those instances where we seek an
intellectual property license from another, we may not be able to obtain the
license on a commercially reasonable basis, if at all, thereby raising concerns
on our ability to freely commercialize our technologies or products.
We rely on trade secret protection and other unpatented proprietary rights for
important proprietary technologies, and any loss of such rights could harm our
business, results of operations and financial condition.
We rely on trade secret protection for our confidential and proprietary
information. No assurance can be given that others will not independently
develop substantially equivalent confidential and proprietary information or
otherwise gain access to our trade secrets or disclose such technology, or that
we can meaningfully protect our trade secrets. In addition, unpatented
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proprietary rights, including trade secrets and know-how, can be difficult to
protect and may lose their value if they are independently developed by a third
party or if their secrecy is lost. Any loss of trade secret protection or other
unpatented proprietary rights could harm our business, results of operations and
financial condition.
If product liability lawsuits are brought against us, we may incur substantial
liabilities.
The manufacture, clinical testing, marketing and sale of medical products
involve inherent product liability risks. If product liability costs exceed our
product liability insurance coverage (or if we cannot secure product liability
insurance), we may incur substantial liabilities that could have a severe
negative impact on our financial position. Whether or not we are ultimately
successful in any product liability litigation, such litigation would consume
substantial amounts of our financial and managerial resources and might result
in adverse publicity, all of which would impair our business. Additionally, we
may not be able to maintain our clinical trial insurance or product liability
insurance at an acceptable cost, if at all, and this insurance may not provide
adequate coverage against potential claims or losses.
If we or current or future collaborators or service providers fail to comply
with healthcare laws and regulations, we or they could be subject to enforcement
actions and civil or criminal penalties.
Although we do not currently have any products on the market, once we begin
commercializing our drug candidates, we will be subject to additional healthcare
statutory and regulatory requirements and enforcement by the federal and state
governments of the jurisdictions in which we conduct our business. Healthcare
providers, physicians and third-party payers play a primary role in the
recommendation and prescription of any drug candidates for which we obtain
marketing approval. Our future arrangements with third-party payers and
customers may expose us to broadly applicable fraud and abuse and other
healthcare laws and regulations that may constrain the business or financial
arrangements and relationships through which we market, sell and distribute our
therapeutic candidates for which we obtain marketing approval. Restrictions
under applicable federal and state healthcare laws and regulations, include the
following:
•the federal Anti-Kickback Statute, which prohibits, among other things, persons
from knowingly and willfully soliciting, receiving, offering, or paying
remuneration (a term interpreted broadly to include anything of value,
including, for example, gifts, discounts, and credits), directly or indirectly,
in cash or in kind, to induce or reward, or in return for, either the referral
of an individual for, or the purchase, order, or recommendation of, an item or
service reimbursable under a federal healthcare program, such as the Medicare
and Medicaid programs;
•federal civil and criminal false claims laws and civil monetary penalty laws,
such as the U.S. federal False Claims Act (FCA), which prohibit, among other
things, individuals or entities from knowingly presenting, or causing to be
presented, claims for payment to Medicare, Medicaid, or other third-party payers
that are false or fraudulent, or making a false statement or record material to
payment of a false claim or avoiding, decreasing, or concealing an obligation to
pay money owed to the federal government. In addition, the government may assert
that a claim including items and services resulting from a violation of the
federal Ani-Kickback Statute constitutes a false or fraudulent claim for
purposes of the FCA;
•provisions of the federal Health Insurance Portability and Accountability Act
of 1996 (HIPAA), which created new federal criminal statutes, referred to as the
"HIPAA All-Payer Fraud Prohibition," that prohibit knowingly and willfully
executing a scheme to defraud any healthcare benefit program and making false
statements relating to healthcare matters;
•federal transparency laws, including the federal Physician Payment Sunshine
Act, which require manufacturers of certain drugs and biologics to track and
disclose payments and other transfers of value they make to U.S. physicians
(currently defined to include doctors, dentists, optometrists, podiatrists and
chiropractors) and teaching hospitals as well as physician ownership and
investment interests in the manufacturer, and that such information is
subsequently made publicly available in a searchable format on a CMS website,
effective January 1, 2022, these reporting obligations will extend to include
transfers of value made to certain non-physician assistants and nurse
practitioners;
•provisions of HIPAA, as amended by the Health Information Technology for
Economic and Clinical Health Act and its implementing regulations, which imposes
certain requirements relating to the privacy, security and transmission of
individually identifiable health information; and
•state law equivalents of each of the above federal laws, such as anti-kickback
and false claims laws which may apply to items or services reimbursed by any
third-party payer, including commercial insurers, state transparency reporting
and compliance laws; and state laws governing the privacy and security of health
information in certain circumstances, many of which differ from each other in
significant ways and which may not have the same effect, thus complicating
compliance efforts.
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Ensuring that our future business arrangements with third parties comply with
applicable healthcare laws and regulations could involve substantial costs. If
our operations are found to be in violation of any such requirements, we may be
subject to penalties, including administrative, civil or criminal penalties,
imprisonment, monetary damages, the curtailment or restructuring of our
operations, or exclusion from participation in government contracting,
healthcare reimbursement or other government programs, including Medicare and
Medicaid, any of which could adversely affect financial results. Although
effective compliance programs can mitigate the risk of investigation and
prosecution for violations of these laws, these risks cannot be entirely
eliminated. Any action against us for an alleged or suspected violation could
cause us to incur significant legal expenses and could divert our management's
attention from the operation of our business, even if our defense is successful.
In addition, achieving and sustaining compliance with applicable laws and
regulations may be costly to us in terms of money, time and resources.
We are involved in legal proceedings and may incur substantial litigation costs
and liabilities that will adversely affect our business, financial condition and
results of operations.
From time to time, third parties have asserted, and may in the future assert,
that we or our partners infringe their proprietary rights, such as patents and
trade secrets, or have otherwise breached our obligations to them. A third party
often bases its assertions on a claim that its patents cover our technology
platform or drug candidates or that we have misappropriated its confidential or
proprietary information. Similar assertions of infringement could be based on
future patents that may issue to third parties. In certain of our agreements
with our partners, we are obligated to indemnify and hold harmless our
collaboration partners from intellectual property infringement, product
liability and certain other claims, which could cause us to incur substantial
costs and liability if we are called upon to defend ourselves and our partners
against any claims. If a third party obtains injunctive or other equitable
relief against us or our partners, they could effectively prevent us, or our
partners, from developing or commercializing, or deriving revenue from, certain
drugs or drug candidates in the U.S. and abroad. Costs associated with
litigation, substantial damage claims, indemnification claims or royalties paid
for licenses from third parties could have a material adverse effect on our
business, financial condition and results of operations.
We are involved in legal proceedings where we or other third parties are
enforcing or seeking intellectual property rights, invalidating or limiting
patent rights that have already been allowed or issued, or otherwise asserting
proprietary rights through one or more potential legal remedies. For example, we
are currently involved in German litigation proceedings whereby we and Bayer
Healthcare LLC are seeking at least co-ownership rights in certain of each
other's patent filings related to PEGylated Factor VIII products. We believe
that Bayer's claims to an ownership interest in these is without merit and we
are vigorously defending our exclusive ownership rights to this intellectual
property. These German litigation proceedings are currently stayed pending the
outcome of ongoing mediation efforts. In the U.S., Bayer filed a complaint
against Baxalta and Nektar alleging the ADYNOVATE® product infringes a Bayer
patent. Although the U.S. court dismissed all of Bayer's claims against Nektar
and Nektar was removed as a defendant, a jury found the Bayer patent was valid
and infringed, and awarded Bayer damages, the responsibility of which are borne
fully by Baxalta. This damages award does not impact our royalties from sales of
ADYNOVATE® under our collaboration with Baxalta and Baxalta is currently
appealing the decision. In other U.S. proceedings, Nektar and Baxalta filed
complaints against Bayer Healthcare alleging Bayer's JIVI® product infringes
several Nektar patents. A jury trial in this proceeding is scheduled to being in
the summer of 2020. In addition, in response to notices AstraZeneca and we
received from the generic companies, Apotex (Apotex Inc. and Apotex Corp.), MSN
Laboratories Pvt. Ltd., and Aurobindo Pharma USA INC. alerting us that they had
filed abbreviated new drug applications (ANDAs) with the FDA to market a generic
version of MOVANTIK® (Paragraph IV Certifications), AstraZeneca and we together
filed patent infringement suits against each of these generic companies. In
these Paragraph IV Certifications, all three generic companies only alleged one
patent, U.S. Patent No. 9,012,469, is invalid, unenforceable and/or not
infringed by the manufacture, use or sale of their respective generic products.
At this time, none of the other five Orange Book listed patents associated with
MOVANTIK® are being challenged by these generics companies. In addition, on
March 18, 2020, Aether Therapeutics Inc. filed a complaint against AstraZeneca,
Nektar and Daiichi-Sanko, Inc. alleging MOVANTIK® infringes U.S. Patent Nos.
6,713,488, 8,748,448, 8,883,817 and 9,061,024. We are also regularly involved in
opposition proceedings at the European Patent Office and in inter partes review
proceedings at the U.S. Patent and Trademark Office where third parties seek to
invalidate or limit the scope of our allowed patent applications or issued
patents covering (among other things) our drugs and platform technologies.
We are involved in legal proceedings other than those related to intellectual
property. For example, on October 30, 2018, we and certain of our executives
were named in a putative securities class action complaint filed in the U.S.
District Court for the Northern District of California, which complaint was
subsequently amended on May 15, 2019. Also, on February 13, 2019, and February
18, 2019, shareholder derivative complaints were filed in the U.S. District
Court for the District of Delaware naming the CEO, CFO and certain members of
Nektar's board. These class action and shareholder derivative actions assert,
among other things, that for a period beginning at least from November 11, 2017
through October 2, 2018, our stock was inflated due to alleged
misrepresentations about the efficacy and safety of bempegaldesleukin. In
addition, on August 19, 2019, we and certain of our executives were named in a
putative securities class action complaint filed in the U.S. District Court for
the Northern District of California, which complaint was subsequently amended on
January 24, 2020. Also, on February 11, 2020, and on February 20,
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2020, shareholder derivative complaints were filed in the U.S. District Court
for the Northern District of California naming the CEO, CFO and certain members
of Nektar's board. These class action and shareholder derivative actions assert,
among other things, that for a period between February 15, 2019 and August 8,
2019, inclusive, our stock was inflated due to an alleged failure to disclose a
reduction in the planned number of bempegaldesleukin clinical trials and a
bempegaldesleukin manufacturing issue.
The cost to us in initiating or defending any litigation or other proceeding,
even if resolved in our favor, could be substantial, and litigation would divert
our management's attention. Uncertainties resulting from the initiation and
continuation of patent litigation or other proceedings could delay our research
and development efforts or result in financial implications either in terms of
seeking license arrangements or payment of damages or royalties. There is no
guarantee that our insurance coverage for damages resulting from a litigation or
the settlement thereof (including the putative securities class action lawsuits
and shareholder derivative lawsuits) is sufficient, thereby resulting in
substantial financial risk to the Company.
Our internal computer systems, or those of our partners, vendors, CROs, CMOs or
other contractors or consultants, may fail or suffer security breaches, which
could result in a material disruption of our product development programs or the
theft of our confidential information or patient confidential information.
Despite the implementation of security measures, our internal computer systems
and those of our partners, vendors, contract research organizations (CROs),
contract manufacturing organizations (CMOs) and other contractors and
consultants are vulnerable to damage from computer viruses, unauthorized access,
business email compromise, natural disasters, terrorism, war and
telecommunication and electrical failures. Such events could cause interruptions
of our operations. For instance, the loss of preclinical data or data from any
future clinical trial involving our product candidates could result in delays in
our development and regulatory filing efforts and significantly increase our
costs. To the extent that any disruption or security breach were to result in a
loss of, or damage to, our data, or inappropriate disclosure of confidential or
proprietary information of our company or clinical patients, we could suffer or
be subject to reputational harm, monetary fines (such as those imposed by
European Regulation 2016/679, known as the General Data Protection Regulation,
or "GDPR" and, the California Consumer Privacy Act, or "CCPA"), civil suits,
civil penalties or criminal sanctions and requirements to disclose the breach,
and other forms of liability, and the development of our product candidates
could be delayed. In addition, we continue to be subject to new and evolving
data protection laws and regulations from a variety of jurisdictions, and there
is a risk that our systems and processes for managing and protecting data may be
found to be inadequate, which could expose us to fines and litigation.
The United Kingdom's withdrawal from the European Union (EU) may have a negative
effect on global economic conditions, access to patient markets, and regulatory
certainty, which could adversely affect our operations.
On January 31, 2020, the United Kingdom (UK) withdrew from the EU (Brexit),
thereby triggering a transition period that is set to end on December 31, 2020,
during which the UK and the EU will negotiate their future relationship.
However, the terms of the withdrawal have yet to be fully negotiated. The
implementation period began February 1, 2020 and will continue until December
31, 2020. During this 11-month period, the UK will continue to follow all of the
EU's rules and its trading relationship will remain the same. However,
regulations (including financial laws and regulations, tax and free trade
agreements, intellectual property rights, data protection laws, supply chain
logistics, environmental, health and safety laws and regulations, medicine
licensing and regulations, immigration laws and employment laws) have yet to be
addressed. This lack of clarity on future UK laws and regulations and their
interaction with EU laws and regulations may negatively impact foreign direct
investment in the UK, increase costs, depress economic activity, and restrict
access to capital. The uncertainty concerning the UK's legal, political, and
economic relationship with the EU after Brexit may be a source of instability in
the international markets, create significant currency fluctuations, and/or
otherwise adversely affect trading agreements or similar cross-border
co-operation arrangements (whether economic, tax, fiscal, legal, regulatory or
otherwise) beyond the date of Brexit.
These developments, or the perception that any of them could occur, may have a
significant adverse effect on global economic conditions and the stability of
global financial markets, and could significantly reduce global market liquidity
and limit the ability of key market participants to operate in certain financial
markets. In particular, it could also lead to a period of considerable
uncertainty in relation to the UK financial and banking markets, as well as on
the regulatory process in Europe. Asset valuations, currency exchange rates, and
credit ratings may also be subject to increased market volatility.
If the UK and the EU are unable to negotiate acceptable agreements or if other
EU Member States pursue withdrawal, barrier-free access between the UK and other
EU Member States or among the European Economic Area overall could be diminished
or eliminated. The long-term effects of Brexit will depend on any agreements (or
lack thereof) between the UK and the EU and, in particular, any arrangements for
the UK to retain access to EU markets either during a transitional period or
more permanently.
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There is currently considerable uncertainty on regulatory processes in Europe
and the European Economic Area. The lack of clarity about which EU rules and
regulations the UK would replace or replicate, such as rules and regulations
relating to trade (including the importation and exportation of
pharmaceuticals), clinical research, and intellectual property, increases the
risk that our clinical trials being carried out in UK are delayed or
disrupted. Further, depending on which rules and regulations the UK ultimately
adopts, our business could be negatively affected.
Global economic conditions may negatively affect us and may magnify certain
risks that affect our business.
Our operations and performance have been, and may continue to be, affected by
global economic conditions, including, for example, adverse global economic
conditions resulting from the COVID-19 pandemic. See also the risk factor in
this Item 1A titled "Our business could be adversely affected by the effects of
health epidemics, including the recent COVID-19 pandemic." As a result of global
economic conditions, some third-party payers may delay or be unable to satisfy
their reimbursement obligations. Job losses or other economic hardships may also
affect patients' ability to afford healthcare as a result of increased co-pay or
deductible obligations, greater cost sensitivity to existing co-pay or
deductible obligations, lost healthcare insurance coverage or for other reasons.
We believe such conditions have led and could continue to lead to reduced demand
for our and our collaboration partners' drug products, which could have a
material adverse effect on our product sales, business and results of
operations.
Further, with rising international trade tensions, our business may be adversely
affected following new or increased tariffs that result in the increased global
clinical trial costs as a result of international transportation of clinical
drug supplies, as well as the costs of materials and products imported into the
U.S. Tariffs, trade restrictions or sanctions imposed by the U.S. or other
countries could increase the prices of our and our collaboration partners' drug
products, affect our and our collaboration partners' ability to commercialize
such drug products, or create adverse tax consequences in the U.S. or other
countries. As a result, changes in international trade policy, changes in trade
agreements and the imposition of tariffs or sanctions by the U.S. or other
countries could materially adversely affect our results of operations and
financial condition.
Our business could be negatively impacted by corporate citizenship
and sustainability matters.
There is an increased focus from certain investors, employees, and other
stakeholders concerning corporate citizenship and sustainability matters, which
include environmental concerns and social investments. We could fail to meet, or
be perceived to fail to meet, the expectations of these certain investors,
employees and other stakeholders concerning corporate citizenship and
sustainability matters, thereby resulting in a negative impact to our business.
Our operations may involve hazardous materials and are subject to environmental,
health, and safety laws and regulations. Compliance with these laws and
regulations is costly, and we may incur substantial liability arising from our
activities involving the use of hazardous materials.
As a research-based biopharmaceutical company with significant research and
development and manufacturing operations, we are subject to extensive
environmental, health, and safety laws and regulations, including those
governing the use of hazardous materials. Our research and development and
manufacturing activities involve the controlled use of chemicals, radioactive
compounds, and other hazardous materials. The cost of compliance with
environmental, health, and safety regulations is substantial. If an accident
involving these materials or an environmental discharge were to occur, we could
be held liable for any resulting damages, or face regulatory actions, which
could exceed our resources or insurance coverage.
If earthquakes or other catastrophic events strike, our business may be harmed.
Our corporate headquarters, including a substantial portion of our research and
development operations, are located in the San Francisco Bay Area, a region
known for seismic activity and a potential terrorist target. In addition, we own
facilities for the manufacture of products using our advanced polymer conjugate
technologies in Huntsville, Alabama and own and lease offices in Hyderabad,
India. There are no backup facilities for our manufacturing operations located
in Huntsville, Alabama. In the event of an earthquake or other natural disaster,
political instability, or terrorist event in any of these locations, our ability
to manufacture and supply materials for drug candidates in development and our
ability to meet our manufacturing obligations to our customers would be
significantly disrupted and our business, results of operations and financial
condition would be harmed. Our collaboration partners and important vendors and
suppliers to us or our collaboration partners may also be subject to
catastrophic events, such as earthquakes, floods, hurricanes, tornadoes and
pandemics any of which could harm our business (including, for example, by
disrupting supply chains important to the success of our business), results of
operations and financial condition. We have not undertaken a systematic analysis
of the potential consequences to our business, results of operations and
financial condition from a major earthquake or other catastrophic event, such as
a fire, sustained loss of power, terrorist activity or other
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disaster, and do not have a recovery plan for such disasters. In addition, our
insurance coverage may not be sufficient to compensate us for actual losses from
any interruption of our business that may occur.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period.
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form our basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. We evaluate our
estimates on an ongoing basis. Actual results may differ from those estimates
under different assumptions or conditions. Other than as the result of the
adoption of the new credit impairment accounting guidance as described in Note 1
to our Condensed Consolidated Financial Statements, there have been no material
changes to our critical accounting policies and estimates discussed in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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