Nektar Therapeutics: Another Clinical Failure Nearly Wipes Out The R&D Value

There are multiple parts to the valuation of a biotech. Approved and marketed products can be valued through discounted cash flow, multiple-based approaches like P/E, and so on, while pipeline products and "technology platform" values are much more subjective, particularly as they're driven by the analyst's view of the likelihood of approval. Last and not least is the cash the company has on hand, which while straightforward, has to be viewed as a dwindling asset.

This brings me to Nektar Therapeutics (NASDAQ:NKTR). Roughly a week after my last article on the company, Nektar announced the failure of the Phase II ISLAND study of its lead drug rezpegaldesleukin (or "rezpeg") and partner Lilly's (LLY) decision not to continue on with further development in lupus.

With this news, the value of Nektar shares has fallen below its spot cash value, and given the numerous clinical failures, I can't say that's an unfair or disproportionate response. I fully expect Nektar to move on with its current identified pipeline candidates and I would likewise expect to see the company pursue M&A and/or in-licensing to add clinical candidates to its pipeline. For investors, this is basically a gamble that $500M-plus in cash will somehow, eventually, buy shareholders something of value, but that sort of proposition doesn't suit my investment style.

Like Santorini, This ISLAND Blew Up

Nektar announced Thursday evening that the Phase II ISLAND study of rezpeg in moderate-to-severe systemic lupus erythematosus (or SLE) failed and that partner Lilly would not be moving the drug along to Phase III development.

The ISLAND study was designed to show a 4-point improvement in patient Systemic Lupus Erythematosus Disease Activity Index 2000 (or SLEDAI-2K) scores, but only 8.8% of patients (placebo-adjusted) in the modified intent-to-treat population achieved that response. While there were some signs of efficacy by other criteria, there was no dose-dependent response (the mid-level dose showed the best response).

While rezpeg seemed to do little good for SLE patients, it definitely had an impact. Discontinuations ranged from 19% to 40% (vs. 12% in the placebo group), and there were meaningful treatment-emergent adverse effects, with 35% of patients in the low-dose group experiencing 1 or more TEAE, ranging up to 49% in the high-dose group.

With at best equivocal efficacy and significant tolerability issues, I don't see a credible path forward for rezpeg in SLE, and given the meaningful market opportunity, the fact that Lilly doesn't want to invest in a Phase III program tells you what you need to know.

Rezpeg Is Likely Done For

Lilly has not yet said one way or another if they will continue on with their plans to put rezpeg into a Phase IIb study for atopic dermatitis in the second half of the year, nor whether they will bring forth a third indication.

At this point I find either doubtful. There was some evidence of efficacy in atopic dermatitis in Phase Ib, but there were definitely some "quirks" to the data that call the strength of the efficacy signal into question. Moreover, tolerability was an issue here as well, with high rates of injection site reactions and elevated incidences of infection. While AD is a sizable market, I don't think there's enough here to argue for going forward, particularly when tolerability will likely be an issue relative to already-approved treatments.

As far as the third indication goes, Lilly previously decided not to move forward with a psoriasis indication, and now there's a larger pool of evidence regarding overall efficacy and tolerability that doesn't work in the drug's favor. I expect Lilly will walk away from this program.

Cash Will Keep The Lights On

Management announced that with this trial failure there would be further cost-cutting efforts in an effort to extend the life of the $505 million cash balance that the company had at the end of 2022.

As I discussed in that prior piece, there are multiple investigator-led studies of NKTR-255 underway in multiple cancer types, and management plans to run its own combo study in r/r large B-cell lymphoma starting later this year. There's also NKTR-288 in pre-clinical development and an upcoming TNFR2 agonist antibody also in pre-clinical testing.

NKTR-255 is arguably worth exploring as a CD8 and NK cell stimulator meant to improve the efficacy of checkpoint therapies like PD-L1 (Merck's (MRK) Keytruda and Bristol-Myers' (BMY) Opdivo) and cell therapies like Gilead's (GILD) Yescarta or Bristol-Myers' Breyzani. That said, given Nektar's history with proprietary drug development, I can understand why no one would give this drug much credit for any real chance of success at this point. At a minimum, I definitely want to see real clinical data before assigning anything more than a run-of-the-mill chance of success (5% for Phase I oncology drugs).

The reality in biotech is that you almost never see a company say, "well, we gave it a good shot and it didn't work … we're going to close up shop and return the cash to shareholders." Instead companies turn back to their labs to find new internal candidates or seek outside options (acquisitions or in-licensing) to keep the ball rolling (and executive salaries flowing).

I expect the same here. Maybe Nektar will find a worthwhile candidate or two, or maybe they'll find a merger partner that needs cash and they can do a deal that works for both groups of shareholders. Whatever the case, I don't expect Nektar to just shut down and fade away.

The Outlook

If everything works, NKTR-255 could generate over $1B in sales and that's arguably worth around $0.50-$0.75/share today on a 5% chance of success. The year-end cash on hand is worth another $2.40/share or so, but this will be a dwindling asset (how fast it dwindles depends on how aggressively Nektar spends on NKTR-255 and its preclinical pipeline).

Best case, then, is that Nektar is worth something around $3/share, but the current price of $1.50 certainly points to the market pricing in the likelihood that management will fritter away that cash with no long-term benefit to shareholders.

The Bottom Line

I've seen companies come back from disappointments like this. Names like Achillion and Celldex (CLDX) come to mind, but it's certainly debatable as to whether Nektar's name belongs among them. I can understand if there are readers who want to speculate on the potential of NKTR-255 and/or the possibility that $500M of cash will buy something worthwhile, but this is really just a gamble at this point even among the high-risk standards of biotech.