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

SKrow

There are aggregate parts to nan valuation of a biotech. Approved and marketed products tin beryllium weighted done discounted rate flow, multiple-based approaches for illustration P/E, and truthful on, while pipeline products and "technology platform" values are overmuch much subjective, peculiarly arsenic they're driven by nan analyst's position of nan likelihood of approval. Last and not slightest is nan rate nan institution has connected hand, which while straightforward, has to beryllium viewed arsenic a dwindling asset.

This brings maine to Nektar Therapeutics (NASDAQ:NKTR). Roughly a week aft my past article connected nan company, Nektar announced nan nonaccomplishment of nan Phase II ISLAND study of its lead supplier rezpegaldesleukin (or "rezpeg") and partner Lilly's (LLY) determination not to proceed connected pinch further improvement successful lupus.

With this news, nan worth of Nektar shares has fallen beneath its spot rate value, and fixed the galore objective failures, I can't opportunity that's an unfair aliases disproportionate response. I afloat expect Nektar to move connected pinch its existent identified pipeline candidates and I would likewise expect to spot nan institution prosecute M&A and/or in-licensing to adhd objective candidates to its pipeline. For investors, this is fundamentally a bet that $500M-plus successful rate will somehow, eventually, bargain shareholders something of value, but that benignant of proposition doesn't suit my finance style.

Like Santorini, This ISLAND Blew Up

Nektar announced Thursday evening that nan Phase II ISLAND study of rezpeg successful moderate-to-severe systemic lupus erythematosus (or SLE) grounded and that partner Lilly would not beryllium moving nan supplier on to Phase III development.

The ISLAND study was designed to show a 4-point betterment successful diligent Systemic Lupus Erythematosus Disease Activity Index 2000 (or SLEDAI-2K) scores, but only 8.8% of patients (placebo-adjusted) successful nan modified intent-to-treat organization achieved that response. While location were immoderate signs of efficacy by different criteria, location was nary dose-dependent consequence (the mid-level dose showed nan champion response).

While rezpeg seemed to do small bully for SLE patients, it decidedly had an impact. Discontinuations ranged from 19% to 40% (vs. 12% successful nan placebo group), and location were meaningful treatment-emergent adverse effects, pinch 35% of patients successful nan low-dose group experiencing 1 aliases much TEAE, ranging up to 49% successful nan high-dose group.

With astatine champion equivocal efficacy and important tolerability issues, I don't spot a reliable way guardant for rezpeg successful SLE, and fixed nan meaningful marketplace opportunity, nan truth that Lilly doesn't want to put successful a Phase III programme tells you what you request to know.

Rezpeg Is Likely Done For

Lilly has not yet said 1 measurement aliases different if they will proceed connected pinch their plans to put rezpeg into a Phase IIb study for atopic dermatitis successful nan 2nd half of nan year, nor whether they will bring distant a 3rd indication.

At this constituent I find either doubtful. There was immoderate grounds of efficacy successful atopic dermatitis successful Phase Ib, but location were decidedly immoderate "quirks" to nan information that telephone nan spot of nan efficacy awesome into question. Moreover, tolerability was an rumor present arsenic well, pinch precocious rates of injection tract reactions and elevated incidences of infection. While AD is simply a sizable market, I don't deliberation there's capable present to reason for going forward, peculiarly erstwhile tolerability will apt beryllium an rumor comparative to already-approved treatments.

As acold arsenic nan 3rd denotation goes, Lilly antecedently decided not to move guardant pinch a psoriasis indication, and now there's a larger excavation of grounds regarding wide efficacy and tolerability that doesn't activity successful nan drug's favor. I expect Lilly will locomotion distant from this program.

Cash Will Keep The Lights On

Management announced that pinch this proceedings nonaccomplishment location would beryllium further cost-cutting efforts successful an effort to widen nan life of nan $505 cardinal rate equilibrium that nan institution had astatine nan extremity of 2022.

As I discussed successful that anterior piece, location are aggregate investigator-led studies of NKTR-255 underway successful aggregate crab types, and guidance plans to tally its ain combo study successful r/r ample B-cell lymphoma starting later this year. There's besides NKTR-288 successful pre-clinical improvement and an upcoming TNFR2 agonist antibody besides successful pre-clinical testing.

NKTR-255 is arguably worthy exploring arsenic a CD8 and NK compartment stimulator meant to amended nan efficacy of checkpoint therapies for illustration PD-L1 (Merck's (MRK) Keytruda and Bristol-Myers' (BMY) Opdivo) and compartment therapies for illustration Gilead's (GILD) Yescarta aliases Bristol-Myers' Breyzani. That said, fixed Nektar's history pinch proprietary supplier development, I tin understand why nary 1 would springiness this supplier overmuch in installments for immoderate existent chance of occurrence astatine this point. At a minimum, I decidedly want to spot existent objective information earlier assigning thing much than a run-of-the-mill chance of occurrence (5% for Phase I oncology drugs).

The reality successful biotech is that you almost ne'er spot a institution say, "well, we gave it a bully changeable and it didn't activity … we're going to adjacent up shop and return nan rate to shareholders." Instead companies move backmost to their labs to find caller soul candidates aliases activity extracurricular options (acquisitions aliases in-licensing) to support nan shot rolling (and executive salaries flowing).

I expect nan aforesaid here. Maybe Nektar will find a worthwhile campaigner aliases two, aliases possibly they'll find a merger partner that needs rate and they tin do a woody that useful for some groups of shareholders. Whatever nan case, I don't expect Nektar to conscionable unopen down and slice away.

The Outlook

If everything works, NKTR-255 could make complete $1B successful income and that's arguably worthy astir $0.50-$0.75/share coming connected a 5% chance of success. The year-end rate connected manus is worthy different $2.40/share aliases so, but this will beryllium a dwindling plus (how accelerated it dwindles depends connected really aggressively Nektar spends connected NKTR-255 and its preclinical pipeline).

Best case, then, is that Nektar is worthy thing astir $3/share, but nan existent value of $1.50 surely points to nan marketplace pricing successful nan likelihood that guidance will fritter distant that rate pinch nary semipermanent use to shareholders.

The Bottom Line

I've seen companies travel backmost from disappointments for illustration this. Names for illustration Achillion and Celldex (CLDX) travel to mind, but it's surely debatable arsenic to whether Nektar's sanction belongs among them. I tin understand if location are readers who want to estimate connected nan imaginable of NKTR-255 and/or nan anticipation that $500M of rate will bargain thing worthwhile, but this is really conscionable a bet astatine this constituent moreover among nan high-risk standards of biotech.

Stephen Simpson is simply a freelance financial writer and investor. Spent adjacent to 15 years connected nan Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That past portion isn't wholly true. Probably.