Nektar Therapeutics (NASDAQ:NKTR) Q1 2023 Earnings Call Transcript

Nektar Therapeutics (NASDAQ:NKTR) Q1 2023 Earnings Call Transcript May 9, 2023

Operator: Good day and thank you for standing by. Welcome to the Nektar Therapeutics First Quarter 2023 Financial Results Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Vivian Wu. Please go ahead.

Vivian Wu: Thank you, Crystal and good afternoon everyone. Thank you for joining us today. With us on the call are Howard Robin, our President and CEO; Dr. Jonathan Zalevsky, our Chief of Research and Development; Dr. Mary Tagliaferri, our Chief Medical Officer; and Sandra Gardiner, our acting Chief Financial Officer. On today’s call, we expect to make forward-looking statements regarding our business, including statements regarding the therapeutic potential of and future development plans for drug candidates and research programs, the timing of the initiation of clinical studies and the availability of clinical data for our drug candidates, the timing and plans for future clinical data presentations, the formation – future development plans or success of our collaboration arrangements, the expectations following our corporate restructuring and reorganization, financial guidance and certain other statements regarding the future of our business.

Because forward-looking statements relate to the future, they are subject to uncertainties and risks that are difficult to predict and many of which are outside of our control. Our actual results may differ materially from these statements. Important risks and uncertainties are set forth in our Form 10-K that was filed on February 28, 2023, which is available at sec.gov. We undertake no obligation to update any of these forward-looking statements, whether as a result of new information, future developments or otherwise. A webcast of this call will be available on the IR page of Nektar’s website at nektar.com. With that said, I would like to hand the call over to our President and CEO, Howard Robin. Howard?

Howard Robin: Thank you, Vivian, and thank you all for joining us today. As you know, a few weeks ago, we announced our plans to implement a new strategic plan and cost restructuring at Nektar. And I’m pleased to report today that we enacted the plan quickly and that we will begin to see ongoing expense savings starting in the third quarter of this year. The new plan focuses our company more clearly on immunology and importantly, also extends our cash runway through at least the middle of 2026. A core element of our new pipeline focus and plan is on the advancement of REZPEG, and we intend to move quickly to initiate a well-powered randomized Phase 2b study for REZPEG in patients with atopic dermatitis. We were incredibly pleased to have regained the rights to this first-in-class regulatory T cell program from Lilly.

Importantly, there are no royalties owed to Lilly for this transfer and REZPEG now becomes a wholly owned asset of Nektar’s. Atopic dermatitis, as a target indication for REZPEG, is attractive to us for several reasons, not the least of which is the strength of the data that has been generated for REZPEG in patients with atopic dermatitis. The non-topical biologic treatment landscape is significantly growing. The approvals of DUPIXENT and other IL-13 based biologics have driven this growth. In the U.S. alone, approximately 16 million people are living with atopic dermatitis with 3 out of 4 of these affected by moderate to severe disease. In 2021, biologic sales for atopic dermatitis were close to $5 billion and sales continue to grow. That being said, atopic dermatitis is a disease area where there is still a very high unmet need for novel biologic treatment options.

Most notably, the mechanisms available to patients today after they fail topical treatments overlap and fall into either the category of IL-13 based mechanisms or JAK inhibitor. Both mechanisms have limitations on efficacy and both have some notable safety challenges, which include black box warnings with the JAK inhibitor class. Even with the growth in the adoption of these mechanisms, at least 50% of patients don’t respond to these therapies at all, and many patients see a rebound in their disease after coming off these therapies. This opens a real opportunity for REZPEG to be introduced as the first regulatory T cell mechanism that is differentiated from these overlapping existing mechanisms. The Phase 1b data for REZPEG was compelling and set the stage for us to measure the potential for REZPEG be a remitted therapy with longer-term disease control and less frequent maintenance dosing.

JZ will review the data reported for REZPEG in a few minutes, including the quality and durability of responses we saw in patients. Now as we mentioned in our reprioritization plan with a focus on immunology, we’ll also continue the development of our IL-15 program, NKTR-255 in cancer, while we explore strategic partnership options. NKTR-255 is being developed in combination with cell therapies, and we believe it could be a valuable adjuvant therapy for companies focused in the area of cell therapy. Our Phase 2 study of NKTR-255 in combination with approved cell therapies, BREYANZI and Yescarta, as well as the Phase 2 JAVELIN Bladder Medley study with Mercy KGaA will continue while we seek a development partner. We continue to see great value in NKTR-255 and early data showed its promise as a potentiator of cell therapies that could benefit patients suffering from very difficult-to-treat cancers.

Our goal is to find a strategic co-development partner this year. As I’ve stated earlier, our primary focus is on immunology. And to that end, we have 2 preclinical candidates advancing, a TNFR2 antibody program and a PEG CFS 1 program, which JZ will discuss in a moment. Our goal is to have an IND ready in 2024 for at least 1 of these programs. We’re deeply grateful to our employees for their commitment and dedication to Nektar and the patients we aim to serve. The decisions over the past month to further reduce our head count have been difficult, but we believe these are the right decisions to maximize the success of REZPEG and our immunology programs. We’re confident that our focus on immunology is the best path forward to bring important potential therapies to patients and to create value for our shareholders.

And now I’ll pass the call to JZ to review the programs in more detail.

Jonathan Zalevsky: Thanks, Howard. Starting with REZPEG. This is a unique molecule that has shown promising efficacy in multiple clinical trials as a single agent. Our goal with this program is to address the underlying Treg deficiencies and consequent overactivity of effector T cells in these diseases by selectively activating and expanding Tregs. REZPEG is uniquely positioned as the most advanced IL-2-based Treg mechanism in the clinic with opportunity and potential in a number of autoimmune disease indications. . Now Howard touched on 1 of these indications, atopic dermatitis. Management of atopic dermatitis has a few main goals. The first goal is the rapid efficacious treatment of the acute phase of the plant. And second, this is a far more challenging control of the chronic disease in the long term.

And given that most patients with moderate to severe disease need medication for many years, the safety profile is also critically important. The current treatment landscape for patients with moderate to severe disease that requires systemic therapy has 2 major classes of medicines currently approved for standard of care. One class of these target key cytokines that drive the TH2 inflammation pathway, the flagship in this class is DUPIXENT or dupilumab, which blocks the IL-4 and IL-13 pathways. Lebrikizumab which is expecting approval later this year and the recentfly approved Adbry both target and block IL-13 only. While DUPIXENT is a very successful drug, there is now real-world data that describes some of its limitations. One real-world evidence study shows the lack of durable efficacy in that 79% of patients that discontinued DUPIXENT lost disease control after an average of 4 months and needed to restart therapy.

Another real-word study showed that 27% of patients taking DUPIXENT developed moderate to severe conjunctivitis, requiring treatment with anti-inflammatory eye drops or appointments. The other major class of therapies for atopic dermatitis are the JAK inhibitors. These interfere with T cell activation and thus suppress inflammation in the dermis. JAK inhibitors show impressive efficacy in atopic dermatitis, but they carry multiple black-box warnings making them less attractive for chronic use. Because the JAK inhibitors are associated with these multiple safety risks, the FDA had only granted a label for the JAK inhibitors in patients whose disease is not adequately controlled with other systemic drug products, including biologics. In the clinic, because of the black-box warnings, dermatologists acknowledge that JAK inhibitors are not suited for many of their patients, including individuals greater than 65 years old or those with the comorbidities associated with the black-box warning.

Like DUPIXENT, patients that discontinue JAK inhibitors also quickly lose disease control and relapse. Unlike IL-13 blockers and JAK inhibitors, which both block their respective pathways, REZPEG is designed to target the IL-2 receptor complex and stimulate the expansion and function of Treg cells. These in turn suppress the harmful T cells that are driving the underlying pathology of atopic dermatitis. REZPEG aims to restore homeostasis in the immune system through the proliferation of T-reg cells rather than just blocking effector cells. And consequently, REZPEG provides a completely different mechanism of action compared to the other drugs that are currently approved or under development in the atopic dermatitis space. The Phase 1b data from our first initial proof-of-concept study in moderate-to-severe atopic dermatitis reinforces our conviction in REZPEG.

Photo by National Cancer Institute on Unsplash

The 12-week Phase 1b study conducted by Lilly tested two doses of REZPEG compared to placebo and then followed patients for 36 additional weeks after the last dose of therapy. Last September, we presented the interim data from this trial. REZPEG demonstrated a dose-dependent reduction in eczema area and severity index scores in patients, also known as the ES score with approximately a 70% reduction in scores at week 12 at the highest dose tested. We also saw a dose-dependent improvement in the investigator global assessment for atopic dermatitis and itch responder rates through week 12 of treatment. Consistent with the REZPEG mechanism of action, total Tregs and CD25bright Tregs increased versus placebo through week 12. The efficacy observed at 12 weeks of treatment with REZPEG is in line with efficacy observed after 16 weeks of treatment with DUPIXENT.

But clearly, the most fascinating observation from the study was that when we looked at patients 36 weeks after we stopped dosing REZPEG, their skin scores and other measurements of disease activity remain very low. And this is an effect that is not observed with DUPIXENT. This has us and KOLs very enthusiastic about the potential for long-lasting responses and infrequent maintenance dosing with REZPEG in the setting of atopic dermatitis.. We have now received the final data for this study from Eli Lilly, and the study results positively extend the interim results previously reported. In addition, these data include additional efficacy endpoints that were not covered in last year’s EADV presentation. To briefly touch on some of these, we observed a dose-dependent decrease in the percentage of body surface area involved with atopic dermatitis, also known as BSA in patients treated with REZPEG with patients at the highest dose level reaching a 72% reduction in BSA at week 12 as a reminder, BSA continuous measurement that correlates with EASI.

We also observed dose-dependent reductions in 2 patient-reported outcome measures, the Dermatology Life Quality Index, also known as DLQI, and the patient-oriented eczema measure or POEM. In addition, the final data set has data for more patients completing the 36-week observation period. We are very excited about the data obtained in this study. REZPEG showed efficacy across all measures of physician-reported disease activity and patient-reported outcomes. And these effects were durable and maintained after patients stopped REZPEG administration at week 12. We look forward to ending in the coming months. When we develop REZPEG at Nektar, our hypothesis was that restoring Treg populations in patients with autoimmune disease would restore the normal balance of the immune system and potentially provide a disease-modifying therapy.

We are excited to see the long duration of sustained response observed in the atopic dermatitis study, consistent with this hypothesis. These collective data demonstrate REZPEG’s potential as a remit of therapy and support the quick advancement of REZPEG to move into a Phase 2b study in atopic dermatitis later this year. We are now finalizing the Phase 2b study, which will give the industry standard Phase 2 study design similarly to Phase 2 work conducted for approved IL-13 and other agents. This will allow us to evaluate multiple dose regimens of REZPEG in a 16-week induction period followed by a 28-week maintenance period. We believe the study design will enable data to be better compared to prior Phase 2 studies at a 16-week primary endpoint readout at the end of the induction period.

We have assembled a scientific steering committee for this trial and we are pleased to announce that Dr. Jonathan Silverberg from the George Washington University School of Medicine and Health Sciences will be the Chair of this committee. We are truly excited for REZPEG’s potential as a first-in-class Treg stimulator, and we look forward to initiating this Phase 2b study in patients with moderate-to-severe atopic dermatitis this year. The Phase 2 top line data reported in lupus earlier this year also demonstrated clinically meaningful improvements as compared to placebo across key secondary end points, including BICLA and LLDAS at the mid-dose level. And since we reported the data, we have had time to meet with many thought leaders in the field of lupus.

Their reaction to our study results has been positive and provided us with many insights. In their feedback, the thought leaders focused on REZPEG’s rapid onset of BICLA and LLDAS response as well as the magnitude of the effect on these endpoints was observed. There is agreement that the Phase 2b data provides ample evidence to design a Phase 3 registrational study around these approvable end points. While we remain very interested in lupus, to be clear, we are prioritizing first the Phase 2b study in atopic dermatitis because it will allow us to rapidly reach a definitive result in a randomized study. We may have the opportunity to revisit a development strategy in lupus once we get the results from this atopic dermatitis study. We are extremely excited about REZPEG now being a wholly owned component of our pipeline.

While our near-term focus is on atopic dermatitis, we continue to believe that REZPEG has broad potential in multiple indications. As development of this program progresses, we will continue to evaluate further opportunities and indications for REZPEG. Moving to NKTR-255. We are evaluating strategic partnership options for the asset, while we continue our NKTR-sponsored Phase 2study of NKTR-255 in combination with cell therapies and the Phase 2 JAVELIN Bladder Medley Study with our partner, Merck KGaA. NKTR-255 is an agent that engages the full biology of the IL-15 pathway to provide functional activation and homeostatic control of IL-15 responses of immune cells, mainly natural killer cells, CD8 T cells and immune memory subsets. As the full agonist of the IL-15 pathway, it can signal through both cis and trans presentation of the TRIMERIC-IL-15 receptor complex.

NKTR-255 can be combined with multiple mechanisms ranging from targeted therapies, to cell therapies, including CAR-T and even TCR therapies and checkpoint inhibitors to potentially improve the efficacy of these agents. While we continue to see great value in this program with NKTR-255 showing broad potential applicability across oncology indications, we believe prioritizing our immunology programs provides great opportunity to create value for our shareholders. We believe further development of NKTR-255 with the strategic partner is, therefore, the best path forward for our program, and our goal is to find a partner this year. With this reprioritization, the NKTR-255 study in combination with DARZALEX FASPRO in multiple myeloma and in combination with cetuximab in solid tumors are wrapping up as we prioritize the cell therapy in bladder cancer sites.

Now turning to our preclinical research programs. We are advancing our research pipeline with a focus on autoimmune disease. The first program we are working on is our new PEG colony-stimulating factor, also known as CSF1 program. PEG CSF1 is the polyethylene glycol or PEG modified version of the CSF1 protein. This molecule was engineered to optimize their receptor interaction and the exposure to selectively modulate the resolution processes of inflammation. We believe this program has applications in a number of therapeutic indications, including acute and chronic inflammation as well as fibrosis. And we are excited to be ramping up the program. Our second preclinical program is our TNFR2 agonist antibody being developed in collaboration with biologic design.

TNFR2 is highly expressed on Tregs, neuronal cells and endothelial cells, and TNFR2 agonism has been shown to potentiate the suppressive effect and overall functional properties of Tregs. If absent, it is associated with CNS autoimmunity. While its presence has been associated with protective effects for neuronal cells as well as other cell populations and tissues in the body. The lead antibodies we have identified shows selective Treg binding and signaling, which enables them to be developed specifically for autoimmune disease. We are very excited about this program and its potential to suppress inflammation and promote the human resolution. We plan to file an IND for at least one of these programs in 2024 and look forward to keeping you updated on our progress as these programs mature.

And with that, I will turn the call over to Sandy for a review of our cost restructuring plan and financial guidance.

Sandra Gardiner: Thank you, JZ, and good afternoon, everyone. I’d like to first outline the actions we are taking currently in the second quarter as part of our cost restructuring plan to reduce operating expenses. And then I will provide 2023 financial guidance. We ended the first quarter with approximately $457 million in cash and investments with no debt on our balance sheet. As we announced in April, we have reduced our San Francisco-based workforce by approximately 60%. Costs related to the restructuring will be paid by the end of June in the second quarter. We now have approximately 55 employees based in San Francisco going forward. On an annual run rate basis, the reduction to personnel represents approximately $30 million a year in operating expense reductions.

We will have quarterly savings beginning in the third quarter of 2023, and we expect to fully realize these annual savings in 2024. With these reductions in annual operating expenses, as Howard stated, our plan allows for Nektar to have a cash runway through at least the middle of 2026 with our existing cash on hand. Any cash brought in from partnering or other strategic activities would further extend this runway and bolster the balance sheet. Before I move on to 2023 financial guidance, I will note a few non-cash items that were recorded during the first quarter of 2023. First, we recorded a one-time non-cash charge of $76.5 million to impair the goodwill that was previously recorded on our balance sheet, primarily from two acquisitions made over 17 years ago, the 2001 acquisition of Share Water Corporation and the 2005 acquisition of Aerogen.

In Q1, we also recorded a $13.2 million noncash impairment primarily for leased assets. These aggregate non-cash impairment charges of $89.7 million contributed $0.48 to our net loss per share in Q1 2023. Excluding these non-cash impairment charges, net loss on a non-GAAP basis for the first quarter of 2023 and was $47.3 million or $0.25 basic and diluted loss per share. I’ll now review our 2023 financial guidance. We expect to end 2023 with at least $315 million in cash and investments. In the second quarter of 2023, we will have non-recurring cash payments of approximately $8 million in connection with our reduction in head count. We expect our net cash usage to decrease in the second half of the year after these payments are made in June.

As I said earlier, this reduction in net cash utilization extends our cash runway through at least the middle of 2026. Our GAAP revenue for full year 2023 is expected to be between $80 million and $90 million. This revenue includes $65 million to $70 million in non-cash royalties and $15 million to $20 million in product sales. We anticipate full year 2023 GAAP R&D operating expenses will range between $105 million and $115 million, which includes approximately $15 million to $20 million of non-cash depreciation and stock compensation expense. We expect G&A operating expense for full year 2023 and to be between $75 million and $80 million, which includes approximately $15 million to $20 million of noncash depreciation and stock compensation expense.

For the full year 2023, we expect to recognize restructuring, impairment and costs of terminated programs of approximately $30 million to $35 million, $13.2 million of which is a non-cash impairment that I mentioned earlier and was recognized in Q1 2023. Our full year 2023 non-cash interest expense is expected to be between $20 million and $25 million. And with that, we’ll now open the call for questions. Operator?

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Q&A Session

Operator: Thank you. Our first question will come from Chris Shibutani from Goldman Sachs.

Unidentified Analyst: Hi, good afternoon, everyone. This is Charlie on for Chris. Thank you so much for taking my questions. I understand the excitement for having REZPEG back in-house. But just wondering, as we’re thinking about the restructuring efforts going forward, are you open to the opportunity to potentially partnering REZPEG with another pharma partner at some point? Or are you happy to keep it in-house at this point? And then I have a quick follow-up.

Howard Robin: Yes. Good. This is Howard. Good question. At this point, I have no plans to partner with anybody else. This is Nektar’s program. I think it’s a great opportunity for us to see this through to completion. I do see from the data that we should be able to complete a Phase 2b trial in atopic dermatitis with success. And it will be the first mechanism of its kind and, I think, set the stage for a new way to treat autoimmune disease. So for now, it’s our drug. I hope that answers it.

Unidentified Analyst: No, that’s very helpful. Thank you. And then just quickly, if we think about the timeline for the Phase 2b in atopic dermatitis that has kind of played out just now, should we be expecting those data to maybe be like a mid-2024 sort of time line?

Howard Robin: Yes. Look, we’re going to – look, we’re going to start that study as soon as we can. It’s going to take a few more months to finalize the design and get sites set up. I would say that you’re looking at somewhere in the range of 14 to 18 months to complete that study from the time we start. So as soon as we start it, we’ll give everybody a more thorough update.

Unidentified Analyst: Okay. Great. Thank you so much for taking our questions.

Operator: Thank you. Our next question comes from Jerry Gong from Mizuho. Your line is open.

Jerry Gong: Hi, this is Jerry Gong for Mara Goldstein. Thanks for taking our questions. Just two quick ones from us. For the Phase 2b study in atopic dermatitis, are you planning to conducting differential analysis for different patients with probably DUPIXENT, JAK, other cytokine use? And one quick one on NKTR-255. Can you give any color on the type of partnership that I can look for? Like would a Lilly type of deal be interesting?

Howard Robin: Well, okay, let me take the second half first, and then I’ll give it over to JZ to answer your first part of your question. I think look, we’re focused – right now, I think we’re – we need to focus. We need to make sure our cash runway runs through at least the middle of ‘26. I’m comfortable that we can do that. And that means we’re going to focus right now on atopic dermatitis because it’s an enormous market. Certainly much larger than the cell therapy market. And I do think that that’s where we need to focus. And I think REZPEG has not just the potential to treat atopic dermatitis. But if we’re successful there, the potential for that type of mechanism in various autoimmune disorders is kind of exciting.

I do think for NKTR-255, I can’t tell you what that will look like yet. Obviously, it will be in combination with a cell therapy, whereas obviously, what we’re doing with REZPEG is active as a single agent. So we have to explore carefully what that deal would look like. I think it could be a joint collaboration. It could be a license deal. Don’t know yet. Certainly, all the cell therapy companies are talking to us because I do believe they feel that IL-15 is going to be important in potentiating cell therapies. So, lots of discussion, lots of potential. It could be a collaboration, could be a license, don’t know yet.