Nektar Phase III Trials At Risk

 |  About: Nektar Therapeutics (NKTR), Includes: AZN, ENZN
by: Martin Shkreli

Shorting Nektar (NASDAQ:NKTR) is a good investment. There are material deficiencies with lead asset NKTR-118, which I believe will result in the failure of this drug to achieve Phase III clinical trial primary endpoints. In the absence of positive results for NKTR-118, Nektar is worth very little (~$1 per share). Even if NKTR-118 succeeds, I don't think NKTR stock is worth $8 per share.

NKTR-118 is a mu-opioid receptor antagonist constipation drug with seemingly positive phase 2 data in opioid-induced constipation ("OIC"). Phase 3 results will be reported in Q4 2012 and this is a significant binary event for the company. I believe these phase 3 studies will fail. The reason for this is the unreliability of mu-opioid antagonists in eliciting a robust anti-constipation duration of effect in clinical trials. ALKS 37, Entereg, CB-5945 and PTI-901, all opioid antagonists, have failed to show a durable effect in long-term studies of constipation. All of these drugs show good short-term effects on constipation, but no drug has a long duration of action. Some of these drugs are FDA approved and to gain any share, NKTR-118 needs to show long-term (12 week) alleviation of opioid induced constipation. The one drug in this class to show a robust long-term response is oral methylnaltrexone (Relistor). This drug will likely be FDA approved this year, and Nektar and AstraZeneca will be playing "catch-up." The lack of efficacy at the low dose of the Relistor study illustrates that constipation studies, in general, are difficult to achieve success with. It will be hard for NKTR-118 to differentiate from Relistor, if it succeeds in the forthcoming pivotal trials.

The phase 2 results of NKTR-118 show a doubling in increased bowel movements at the target dose at 1 week. It is very important to note the primary endpoint is at just one week of therapy (there is some confusion that this was a four week endpoint). The clinical effect is small, with only one and a half increased bowel movements per week versus placebo. Indeed, this improvement is smaller than that seen with ALKS 37. Recall that ALKS 37, despite initial great short-term data, failed to replicate this effect in a longer study. Remember, these drugs are very similar, and the ALKS 37 experience illustrates why it is hard to trust replicating and extending initial OIC data with a mu-opioid receptor antagonist. At lower doses, NKTR-118 doesn't work well, and at only moderately higher doses is it too toxic (see the SAE). Finally, I'm not sure the improvement in bowel movements seen with NKTR-118 is clinically meaningful.

Constipation trials are very hard to run as the effect size of any drug is usually small with large variability in results. There are numerous other agents and non-medicinal physiological procedures patients can try during the study, even if they're encouraged not to. Psychological and physiological resistance and acclimation also occurs in these trials, especially if they are done over longer periods of time (1 week versus 12 weeks). Patient adherence and self-reporting is yet another clinical trial issue. The primary endpoint of the NKTR-118 trial is over 12 weeks (3 months). Nektar and its partner AstraZeneca are running just two Phase III trials to win approval of NKTR-118. The FDA requires two successful Phase III trials to grant approval.

Even if NKTR-118 works over 12 weeks, there are several other mu-opioid antagonists, including Relistor, CB-5945 and Entereg it will have to compete with. Using an 11% discount rate (quite generous given the operational hurdles), a 100% chance of success (no discount for failure), a $700 million peak sales estimate, a 21% no-cost royalty, no other costs whatsoever, the full value of filing and approval milestones, a patent expiry in 2026, 5% return on cash and full value for cash on hand now, I get a stock price very close to the current stock price ($8.22). Why would one go long a stock that is pricing in perfection? If anything at all happens to these projections, such as a competitor entrance, failure to achieve peak sales, failure to achieve clinical success, failure to persuade FDA of clinical significance, failure of IP, failure to reinvest funds properly, etc, the investment can be lost.

A bull might argue that $700 million is conservative for this product. That is impossible given the variety of other mu-opioid receptor antagonists there are. If approved, this drug would sell a lot less than $700 million, if the results are good at all, and if the FDA believes those results are worth approving. The FDA has been changing its mind quite a bit when it comes to constipation. Keep in mind no company has cracked the constipation market with a large product thus far. The Takeda/Sucampo product Amitiza is a relatively minor product with only ~$200 million in sales. Zelnorm was a $600 million product before it was withdrawn from the market and Lotronex sales are tiny. Entereg and Relistor sales are microscopic. Increasing spontaneous bowel movements is a reasonable endpoint for this disease but I question the medical significance of one more successful bowel movement than placebo in a one week period. With at least 3 look-a-likes, it is practically impossible for NKTR-118 to be worth $8 per share, and is probably worth $1-$2 per share in present value.

I don't value Nektar's next most highly valued product, a pegylated irinotecan called NKTR-102, very highly at all. In fact, I think the NPV of this project is negative. Cancer companies have abandoned developing new chemotherapies. Ask Bristol, Merck and Roche if they're interested in licensing NKTR-102. They'll stick with their PD1, MET and other exciting new targeted cancer drugs. Nektar is nevertheless running the Phase III "BEACON" study in almost one thousand breast cancer patients. This trial will take a long time to enroll and a long time to report results.

There is precious little evidence to handicap the results of this hail-mary Phase III. The company has some uncontrolled response rate data that seem encouraging, but with expectations moving so quickly with drugs like Perjeta receiving approval, it's hard to know what is good in breast cancer anymore, especially without randomized studies. I'm not a big believer in trying to predict OS data with uncontrolled response rates and single-arm survival.

Enzon has a very similar drug which the market is not giving it much value for. So I'm not sure we should do the same for NKTR. Of course, Nektar is spending an enormous amount of money on NKTR-102, which really drains from any value one might assign to NKTR-118. Nektar has routinely made missteps with NKTR-102. First, the company had us expecting a partnership for the product, which hasn't materialized. Next, the company suggested it could receive FDA approval in non-randomized ovarian cancer results, which is absurd. These false starts make me wonder if Nektar really knows what it is doing in cancer.

BAY855 is a pegylated hemophilia product being developed by Baxter with a royalty to Nektar. There is no clinical data I'm aware of for this compound and a ton of other companies are developing long-acting Factor 8 products. I suspect Biogen and others would have something to say if I valued this any more than nominally.

NKTR-061 is an inhaled antibiotic with minor sales potential being developed in collaboration with Bayer. It is unclear if this product is being pursued any longer after a very public set of issues. I don't value it as the sales potential of the product and it's current inactive state give me pause.

I don't value the rest of Nektar's preclinical pipeline which leaves us with their two Phase I pain projects. These aren't worth anything to be either. Trying to perfect pain drugs is a Sisyphean task. They are about as close to perfect as you're going to get in pharmaceuticals. Marginal improvements do not create value in the drug business (see tapentadol).

Nektar has a strange setup. The company has 423 employees, which seems about two- to three-times as many necessary for what it does. The stock price hasn't moved in 5 years and the CEO makes several million dollars per year, a lot of it in cash. Most importantly, the entire company had $113 million of negative cash flow in 2011, and they seem to be on a path to exceed even that in 2012. This greatly reduces any NPV of NKTR-118, to a point where even in a best-case-scenario that drug goes from being worth $8 to perhaps as little as $6. I don't like buying stocks where the most I can make is -$2 per share. The opposite holds true, I love shorting stocks where no matter how well the company's assets perform, the stock drops $2 due to the company's mismanagement of expenses and funding of low-impact projects and the implied 100% probability of success of the stock market.

As you might imagine, I am short Nektar stock and I suspect it will fall 80% when one of the NKTR-118 Phase III trials fails. If the trial works, the significant competition and small market size will result in the stock falling 50%-80% anyway.

It's time to recap my prior stock picks on SeekingAlpha.

Name Entry Price Exit Price Days Return IRR Comment
Neoprobe 6/1/11 5.25 8/5/11 2.00 65 -62% 1396%
Oncothyreon 7/25/11 10.00 3/9/12 4.97 238 -50% 87%
Avanir 5/31/11 4.62 11/25/11 2.00 178 -57% 151%
Mesoblast 8/18/11 7.95 Ongoing 5.93 305 -25% 31% Finally cracking.
Biomarin 6/8/11 27.12 Ongoing 37.04 376 37% 35% I think takeover rumors are true.
Chelsea 7/29/11 5.08 Ongoing 1.30 325 -74% -78% Stay tuned.
Zalicus 7/6/11 2.60 11/9/11 1.16 126 -55% 258%
Human Genome 8/28/11 12.63 3/19/12 7.89 204 -38% 77%
Star Scientific 6/5/11 5.26 Ongoing 4.25 379 -19% 18% Worthless.
Ampio 1/6/12 4.51 Ongoing 3.79 164 -16% 39% Worthless.
MannKind 1/19/12 2.84 3/19/12 2.33 60 -18% 173%
Cytori 3/19/12 3.13 4/10/12 2.10 22 -33% 11115%
Biotime 4/10/12 4.39 Ongoing 4.27 69 -3% 15% Worthless.
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Disclosure: I am short NKTR.

Author's note: I have removed the reference to the Litman et al. paper which I incorrectly misinterpreted. Thank you to a shareholder of NKTR for pointing this out. I misread this paper and apologize for any confusion that may have resulted. My thesis, is however, unchanged.

Additional disclosure: I may change my mind.