Nektar Therapeutics' (NKTR) CEO Howard Robin on Q4 2017 Results - Earnings Call Transcript

Nektar Therapeutics (NASDAQ:NKTR) Q4 2017 Earnings Conference Call March 1, 2018 5:00 PM ET

Executives

Howard Robin - President, Chief Executive Officer

Gil Labrucherie - Chief Financial Officer

Dr. Steve Doberstein - Chief R&D Officer

Dr. Jonathan Zalevsky - Chief Scientific Officer

Mary Tagliaferri - Chief Medical Officer

Jennifer Ruddock - Senior Vice President, Investor Relations

Analysts

Chris Shibutani - Cowen

Jessica Fye - JPMorgan

Bert Hazlett - BTIG

Difei Yang - Mizuho Securities

Andy Hsieh - William Blair

David Steinberg - Jefferies

Operator

Good day ladies and gentlemen, and welcome to the Nektar Therapeutics Q4 and Year End 2017 Financial Results Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Ms. Jennifer Ruddock, Senior Vice President, Investor Relations. Please go ahead.

Jennifer Ruddock

Thank you, Crystal. Good afternoon and thank you for joining us today. With us are Howard Robin, our President and CEO; Gil Labrucherie, our Chief Financial Officer; Dr. Steve Doberstein, our Chief R&D Officer; Dr. Jonathan Zalevsky our Chief Scientific Officer and Mary Tagliaferri our Chief Medical Officer. Several members of our team are joining from different locations. So we ask for your patience today during Q&A, if there is any lag in our response time.

On this call we expect to make forward-looking statements regarding our business, including the timing of future clinical trials and clinical trial results, clinical development plans, the economic potential of our collaboration partnerships, the therapeutic potential of certain drugs and drug candidates, as well as those of our partners, our financial guidance for 2018 and certain other statements regarding the future of our business.

Because these forward-looking statements relate to the future, they are subject to inherent uncertainties and risks that are difficult to predict and many of which are outside of our control. Important risks and uncertainties are set forth in the Form 10-K we filed today, which is available at sec.gov.

We undertake no obligation to update any forward-looking statements, whether as a result of new information, future development or otherwise. A webcast of this call will be available on the IR page at Nektar's website at nektar.com.

With that, I will now turn the call over to Howard. Howard?

Howard Robin

Thank you Jennifer, and thank you to everyone for joining us today for our year end 2017 conference call. On today’s call we will review the many upcoming milestones for Nektar's pipeline over the next 12 months, including our planned submission of an NDA for NKTR-181 in the second quarter and the continued advancement of our I-O portfolio with NKTR-214, NKTR-262, and NKTR-255. We will also provide our financial guidance for 2018.

2017 was a truly transformational year for our company. We achieved major successes on multiple fronts with Nektar invented medicines across three therapeutic areas; pain, immuno-oncology and immunology. This is a singular set of achievements that is truly remarkable and is the culmination of many years of hard work and scientific innovation by the Nektar team.

In the area of chronic pain, all Phase 3 trials of NKTR-181 were successful. The efficacy study in patients, the long term safety study in patients and the pivotal human abuse liability study conducted in recreational drug users. This successful and comprehensive Phase 3 development program will enable us to submit an NDA package for NKTR-181 in the second quarter of this year.

In the immuno oncology we developed a highly valuable and highly focused strategy, which resulted in a pipeline of new potential medicines that address the key components of the immune cycle in order to restore immune surveillance and properly harness the body’s immune system to fight cancer.

We now have a strong pipeline in immuno oncology, NKTR-214, NKTR-262 and NKTR-255. We’ve had compelling results with our lead I-O program NKTR-214 in terms of clinical efficacy, safety and supporting translational science, which led to our recent strategic collaboration with Bristol-Myers Squibb. The collaboration enables us to develop NKTR-214 broadly and rapidly in order to establish it as a backbone of cancer care across multiple indications.

And in immunology we opened the IND and began clinical development with NKTR-358, a first in class T reg, targeting resolution therapeutic to treat autoimmune disease. Our preclinical success with NKTR-358 led to an extensive partnership with Eli Lilly to develop NKTR-358 for a wide range of autoimmune diseases. Based upon the proof-of-mechanism results observed to-date in the single ascending dose first in human trail, NKTR-358 is now advancing into lupus patients in a multiple-ascending dose study which we plan to begin in the second quarter of this year. I don’t know of any other company at our stage of development to have this number of substantial and successful achievements in a single year, and I am very proud of our employees.

First let’s review the substantial progress we’ve made with NKTR-181. In the past two months, we’ve had two highly productive, pre-NDA meetings with the agency to discuss our clinical, non-clinical, and CMC data packages that will go into our NDA submission. As you know, our NDA data package includes an extensive amount of efficacy and safety data in over 2,100 patients and healthy subjects. This includes our 600 patient Phase 3 efficacy trial, our two human abuse potential studies and our 630 patient Phase 3 long term safety study, which also included long term measurements of pain control, as well as a wide range of PK and PD studies of therapeutic and supra therapeutic doses of NKTR-181 in over 450 healthy subjects.

The FDA staff gave us clear and collaborative guidance on the expectations for completion of our NDA submission. An agreement was reached to file the package in the second quarter of this year. The agency further confirmed that Nektar has an adequate abuse potential assessment data package and that together with the safety population the data appeared to be adequate to warrant a discussion of a less restrictive scheduling than schedule two. As I said earlier, we are on track to submit the NDA for filing in the second quarter of this year.

NKTR-181 has emerged not only as a critically important new potential medicine to treat patients with moderate-to-severe chronic pain, but also as an important component of a solution to address the opioid public health emergency. This afternoon Steve and I were invited to and participated in the opioid summit at the White House, which focused on the treatment of addiction in our country and the education, prevention and treatment of pain patients in light of the current opioid epidemic we are facing. A key theme of this event was the importance of providing pain relief to patients without the high risks of abuse and addiction found with today’s opioid drugs.

As the first new full mu-opioid agonist molecule to be developed in over 50 years, NKTR-181’s unique inherent properties position the drug to not only help stem the rate of new addiction to conventional opioids, but also to reduce diversion of prescription pain medications for abuse. We strongly believe that we could add more value to NKTR-181 through the continuing regulatory process. We believe NKTR-181 is a major building block in the fight against opioid addiction and we are highly focused on the best way to bring this important new medicine to patients quickly following approval. We are actively evaluating potential licensing to commercial partners or other strategic, structural alternatives while we advance the regulatory process.

Finally we are very pleased to announce today that two NKTR-181 abstracts were accepted for oral presentation at the upcoming 2018 Annual Scientific Meeting for the College of Problems of Drug Dependence, which will be held in San Diego the week of June 9. The first presentation will feature results from our dopamine microdialysis animal models which show that NKTR-181 does not create the same dopamine surge in the brain’s reward center as is observed with standard opioids.

The second presentation will review new positive data from our Phase 3 efficacy study from an important exploratory end point related to assessing the abuse potential of the medicine. The end point used in new measurement tool called MADDERS, which was developed with the FDA Action Public Private Partnership Initiative in order to quantify potential abuse related events in clinical trials. The MADDERS tool was specifically developed to generate evidence to support approval, labeling and scheduling decisions for new medicines.

Now let’s talk about NKTR-214. As you know, we recently entered into a transformative collaboration with Bristol-Myers Squibb, the global leader in immuno-oncology. This new collaboration is a major strategic step forward for our company in order to establish Nektar as a new leader in the immuno-oncology field. The collaboration’s broad clinical development program ensures that we could advance this new potential medicine to as many patients as possible as quickly as possible.

As you know Nektar will book all global revenue and we will keep 65% of global profits for NKTR-214. We will also receive an upfront payment of $1 billion and a premium equity investment of $850 million at $102.60 per share. We expect the collaboration to commence in the second quarter once the HSR review period ends.

Since we have the flexibility to pursue other combination possibilities, we maintain pricing and distribution control for NKTR-214 and our partner has committed to pay two-thirds of the collaborations development costs. We now have the right foundation in place to maximize the value of NKTR-214.

Onto the framework of the new collaboration, Bristol-Myers Squibb and Nektar will be initiating over 20 registration enabling studies that will enroll approximately 15,000 patients in nine tumor types. These trials will start within the first 14 months of the collaboration and the first two Phase 3 studies which Bristol will start in the middle of this year will be conducted in patients with first line melanoma and first line renal cell carcinoma.

We plan to share the design of these trails later this year at ASCO. At ASCO we will also share our first presentation of data from the second part of the ongoing PIVOT study of NKTR-214 plus Opdivo knows as the expansion stage.

At JP Morgan I provided an update on the patients from the first part of the ongoing PIVOT study, the 38 patients from the dose escalation stage. To remind you, the response rates we reported at JP Morgan were 75% response in second line I-O naïve non-small cell lung cancer, a 64% response rate in first line I-O naïve melanoma patients, and a 57% response rate in first-line I-O naïve renal cell carcinoma patients.

Further, all of the partial and complete responses observed in the dose escalation stage of the trail has been confirmed and we see ongoing tumor shrinkage and all patients with responses from dose escalation continue on treatment. Importantly, there have been no patients with responses who relapsed in any of the tumor types. This highlights that the length of time patients spend on treatment with the combination of NKTR-214 plus nivolumab is correlated with further tumor shrinkage and improved and continued response.

Specifically I want to take a moment to focus on the improvement and response over time for the 14 patients with first line renal cell carcinoma. When we initially presented the first line RCC dose escalation data as the SITC Conference in November of last year, the response rate was 46%. As I just said two months later at the time of JP Morgan the response rate was 57%. Today we are pleased to report that we have additional patients with stable disease that converted to responders, which means we now have a 71% response rate in first line RCC with all patients with responses confirmed in ongoing treatment.

There is also one additional patient in first line RCC with stable disease who is still on treatment as well. That patient had experienced tumor reduction and also has a potential to convert to responder.

Across the entire 38 patients in dose escalation in all tumor types, we now see a confirmed 60% overall response rate in the 20 patients with base line PD-L1 Negative Status. In addition, our safety profile across the entire PIVOT population continues to be encouraging with no patients discontinuing because of treatment related AEs and a low 11% G3 adverse event rate in over 150 patients treated to-date. As I just stated, at ASCO we will present the first data from the second expansion study.

The PIVOT study continues to enroll patients into the second expansion stage. As you’ll recall we plan to enroll 330 patients into 13 different expansion cohorts that’s been in five different tumor types. We expect to complete enrolment for the first five tumor types by the end of the third quarter of 2018. In the second quarter we will add three new expansion cohorts to PIVOT, gastric, colorectal and small cell lung cancer. It will begin enrolment very shortly after the HSR review period.

As we retain the ability to develop NKTR-214 in combination with other anti-cancer agents, we plan to initiate additional development collaborations this year. This will ensure that we maximize our potential to rapidly establish NKTR-214 as the future backbone of immuno-oncology therapy. Today, we have several NKTR-214 combination programs underway in non-clinical tumor models, including a collaboration with Takeds with five different targets, as well as vaccine and other small molecule programs. Based on the positive results from multiple pre-clinical studies, we expect to advance several new combinations into the clinic this year.

At the upcoming AACR conference in April, we will present four separate non-clinical datasets for NKTR-214, including a combination of NKTR-214 with an HDAC inhibitor in models of renal and colon cancer, and a combination of NKTR-214 with an adoptive T-cell transplant approach conducted in collaboration with Dr. Anthony Revis.

It’s important note that the Bristol-Myers Squibb collaboration puts us in a very strong financial position and allows us to execute on our vision for Nektar’s portfolio in immune-oncology. Our pipeline of I-O candidates beyond NKTR-214 includes NKTR-262, a TOR 78 Agonist, and NKTR-255 and IL-15 candidate that can stimulate both NK cells and memory T cells.

The preclinical data for the NKTR-214, 262 combination are particularly compelling and we are on track to dose the first patient in the novel-novel combination trail of NKTR-262 with NKTR-214 this month. The trial will enroll up to 400 patients with eight different tumor types in first and second line as well as refractory settings. The first stage of the trial will assess the doublet to NKTR-262 and NKTR-214 and the second stage of the trail we have the option to evaluate a triplet of NKTR-262 and NKTR-214 plus Opdivo. We expect to have the initial data from this trail sometime in the fourth quarter of this year.

Now let me give you an update on the advancement of Nektar-358 with our partner Eli Lilly. As I stated earlier, with success in the Phase 1 singe-ascending dose trial of Nektar-358 in healthy volunteers, Nektar-358 is now slated to enter Phase 1b multiple ascending dose trial in patients with lupus in the second quarter of this year.

This Phase 1b study will enroll approximately 50 patients and will evaluate safety and biomarkers of Nektar-358. With a 12-week retreatment period we expect the trail duration to be 18 to 24 months with initial data sometime in 2019.

And with that, I’ll hand the call over to Gil to provide financial guidance for 2018.

Gil Labrucherie

Thank you Howard and good afternoon everyone. I’ll start with a few points on the progress of MOVANTIK and ADYNOVATE and then I will review our 2018 financial guidance.

Our royalty revenue from MOVANTIK and ADYNOVATE continues to grow nicely and we expect this growth of our royalty revenue to continue in 2018. Our royalty revenue for 2017 was approximately $33.5 million, which represents a 72% increase from 2016. On January 15, 2018 the European commission granted marketing authorization for ADYNOVI as ADYNOVATE is noted in Europe, enabling patient access to ADYNOVI throughout Europe beginning this year. As a result of this European approval, we will recognize a $10 million milestone in Q1 of this year.

Not let’s turn to our 2018 financial guidance. First, starting with our cash position, including the upfront payments from the BMS collaboration we expect to end the year with a cash position of between $1.9 billion and $1.925 billion. For 2018 GAAP revenue, our guidance for revenue outside of the payments from the Bristol collaboration is between $100 million and $110 million, which we expect to be ratable over the four quarters of 2018 with the exception of the $10 million milestone payment for the European approval of ADYNOVI that we will recognize this quarter.

With respect to the BMS collaboration, we expect to receive the upfront payments when the HSR review period ends, which we estimate will occur in the second quarter of this year. While we currently anticipate that a portion of the upfront payments from the BMS collaboration will likely be recognized in 2018, we are working closely with our independent auditors to determine the new GAAP ASC 606 revenue recognition accounting principles will apply to the BMS collaboration payments.

We expect to complete this analysis and provide our final assessment of revenue recognition for the BMS collaboration on our Q1 quarterly financial results call. In the meantime, we recommend for modeling purposes to include a placeholder of $125 million in revenue to be recognized in Q2 of 2018 for the BMS collaboration.

We anticipate 2018 GAAP R&D expense will range between $400 million and $425 million, which includes approximately $67 million of non-cash depreciation and stock compensation expense. We expect to incur R&D expense on a fairly ratable basis over the four quarters of 2018.

There are a few key points that I want to highlight for our 2018 R&D investment plan. Our plans for the NKTR-214 development program include substantially completing enrolment in all of the current PIVOT expansion cohorts by the third quarter of this year, a goal BMS and Nektar were already working towards under our current clinical trial collaboration agreement.

In connection with our new collaboration agreement, after the conclusion of the HSR review period, we and BMS plan to start at least 20 registerational trails within 14 months after the collaboration is effective. Our plan includes to start Phase 3 studies in melanoma and renal cell carcinoma by mid-218, as well as other indications in the second half of 2018. After the collaboration is effective, we will work closely with BMS to continue planning the operational execution activities for the broad joint clinical development campaign that is outlined in our collaboration.

Keep in mind that under our BMS strategic collaboration agreement, our cash outlay is subject to an annual cap of $125 million in GAAP development expenses, which will be prorated for 2018 from the closing date of the agreement. While we will continue to recognize GAAP R&D expense for NKTR-214 to the extent such expenses exceed the $125 million annual payment cap, BMS will reimburse Nektar for all development costs in excess of the annual cap under our quarterly reconciliation process.

For Nektar-358 our plans include the start of a Phase 1b multiple ascending dose study in lupus patients in the second quarter of 2018. As you will recall, after the conclusion of the Phase 1b study Eli Lilly will then lead the development program for Nektar-358 from Phase 2 through regulatory approval with Nektar being a co-development partner.

Later this month we will commence our Phase 1 clinical study for NKTR-262 in combination with NKTR-214 with an enrolment schedule that should allow us to establish out Phase 2 recommended dose and share initial data from the study before the end of this year.

We also continue to advance the NKTR-255 program towards an IND filing, which we expect to occur in the first half of 2019. For NKTR-181 we plan to make a significant investment this year to advance NKTR-181 through the FDA approval process, including the planned NDA filing in Q2, drug to drug interaction studies needed to finalize labeling, CMS stability studies, as well as manufacturing the initial commercial launch supplies.

G&A expense for 2018 is projected to be between $65 million and $68 million, which includes $28 million of non-cash depreciation and stock compensation expense. For 2018 interest expense will be approximately $40 million including approximately $90 million of non-cash interest expense related to the CIMZIA and MIRCERA royalty monetization. As I stated earlier, we plan to end 2018 with approximately $1.9 billion to $1.925 billion in cash and investments.

With that, I will open the call for questions. Operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And our first question comes from Chris Shibutani from Cowen. Your line is open.

Chris Shibutani

Great. And thanks very much for the update, very helpful. I wanted to ask some questions about 262 in particular. Can you talk us through how you’re thinking about any of the pre-clinical data that you have and how that’s guiding your thinking about dosing for the combination with 214?

Howard Robin

Okay, I’ll let JZ answer that question.

A –Dr. Jonathan Zalevsky

Sure. Hey Chris. So it’s a good question. So definitely the pre-clinical models that we ran allowed us to understand the nature of the dose administration, and that’s both in terms of the frequency, even the dose volume, even the relationship of dose to properties of the tumor, such as the tumor size, the tumor’s age, and even some of the underlying composition of the cells inside the tumor.

So we took all that into consideration when we went and did all of the IND enabling, non-clinical toxicology studies which then further allowed us to pick a starting dose, which we could justify based on all of those parameters that I just described, as well as the overall toxicology assessment that’s required by the FDA before you open a first-in human trial, so all of that was considered to pick our starting dose, and I’ll give a little bit more color on that also.

In the way we designed the clinical trial, we’re injecting either one or two tumors on any occasion of intratumoral administration, so this is very different than say something like TVEC where you could be injecting 10 or more tumors in any given time. So this is a very different approach than that, and also the frequency of that injection is either once or on a 21 day cycle we have the chance to dose a few times and re-stage the patients as needed. So it’s a very, almost minimalistic amount of intratumoral administration, which we think is going to be very key to the overall success of NKTR-262.

In terms of the combination with NKTR-214 the philosophy there is that we know that any innate-immune action of the immune system has to end with a faithful handoff from the innate to the adaptive immune response, and that initial innate response which is not antigen specific then switches to be antigen specific at the adaptive level, and so the whole kind of science behind this combination is that when you co-administer the two agents, in particular having NKTR-214 on board after the IV administration, it really increases the efficiency of that innate to adopt a hand-off, and it actually really increases the number of antigen reactive T-cells and then those can go off and give you an abscopal response, really targeting any tumor in the patient, even the tumors that are very far away from the few that were injected.

Chris Shibutani

So then just to be clear then on the 214 dose, do you expect that to be the same dose that you are using for instance in PIVOT or is it likely to be different to optimize for the 262 combination? Thanks.

A –Dr. Jonathan Zalevsky

Sorry, it’s the same dose we’re using in PIVOT.

Howard Robin

Chris, we just want to congratulate you – everyone at Nektar wants to congratulate you on the outstanding performance of your children at the Olympics. So I want to make sure we didn’t forget that, that’s important.

Chris Shibutani

I appreciate the support and kind words, thank you.

Operator

Thank you. And our next question comes from Jessica Fye from JPMorgan. Your line is open.

Jessica Fye

Great. Thanks for taking my questions. I have a couple related to partnering, both with 214 and 181. So first, I was hoping if you could kind of set expectations, when you say that you plan to initiate additional development collaborations this year, should we expect more cash to come into Nektar from those? Are those more sort of cooperative clinical collaborations without money changing hands?

And sort of in the same vein and slightly related or may be against the backup of this massive deal that you just did, how does that change everything about your priorities for the structure of the future 181 collaboration, and lastly I just want to confirm one of the data points you said in the prepared remarks, the 60% response rate in 20 patients with PDL1 negative status, is that just blended across all tumor types?

Howard Robin

Okay, so last question first, yes it’s blended across all tumor types. To your first question, it was a good question. Look, as you know, there are no other drugs in development like NKTR-214. Everybody is now jumping on the isle to bandwagon, but the fact of the matter is there is nothing else in clinical development that looks like NKTR-214. And as you could also imagine there are many, many companies that are highly interested in combining NKTR-214 with their unique molecules.

I don’t know that I expect significant upfront money to change hands here. I don’t think that’s what we’re looking for. I don’t think that’s a priority for us at this moment. I think the most important thing we could do is find the right partners, whether they’d be small molecules, whether they’d be vaccines, there’s a range of things. Let’s find the right partner with the best potential opportunity and lets figure out how to work with that partner to combine NKTR-214 with their technology and show that NKTR-214 genuinely is the centerpiece of immuno oncology.

On the second question with regard to NKTR-181, look, again clearly – I don’t want to suggest that money is not important. It is very, very important; cash is very, very important. But at this point we have – we’re probably in better shape than most biotech companies and I think we can gain a lot by nurturing NKTR-181 through the regulatory process and the further it goes through the regulatory process the more likely it is that we can build even value on top of what we’ve already built.

We’ve had – you know our pre-NDA meetings with the FDA were excellent. The FDA is very supportive and has been extremely cooperative in helping us move NKTR-181 forward and as I said, we have an agreement with them that we’ll be filing NKTR-181 in the second quarter of this year and they are taking a very close look at what it would be to give it a scheduling that’s better than schedule two.

So we’re very happy about that. We expect to do the filing and at this point we are talking to companies and we are evaluating other possibilities and other strategic structures that could bring NKTR-181 to patients. I can tell you that Nektar Therapeutics has no intention of marketing NKTR-181; that is not our expertise. We are an immuno oncology immunology company and that’s where we’re going to focus our efforts. But there are all kinds of strategic structures, there is all kinds of potential collaborations with companies that we are discussing and I am hopeful that we will get this patient, disrupt the patients rather rapidly as I said.

Steve and I were invited to and we attended the Opioid Summit at the White House today. We’re actually in Washington right now. That’s why we’re at different locations and there is no doubt that a drug like NKTR-181 has the potential to be a major component of the solution to the Opioid crisis, no doubt about that. So we’re looking at all the possibilities and I think we’re going to be very proud of the results in the end.

Jessica Fye

Hey Howard, just to make sure I am hearing you correctly, I mean I was sort of asking about like can you maximize your royalties since you don’t necessarily need the upfront, but are you saying that also you now have more of the luxury of time with this cash infusion to capture better volume by just getting the product close to market?

Howard Robin

You know what; it’s a very good question. It’s both Jessica. So first of all, absolutely right. I would much rather get a back end on NKTR-181 than additional whatever upfront. I don’t think that’s our driver now. So in the context of whatever we do with 181, the back end, because I believe it’s going to be a very, very important drug in the marketplace, the back end is very important to us.

However what you said, the second part of your comment was also true. I think the longer we take it through the regulatory process and the more we get FDA buy-in on NKTR-181, it makes it even more and more valuable to somebody. So it also gives us the ability to talk to different companies, to look at different strategic structures, there is no time crunch on it. I just want to make sure that when it does get approved its ready to be marketed.

Jessica Fye

Understood. Thank you.

Operator

Thank you. Our next question comes from Bert Hazlett from BTIG. Your line is open.

Bert Hazlett

Thank you, thank you for taking the question. Congrats on the progress. So just continuing along the lines of some of what’s been asked, with regard to your appetite to explore additional combinations of additional IO therapies outside of Nektar. You’ve got 262, 255, you’ve got who knows what in the covered that your team is working on.

Are we hearing that there is the potential for material in-licensing or potentially even acquisition of additional technologies now with the cover is full in terms of the cash position there or is that just more exploratory development types of deals? I’d really love to pin you down on a little bit of the specifics there.

Howard Robin

Well look, again an excellent question and I should just start by saying we are very, very conscious of how we use our cash. So I don’t want you think that now that we have a very, very nice hoard of cash that we are going to use it in an inappropriate fashion. We are very, very frugal here at Nektar, I can tell you that.

Now that said, we are looking at a number of different collaborations where its genuinely – we put in NKTR-214, the company puts in their molecule and we see how that develops, but I would not rule out the possibility of acquiring something if it made sense. But we would have to – you don’t get many shots at that and you have to do it very carefully and very cleverly and you have to make sure that whatever you do acquire is something that you really want to put your stake in the ground with. So while I wouldn’t rule out the acquisition of the technology to combine with NKTR-214, I will tell you that we are going to be very, very judicious on doing that.

Bert Hazlett

Okay, thank you for that. Then just a little bit more again on the – on your language with regard to less restrictive scheduling for 181. It would be a very intriguing development if it were to happen, but I would love to understand a little bit better what give you the thought that our regulatory agencies might be willing to consider that.

Howard Robin

I’m going to let Steve handle that question.

A –Dr. Steve Doberstein

Yes, hi Bert. So just to be clear about that, what Howard said in his remarks, which was absolutely correct, is that the agency has given us guidance that our eight factor analysis, which is what underlies the pharmacology part of the scheduling decision and our safety database are sufficient to consider better scheduling, less restrictive scheduling than C2. That of course isn’t a scheduling decision. It’s just that you know they like what they have seen so far.

Now that’s a very big discussion that happens within FDA during review of the NDA between the division and the control substances staff. They then make a recommendation that comes out CSS to the Drug Enforcement Administration, DEA, and that happens around the time or immediately after approval. So it’s actually quite a while before we understand what the scheduling is really going to be for NKTR-181, but at least we have the data in place now that makes that discussion relevant with FDA, that’s the guidance we’ve been given.

Bert Hazlett

Okay and then just one other quick one on 358. Could you remind us of your involvement on the day-to-day and week-to-week basis in terms of the development of that program?

Howard Robin

JZ you want to cover that?

A –Dr. Jonathan Zalevsky

Sure, hey Bert. Yeah, so we have a very, very strong relationship closely with Eli Lilly. Now formally the way that the deal is structured, Nektar is the responsible party up until Phase 2. So we are the sponsor and running the both Phase 1a study that’s ongoing now, as well as the Phase 1b study that we’ll begin in the second quarter, the multiple ascending dose trail in lupus patients. So we have the font and the leadership and the responsibility for executing.

But the great things is that Lilly is not a passive partner. Now we don’t want them to do. In fact one of the goals of this whole collaboration was they have extensive experience in immuno-science, in the immunology space, so we really wanted to leverage that expertise and work together very closely. So the project teams are joint. They communicate regularly. We are on phone calls together multiple times a week, multiple even face to face meetings. So it’s a very, very healthy and an extremely collaborative group.

Bert Hazlett

Okay, thanks. Congratulations again on everything.

A –Dr. Jonathan Zalevsky

Thank you.

Operator

Thank you. Our next question comes from Difei Yang from Mizuho Securities. Your line is open.

Difei Yang

Hi, good afternoon. Thanks for talking my question. After all these questions I have a very easy one. On PROPEL study, where would you plan to share the results. Is it at a conference or should we be expecting a conference call specifically for the results.

Mary Tagliaferri

Hi Difei, this is Mary Tagliaferri. We have had a long standing tradition of sharing our clinical data at conferences, at medical conferences with participating investigators and we anticipate in the second half of this year we will be able to present some PROPEL data, and so you can expect to see that at a medical conference.

Howard Robin

But you know we are always open to providing data when we think it’s appropriate for investors. For example, we just told you on todays call that in first line renal cell carcinoma our response rate is now 71%. That’s a new piece of information that no one has seen before. So we’ll always be able to provide information on a reasonably timely basis, but we generally try to hold things for major medical meetings.

Difei Yang

Okay, thank you.

Operator

Thank you and our next question comes from Andy Hsieh from William Blair. Your line is open.

Andy Hsieh

Hi, thanks for taking my questions and again, congratulations on a very transformative 2017. I got two questions. One has to do with I guess the market potential for 262. It’s a Intratumoral injection and obviously not tumors are palpable. So just wondering your thoughts on what type of tumors can you target there.

The second question has to do with the safety of 214. So you said there, did I hear correctly and correct me if my wrong, grade 3 adverse events happen in 11% of the patients among what over 100 patients tested. Do you mind sharing what types of AEs have you seen? Is it different from what we’ve seen at SITC?

Howard Robin

Okay, sure. First let me touch on the first part of your question, which is how do you – what’s the market for a drug that’s dosed just a few times. I think well, if you have an important drug like NKTR-262, I think everybody understands that a TLR-78 agonist is potentially very, very important in immuno-oncology, but of course it can’t be delivered systematically. If you give it systematically I think the side effect profile would be significantly problematic. On the other hand when you combine it with 214 you do get the episcopal effects and that’s why I think it’s a very, very important program.

Now I don’t want to talk about what the market potential is because you have to talk about pricing and I don’t think we are ready to do that yet given the early stage of development. But clearly what this allows us to have is a Nektar wholly owned combination. So it means that we have NKTR-214 and NKTR-262 or should I say 262 and 214 because 262 theoretically comes first in the cascade.

So with that wholly owned combination maybe there is no need for a checkpoint inhibitor with that combination. So we have to see how that plays out, we have to see how that evolves, and depending on the efficacy that we see from that and how valuable that combination is, it will create a market for itself.

With regard to the safety profile, I’ll let Mary go into some detail, but I think it’s very important to note no one has dropped off of NKTR-214 studies because of safety issues, not a single patients has stopped therapy because of safety, that’s an important distinction. Please follow through Mary.

Mary Tagliaferri

Yeah, thank you. So as you know we have this very convenient outpatient dosing regimen that's every three weeks and that NKTR-214 can be dosed in antibody like schedule and we see incredibly low treatment related AE grade 3 rate of 11%. And really no one treatment related AE stands out and as we’ve shared many times with our hypothesis of increasing T regs in the periphery, but not Intratumorally.

We don’t see a high rate of [inaudible] like you would see what stimulates in checkpoint inhibitors. The most common symptoms that we see are flu like symptoms tend to occur in the first cycle and as patients are treated with subsequent cycles, patients usually become more tolorized to the cytokine and do not have flu like symptoms as they progress through treatment.

Physicians really appreciate this, because it’s easy to manage the patients. About 24 to 48 hours after dosing patients can expect to have a fever and they take Tylenol or NSAID and its resolved very quickly in a couple of days and the predictability of the side effect profile is very much appreciated by both the physicians and the patients alike.

Again, we don’t have discontinuations. We do see discontinuation rates as high as 20% in these clinical trials with checkpoint inhibitors and so we are very pleased that patients can tolerate treatment as Howard said.

Howard Robin

And also let’s not forget the efficacy component. As I said earlier, that every patient that has responded has stayed on drug. There has been no relapses for any patient who has responded. And as you look at it, as I talked about renal cell carcinoma as an example, we reported it as a 46% response rate, a few months later 57% response rate and now a few months later it’s a 71% response rate. So responses get better over time with this therapy and on top of that, not a single patient who has reposed has relapsed.

Mary Tagliaferri

Yeah, and I think differentiating in the world of renal cell carcinoma, when some approaches are combining say Tenro [ph] with TKI you know the grad 3 or higher AR rate is the as high as 65% and you have a high dropout rate. Almost 20% of the patients discontinue treatment because they can’t tolerate the combination. So having a highly tolerable regiment with a very high objective response rate is certainly what’s desirable today in the landscape of immuno-oncology.

Andy Hsieh

Great. Thank you so much for all the details and congrats again.

Mary Tagliaferri

Thank you, Andy.

Operator

Thank you. And our next question comes from David Steinberg from Jefferies. Your line is open.

David Steinberg

Yeah, thanks very much. I just had some questions on some of the finer points of your Bristol-Myers collaboration. So first, is the profit split with Bristol on all the 214 sales, is its only after [inaudible] or all sales and then secondly, how is the profit calculated for the purposes of determining the 35/65 split. Is it operating profit ex-R&D or another calculation? And third, how will you treat SG&A? Is SG&A associated with a partnership? Is that what will appear on your income statement? Thanks.

Howard Robin

Okay, so I’ll leave the last question to Gil. Let me take the first two. They are entitled to 35% of the profits on NKTR-214 regardless on how it’s used. We are certainly free to develop it with other combinations outside of Opdivo, but they are still entitled to 35% of the profits on NKTR-214. They also have to pay a percentage of the development costs, even if it’s not Opdivo. So if we were to do a development program with someone – in collaboration with some other company, whether it’s a vaccine or a small molecule, they have to pay their share of that development cost as well, even though it doesn’t involve Opdivo. So that is how that works. I think your second question was – refresh my memory again David, what your second question was?

Mary Tagliaferri

Howard, his second question would really be the operating profit.

Howard Robin

I remember, sorry. The operating course of like – the second part of it was what goes into the profit split? And you asked if research and development goes into the profit split, it does not. We pay approximately one-third, a little less than a third of the development cost. They pay a little more than two-thirds of the development cost and that has nothing to do with the profit split. So in that sense Nektar pays approximately a third of R&D expenses and that has nothing to do with the profit split. And I’ll let Gil explain how G&A work.

Gil Labrucherie

Yeah, so the P&L for 214 is just what you would imagine though. There is a COGS line and there is allocable commercial expenses for the direct efforts of Nektar and BMS to promote NKTR-214 resulting in operating margin, operating profit will then be split between Nektar and BMS with 65% going into Nektar and 35% going to BMS.

Operator

Thank you. And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Howard Robin for any closing remarks.

Howard Robin

Okay, well thank you for joining us this evening and again, I want to thank our investors for supporting Nektar for all these years. I think we finally achieved tremendous success. I expect that it continues and I of course want to thank all the employees for doing such a spectacular job, which really puts us at the forefront of immuno-oncology and the forefront of biotech. So we are very proud of everyone. So thank you very much. I appreciate your time today.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.