Nektar: Undervalued And A Tremendous Prospect

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About: Nektar Therapeutics (NKTR), Includes: BMY, LLY, PFE
by: BioSci Capital Partners
Summary

Due to the significant volatility and market inefficiency, there are stellar investment opportunities in the life sciences sector.

Nektar Therapeutics is a prime example of an excellent opportunity. It has an extremely robust pipeline, yet the stock is still highly undervalued.

As a testament to the quality of its proprietary technology, Nektar is able to ink high-profile partnerships with Bristol-Myers Squibb, Pfizer, and Eli Lilly.

The potential mega-blockbuster, NKTR-214 is being investigated in combination with other flagship immune checkpoint inhibitors for various cancers.

NKTR-358 is a powerful drug to potentially change the management for autoimmune disease. The silver bullet, NKTR-181 is most likely to be approved and launched this year.

Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market. - Warren Buffett

As an immune-oncology innovator, Nektar Therapeutics (NKTR) stood out as one of the most undervalued stocks. Since I recommended Nektar to my private investment community Integrated BioSci Investing, it returned more than 75% profit for the core portfolio CP-Alpha. Interestingly, that figure simply represents a tiny fraction of the unlocked value in Nektar. With a deeply entrenched pipeline of potential mega blockbusters, the stock will appreciate strongly even if one molecule turns out as a success. Highly reputable partners like Bristol-Myers Squibb (BMY), aka BMS, Pfizer (PFE), and Elli Lilly (LLY) already committed their capital to fund Nektar. In the remarkable collaborations, they are advancing their medicines in an unimaginable number of trials to service a vast number of indications. Despite an overhanging cloud on the stock, "opportunistic" investors can take advantage of this market inefficiency to enjoy significantly more upsides. In this article, I'll provide a fundamental analysis of Nektar and my expectation for this Phillip Fisher growth equity.

Figure 1: Nektar Therapeutics chart (Source: StockCharts)

About The Company

As usual, I’ll present a brief corporate overview for new investors. If you are familiar with the firm, I suggest that you skip to the subsequent section. Headquartered in San Francisco, Nektar leverages the powerful therapeutic design tool (chemistry polymer) to innovate and commercialize stellar medicines as shown below. Due to the structural adeptness of polymers, Nektar can customize the behavior of essentially any drug. And yet, the company picks low-hanging fruit (i.e. well-characterized pathways) to ensure that they yield clinically meaningful results.

Figure 2: Therapeutic pipeline (Source: Integrated BioSci Investing)

The Cornerstone of Cancer Management

The honeycomb of Nektar is powered by the cornerstone of stellar cancer management (i.e. combination therapy). Leveraging the unique properties of these rogue cells, combination therapy confers excellent efficacy and safety. Cancer cells are distinctive because they are essentially "immortal." There's no finite cellular division for cancers. They divide rapidly, consume tremendous resource until the host is expired. Their extreme turnover rate enabled them with the high "mutability" to render the treatment obsolete. By simultaneously suppressing multiple cancer targets, combination therapy lessened the time for these tumors to evolve. Therefore, it prevents tumors from escaping immune detection.

Accordingly, Nektar's potential mega blockbuster, NKTR-214, also known as bempegaldesleukin (i.e. bempeg), is a powerful active pharmaceutical ingredient ("API") being investigated in various combination therapies. As the CD122-biased agonist, bempeg activates the interleukin-2 (IL2) receptor beta subunit. Consequently, it leads to the growth of tumor-infiltrating lymphocytes (i.e. TILs) such as CD8+ effector T cells (i.e. killer T-cells) and natural killer cells. Highly adept at combating cancers, TILs play crucial roles in the body's natural defense system (i.e. the immune system).

The Sleeping Beauty, bempeg, is awakened as therapeutic synergy when combined with other cancer drugs, the immune checkpoint inhibitors. In regulating immune checkpoints through signaling molecules, cancer cells create a dampening (i.e. immunosuppressive) environment that weakens the immune system from defending against tumors. To overcome that obstacle, immune checkpoint inhibitors (ICIs) like a PD-L1 suppressor is utilized. To achieve synergy, Nektar removes the immune brakes via ICIs while boosting the immune system with bempeg.

Mega Partnerships Reflect Substantial Value

As votes of confidence, pharmaceutical giants inked collaborative partnerships with Nektar to develop combination regimens for different cancers. The mega-deal with Bristol-Myers Squibb (BMY) was signed back in February 2018. It enabled the development of bempeg in combinations with nivolumab (Opdivo) and Opdivo plus ipilimumab (Yervoy) in 20 cancer indications across nine different tumors. They include melanoma, renal cell carcinoma (“RCC”), non-small cell lung cancer (NSCLC), bladder cancer, and triple negative breast cancer. Of note, Nektar and BMS will correspondingly receive 65% and 35% of potential sales. Interestingly, BMS paid Nektar $1.85B in upfront payments which comprises of $1B in cash and $850M in equity priced at $106 per share. The development costs will be split 78% and 22% for BMS and Nektar, respectively.

Additionally, Nektar announced another collaborative partnership with Pfizer (PFE) in November 2018. They seek to develop bempeg in combination with avelumab (Bavencio), talazoparib (Talzenna), or enzalutamide (Xtandi) in various tumors. Under the agreement, the companies retain their commercial rights whereas Pfizer is responsible for the study. Bempeg will be assessed with either Bavencio plus Xtandi OR Talzenna plus Bavencio. While there's no upfront money in this partnership, Nektar is getting a "free ride" from Pfizer. In other words, Nektar does not have to spend its precious cash.

Back in July 2017, Eli Lilly (LLY) also teamed up with Nektar to co-develop NKTR-358 for the $45.5B autoimmune disease market. Under the terms, Nektar received an initial payment of $150M. The company also is eligible to gain $250M in milestone payments. There's also the double-digit royalty payment for Nektar. On top of the 75% developmental expenses, Lilly absorbs all the commercialization costs.

With three gargantuan deals under its belt, I strongly believe that there's tremendous value in Nektar's assets. And Nektar is unlocking value with its strong partners. After listening to the conference call, I got the impression that the partnerships made significant progress. Nonetheless, there's a delay in the registrational trials by four months from the June anticipated date. This is due to the complex nature of the trials that necessitate more planning. Nektar stated that the data for the additional PIVOT cohorts and other tumor types will mature this year. Therefore, Nektar will present the data at various medical conferences. Citing the catalysts, President and CEO Howard Robin enthused,

Starting with bempeg, and our collaboration with Bristol-Myers Squibb, we have initiated a number of registrational trials for the bempeg and nivo doublet combination in first line metastatic melanoma, renal cell carcinoma and bladder cancer, and we added a new expansion arm to PIVOT focused on enrolling second line non-small cell lung cancer patients, following treatment and relapse in first line with chemo in checkpoint therapy. The joint development plan with Bristol includes many registrational trials across multiple tumor types. BMS and Nektar are currently working on the designs for the next wave of trials in lung, breast, gastric and colorectal cancers as well as sarcoma. Our two teams that have been working very closely together on trial designs in a changing competitive landscape. We are developing a comprehensive registrational strategy and one that positions competitively the doublet of bempeg and nivo as well as the triplet of bempeg and nivo and ipi across various tumor types in our collaboration.

Prescription Opioid Abuse Epidemic

Aside from the combination therapy, I strongly believe that Nektar has the "silver bullet" NKTR-181 for the prescription opioid abuse epidemic. Back in July 2018, Nektar filed a New Drug Application (NDA) for NKTR-181 as the treatment for low back pain. In response, the FDA intends to hold an advisory committee (ADCOM) meeting sometime in August this year. And the agency set the Prescription Drug User Fee Act (PDUFA) on Aug. 29. Under the reign of the former FDA Commissioner (Dr. Scott Gottlieb), the agency is aggressive in curbing the epidemic. In my view, the demand for a solution to halt a phenomenon that's plaguing millions of American families is extremely strong. Hence, I was nearly 100% certain that NKTR-181 will be promptly approved. The merits for potential approval came from its robust Phase 3 (SUMMIT 07) trial outcomes. As NKTR-181 deters opioid abuse from the "molecular level," I strongly believe that it is the answer to the growing national crisis. Hence, I still believe in NKTR-181's ultimate approval.

And yet, I'm somewhat less confident because I'm not as familiar with the interim Commissioner (Norman Sharpless, M.D.) as I am with the former FDA Chief. After all, I followed Gottlieb's policy development closely. From a credential viewpoint, Dr. Sharpless heralds a stellar track record. He served as the 15th director of the National Cancer Institute ("NCI"). Prior to NCI, Sharpless was the director of the University of North Carolina (UNC) Lineberger Comprehensive Cancer Center. Sharpless was a Morehead Scholar at UNC who went on to teach at Harvard Medical School. Notably, Sharpless co-founded two bioscience companies (G1 Therapeutics) and HealthSpan Diagnostics. The firms are focused on the development and innovation of cancer medicines and blood tests.

My best guess is that Sharpless is "friendly" toward therapeutic innovators, especially those with an immune-oncology focus like Nektar. After all, Sharpless has a bioscience innovation background. As such, I strongly believe that NKTR-181 will be approved later this year. And it will serve as a notable growth catalyst for Nektar. Interestingly, the firm is gearing up the logistics for launch. Mr. Robin noted,

We remain confident that NKTR-181 can be an important building block in addressing the crisis and potentially helping patients new to opioid therapy suffering from chronic low back pain. As I stated last quarter, we have established a separate subsidiary company to launch NKTR-181, we expect to announce the new company and management team members within the next several weeks. As we had to prepare for a potential approval, our objective is to finalize the capital structure with one or more potential capital partners to support commercial launch. We believe a launch to be done efficiently with a specialized medical liaison team and a small sales force. To prepare for launch, we are completing the production of launch inventory as well as market access preparation and distribution arrangements. We continue to be very excited about the future for NKTR-181.

In my view, NKTR-181 approval is nearly a given. Nonetheless, its commercialization success remains to be seen. Though the fundamentals strongly support a "home run," I'm still hesitant about its initial launch success. Since Nektar is "going at it alone," an aggressive launch is nearly impossible. As Mr. Robin stated, the launch will be done by a "specialized medical science liaison team and a small sales force." Since it takes times for pharmaceutical reps to build relationships with physicians, hospitals, and clinics, it can take significant time prior to a sales ramp up. By several years into launch, NKTR-181 should log in good revenue due to the driving force of the prescription opioid abuse epidemic. In other words, NKTR-181 is the answer for a dreaded problem, yet the drug needs time because of the "bottleneck" effect of a small sales force.

Financial Assessment

Given that the earnings report reveals important information, I'll assess the 1Q2019 earnings report for the period that concluded on March 31. Nektar procured $28.2M revenues compared to $38.0M for the same period a year prior. This represents a 25.7% decrease due to the $10.0M from Takeda relating to Adynovi's Europe approval. That aside, the research and development (R&D) expense for the respective periods registered at $148.9M and $124.8M. The higher R&D is due to various clinical investigations such as bempeg's Phase 2 and registration trials. Moreover, the Phase 1 study of NKTR-358 and the Investigational New Drug-enabling activities for NKTR-255 lead to higher R&D spending. Of note, I generally view a higher R&D positively because the money invested today can translate into blockbuster profits in the future.

Additionally, there were $118.5M ($0.68 per share) net loss vs. $95.8M ($0.60 per share) decline for the same year-over-year (YOY) comparison. The 13.3% decrease in bottom line signifies a company that is growing aggressively: Significant capital was committed to R&D. Regarding the balance sheet, there was $1.39B in cash, equivalents, and investments, thus signifying a 4.5% increase from the $1.33B last year. Based on the $149M quarterly OpEx, I expect there's adequate capital to fund operations for at least two more years. I highly doubt that a public offering will occur in the near future.

Figure 3: Key financial metrics (Source: Nektar)

Valuation

On the subject of valuation, Warren Buffett mentioned that two analysts can come up with completely different figures for the same stock. Due to the subjective nature of valuation, I employ the most reasonable assumptions to enhance objectivity. In my usual process, I first check the Wall Street analyst consensus to learn about the market sentiment on the stock. In the short term, market sentiment is a fair indicator of the stock price. Based on the $74 consensus price target ("PT"), the market seems bullish on Nektar. For the long-term fundamental analysis, I calculated my PT as shown below.

Molecules

Indications

% success

Estimated peak sales

Discounted peak sales

NKTR-214

20 different trials across 9 different cancers

70%

$7B (BMY paid $1.8B for this deal so $7B is a rather conservative estimate)

$6B

NKTR-358

SLE and potentially other autoimmune diseases

60%

$3B

(autoimmune disease market grows to $45B by 2022)

$1B

NKTR-181

Low back pain

70%

$3B

($9B market)

$1B

Rest of pipeline

various

60%

$2B

$1B

Total peak sales

$9B

Table 1: Valuation of the sum using the parts (Source: Integrated BioSci Investing)

To arrive at my PT, I took the 25% profits margin from $9B to get $2.25B future net earnings. In dividing $2.25B by 173.8M shares, I obtained the $12.94 per share. With the 10 price-to-earnings ratio applied to my calculations, the arithmetic yield $129.4 per share. And by placing a 15% discount, I got the $109 PT which is comparable to BMS' appraisal.

Potential Risks

At this point in its growth cycle, the main risk for Nektar is if the company can continue to post positive clinical outcomes, especially for the PIVOT and the Phase 3 trials studying bempeg. As I believe that most value resides in the bempeg franchise, a negative clinical outcome can induce the stock to tumble more than 50%, and vice versa. Moreover, the risks for efficacy reduction as the trials progress is real. This is because cancer cells are notorious for evolving to escape immune detection even with combination therapy. So long as the overall response rate is within an acceptable range, the drug should gain approval. Moreover, other pipeline assets might not procure positive clinical outcomes and thereby cause the stock to significantly depreciate. Furthermore, NKTR-181 may not gain marketing authorization this August. Despite the more than favorable chances of approval, there's no guarantee when it comes to forecasting a regulatory binary. The new FDA commissioner added more twist to my forecast because I do not know him as well as Dr. Gottlieb.

Final Remarks

In all, I maintain my strong buy recommendation on Nektar with the five out of five stars recommendation. And I ascribed the $109 price target to be reached within two to three years. Investors might be surprised of the striking mismatch in the company's intrinsic value vs. its current $32.98 valuation. At its current share price, Nektar is worth $5.75B yet it already has nearly $2B in cash. Since BMS paid $106 per share for Nektar, I'm certain that the company is worth at least that much. Though I've studied countless companies, Nektar has one of the most, if not the most, promising pipelines. The company is brewing several blockbusters such as bempeg, NKTR-181, NKTR-255, NKTR-358. Nektar and its partners are aggressively pushing the "basket approach" studies along with combination therapy for many cancers. Even if a small number of indications prove fruitful, the shares should rally strongly. The market inefficiency is certainly there for this stock. If you are patient, you are most likely to enjoy strong returns.

I'd like to bid farewell with a quote by Warren Buffett: "Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: As a medical doctor/market expert, I'm not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself and my affiliates pertaining to any security without notification except where it is required by law. I'm also NOT responsible for the action of my affiliates. The thesis that I presented may change anytime due to the changing nature of information itself. Investing in stocks and options can result in a loss of capital. The information presented should NOT be construed as recommendations to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. That said, you are expected to perform your own due diligence and take responsibility for your action. You should also consult with your own financial advisor for specific guidance, as financial circumstance are individualized.