2014 Looking Like A Big Year For Nektar

Long-term investors in Nektar Therapeutic (NKTR) have had a roller coaster ride over the years, as these shares have traded up and down on for particular products like inhaled insulin and Nektar's PEGylation licensing royalty streams in general. Over the last few years, though, the company has been focusing on not only increasing its share of value in its partnered programs, but using the cash generated by them to support its own proprietary development portfolio.

The next year is looking like a big one for the company, as it should have considerably more clarity about the future of its opioid-induced constipation drug and its metastatic breast cancer drug. Together these drugs encompass about half of the value I see in the shares. While Nektar must deal with the same risks and uncertainties as any biotech, I think the Street may be underpricing these shares. Even with what I think are relatively conservatives estimates for many of the lead programs, I think the shares may be almost 30% undervalued and Nektar does offer a deep pipeline of potential drug candidates.

To Go Or Not To Go With New OIC Drugs?

Nektar's lead pipeline drug, both in terms of development and value potential, is NKTR-118 (naloxegol), an oral PEGylated version of naloxol. Naloxol is similar to naloxone, a drug used to counter opiate overdose, and naloxegol treats opioid-induced constipation by essentially mediating opioid-induced bowel dysfunction without interfering in the overall analgesia.

Multiple clinical studies have shown that the 25-mg dose of NKTR-118 does lead to a statistically significant increase in bowel movements compared to a placebo. These studies have also demonstrated a relatively clean safety profile. Even so, the FDA is apparently concerned about the risk of cardiovascular side effects and has raised the possibility of demanding a CV outcomes (CVOT) study, either before or after approval is granted.

NKTR-118 has not shown a higher risk of CV events in prior studies, but the FDA is apparently spooked by CV safety signals shown by Cubist's (CBST) Entereg, and so now the whole sector is paying the price. NKTR-118 acts by a different mechanism than the one the FDA is worried about, but this is the FDA we're talking about and there are no guarantees. Because of this risk, Nektar's marketing partner AstraZeneca (AZN) modified their marketing agreement to give them an out-clause in the event that the FDA demands a pre-approval CVOT and AZN chooses to walk away. Assuming that the FDA doesn't demand a pre-approval CVOT, FDA approval should come in 2014.

I'm not actually that worried that AstraZeneca will bail out, but I still do have my doubts about this drug. The results shown to date are broadly similar to Salix's (SLXP) oral Relistor (another OIC drug that has seen a very difficult regulatory path and is still not approved). What's more, these companies don't run studies that compare the drugs to stool softeners and laxatives. While stool softeners and laxatives don't work for all patients, they are likely to remain the first-line therapy and that could cut into some of the gaudy peak sales predictions on the Street.

Waiting For Data (And A Partner?) For NKTR-102

NKTR-102 is the biggest wholly-owned program at Nektar today. NKTR-102 is a PEGylated version of Pfizer's (PFE) Camptosar, a drug that can be quite effective but also carries high levels of GI toxicity. By PEGylating the drug, Nektar has enhanced tumor permeability and retention, while also improving tolerability.

Early studies of NKTR-102 in metastatic breast cancer have been quite encouraging, with a Phase II study showing a 30% response rate as a monotherapy. With that, the company launched the Phase III BEACON study in breast cancer.

I'm optimistic about this study. First, it was designed in a way to focus on patients that are presently under-served by existing cancer drugs. Second, it is an open-label study and enrollment ended five months earlier than expected - that doesn't prove anything, but I take it as a sign that the doctors involved in the study think there's something to this drug and wanted to get their patients on it. I don't believe that a futility analysis in the first quarter of 2014 will bring the trial to an early close due to better-than-expected efficacy, but then I also don't believe it will end the trial due to futility. Instead, I expected to see top-line data by the end of 2014 that supports approval in breast cancer.

Whether or not the drug works in metastatic breast cancer is a big enough unknown in its own right, but I think the odds are favorable. Assuming a successful outcome, I would expect the company to begin advanced partnering talks, as I don't see the company wanting to build its own sales force.

The real question is whether the drug has a future in other indications like ovarian and colorectal cancer. A small study of late-stage pre-treated glioblastoma multiforme patients showed 55% patients achieving six-week progression-free survival (where conventional therapies would normally result in about 25%). That's encouraging regarding the efficacy of the drug, though the GBM market is not particularly large on its own.

A Deep Pipeline Behind These

A full telling of Nektar's story would run on to quite some length, but a few other pipeline candidates merit mention. Nektar management is still optimistic about NKTR-181 (a PEGylated opioid) for pain, even though a Phase II study failed to achieve its primary endpoint due to a higher placebo response. Instead of running another Phase II study, management is moving forward with a Phase III study in 2014, but modifying the trial design to hopefully fix the problems in the Phase II study (including an interim analysis that will spare them time and money if the results aren't looking good).

Beyond these drugs, Nektar has some interesting wholly-owned drugs for pain and cancer that should go into further clinical development in 2014. Also noteworthy is the company's partnered programs. Bayer is finally moving forward with a Phase III study of inhaled amikacin; a drug that carries substantial potential royalties (30% US, 22% OUS) for Nektar, though peak sales are likely to be in the range of $300 million. Nektar is also tied to Baxter's (BAX) long-acting version of Advate (hemophilia), and entitled to 8% to 10% royalties on a drug that I believe could generate more than $1 billion in peak sales.

The Bottom Line

I believe that NKTR-118 is worth around $4 per share, about a dollar less than most sell-side analysts as I believe the drug isn't quite differentiated enough and still carries some approval risks. For NKTR-102, I assign $2.50 per share in value for the breast cancer indication and almost $0.60 for the other, largely unspecified, potential follow-on uses. I assign a value of nearly $2 to Nektar's royalty stream from BAX-555, and a little over $1 to NKTR-181 in pain. For the sake of brevity, I'll note that the sum of Nektar's existing royalty streams and the pipeline values for proprietary drugs like NKTR-192 and partnered drugs like amikacin comes to $4 per share.

All told, I calculate a value of nearly $14 per share for Nektar. That's annoyingly similar to the current sell-side average reported by Yahoo! Finance, but so be it. I believe Nektar has an uncommonly deep pipeline of drug candidates, and I believe its PEGylation and polymer conjugation technologies will continue to make it a prime development partner (to say nothing of generating its own stream of clinical candidates). Few biotechs are cheap today, but at about 30% below my estimate of fair value and with several key events in 2014, Nektar is worth a closer look today.

Source: 2014 Looking Like A Big Year For Nektar

Disclosure: I 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. (More...)

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