Still More Chaos At Nektar, But There’s Value In The Pipeline – Nektar Therapeutics (NASDAQ:NKTR) No ratings yet.

Nektar (NKTR) shares have remained volatile, with new turbulence tied to the rejection and abandonment of pain drug NKTR-181, another restructuring to the Bristol-Myers (BMY) partnership, and ongoing uncertainty about the clinical and commercial profile of its key asset bempegaldesleukin (“bempeg”). While the shares are up more than 10% since my last update, a little worse than the return of the two largest biotech ETFs, the shares had been substantially higher less than a week ago – after the release of slides ahead of the JPMorgan Healthcare Conference and the unsuccessful FDA AdCom meeting on NKTR-181.

I think there are valid questions about management here, and it’s hard to feel good about any investment when you’re not really confident about management, but I believe the potential of bempeg in melanoma supports the valuation and I do still see upside from here, though it’s far from what I’d call a high-confidence pick.

Melanoma Data Continue To Support Some Value

My bullishness on Nektar is driven in no small part by the data seen to date in studies of bempeg in melanoma. The most recent update (SITC in November) showed a continuation of the 53% overall response rate and 34% complete response rate at over 18 months follow-up in 38 patients. Data continue to support efficacy in difficult patients (high LDH and/or liver mets), with even stronger results in patients (44%) who got properly-manufactured drug versus those who didn’t (27%).

The PIVOT-02 study still hasn’t reached a median progression-free survival time, but the response continues to deepen, with a roughly 7-month median time to a complete response. Eyeballing the curves that Nektar has provided, I’d estimate a 12-mo PFS rate somewhere in the mid-50%’s, which would compare well with Bristol’s nivolumab and Merck’s (MRK) pembrolizumab, but I want to emphasize that this is a back-of-the-envelope calculation.

Nektar is also looking to address a larger market opportunity, agreeing with Bristol to launch a registration study in adjuvant melanoma, with a mid-2020 start.

For all of the issues with the bempeg development process (minimal single-agent efficacy and no controlled Phase II data high among them), I am still bullish on this opportunity. IL-2 is a proven treatment option in melanoma, and it is entirely plausible and consistent with past experience that the drug could be meaningfully effective in melanoma and less so, maybe not at all, in other cancer types.

Bempeg’s Development Elsewhere Remains Rocky

Nektar continues to move the ball down the field with bempeg in melanoma, but the development in other indications has remained more volatile.

Once again the company and Bristol amended their partnership agreement on bempeg. Now there is clarity on the six registration studies, and non-small-cell lung cancer is no longer in play at the registration study level (for now…). In addition to already-known studies in melanoma, cisplatin-ineligible urothelial cancer (or UC), and metastatic renal cell carcinoma (or mRCC), there will be studies in adjuvant melanoma, muscle-invasive bladder cancer, and a study in mRCC with a different drug combination (bempeg+nivo+axitinib versus the other study using bempeg+nivo+sutent/cabo).

Under this new agreement, Bristol will also run two Phase I/II dose escalation/expansion studies – one in NSCLC in combo with nivo, and one in first-line RCC using a combo of bempeg, nivo, and Inlyta.

I remain cautious, if not skeptical, regarding bempeg’s potential in bladder/UC and NSCLC. The data seen thus far on bempeg in UC hasn’t blown me away, but Bristol could be looking for any opportunity to boost the underlying performance of nivo and compete more effectively against Merck and Roche (OTCQX:RHHBY). In NSCLC, I’m not really sure what’s going on – clearly Bristol is seeing something in the early-stage data to suggest that there’s something there, and the issue may be with the doses they’ve tested so far. Given the tolerability profile of bempeg, testing larger doses may well be worthwhile at the Ph I/II level given the size of the market opportunity.

This is a completely subjective assessment, but listening to the question and answer session at JPMorgan, I get a sense of a lot of chaos and wasted time and money in the bempeg partnership. Again, this is just my speculation, but I wonder if Bristol got so excited about the potential of bempeg, and the need to boost its nivo PD-1 franchise in the face of competition from Merck (and to a lesser extent Roche), that they took some shortcuts and skipped some steps – to be this far in the process and for there to still (apparently) be questions about optimal dosing doesn’t exactly speak to a methodical process.

An Embarrassing Failure

While issues with bempeg development may be shared between Bristol and Nektar managements, what happened recently at the FDA is all on Nektar. Not only did the FDA’s AdCom vote against NKTR-181 (oxycodegol), it was a 27-0 vote. I’ve been following med-tech for over 20 years now, and I can’t immediately recall such a resounding rejection of a drug.

Although getting any new opioid past the FDA these days was probably a non-starter, the company’s decision not to run the two studies (one in opioid-naïve patients and one in opioid-experienced patients; Nektar did the former and not the latter) the FDA wanted absolutely didn’t help their cause, and the panelists seemed less than convinced about the true abuse deterrence potential of the drug’s formulation. In fairness to Nektar, I don’t think data from a second study in opioid-experienced patients would have shifted the ultimate result; I believe getting a new opioid through the FDA now will require air-tight abuse deterrence data (and I’m not sure that’s achievable).

The Outlook

Bempeg in melanoma anchors my valuation for Nektar, contributing about $17.50 to my fair value on the assumption of 40% market share and a 65% chance of success. I do estimate close to another $9/share in value from the rest of the bempeg program; I’m not particularly bullish about the UC/bladder or NSCLC potential, and I’d note that the company hasn’t provided meaningful updates on the RCC program in a while. With those other programs, my modeled odds of success are 25% or lower, so positive high-quality data could definitely create incremental value.

I haven’t discussed the rest of the pipeline in this piece, including NKTR-358, NKTR-262, and NKTR-255 (which the CEO described in the breakout session as “potentially just as important as bempeg”), but those are all compounds worth following – NKTR-358 has a very large addressable market opportunity (if effective and safe), while NKTR-255 is an interesting approach to the IL-15 target that has long appealed to some cancer researchers and drug developers.

My all-in fair value estimate for Nektar is now just under $34, having subtracted NKTR-181 from the model (the company announced it was dropping the drug after the AdCom vote).

The Bottom Line

By no means am I going to suggest that investors should pick Nektar over Alnylam (ALYN) or Neurocrine Biosciences (NBIX), two other biotechs I’ve written about extensively and believe are undervalued. But I do think bempeg in melanoma could amount to something, and I believe there is enough pipeline value elsewhere (bempeg in other indications and the aforementioned other drugs) to justify this as an idea for risk-tolerant biotech investors.

Disclosure: I am/we are long ALNY, NBIX, RHHBY. 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.

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