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| NKTR > SEC Filings for NKTR > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
We have financed our operations primarily through revenue from product sales and
royalties and research and development contracts and public and private
placements of debt and equity. To date we have incurred substantial debt as a
result of our issuances of subordinated notes that are convertible into our
common stock. Our substantial debt, the market price of our securities, and the
general economic climate, among other factors, could have material consequences
for our financial condition and could affect our sources of short-term and
long-term funding. Our ability to meet our ongoing operating expenses and repay
our outstanding indebtedness is dependent upon our and our partners' ability to
successfully complete clinical development of, obtain regulatory approvals for
and successfully commercialize new drugs. Even if we or our partners are
successful, we may require additional capital to continue to fund our operations
and repay our debt obligations as they become due. There can be no assurance
that additional funds, if and when required, will be available to us on
favorable terms, if at all.
Our substantial investment in our preclinical and clinical research and any
potential new licensing or partnership agreements, if any, will be the key
drivers of our results of operations and financial position during 2009. One of
our collaboration partners has a one-time license extension option exercisable
in December 2009. If this partner elects to exercise this license extension
option right, we will receive a cash payment of $31.0 million in December 2009.
Results of Operations
Three Months and Six Months Ended June 30, 2009 and 2008
Revenue (in thousands, except percentages)
Percentage
Three months Three months Increase / Increase /
ended ended (Decrease) (Decrease)
June 30, 2009 June 30, 2008 2009 vs. 2008 2009 vs. 2008
Product sales and royalties $ 10,525 $ 9,010 $ 1,515 17 %
Collaboration and other 2,463 11,391 (8,928 ) (78 %)
Total revenue $ 12,988 $ 20,401 $ (7,413 ) (36 %)
Percentage
Six months Six months Increase / Increase /
ended ended (Decrease) (Decrease)
June 30, 2009 June 30, 2008 2009 vs. 2008 2009 vs. 2008
Product sales and royalties $ 16,995 $ 19,381 $ (2,386 ) (12 %)
Collaboration and other 5,704 21,012 (15,308 ) (73 %)
Total revenue $ 22,699 $ 40,393 $ (17,694 ) (44 %)
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Our revenue is derived from our collaboration agreements, under which we may
receive contract research payments, milestone payments based on clinical
progress, regulatory progress or net sales achievements, royalties or product
sales revenue. Significant variations in the timing of receipt of cash payments
and our recognition of revenue can result from the nature of significant
milestone payments based on the execution of new collaboration agreements, the
timing of clinical, regulatory or sales events which often result in single
milestone payments and the timing and success of the commercial launch of new
drugs by our collaboration partners.
The decrease in total revenue for the three months and six months ended June 30,
2009 compared to the three months and six months ended June 30, 2008, was
primarily attributable to the termination of our Tobramycin Inhalation Powder
(TIP) collaboration agreement with Novartis Vaccines and Diagnostics Inc. and
the assignment of our Cipro Inhale collaboration agreement with Bayer Schering
Pharma AG to Novartis. Pursuant to the terms of the transaction in which we
assigned this collaboration agreement to Novartis, we maintain the right to
receive certain potential royalties in the future based on net product sales if
Cipro Inhale receives regulatory approval and is successfully commercialized.
The timing of our product sales depends upon our collaboration partners'
requirements and we do not expect to recognize our revenue ratably each quarter
in 2009. One of our collaboration partners has a one-time license extension
option exercisable in December 2009. If this partner elects to exercise this
license extension option right, we will receive a cash payment of $31.0 million
in December 2009.
Product sales and royalties
The decrease in product sales and royalties for the six months ended June 30,
2009 compared to the six months ended June 30, 2008 is attributable to lower
product sales volumes to our collaboration partners. The increase in product
sales and royalties for the three months ended June 30, 2009 compared to the
three months ended June 30, 2008 resulted from changes in the timing of
shipments.
Collaboration and other
Collaboration and other revenue includes reimbursed research and development
expenses, amortization of deferred up-front signing and milestone payments
received from our collaboration partners, and intellectual property license fee
revenue. Collaboration revenue fluctuates from year to year, and therefore
future collaboration revenue cannot be predicted accurately. The level of
collaboration and other revenues depends in part upon the continuation of
existing collaborations, the stage of program development, and the achievement
of milestones.
The decrease in Collaboration and other revenue for the three months and six
months ended June 30, 2009 compared to the three months and six months ended
June 30, 2008 is attributable to the termination of our TIP collaboration
agreement and the assignment of the Cipro Inhale collaboration agreement that
each accounted for approximately $6.9 million and $13.5 million of Collaboration
and other revenue, respectively. We do not expect to recognize any revenue
related to these two agreements in 2009.
The timing and future success of our product development programs are subject to
a number of risks and uncertainties. See "Part II, Item 1A-Risk Factors" for
discussion of the risks associated with our partnered research and development
programs.
Cost of Goods Sold and Product Gross Margin (in thousands, except percentages)
Percentage
Three months Three months Increase / Increase /
ended ended (Decrease) (Decrease)
June 30, 2009 June 30, 2008 2009 vs. 2008 2009 vs. 2008
Cost of goods sold $ 10,231 $ 5,444 $ 4,787 88 %
Product gross margin $ 294 $ 3,566 $ (3,272 ) (92 %)
Product gross margin % 3 % 40 %
Percentage
Six months Six months Increase / Increase /
ended ended (Decrease) (Decrease)
June 30, 2009 June 30, 2008 2009 vs. 2008 2009 vs. 2008
Cost of goods sold $ 15,330 $ 12,671 $ 2,659 (21 %)
Product gross margin $ 1,665 $ 6,710 $ (5,045 ) (75 %)
Product gross margin % 10 % 35 %
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For the three months ended June 30, 2009 compared to the three months ended
June 30, 2008, the decrease in product gross margin percentage is attributable
to a shift in product mix and decreased manufacturing volume; the decreased
manufacturing volume resulted in increased unabsorbed manufacturing overhead
recognized as Cost of goods sold.
For the six months ended June 30, 2009 compared to the six months ended June 30,
2008, Cost of goods sold increased despite a decrease in Product sales; lower
production volumes during 2009 resulted in increased in unabsorbed manufacturing
overhead costs. The lower product gross margin percentage is also attributable
to a shift in the product mix and a $2.1 million success fee that became due to
one of our former consulting firms as the final payment due under the agreement
recognized during the first quarter of 2009.
As a result of the fixed cost base associated with our manufacturing activities,
we expect product gross margin to fluctuate period to period depending on the
level of manufacturing orders from our customers.
Other Cost of Revenue (in thousands, except percentages)
Percentage
Three months Three months Increase / Increase /
ended ended (Decrease) (Decrease)
June 30, 2009 June 30, 2008 2009 vs. 2008 2009 vs. 2008
Other cost of revenue $ - $ 1,487 $ (1,487 ) n/a
Percentage
Six months Six months Increase / Increase /
ended ended (Decrease) (Decrease)
June 30, 2009 June 30, 2008 2009 vs. 2008 2009 vs. 2008
Other cost of revenue $ - $ 6,821 $ (6,821 ) n/a
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Other cost of revenue for the three months and six months ended June 30, 2008
includes the costs of maintaining our Exubera manufacturing capacity after the
termination of the Pfizer agreements on November 9, 2007 through the termination
of our inhaled insulin programs in April 2008.
Research and Development Expense (in thousands, except percentages)
Percentage
Three months Three months Increase / Increase /
ended ended (Decrease) (Decrease)
June 30, 2009 June 30, 2008 2009 vs. 2008 2009 vs. 2008
Research and development expense $ 24,150 $ 33,500 $ (9,350 ) (28 %)
Percentage
Six months Six months Increase / Increase /
ended ended (Decrease) (Decrease)
June 30, 2009 June 30, 2008 2009 vs. 2008 2009 vs. 2008
Research and development expense $ 48,040 $ 70,873 $ (22,833 ) (32 %)
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Research and development expenses consist primarily of personnel costs,
including salaries, benefits, and stock-based compensation, clinical studies
performed by contract research organizations (CROs), materials and supplies,
licenses and fees, and overhead allocations consisting of various support and
facilities related costs.
The decrease in Research and development expense for the three months and six
months ended June 30, 2009 compared to the three months and six months ended
June 30, 2008, is primarily attributable to the completion of the sale of
certain assets related to our pulmonary business, associated property, and
intellectual property to Novartis on December 31, 2008 (referred to as the
"Novartis Pulmonary Asset Sale") and the workforce reduction executed in
February 2008. As part of the Novartis Pulmonary Asset Sale, we transferred
approximately 140 of our personnel dedicated to our pulmonary operations and our
San Carlos research and manufacturing facility to Novartis. In addition, we
ceased research activities on the TIP research and development program, the
Cipro Inhale program and certain other proprietary pulmonary development
programs. For the three months and six months ended June 30, 2009 compared to
the three months and six months ended June 30, 2008, personnel costs decreased
by approximately $4.5 million and $13.9 million, respectively, and facilities
costs decreased by approximately $4.4 million and $8.2 million, respectively.
General and Administrative Expense (in thousands, except percentages)
Percentage
Three months Three months Increase / Increase /
ended ended (Decrease) (Decrease)
June 30, 2009 June 30, 2008 2009 vs. 2008 2009 vs. 2008
General and administrative expense $ 9,087 $ 13,328 $ (4,241 ) (32 %)
Percentage
Six months Six months Increase / Increase /
ended ended (Decrease) (Decrease)
June 30, 2009 June 30, 2008 2009 vs. 2008 2009 vs. 2008
General and administrative expense $ 20,107 $ 25,275 $ (5,168 ) (20 %)
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General and administrative expense is associated with administrative staffing, business development and marketing. For the three months and six months ended June 30, 2009 compared to the three months and six months ended June 30, 2008, personnel costs decreased by approximately $1.3 million and $2.4 million, respectively, due to headcount reductions, marketing costs decreased by approximately $0.6 million and $1.0 million, respectively, professional outside service costs decreased by approximately $0.7 million and $1.0 million, respectively, and patent fees decreased by $0.3 million and $0.5 million, respectively, due to the transfer of pulmonary specific intellectual property as part of the Novartis Pulmonary Asset Sale. Additionally, for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, stock-based compensation expense decreased by $0.2 million.
Interest Income and Interest Expense (in thousands, except percentages)
Percentage
Three months Three months Increase / Increase /
ended ended (Decrease) (Decrease)
June 30, 2009 June 30, 2008 2009 vs. 2008 2009 vs. 2008
Interest Income $ 950 $ 3,190 $ (2,240 ) (70 %)
Interest Expense $ (2,948 ) $ (3,929 ) $ (981 ) (25 %)
Percentage
Six months Six months Increase / Increase /
ended ended (Decrease) (Decrease)
June 30, 2009 June 30, 2008 2009 vs. 2008 2009 vs. 2008
Interest Income $ 2,600 $ 8,203 $ (5,603 ) (68 %)
Interest Expense $ (6,285 ) $ (7,847 ) $ (1,562 ) (20 %)
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The decrease in interest income for the three months and six months ended
June 30, 2009, compared to the three months and six months ended June 30, 2008,
was primarily attributable to lower interest rates and a lower average balance
of our cash, cash equivalents, and short-term investments. The decrease in
interest expense for the three months and six months ended June 30, 2009,
compared to the three months and six months ended June 30, 2008, was primarily
attributable to a lower average balance of convertible subordinated notes
outstanding. We repurchased $100.0 million of our 3.25% convertible subordinated
notes in the fourth quarter of 2008.
Liquidity and Capital Resources
We have financed our operations primarily through revenue from partner
licensing, collaboration and manufacturing agreements, public and private
placements of debt and equity securities and financing of equipment acquisitions
and certain tenant leasehold improvements.
We had cash, cash equivalents and short-term investments in marketable
securities of $294.3 million and indebtedness of $241.2 million, including
$215.0 million of 3.25% convertible subordinated notes due September 2012sa,
$21.0 million in capital lease obligations, and $5.2 million in other
liabilities as of June 30, 2009.
Due to the recent adverse developments in the credit markets, we may experience
reduced liquidity with respect to some of our short-term investments. These
investments are generally held to maturity, which is less than one year.
However, if the need arose to liquidate such securities before maturity, we may
experience losses on liquidation. At June 30, 2009, the average portfolio
duration was approximately five months and the contractual maturity of any
single investment did not exceed twelve months. To date we have not experienced
any liquidity issues with respect to these securities, but should such issues
arise, we may be required to hold some, or all, of these securities until
maturity. We believe that, even allowing for potential liquidity issues with
respect to these securities, our remaining cash, cash equivalents, and
short-term investments will be sufficient to meet our anticipated cash needs for
at least the next twelve months. Based on our available cash and our expected
operating cash requirements we do not intend to sell these securities and it is
not more likely than not that we will be required to sell these securities
before we recover the amortized cost basis. Accordingly, we believe there are no
other-than-temporary impairments on these securities and have not recorded a
provision for impairment.
Cash flows used in operating activities
Cash flows used in operating activities for the six months ended June 30, 2009
totaled $71.1 million that includes $4.9 million for employee bonus payments
related to services performed in 2008, $3.5 million for our semi-annual interest
payment on our convertible subordinated notes, $2.7 million for severance
payments for employees terminated in December 2008, and $60.0 million of other
net operating cash uses. Because of the nature and timing of certain cash
receipts and payments, net cash utilization is not expected to be ratable over
the four quarters of the year. One of our collaboration partners has a one-time
license extension option exercisable in December 2009. If this partner elects to
exercise this license extension option right, we will receive a cash payment of
$31.0 million in December 2009.
For the six months ended June 30, 2008, cash used in operations includes
payments to Bespak Europe Ltd. and Tech Group North America, Inc. of
$39.9 million for amounts due under our termination agreements with those
companies related to the Exubera inhaler contract manufacturing agreement, all
of which was recorded as an expense in 2007, $5.0 million to maintain Exubera
inhaler manufacturing capacity at Tech Group's facility, and $5.3 million for
severance, employee benefits, and outplacement services in connection with our
workforce reduction plans.
Cash flows from investing activities
We purchased $8.0 million and $10.3 million of property and equipment in the six
months ended June 30, 2009 and 2008, respectively. During the six months ended
June 30, 2009 we paid $4.4 million of previously expensed transaction costs
related to the Novartis Pulmonary Asset Sale, which was completed on
December 31, 2008.
Cash flows used in financing activities
Cash used in financing activities were not significant for the six months ended
June 30, 2009 and for the six months ended June 30, 2008.
Contractual Obligations
In the three-months ended June 30, 2009, there was no material change to the
summary of contractual obligations included in our Annual Report on Form 10-K
for the year ended December 31, 2008.
Off-Balance Sheet Arrangements
We do not utilize off-balance sheet financing arrangements as a source of
liquidity or financing.
Recent Accounting Pronouncements
SFAS No. 168
In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS
No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of
Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162
(SFAS 168). The statement confirmed that the FASB Accounting Standards
. . .
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