A Key Healthcare Technology Worth Millions

Kanak is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nektar Therapeutics (NASDAQ: NKTR) has an interesting business model. It developed a key technology that bridges a crucial shortcoming of another very useful technology, broadening its scope in the kinds of drugs it can be used to manufacture. Nektar licenses this technology to some of the largest biotech companies, helping create some of their top blockbuster drugs. It makes millions of dollars every time another company’s drug in development hits a milestone.

The technology
The technology is called PEGylation. It is a conjugation process in which a drug combines with a polymer called polyethylene glycol (PEG) to enhance its properties. PEG is a water soluble, non-toxic and non-immunogenic compound that is discharged from the body safely. However, earlier PEGylation approaches were not applicable to small molecules, antibody fragments, and peptides.

They were limited to creating biologics, thus limiting the ability to enhance drug properties. In a few products, PEG altered the efficiency of drugs. Most importantly, they could not be used through oral administration. To overcome these limitations, Nektar created an advanced technology which can be used in a wide range of molecules.

Nektar’s advantage
Nektar’s technology is an advanced polymer conjugates process that increases the therapeutic properties of drugs many times without any alteration. The technology is based on PEGylation, but it combines PEG with both small and large molecules. Nektar has four types of conjugates based on molecular classes: small molecule polymer conjugates, pro-drug conjugates, large molecule polymer conjugates, and antibody fragment conjugates.

This process can also be used in drugs which can be administered orally. Nektar became the world leader in enabling therapeutic properties of drugs using PEGylation technology. The company developed seven products in partnerships with the world’s leading pharmaceutical companies. These approved products generate more than $7 billion per year.

Approved products
The company has licensing agreements with leading biotech and pharma companies, including Affymax, Amgen, MAP Pharmaceuticals, Merck, Pfizer, Roche, and UCB Pharma. Nektar has a total of eight products approved in the U.S. and the EU based on PEGylation technology.

Table1:

Products

Company

Treatment

Cimzia

UCB

Crohn's disease and rheumatoid arthritis

Mircera

Roche

Nephrology

Pegasys

Roche

Hepatitis-C

Neulasta

Amgen

Oncology

Peg-Intron

Merck

Hepatitis-C

Definity

BMS

Diagnostic

Somavert

Pfizer

Immunology

Macugen

Valeant

Age-related macular degeneration

Source: Company

Strong collaboration for clinical programs
Nektar continues to enhance its revenue generating capacity through strong collaboration. This will also support the company financially to carry out development processes. At present, the company has partnerships with large companies like AstraZeneca, Baxter, Bayer, and UCB to develop products for different indications. These products are in advanced stages of clinical programs.

Of them, Naloxegol from AstraZeneca recently completed the KODIAC studies (Phase III program) successfully to treat opioid-induced constipation. Bayer also has two Phase III candidates -- Amikacin Inhale for pneumonia and Cipro DPI for lung infections. In addition, Baxter’s BAX 855 for hemophilia, UCB’s Cimzia for additional indications and Nektar’s NKTR-102 for breast cancer are candidates in Phase III stage.

Target market
Opioid Induced Constipation: Approximately 28 million-35 million patients suffer from constipation from taking opioids for long-term pain. Half of them are treated with existing medications, including OTC and laxatives. However, current treatment options are not satisfactory. There is a demand for novel treatments for OIC such as Naloxegol, which is developed using Nektar’s PEGylation technology. Nektar will improve its royalty revenue considerably on NDA filing and successful launches of Naloxegol.

Naloxegol is likely to compete with Bevenopran or CB-5945, a Phase III candidate from Cubist Pharmaceuticals (NASDAQ: CBST), primarily indicated for OIC. CB-5945 intends to block the adverse effects of opioid pain medications while acting peripherally. Cubist targets to file new drug applications (NDA) by 2015. Moreover, the product is under study to treat OIC patients with chronic non-cancer pain. On approval, the product may become a first line therapy in those patients as there are no FDA-approved drugs available.

Also, Cubist has a wide range of anti-infectives specific to Gram positive and Gram negative pathogens, abdominal infection, and OIC. In the recent quarter ended June 30, 2013, Cubist posted revenue of $258.8 million, up 12.2% over the same period in 2012, due to increasing sales of Cubicin and Entereg. It expects to increase earnings by steady double digit figures over the next three years on the back of acquisitions, according to Jefferies analysts.

Hemophilia: The World Federation of Hemophilia estimated that more than 400,000 people in the world have hemophilia. Hemophilia A and hemophilia B are common forms of hemophilia caused by insufficient amount of clotting factors. Baxter, Nektar’s partner, has a solid position in the hemophilia market with two approved (Advate and Recombinate) and two pipeline (BAX 855 and BAX 111) products. BAX 855 is developed based on Nektar’s PEGylation technology.

Competing with BAX 855, Novo Nordisk (NYSE: NVO) is strengthening its portfolio in hemophilia with NN7088 -- a Phase III candidate. The product expects to be launched by 2014, a year ahead of BAX 855. In addition to NN7088, Novo Nordisk already has two approved products and two pipeline candidates in hemophilia therapeutics.

In the second quarter of 2013, Novo Nordisk reported sales of around $3.8 billion (DKK$21.4 billion), up 10% compared to last year. Probably in 2014, NN7088 will capture some market share; however, Baxter expects to retain its position due to strong relationships with physicians and that will help Nektar through royalties.

Market performance
Nektar’s top line depends on revenue from product sales, royalties, license fees, and milestone payments. Product sales include cost of manufacturing, marketing, and royalties: UCB’s Cimzia, Roche’s Mircera, and Affymax’s Omontys represent majority of Nektar’s revenue. The company also receives upfront and milestone payments related to product licensing, collaboration agreements, and R&D expenses.

In the second quarter ending June 30, 2013, revenue was $33.9 million, up 43%, due to increased product sales, $3.8 million non-cash royalty, and $10 million as milestone payment received for Phase III studies of Amikacin Inhale. Increase in development costs increased the company’s operating expenses by 31% to $66.5 million, resulting in negative earnings. During the quarter, net loss was $42.7 million, or $0.37 loss per share as compared to $34.3 million, or $0.30 loss per share in the same period last year. As of June 30, 2013, the company had cash and investments of $227 million, including cash balance of $41.4 million, $25 million restricted cash, and $147.7 million debt.

Conclusion
Nektar can strengthen its earnings potential through strong partnerships with leading companies. Recent positive results on the Naloxegol and BAX 855 clinical studies and additional indications for Cimzia will boost Nektar’s performance. In addition, its robust pipeline across therapeutics will make the company stronger in the conjugation segment with its patented PEGylation technology.

It's no secret that biotech stocks have been soaring recently, but the best investment strategy is to pick great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" not only shares stocks that could help you build long-term wealth, but also winning strategies that every investor should know. Click here to grab your free copy today.


Kanak Kanti De has no position in any stocks mentioned. The Motley Fool recommends Cubist Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure