Guest Pitch: Nektar Therapeutics (NKTR)

Cheap shot at a blockbuster drug (at $0.73)

This idea was shared by Adam May.

Below is a concise, more accessible overview of the situation that I’ve prepared for SSI. I’ve also put together a longer, more detailed version (mostly aimed at the biopharma community). You can access the full version of the pitch here.

Disclaimer – keep in mind that small cap biotechs are very risky and can always have more downside than what you think possible.

 

Summary

Nektar Therapeutics represents one of the most compelling risk/reward profiles I have ever seen in small cap biotech. NKTR is developing a promising treatment for atopic dermatitis (ref. AD). The company has been left for dead after a string of bad luck (including a faulty data analysis done by Eli Lilly) despite having a shot at a blockbuster drug. NKTR also has a “hidden” asset that may be worth more than its entire market cap alone. Even with all that, the company trades at just 50% of its cash.

This creates a substantial risk/reward skew – the upside potential is massive, with attainable blue-sky case likely yielding a nearly $2B company that would represent >10x from NKTR’s current price. Even moderately successful results would likely generate 3x-4x returns.

Meanwhile, the potential downside should be small. NKTR is already trading at 50% discount to cash, whereas many biotechs often bottom out around this level after failing their trials. On top of this, NKTR has a few assets that are likely still largely unaccounted for. This includes Dapirolizumab, for which NKTR owns milestone payments and low single-digit royalty rights. Yesterday (Feb 12), we finally got an idea of how to value this asset for the first time when Royalty Pharma purchased “mid-single digit” royalties to a very similar drug for $250M. We effectively got a value comp, which suggests that NKTR’s Dapi royalty (excluding milestone payments) could be worth $125M in today’s royalty stream market. That alone is just shy of NKTR’s entire market cap at the moment, and is completely independent of NKTR’s primary upside thesis centered around its atopic dermatitis data. I believe the Royalty Pharma’s transaction is what caused the volatility in NKTR’s trading yesterday.

Although I am clearly bullish (and long) NKTR at current prices, I am NOT arguing that its AD readout has an atypically high probability of success (ref. POS). Rather, I argue that its POS is being underwritten as *zero* in spite of encouraging P1b proof of concept data. That seems unreasonable, and I would strongly expect the stock to trade higher before the phase 2 data arrives in Q2 2025. There’s 80% upside just to reach zero enterprise value by the time of the readout, which doesn’t seem like a stretch given that comparable peers developing drugs for the same indication all traded at significantly positive enterprise values leading up to data. To me, NKTR has clearly better validation and a higher probability of success in its study than any of the comps did.

Below, I will briefly analyze NKTR’s key asset, existing data, competitor data, financial position, and the (much larger) valuations that have recently been ascribed to similar AD readouts.

 

Brief history

NKTR is a biotechnology company developing drugs based on modifying natural human signaling molecules (cytokines) with “PEGylation” technology. Historically, it was a multi-billion dollar oncology company, but oncology efforts failed. The company is now focussed on their anti-inflammatory drug Rezpegaldesleukin (ref. Rezpeg).

Rezpeg is a modified IL-2 molecule, designed to tamp down the immune system by increasing the population of anti-inflammatory T cells (“T-Regs”). Rezpeg has been studied in several indications, mostly by Eli Lilly (LLY), which had paid $150M to partner on the drug way back in 2017. Rezpeg showed signs of activity in lupus and psoriasis, but was not considered active enough to be competitive. It is now being studied in atopic dermatitis.

In 2022, LLY presented the Rezpeg data in AD for the first time. The results were horrible. We will cover the numbers below, but what LLY showed confirmed beyond a doubt that Rezpeg was dead in AD. So, LLY returned to the worthless drug’s rights back to NKTR, and investors orphaned NKTR’s stock.

However, in 2023 NKTR discovered that LLY has misanalyzed the AD dataset, and the true results were much more encouraging than what LLY showed. LLY itself eventually confirmed NKTR’s re-analysis of data as completely correct/legitimate. This article notes:

An independent statistical firm was employed to analyse the raw data and found it to be incorrect. The internal statistical and clinical teams in charge of the two studies at Lilly were made aware and Lilly confirmed the errors in written communications with Nektar.

Industry leading key opinion leaders such as David Rosmarin and Jonathan Silverberg have also underwritten the correctly re-analized data by NKTR. By that time, however, NKTR’s story has been written off by investors.

 

Rezpeg’s data

We will look at 2 endpoints based on the “EASI” score. The EASI score is the main tool used to grade AD severity. EASI75 rate is, roughly, the % of patients whose AD improved by 75% or more. EASI75 rate adjusted for placebo (“EASI75 delta”) is the main endpoint in AD studies, but mean EASI reduction (which can roughly be considered a % reduction of AD severity) is more statistically robust in small sample size datasets like NKTR’s. Both must be considered.

The “gold standard” in EASI75 Delta (set by market leader Dupixent) is ~33%. “Lesser” drugs have EASI75 Deltas ranging from 13% to 29%. NKTR’s EASI75 Delta from incorrect LLY analysis was just 9%. However, NKTR’s appropriately re-analyzed Delta was 21%.

As we can see from above, the LLY analysis made Rezpeg look useless, worse than the lowest-efficacy AD drug on the market (Nemluvio at EASI75 Delta of 13%). However, the correct re-analysis of the data by NKTR (done after the stock has been crushed/left for dead) shows a much more competitive 21% EASI75 delta that falls right in the middle of the 13%-29% rates of drugs that are currently vying for market position for use in patients that fail Dupixent.

While NKTR’s primary endpoint for the Phase 1 data above was assessed at week 12, a closer analysis of the data shows that the results were actually far more encouraging than what 21% Wk12 EASI75 rate suggests. The story gets really interesting when you look closer at Rezpeg’s re-analysis at Week 10. Here’s what I mean:

• A responding patient seems to have missed their week 12 appointment. Looking at the study results data below, we can see that the EASI75 rate drops from wk10 to wk12, then goes back up after. In small subtext beneath that data we can see the number of patients assessed at each timepoint. It is 13 patients at week 10, 12 patients at week 12, and then back up to 13 patients thereafter. The EASI75 rate dips and rises in accordance with the changes in patient numbers, suggesting that an EASI75 patient simply no-showed that Wk12 appointment. Since Wk12 was the primary efficacy analysis endpoint, this is what investors look at, but they are missing that the week 12 EASI75 delta would go from 21% to 29% if this responding patient hadn’t missed that appointment.

• Week 12 is also the only timepoint in the 48 week long study where there were 2 placebo patients in EASI75 response. There were 18 efficacy assessments across 48 weeks. These all had either 1 or 0 placebo patients in EASI75 response, except for the week 12 timepoint which,
  again, was the primary efficacy analysis that investors focus on. This is TERRIBLE luck for NKTR. If we eliminated this single random EASI75 placebo responder at week 12, the EASI75 delta would go from 21% to 31%.

Now, if we account for both of these “bad luck factors”, eliminating the random placebo responder and counting the responding patient who simply no-showed their Wk12 appointment, the EASI75 delta soars from 21% to 43%, hurdling even the gold standard Dupixent’s EASI75 delta of 33%. This is highly promising activity.

NKTR also appears to have gotten unlucky with patients getting close to, but just missing EASI75 responses. NKTR’s Mean EASI reduction was -83% at 12 weeks (excluding the responder that missed the visit). Dupixent’s mean EASI reduction was -72%. So, NKTR had a better average reduction of EASI, yet a worse EASI75 responder rate than dupixent. This mathematically necessitates that NKTR had patients getting close to hitting the 75% EASI reduction primary endpoint, but just barely missing it.

 

More on competitors and NKTR’s potential

AD is one of the largest disease indications in the pharmaceutical industry, that’s likely going to see >$20bn TAM in coming years. AD is the principle revenue stream of the megablockbuster Dupixent, which was the 5th largest drug in the world by revenue in 2023 (one spot behind Ozempic), with $11.6bn in sales (and $13.6bn last year). The indication is so large that it has room for multiple blockbuster drugs, especially in the population that tries and fails Dupixent (or other drugs with the similar IL14/13 mechanism of action including Tralokinumab and Lebrikizumab).

The need for new mechanisms of action in AD is so great that pharma companies are advancing
drugs with efficacy far worse than Dupixent:

• Galderma has just launched Nemluvio (13% EASI75 delta);
• SNY is calling Amlitelimab a “potential blockbuster” (29% EASI75 delta);
• AMGN is also aggressively studying Rocatinlimab (19% EASI75 delta).

Although clearly worse than Dupixent, these drugs have new mechanisms, meaning that they have access to a massive pool of patients who fail IL4/13 drugs like Dupixent and need to try something new. NKTR has the only IL-2 drug currently in AD studies.

Note that a “blockbuster” drug in pharma means $1B peak sales. A 3-4x peak sales multiple is a relatively standard valuation. A $3B price tag on NKTR would be $16.21/share with the current OS, representing a 2,220% increase to today’s $0.73. Obviously there are massive caveats to this calculation that is provided only for illustrative purposes. The timeline to confirming a “blockbuster” drug would be long, and would include further share count dilution along the way.

 

AD readout valuation case studies

In the last 3 months, there have been 3 readouts similar to NKTRs. All 3 drugs had worse proof of concept data than NKTR has, yet all 3 traded at large premiums to their cash before study results, whereas NKTR is now trading at 50% of its cash.

As we can see, all 3 of the companies with recent AD readouts had massive value into data despite having no proof of concept to say their drug would work. This makes NKTR’s deeply negative EV into a Q2 readout with strong proof of concept data appear to be a dramatic mispricing.

 

Bonus note

NKTR is actively involved in litigation against Lilly for their incorrect data analysis. I have no expertise at all to judge what this lawsuit could be worth to NKTR if settled, but it would certainly seem to me that NKTR has a legitimate argument at being paid damages for Lilly’s mistake that crushed NKTR’s stock price and delayed their developmental timelines by a year or more. It is possible that NKTR could win a lawsuit here and receive substantial compensation (who knows).

 

Bear points

Small cap biotech is insanely risky. Despite the fact that NKTR showed impressive and statistically significant results in their P1b AD dataset, their P2 could still miss or show uncompetitive results. Note a few bear points below:

• High placebo response rates have derailed recent AD readouts of peers. NKTR management is taking multiple steps to prevent this (largely focused around enrolling more severe patients), but atypically high placebo response rates in P2 are a real risk to success.
• IL-2 drugs have been tried and failed by others. We don’t have data from any other IL-2 drugs in autoimmune conditions outside of NKTR’s. But, we know that MRK studied a similar drug in AD and never shared their P1 results, suggesting they were not good enough to take the drug forward. This is negative “proof of concept” despite NKTR’s own clearly positive P1b data. Of course, it is possible that MRK’s study succumbed to the high placebo response rate as suggested above.
• NKTR’s long-time CMO just resigned. This has been seen as negative by investors and caused a rapid downward move for the stock recently. Investors have taken this as a sign that the P2 study will be negative. However, NKTR mgmt has been clear that they are blinded to the data, meaning that the CMO couldn’t know if the study was looking negative. They have explained her resignation was for personal reasons, and there is reason to believe that the retirement may have been health-related. The 8K filing on her resignation has some of the strongest wording I have seen in such announcements saying that her resignation is for personal and not professional/company related reasons. The CMO also has previously publicly discussed her journey with breast cancer as well as a “new type” of cancer for which she has apparently been undergoing treatment as recently as during COVID.

 

Summary Statement

Clinical trial readouts always involve risk. However, it is truly rare to find a biotech trading at half cash heading into data Phase 2 for a massive market, especially when the company already has robust proof of concept data in that disease. When I consider the strength of NKTR’s AD data, their Dapirolizumab royalty rights arguably equaling their entire market cap in value, the steep valuations that companies with unvalidated AD readouts have recently held into data, and NKTR still trading at half cash, this appears to be the most positively risk/reward skewed setup I have ever seen in small cap biotech.