What we know about Nektar Therapeutics (NKTR) is pretty clear. On Thursday of last week, August 8, trading in shares of Nektar were halted on news from the company had manufacturing problems that resulted in some patients enrolled in the clinical trials for the company’s NKTR-214 cancer drug receiving drugs that were less effective than the correctly manufactured drug. Two of the 22 batches of NKTR-214–Lots 2 and 5 to be precise–were less effective than the other 20 batches and patients given those batches did not respond as well in the trials as those patients who received the correctly formulated batches.
On the news, once trading was resumed, the stock fell from $29.57 on August 8 to $20.92 on August 9 and then to $18.58 on August 12. That is a drop of a rather robust 37.27%. And since the stock was already down from its July 3 price of $36.27, the full drop comes to 48.8%. (The shares rebounded, slightly today, to $18.85, a gain of 1.45%.)
Now it’s easy to understand the plunge. A manufacturing problem, no matter how few batches it affects, is never a minor problem at a biotech drug company. And then the problem was with NKTR-214, a key collaboration with Bristol Myers Squibb (BMS) and its cancer drug Opdivo. At conferences in 2018 and again in 2019 the companies had reported less than thrilling results from the latest round of trials with the two drugs–in fact, the results lagged those in earlier trials. Bristol Myers had paid Nektar a huge $1.85 billion for the potential in NKTR-214. Many on Wall Street had criticized the deal saying that Bristol Myers overpaid and, there was a strong reek of “Told you saw” when the disappointing results were reported. In early 2019 Bristol Myers had acquired a big biotech, Celgene, for a huge $74 billion in a deal expected to close at the end of 2019 or in early 2020. The negative speculation then–after those disappointing results in 2018 and 2019–was that Bristol Myers might simply walk away from the NKTR-214 deal.
With that as background, the news of manufacturing problems with early batches of NKTR-214 were slotted right into the disaster story. For example, here’s the headline from Investor’s Business Daily: “Biotech Crashes 29% After Bad Drug Likely Skewed Cancer Tests.”
Makes it sound like the “bad drug” led to overstated results in the Nektar trials, doesn’t it? When, according to the company, the two bad batches led to lower than expected results in the trials, and, again according to Nektar, the bad batches quite possibly explained the disappointing results from the trials reported by Nektar in 2018 and 2019.
With the negative assumption in that and other headlines (I don’t mean to single out Investor’s Business Daily. Here’s the headline from The Street: “Nektar Therapeutics Sinks on Cancer Treatment Manufacturing Issues”), Nektar’s explanation that the bad batches had actually lowered the results in the NKTR-214 trials with Opdivo and the manufacturing issues, while serious in and of themselves, might indeed explain the disappointing trial results from 2018 and 2019, were pretty much dismissed out of hand as company spin.
And the negative case against Nektar seemed even more comfortable when in its second quarter conference call the company reported that the U.S. Food and Drug Administration had pushed back an important meeting on Nektar’s new, non-addictive opioid, from the end of August into the fall.
Yep, puncturing the Nektar hype was now as popular as stoking that hype back in the day when the company could seemingly do no wrong.
The FDA has found the company’s explanation and analysis of the data a good deal more convincing than the investing press has. According to digging by the Medical Technology Stock Letter, the regulators granted Breakthrough Therapy Designation to NKTR-214 used in combination with Opdivo after they had received notice of the manufacturing problem. The FDA, at least, agreed with the companies’ analysis of the data that showed the response rate in the front line melanoma trial without the results from the two bad batches of NKTR-214 were as high as 74% compared to the 53% reported at the 2019 American Society of Clinical Oncology conference.The FDA’s Breakthrough Designation is a sign that the FDA sees potential in the drug to address an unmet need in front line melanoma and that the NKTR-214-Opdivo combination is both safe and effective.
Nektar continues to enroll patients for a Phase III trial (with 764 patients with previously untreated unresectable or metastatic melanoma.) The company expects, it has said, to have data in the third quarter of 2020.
And while we’re at it, investors should take a deeper look at the “problems” with Nektar’s new opioid, NKTR-181. The original late August FDA deadline for ruling on the drug does indeed seem likely to come and go without FDA action. The problem seems to be that given the current horrific epidemic of opioid addiction, the agency wants to be very, very careful before approving the drug. Many of the issues with NKTR-181 concern the label on the drug and the good news here for Nektar investors is that the company is engaged in discussing labeling with the FDA. It will probably require a advisory committee meeting this fall to work these issues out, but all indications are that the issues are being worked out.
So where does this leave us on Nektar? (I say us because I own shares and options in my personal portfolios and because Nektar is a member of both my Jubak Picks and on my subscription sites my Volatility Portfolios.)
At this point I think the biggest risk with Nektar is time–that is that somethings, everything will take longer than it already has to work out. Getting the market to recognize the potential of NKTR-214 after this week’s drop on unexpected news will probably require solid actual data from the new trials due in 2020. Getting some of the potential of the new opioid into the price of Nektar will probably require actual FDA approval.
I like the upside on Nektar after it has been crushed this week. It doesn’t have $110 potential within the next 12 months–that’s the target price in my Jubak Picks portfolio–but this is easily a $36 a share stock (the July 3 price.) And I can even see a recovery to the February 2019 price of $46 in February 2019. (Which would put the January 17, 2020 call options with a strike of $35 that I own in my Volatility Portfolio on my JubakAm.com and JugglingWithKnives.com sites solidly in the money and in the black) The stock did trade above $66 in late summer/early fall 2018.
Given that time is the key risk here, I want to own shares–no expiration date–in preference to options. I’m not going to sell the long-dated options in the Volatility Portfolio–January 2020 is a long way away. But I am going to use shares rather than options on Nektar to play this plunge. Tomorrow I will be adding Nektar shares to my Volatility Portfolio on JubakAm.com and JugglingWithKnives.com. I already own shares of Nektar in my Jubak Picks portfolio. I will be changing the target price on those shares to $36 from the prior target price of $110. This position shows a loss of 49.95% as of the close on August 13 since I added it to the portfolio on November 13, 2017. (Please note that these shares are extremely volatile and if volatility freaks you out and causes you to sell at bottoms, then Nektar under current conditions isn’t for you.)