Reason for Optimism?
We have discussed Nektar Therapeutics (Nasdaq: NKTR) as a negative EV name with an interesting litigation angle for several months. The stock has appreciated nicely since our first note in September 2023, yet the company continues to trade slightly below cash. The biotech markets are far from fully healthy, but the days when 20-25% of the index trading below cash are thankfully behind us. So why does Nektar continue to belong to this shrinking club of negative EV names?
The litigation narrative vs. Eli Lilly (NYSE: LLY), the David vs. Goliath story, sells well to investors. It’s what got us initially interested. For those unfamiliar with the history, Nektar alleges that Lilly miscalculated data that underrepresented efficacy from a series of studies while it had a license to Nektar’s drug REZPEG. Although we believe Nektar, in our non-legal opinion, is in a good position to extract a settlement from Lilly, we question what the upside is for investors from a settlement, given that the company already trades at a discount to its robust (~$300mm) treasury. Cash is not Nektar’s problem; investors’ optimism in its pipeline is.
Nektar’s lead asset is REZPEG, a biologic that targets Interleukin-2 (IL-2). The company is currently testing REZPEG in two indications: a proof of concept study in alopecia areata and a large 400-patient Phase 2b study in atopic dermatitis. Top-line data from both are expected to be 1H25, with atopic dermatitis scheduled to read out first.
Biologics have become a staple in treating moderate to severe atopic dermatitis, with Sanofi (NYSE: SNY) and Regeneron Pharmaceutical’s (Nasdaq: REGN) Dupixent being the market leader. Dupixent, an IL-4 and IL-13 antagonist, is approved for five different inflammatory conditions, but the indication that contributes the most to the drug’s estimated $13b in annual sales is atopic dermatitis. Despite Dupixent’s enormous success, Nektar argues there is room for improvement with a differentiated biologic, or at minimum, an opportunity to treat Dupixent non-responders before progressing to the more potent JAK inhibitors.
This brings us back to the litigation vs. Lilly. In March court filings, Lilly admitted that the CRO miscalculated data from their Phase 1b atopic dermatitis study with REZPEG and that Nektar’s re-calculations of those data are accurate. Here is the exact language from Lilly’s recent court documents, “Lilly admits that data from the Phase 1 clinical trials containing the CRO’s calculation error were published. Lilly admits that Nektar’s revised calculations of the clinical trial data show 83% efficacy in treating atopic dermatitis after 12 weeks of therapy.” The 83% efficacy Lilly refers to is a statistically significant reduction in Eczema Area and Severity Index (EASI) from baseline with the highest dose of REZPEG (Lilly/CRO miscalculation had initially reported a non-statistically significant 66% reduction). Although these EASI data are from a small proof of concept Phase 1b study, an 83% EASI reduction is highly competitive relative to other approved biologics and JAK inhibitors for moderate to severe atopic dermatitis.
**Nektar’s Corporate Deck March 2024
Cross-study comparisons are dangerous, especially when one of those studies has a much smaller sample size, but shouldn’t the recalculated data for REZPEG, with the admission by Lilly, at least inspire some investor optimism? A biologic with a novel mechanism targeting a monster indication with provocative proof of concept data? The fact that Nektar continues to trade at a discount to its treasury, reflecting no value for its pipeline, speaks volumes about investor apathy towards the company.
We recognize that after a spectacular fall from its $18b perch, Nektar is not a well-liked company by investors. However, if investors could erase their memories and look at Nektar, specifically REZPEG, objectively, we believe there are reasons for optimism. Optimism doesn’t necessarily equate to clinical success, but it should translate into some positive value ascribed to the pipeline leading into data next year.
Eosinophilic Esophagitis (EoE) is another approved indication within the Dupixent kingdom. EoE is a relatively “new” disease, first described in the 1990s. It is an allergic disorder where the esophagus becomes inflamed because of an influx of white blood cells – eosinophils. Patients can experience difficulty eating, vomiting, and chest pain. EoE is considered a rare disease, but its prevalence is increasing with greater physician and patient awareness.
Before FDA approved Dupixent in 2022, patients typically received off-label proton pump inhibitors and oral corticosteroids to manage their EoE. Earlier this year FDA approved a second treatment, Takeda Pharmaceutical’s (NYSE: TAK) Eohelia, a unique oral formulation of the steroid budesonide.
Recently, another company focused on EoE, Eupraxia Pharmaceuticals (Nasdaq: EPRX), listed on Nasdaq. Eupraxia has a proprietary polymer delivery technology that allows localized, time-released delivery of the steroid fluticasone to the disease site. The company is currently enrolling in a Phase 1b/2a dose escalation study in EoE patients, and the initial data from the first two cohorts was encouraging. The company is expected to release data from the third cohort later this month.
CRS All to Itself
We are guilty of hand waving when smart money funds own names we like or are interested in. These funds are validating, especially their participation in smaller companies, but they aren’t perfect. One fund we have highlighted several times is Perceptive Advisors. We talked about their heavy involvement in front of the Soleno Therapeutics (Nasdaq: SLNO) Prader-Willi readout and their recent obesity bets in Veru Inc (Nasdaq: VERU) and Skye Biosciences (Nasdaq: SKYE). Perceptive may have crushed it in Soleno, but they had a bad miss this week as the largest shareholder of Lyra Therapeutics (Nasdaq: LYRA), who reported a Phase 3 failure in chronic rhinosinusitis (CRS). We still like the validation from smart money funds, but even smart money sometimes gets it wrong.
Speaking of CRS, we recently wrote about Optinose (Nasdaq: OPTN) and the approval of their drug device XHANCE for CRS. With Lyra’s failure, Optinose’s XHANCE remains the only FDA-approved CRS product. After a transient pop following Lyra’s setback, the stock appears, once again, stuck until Optinose addresses its financial issues. Perhaps the Lyra outcome needed to happen before investors (and lenders) were willing to fund Optinose. We will have to wait and see.