PFE - Data Errors Could Give Nektar Therapeutics A New Lease On Life

2023-08-08 12:10:35 ET

Summary

• Nektar Therapeutics' lead compound rezpegaldesleukin shows more promising results after errors in efficacy calculations were discovered.
• Nektar shares surged over 90% following the news, with plans to initiate a Phase IIb study in atopic dermatitis.
• However, caution is advised as the newly-adjusted data still falls short compared to other drugs for atopic dermatitis, and Nektar's drug development history is not strong.

Reports of the death of Nektar Therapeutics ’ ( NKTR ) lead compound rezpegaldesleukin (or “rezpeg”), a pegylated variant of IL-2 meant to stimulate production of inhibitory immune cells called regulatory T-cells (or T-regs for short), may have been premature. Nektar announced on August 7 that its former partner Lilly ( LLY ) had made meaningful mistakes in calculating efficacy endpoints for both the atopic dermatitis and psoriasis endpoints, and that the newly-calculated results suggest a more worthwhile compound than previously believed.

Nektar shares shot up more than 90% on the news, taking the share price back up above $1 and the market cap close to $200M, with management announcing its intention to initiate a Phase IIb study in atopic dermatitis later this year.

At this point, I’d still advise a lot of caution here. The reality is that the newly-adjusted Phase Ib data still aren’t especially compelling compared to other drugs addressing atopic dermatitis and Nektar’s drug development history is not good. Nektar would certainly seem to have more going for it now than before, including over $450M in cash at the end of the first quarter, but it’s hard to call this more than an extreme longshot at this point.

Data Calculation Errors Bring Rezpeg Back Into Play

Prior to the August 7 announcement, the outlook for rezpeg was not good. Although management had previously announced that they intended to continue development of the drug in atopic dermatitis, prior data releases from former partner Lilly didn’t suggest that this was a very promising path – Lilly had previously disclosed lackluster early-stage efficacy numbers for both the atopic dermatitis and psoriasis studies, while the Phase II results from the ISLAND study of rezpeg in systemic lupus erythematosus were even worse (only 9% of patients, placebo-adjusted, achieved the targeted improvement).

As it turns out, though, Lilly apparently made some significant errors when calculating the efficacy numbers for the earlier atopic dermatitis and psoriasis studies. When Nektar finally got a look at the data for themselves, the results didn’t seem to add up and management sent the data out for an independent statistical audit. The results from those audits confirmed that Lilly seems to have miscalculated the efficacy endpoints (the Eczema Area and Severity Index, or EASI, score and the Psoriasis Area and Severity Index, or PASI, score), and Nektar’s release stated that Lilly subsequently confirmed the prior errors in writing.

With the new calculations, the Phase Ib study of rezpeg in atopic dermatitis achieved an 83% in average EASI score at 12 weeks (or 36% placebo-adjusted) versus a prior improvement of 66% (17% placebo-adjusted) in the high-dose group. Moreover, the proportion of patients achieving EASI-75 scores improved to 41% (21% placebo-adjusted) from 29% (9% placebo-adjusted). Smaller improvements were seen in the lower-dose group.

In the psoriasis study, the drug achieved a mean improved of 44% on the PASI scale (20% placebo-adjusted) versus Lilly’s reported 40% (21% placebo-adjusted), with 21% of patients achieving PASI-75 (versus 11% in Lilly’s numbers).

At this point, there appears to be no evidence or claims that Lilly made similar errors with the ISLAND lupus study.

With the new results in hand, management has reconfirmed its commitment to developing the atopic dermatitis indication and is now planning a Phase IIb study of rezpeg in biologics-naïve patients moderate-to-severe atopic dermatitis. Management is targeting an October trial start, and the study should take around 14-18 months.

Will This Second Chance Really Matter?

I don’t know how Lilly made the mistakes that they made, and Nektar’s press release didn’t go into a lot of detail here. But Nektar did announce that they’re filling suit against Lilly in response to these errors and Lilly dropping the partnership, alleging that Lilly basically sabotaged the development of rezpeg in order to elevate and prioritize lebrikizumab, an IL-13 antibody that Lilly acquired when it bought Demira in 2020 for $1.1 billion.

Whether Lilly made an honest (albeit still significant) mistake or actively sabotaged Nektar will be for the courts to decide (or a settlement between the companies). In the meantime, does rezpeg really have a viable path to market success in atopic dermatitis?

I’m skeptical.

It is always difficult to compare across clinical trials, but looking at the revised and improved efficacy numbers for rezpeg in that early-stage study, I can’t say the numbers look that impressive next to what we’ve seen from drugs like lebrikizumab, AbbVie ’s ( ABBV ) Rinvoq (upadacitinib), or Pfizer ’s ( PFE ) Cibinqo.

Prior studies of these drugs have shown proportions of patients achieving EASI-75 ranging from 36% (placebo-adjusted) in the SOLO 2 study of Regeneron ( REGN )/ Sanofi ’s ( SNY ) Dupixent (dupilumab) and the highest-dose group of lebrikizumab in Phase IIb testing to 51% in the JADE MONO-2 pivotal study of Cibinqo and around 60% in Rinvoq’s Phase IIb study .

Again, this is at best an “apples to oranges” comparison and the small size of the rezpeg Phase Ib study makes comparisons even more challenging, but looking at the available efficacy data, it looks as though rezpeg would slot in at best toward the bottom end of the group. That could be okay if there were significant advantages to dosing or safety/tolerability, but Rinvoq and Cibinqo are oral medications (rezpeg is injected) and almost 18% (3 of 17) of patients in the high-dose rezpeg Phase Ib group quit the study due to adverse events – quite a bit higher than the discontinuation rates seen in competing studies, though this could be a statistical artifact due to the small size of the study.

Now What?

With Nektar due to report second quarter earnings after the close on August 8, updated guidance and cash information may be available as of this reading, but as of the end of the first quarter, Nektar has ample cash to pursue further development of rezpeg. Further headcount reductions announced after the ISLAND results will save around $30M a year, and I have no doubts that Nektar will be able to fund a proper Phase IIb program for rezpeg.

What that Phase IIb study reveals about rezpeg will become the key driver for the company and the stock. Contrary to my expectations (but in line with what I would have advised), management has put NKTR-255 on simmer, continuing on with combo studies in bladder cancer and B-cell lymphoma, but postponing additional development until and unless they find a partner. Beyond that are two preclinical immunology compounds, at least one of which the company hopes to get into human studies in 2024.

The key to valuation now, then, is whether rezpeg actually does work and/or whether management chooses to deploy a significant piece of that remaining cash balance toward acquiring other clinical assets. Given Nektar’s past history of advancing borderline compounds into late-stage studies (including NKTR-102 and NKTR-181), I don’t think management will give up easily, but I do think competitors have established a fairly high bar for combined efficacy and safety in atopic dermatitis.

If rezpeg is effective and safe/tolerable enough to be a player, there’s a multibillion-dollar market out there for Nektar. Even a relatively small cut of that would be significant compared to the current sub-$200M market cap, but I’d be hard-pressed to give much more than a 20%-25% chance of success for the drug at this point.

The Bottom Line

If rezpeg is good enough to make it to market, Nektar shares are meaningfully undervalued today, but I consider that a very big “if”. As speculative biotech plays go, Nektar does at least have the cash to fund further development and the preclinical pipeline could perhaps add a little extra buzz to the stock. Still, though, I struggle to see this as more than a high-risk speculation and I’d certainly not recommend putting new money to work here unless you are comfortable with the risk of a major loss.

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