LLY - Nektar Therapeutics Looking To Rebuild Faith In Its Now Early-Stage Pipeline

Summary

• Nektar is trying to come back from the crushing failure of bempeg, and it has two lead candidates and $500M in cash to drive the effort.
• The next major clinical milestone is the Phase II read-out of ISLAND in lupus; success could drive $3/share of upside and build credibility for Rezpeg as an autoimmune drug candidate.
• Management is looking to position NKTR-255 as an efficacy-enhancing combo drug candidate for multiple oncology indications, but meaningful data is still lacking.
• Nektar is targeting real markets, but there is a long way to go to clinically prove out these lead candidates.

Cash is king in biotech, and as long as you have enough cash (or enough investors willing to give you more), you can stay in the biotech even after crushing clinical defeats. Such is the case with Nektar (NKTR), its two lead early-stage clinical compounds, and its $500M pile of cash. It's been a while since Nektar has had a meaningful clinical success, and after the failure of bempeg crushed the company in 2022, the company really needs some clinical wins.

The next major update should be the Phase II read-out on the ISLAND-SLE study that partner Lilly ( LLY ) is conducting in moderate-to-severe lupus with the company's compound rezpedgaldesleukin ("Rezpeg"). Prior data have had some contradictions and mixed signals (not uncommon for small studies), but there were signs pointing to efficacy and a strong result here would definitely rebuild some confidence. Further out is a future Phase II study in atopic dermatitis, as well as read-outs in 2024 on the company's lead oncology indication NKTR-255, a drug that the company is positioning a potential efficacy booster to proven oncology compounds.

As is the case with most early-stage biotechs, the odds are long and the potential rewards are high. Simply derisking Rezpeg in lupus to a 50/50 shot could double the share price from here, and both lupus and atopic dermatitis are credible targets. The oncology program could likewise drive significant value, though the track record of drugs developed as companions for existing checkpoint inhibitors or other treatments has been relatively poor.

Will ISLAND Be A Resort Or A Shipwreck?

The most significant event on the Nektar timeline right now is the upcoming read-out from Lilly's Phase II ISLAND-SLE study of Rezpeg in moderate-to-severe lupus. Lilly enrolled 280 patients for three dosing levels, and the primary endpoint for this study is the percentage of patients who achieve a four-point or better reduction in their Systemic Lupus Erythematosus Disease Activity Index 2000 (SLEDAI) score.

A Phase Ib study of the drug in mild lupus suggested worthwhile efficacy, with 7 of 18 patients in the two highest dosing groups (out of four) seeing a four-point or greater improvement in their Cutaneous Lupus Disease Area and Severity Index Activity (or CLASI-A) score. Unfortunately, there was no observed improvements in SLEDAI, but it was a very brief study and it takes time for those benefits to appear.

I'm using a 15% chance of success in this trial in my analysis of Nektar. Given that the ISLAND study is enrolling more severe patients than the prior study and there hasn't been any follow-up information on that Phase Ib cohort (at least to my knowledge), I think the efficacy seen in Phase Ib can't be credited as more than "encouraging", and I'd note that SLE has proven to be a very difficult disease in the past.

The average drug in Phase II studies has a 30% chance of going on to Phase III and a 15% chance of eventually getting approved. Given the difficulty of SLE as an indication, the different patient enrollment criteria, and the different endpoint, I think using an average chance of success is probably generous at this point. Should the ISLAND come up with good efficacy and safety, it could add $3/share to Nektar's share price just based on a 50/50 chance of succeeding in Phase III, and a successful Phase III program could position the drug for over $1 billion in sales, and possibly meaningfully more as I believe currently approved lupus drugs have been commercially limited by less-than-ideal efficacy and safety/tolerability profiles.

Other Value-Driving Events Are Further Down The Line

Lilly is also intending to move forward with a Phase II study of Rezpeg in atopic dermatitis, as well as another undisclosed indication.

Data from a Phase Ib atopic dermatitis study suggested efficacy (including a steady improvement in the EASI score over time), with the larger dose outperforming the smaller dose and both showing increasing separation from the placebo over time. There were some quirks to enrollment (more severe patients (50%) in the placebo group and 12 ?g/kg group (44%) versus the 24 ?g/kg group (35%)), and there was no apparent dose-dependency for blood-based T-reg measurement, but Phase I studies usually aren't perfect. Safety and tolerability will be watch-items (as they always are), with a high incidence of injection site reactions and an elevated rate of infections.

While Rezpeg is likely to drive the most value in the near term, NKTR-255 could be a bigger deal in 2024. NKTR-255 is a PEGylated IL-15 drug that is meant to increase the population and function of NK and CD8+ cells, which in principle should boost the efficacy of checkpoint inhibitors, ADCC antibodies, and cell therapies for cancer.

There are investigator-sponsored studies underway studying NKTR-255 in combination with Bristol-Myers 's ( BMY ) Breyzani in relapsed or refractory large B-cell lymphoma and in combination with Johnson & Johnson 's ( JNJ ) Darzalex in r/r multiple myeloma that should read out before the end of 2023, and management will be launching their own Phase II/III combo study using NKTR-255 with either Gilead 's ( GILD ) Yescarta or Breyzani in r/r large B-cell lymphoma, with the idea being to see whether NKTR-255 can boost the long-term efficacy of these CAR-T therapies.

The mechanism of action is plausible, but that's true for most drugs that make it to the clinic and the reality is that oncology drugs have even lower odds of success than your average non-oncology drug. The potential of a CAR-T-boosting compound would be significant ($1B+), not to mention additional potential beyond that if the drug is shown to boost the efficacy of other drugs like checkpoint inhibitors or ADCC antibodies, but there's just too little data at this point to say much beyond "it sounds good, but we'll see what the data say."

The Outlook

Given the low odds of approval for early-stage drugs, the meaningful revenue opportunities for Nektar's pipeline are overshadowed by the risks of clinical development. That makes updates like the phase II ISLAND read-out all the more important, as shifting the odds on any of the major indications can drive meaningful per-share upside at this point.

I think Nektar is modestly undervalued now, with a fair value of around $3.75 on the basis of the two identified indications for Rezpeg and a placeholder for potential indications for NKTR-255 as a combo therapy constituent. As mentioned above, a successful ISLAND read-out could push the shares to $6, and incremental updates on NKTR-255 could likewise add more value. In the meantime, I continue to expect Nektar to work on preclinical candidates (like NKTR-288 and a future TNFR2 agonist antibody) and consider acquiring or in-licensing other assets.

The Bottom Line

At this point, Nektar is more of a gamble than an investment. There simply isn't enough useful data on any of its pipeline candidates to really drive an informed thesis that they are more (or less) likely than the average early-stage candidate to succeed. That's not unusual with biotech though, as often the best you can hope for with early-stage candidates is to find snippets of data that point to better odds of success and/or a differentiated mechanism of action.

This name will be worth revisiting once the ISLAND data are out, but for now, I can at least say that there's an interesting risk/reward opportunity here. Success with ISLAND could double the share price (+$3/share), while a failure would likely halve it (-$1.50/share) and that may be enough to make this a name to consider for risk-seeking investors.

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