Merrill comments.
• NKTR is scheduled to report Q3/03 (ended
September) financial results on November 5.
Our estimates include the following (see Table
2 for income statement model):
• Total revenues of $25.4 mm vs. $23.2 mm
in Q3/02;
• R&D expenditures of $40.0 mm vs. $38.2
mm in Q3/02;
• General and administrative expenses of
$6.0 mm vs. $6.6 mm in Q3/02;
• Pro forma loss per share of ($0.51) based
on 55.7 mm shares vs. ($0.46) in Q3/02
based on 55.3 mm shares. Consensus loss
per share is ($0.52).
• During the conference call we will be looking
for updates on the following:
• Status of partnered programs including
Exubera, inhaled tobramycin and inhaled
leuprolide.
• Updates on the clinical development of
proprietary programs.
• NKTR’s development partner Pfizer (PFE, N)
will report its financial results for Q3/03
(ended September) on October 22. There has
been considerable speculation in the market
that PFE may discuss the ongoing safety
studies for Exubera, and its timeline for
regulatory filings during its Q3/03 conference
call scheduled for 1.00 p.m. EST. NKTR stock
has rallied from ~$8.00 in early August to
$13.90 (intraday, October 21), due in part to
anticipation of definitive filing time frames
from PFE, and in part to a rally in the
NASDAQ Biotechnology Index.
• NKTR’s valuation is highly dependent on
Exubera and is substantially leveraged to
changes in the timing of its launch. We have
refrained from speculating on such timing, as
the original filing timeframe has been delayed
by 2-3 years. PFE has previously indicated
that an NDA filing for Exubera would not
occur in 2003. We also believe that the FDA is
likely to subject Exubera’s NDA submission to
significant scrutiny, given the potential for
widespread adoption and the safety issues
identified during previous phase III trials (1%
reduction in forced expiratory volume; not
clinically significant; pre-existing cases of
pulmonary fibrosis, pleural effusion and
circulating antibodies with no apparent
clinical significance). Accordingly, we are not
expecting an NDA filing from PFE until the
requisite long-term safety data is deemed to be
“airtight”. We believe that the potential
negative consequences of an NDA filing with
less clarity on the safety issues could be
substantial (e.g., delays in review times, non-approvable
status, inoptimal label), and far
outweigh the benefit of getting to market a few
months earlier.
• Our current model assumes a mid/late 2004
regulatory filing for Exubera, with a product
launch in 2005. The model assumes Exubera
revenues of $61 million, $335 million and $682
million in 2005, 2006 and 2007, respectively.
This results in total revenues to NKTR of $366
mm in 2007, and pro forma EPS of $0.67 (see
Table 2). Our current model does not include
a reduction of ~$30 million in R&D (certain
commercial readiness costs borne by NKTR,
which will be assumed by PFE upon
commercialization). This was due to the fact
that a) the timing of the NDA filing remains
uncertain; and b) a large portion of the
savings would likely be redeployed toward the
development of proprietary products.
• Given the recent speculation in the market
regarding the possibility of an early filing and
launch for Exubera, we have included an
analysis of the potential valuation of NKTR
given three hypothetical scenarios.
1. Scenario 1: Mid-2004 filing, 2005 launch, $15
mm R&D reduction, and end user Exubera
revenues of $682 million in 2007. These
assumptions result in a valuation of $16.00,
assuming a 25% discount rate and a 30x
multiple on EPS 2007E of $0.84 (see Table 1
for details).
2. Scenario 2: Late-2003 filing, 2004 launch, $15
mm R&D reduction, and end user Exubera
revenues of $1 billion in 2007. These
assumptions result in a valuation of $25.00,
assuming a 25% discount rate and a 30x
multiple on EPS 2007E of $1.30.
3. Scenario 3: Mid-2005 filing, 2006 launch, $15
mm R&D reduction and end user Exubera
revenues of $335 million in 2007. These
assumptions result in a valuation of $7.00,
assuming a 25% discount rate and a 30x
multiple on EPS 2007E of $0.37.
Table 1: Hypothetical Valuation Scenarios
2007 Estimates ($ mm) Current Scenario 1 Scenario 2 Scenario 3
Exubera Sales 682 682 1,000 335
Exubera Manufacturing
Revenues
144 144 210 72
R&D Expenditure 167.5 152 151 152
Net Income 44 55 86 24
EPS ($) $0.67 $0.84 $1.30 $0.37
Valuation ($) NA $16 $25 $7
Source: Merrill Lynch Estimates
• We remain enthusiastic regarding the long
term prospects for Exubera, given the
potential for vastly improved patient
compliance, the underpenetrated and
undertreated nature of the type 2 diabetes
market and improving clarity on the overall
safety of the drug. We also believe that any
definitive statement by PFE regarding a near
term filing for Exubera is likely to result in a
sizeable stock price rally. However, given the
substantial swing in valuation depending on
the timing of the Exubera launch, we prefer to
await further clarity on PFE’s filing
timeframe, prior to adjusting our model. In
the interim, we retain our “Neutral” rating.
Nektar Therapeutics – 22 October 2003
Refer to important disclosures on pages 4 to 5. 3
Analyst Certification
I, Hari Sambasivam, hereby certify that the views
expressed in this research report accurately reflect my
personal views about the subject securities and issuers. I
also certify that no part of my compensation was, is, or
will be, directly or indirectly, related to the specific
recommendations or view expressed in this research
report.
Table 2: Nektar Therapeutics Income Statement Model
US$ (mm) 2002A Q1:03A Q2:03A Q3:03E Q4:03E 2003E 2004E 2005E 2006E 2007E
Revenues
Licenses & Collab Research 76.4 18.4 21.2 18.5 19.0 77.1 89.0 102.4 117.7 135.4
Insulin Sales - - - - - - - 12.8 71.8 144.2
Pegylated Product Sales 18.4 7.1 6.5 6.9 7.1 27.7 43.1 60.0 82.7 86.4
Total Revenues 94.8 25.5 27.7 25.4 26.1 104.8 132.1 175.2 272.2 365.9
Expenses
Cost of Goods Manufactured 7.0 4.6 3.7 4.5 4.6 17.4 25.8 38.3 69.9 95.7
General & Administration 26.1 5.2 5.1 6.0 6.0 22.3 24.2 25.4 26.7 28.0
Amortization 4.5 1.1 1.1 1.1 1.2 4.6 4.5 8.0 8.0 8.0
R&D 157.4 32.1 32.4 40.0 42.0 146.5 155.5 159.4 163.4 167.5
Total Expenses 194.9 43.1 42.4 51.6 53.8 190.8 210.0 231.1 268.0 299.1
Operating Income (100.1) (17.5) (14.6) (26.2) (27.7) (86.0) (78.0) (55.9) 4.2 66.8
Net Interest (Expense) (6.4) (2.5) (2.9) (3.1) (3.2) (11.7) (11.6) (13.8) (13.0) (11.3)
Other I ncome (Loss) (1.0)0.14.5 --4.6----
Pretax Income (107.5) (19.9) (13.0) (29.3) (30.9) (93.2) (89.6) (69.7) (8.8) 55.5
Tax ---------19.4
GAAP Net Income (Loss) (107.5) (19.9) (13.0) (29.3) (30.9) (93.2) (89.6) (69.7) (8.8) 36.1
Pro Forma Net Income (Loss) (103.0) (18.9) (16.4) (28.2) (29.7) (93.2) (85.1) (61.7) (0.8) 44.1
GAAP EPS ($) $(1.94) $(0.36) $(0.23) $(0.53) $(0.55) $(1.67) $(1.60) $(1.11) $(0.14) $0.55
Pro Forma EPS $(1.86) $(0.34) $(0.29) $(0.51) $(0.53) $(1.67) $(1.52) $(0.98) $(0.01) $0.67
Weighted Shares (mm) 55.3 55.6 55.7 55.7 55.7 55.7 56.0 63.1 65.1 66.1
Source: Company Reports, Merrill Lynch EstimatesNektar Therapeutics – 22 October 2003
Refer to important disclosures on pages 4 to 5. 5
Convertible Alternatives: Inhale Therapeutic 3.5% 10/17/07 vbsi (Data as of 21-Oct-2003)
Market Value: USD 121 Mn Current Yield: 4.00% Recent Price: 87.5 USD YTM/YTP: 7.16%
Conversion Ratio: 19.82 Yield Gain vs. Stock: 4.00% Parity: 27.55 USD Breakeven: 17.13
Theoretical Value: 90.111 % Theo Value Disc: 2.90% Call Info: Current @ 100 Premium: 217.64%
We estimate over one year this issue will return +6.59% and +1.72% in a stock price move of +/- 25%.
To calculate theoretical values and return profiles, Merrill Lynch uses a proprietary arbitrage model to value the convertible as a combination of embedded options. The model is sensitive to,
amongst other factors, the following inputs: stock volatility, dividend yield, interest rate levels, and credit spread, all of which we hold constant. Further, we assume a similar discount/premium
persists over the entire investment horizon. Our theoretical valuation in no way constitutes a fundamental opinion, nor does a theoretical discount necessarily constitute a recommendation.
*144A. This security may only be offered or sold to persons in the U.S. who are Qualified Institutional Buyers (“QIB’s”) within the meaning of Rule 144A under the Securities Act of 1933, as amended.
Investment Rating Distribution: Health Care Group (as of 30 September 2003)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 80 46.24% Buy 25 31.25%
Neutral 82 47.40% Neutral 15 18.29%
Sell 11 6.36% Sell 1 9.09%
Investment Rating Distribution: Global Group (as of 30 September 2003)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 962 40.56% Buy 328 34.10%
Neutral 1206 50.84% Neutral 318 26.37%
Sell 204 8.60% Sell 44 21.57%
* Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months.
OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential
price fluctuation, are: A - Low, B - Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12-month
period from the date of the initial rating, are: 1 - Buy (10% or more for Low and Medium Volatility Risk Securities - 20% or more for High Volatility Risk
securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities - 0-20% for High Volatility Risk securities); 3 - Sell (negative return); and 6 - No
Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower (dividend not
considered to be secure); and 9 - pays no cash dividend.
[Nektar] MLPF&S or one or more of its affiliates acts as a market maker for the recommended securities to the extent that MLPF&S or such affiliate is willing
to buy and sell such securities for its own account on a regular and continuous basis.
[Nektar] Additional information pursuant to Section 34b of the German Securities Trading Act: Merrill Lynch and/or its affiliates was an underwriter in an
offering of securities of the issuer in the last five years.
[Nektar] MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months.
[Nektar] MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company within the next three
months.
The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill
Lynch, including profits derived from investment banking revenues.
Copyright 2003 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). All rights reserved. Any unauthorized use or disclosure is prohibited. This report has been
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information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Additional information available.
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