Failure leads to change in value for Nektar Therapeutics (NASDAQ:NKTR)

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Therapeutic Nektar (NASDAQ:NKTR) now faces the unenviable challenge of picking up the pieces and restoring investor confidence in the company and the stock after the disappointing failure of the company’s pivotal melanoma study. Though there is yet additional bempegaldesleukine (or “bempeg”) studies that have yet to be read, it seems unlikely that there will be any winners here, leaving Nektar as a more development-stage biotechnology with three main compounds to an early stage.

I was completely wrong about the likelihood of bempeg being successful in melanoma, and it was what I believed to be the program with the highest likelihood of success given the established use of IL-2 as a therapy of last resort . I can’t completely overrule the remaining bempeg studies, but I think it would be very surprising if any of them showed efficacy to warrant an NDA submission, and the remaining three lead compounds (NKTR-358 , NKTR-255 and NKTR -262) are too early in their development to support a strong stock price today.

Pivot failure

On March 14, Nektar and Bristol Myers (BMY) announced that the first analysis of the phase III PIVOT IO-001 study of bempeg and nivolumab (Opdivo) in front-line melanoma showed that the study had failed. Based on these results, the companies decided to unblind the study, not to perform any additional analysis for the endpoint of overall survival and to terminate the PIVOT-12 study of the combo as an adjuvant treatment for melanoma.

Instead of the expected improvement in progression-free survival, the combo showed a hazard ratio of 1.09 (meaning the patients in the combo fared worse than those who received nivolumab alone), with nivolumab monotherapy showing PFS at 5 months that was in line with previous studies (the companies used a PFS of 6.9 from the CheckMate-067 study to power PIVOT).

The combined studies of bempeg and nivo continue in renal cell carcinoma (or RCC) and bladder cancer, with an update on RCC expected in about a month and bladder about a month later. Given the established history of using IL-2 therapy in melanoma (bemeg is a modified form of IL-2), I think this was the best clinical opportunity for bempeg, and coupled with earlier stage clinical data, I don’t see much likelihood of success in RCC or bladder.

The same in lung cancer. The Phase I/II PROPEL results produced in December 2021 do not provide much basis for confidence, especially since the only patient subgroup to show differentiation from monotherapy was in patients with PD-L1 less than 1%, and there’s really no biological rationale that I’m aware of for generating a higher response there (so it could well be an artifact of the small number of patients in the study). There will be data coming later this year from a PROPEL triplet study (bempeg + Merck‘s (MRK) pembrolizumab + chemo), but again, I don’t see an argument for how/why bempeg would perform better here.

A brief M&M on Bempeg in melanoma

It is common for hospitals, teaching hospitals in particular, to have regular meetings called M&M’s (morbidity and mortality) where serious complications, adverse outcomes and/or patient deaths are reviewed, the idea being to review the decisions that were made and determine if the outcome was preventable. Although the process can be very uncomfortable, even for seasoned clinicians, M&Ms are considered invaluable educational tools, and I believe the principle can and should be applied to investing as well.

I had evaluated Nektar with a 66% chance of success in the PIVOT study, but I certainly overlooked the warning signs that were visible in Phase II development and before.

One of the indicators I ruled out was the lack of efficacy of bempeg monotherapy. This was a reported issue with Incyte‘s (INCY) after its failed Phase III (after promising Phase II results), but this one is difficult to assess at a time when combination therapies are becoming increasingly important. There are certain classes of drugs like MEK inhibitors that don’t show much efficacy as a single agent (aside from some less common melanoma subtypes) but seem to lead to better results in combination with other drugs. other agents (BRAF inhibitors in the case of MEK inhibitors). This is a mixed indicator at best – you’d like to see the effectiveness of monotherapy, but that’s not necessarily disqualifying in all cases.

There were also issues in the design and results of the PIVOT-02 study that I should have paid more attention to when assessing the likelihood of Phase III success. PIVOT-02 was not only modest in size with respect to patients enrolled, but also included a higher mix of patients with better prognosis (normal LDH scores, stage M1a/M1b disease, et al) and no comparator arm active.

The study also showed higher complete response rates without a significantly higher ORR, and if you compare the PFS results from the Phase I/II epacadosat study to PIVOT-02, as Daina Graybosch did, SVB analyst Leerink, you see a strange similarity.

comparison of INCY and NKTR Phase II

SVB Leerink

Last but not least is a personal factor. I may get whipped for this in the comments, but never mind. Given that my wife died of metastatic melanoma at age 41, I won’t overlook the risk that I was subconsciously looking for this drug combo to be successful, and I’ll let that lead me to a higher estimate of her chances of success.

At a minimum, I should have used a more conservative estimate of success given the small size of the phase II study, the lack of an active comparison arm, and the healthier mix of patients enrolled. That said, even a more conservative estimate of success (33% to 50%) would still have overestimated the value of the desirability of melanoma and the overall desirability of bempeg.

What’s next for Nektar

As I said above, I am not very optimistic about the prospects for bempeg in its remaining indications. While all of these diseases are different, the reality is that PIVOT IO-001 is the most rigorous study done on bempeg to date and the results weren’t even close. As I found the results from earlier stages of RCC, bladder and lung cancer less compelling than the melanoma data, I can’t say I see much chance of success here now.

Nektar has three other compounds worth watching today, but all are in their early stages. NKTR-358 is the most advanced, with a partner Lily (LLY) is set to deliver more data on phase I studies in atopic dermatitis and psoriasis in a few months and phase II data in lupus in the second half. The data so far, including preliminary phase 1b data in moderate to severe atopic dermatitis, has been encouraging, but I think atopic dermatitis results will need to improve for the drug to be a strong contender. of Sanofi (SNY) / Regenerate‘s (REGN) Dupixent.

There is also early stage data for NKTR-255 in relapsed/refractory multiple myeloma, non-Hodgkin’s lymphoma, colorectal cancer, and head and neck cancer. At the December ASH meeting, the company presented early Phase I data from 15 evaluable patients with MMrr and NHL, with 53% of them having stable disease and some evidence that NKTR-255 could improve the effectiveness of CAR-T therapy. While this is enough to continue studying the drug, it’s worth remembering that only about 5-10% of Phase I oncology drugs make it to approval and there’s nothing out of the ordinary in the data so far. ‘now.

Less information is available on NKTR-262 at this point, and I don’t know what the development path will be here given the challenges of bempeg programs (NKTR-262 has been extensively developed as part of bempeg combination therapies until now).

Perspectives

I use symbolic chances of success for bempeg in its remaining indications today. Success in any of the RCC, bladder or lung cancers would certainly support a higher stock price, but I view this as a very low probability outcome.

Based on past success rates of Phase II autoimmune disease drug candidates, I believe NKTR-358 is worth around $5/share today, given multi-billion dollar revenue opportunities in lupus, atopic dermatitis and psoriasis, but the chances of success are less than 15%. This is now the main driver of value, because although NKTR-255 and NKTR-262 could become considerably more valuable if clinical data warrants more optimism, they are worth less than $2/share today given the low chances of phase I oncology drugs.

Nektar has over $4/share in cash and investments on the balance sheet, and that’s a decent short-term floor for the company, but the company will likely burn that money developing NKTR-255, NKTR-262 and d other pipeline candidates, so it will be a shrinking safety net.

The essential

All told, I think $7 is a reasonable fair value for Nektar today given the low probability of success of the remaining bempeg trials and the early-stage nature of the other compounds in the pipeline. More than $4/share in cash gives Nektar leeway to further develop its pipeline, and I can understand investors wanting to stick around and see if there’s salvage value in bempeg to go along with future updates of these early programs. While there simply isn’t the data in hand today for either NKTR-358 or NKTR-255 to support a higher fair value over typical pipeline hit rates, both could well prove much more valuable if clinical studies prove their effectiveness.

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