Nektar Therapeutics Is a Short

NEW YORK ( TheStreet) -- My goal in this article is to persuade you to short Nektar Therapeutics ( NKTR). I'm short the stock and expect my bet will pay off with an excellent return. Nektar is a $1 billion specialty pharmaceutical company whose main asset is NKTR-118, an experimental drug being developed for opioid-induced constipation (OIC.) I believe NKTR-118 has a marginal risk/benefit profile and addresses a small commercial market. I'm shorting Nektar because the stock is worth $3 per share in my model versus its current value of $8.26.

Nektar licensed NKTR-118 commercial rights to AstraZeneca ( AZN), for which Nektar was paid $125 million in 2009. Nektar will also receive a "significant double-digit" royalty on NKTR-118 sales, if the drug is approved, according to the company. My guess is that this royalty starts at 15% and moves to 20% as sales grow.

Let's calculate a value for NKTR-118. Peak sales of $300 million in 2019 renders the royalty worth $274 million at a 10% discount rate. Likewise, peak sales of $600 million makes the royalty worth $474 million; peak sales of $1 billion equals $845 million in net present value. The key question: What is the upper bound and lower bound of future NKTR-118 revenue?

Nektar-118 will not sell well

Zelnorm, the best-selling constipation drug of all-time, generated revenue of $561 million in 2006. Zelnorm was still growing quite rapidly when it was removed from the market for safety reasons. It probably would have peaked out at $800 million in sales, but no one knows for sure. Zelnorm was approved in irritable bowel syndrome (IBS), a very different and much larger commercial market than opioid-induced constipation (OIC). Nevertheless, Nektar bulls like to claim NKTR-118 will meet or beat Zelnorm in sales, which is hard to believe because the mechanism of action of Zelnorm and NKTR-118 are completely different. Nektar doesn't even seem to have plans to study NKTR-118 in IBS, so Zelnorm isn't a valid comparison.

Let's try predicting NKTR-118 sales by looking at drugs currently approved for OIC. Entereg generated $31 million in trailing 12-month sales before being acquired by Cubist Pharmaceuticals ( CBST). Relistor, marketed by Salix Pharmaceuticals ( SLXP) and Progenics ( PGNX), had sales of $42 million in the past 12 months. Granted, both drugs have limitations and issues that have probably hurt sales, but Salix and Progenics are developing an oral Relistor that will be filed for regulatory approval shortly. Nektar and AstraZeneca won't report results from phase III studies of NKTR-118 until later this year.

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