Nektar Therapeutics (NASDAQ:NKTR) is an intriguing commercial-stage biotech company that's just reported positive late-stage trial results for its pain-busting drug NKTR-181. However, shares have jumped on the news, and the company's market cap has swollen to more than $3 billion. Is there more running room left for its investors?

What it's doing already

Nektar Therapeutics has already successfully developed drugs that it's licensed to collaboration partners and on which it's collected royalties. It also has drugs that it's licensed to others that could win approval soon, and it is working on new medicines that it hasn't yet licensed to a bigger peer.

Researchers develop next-generation medicine in a lab.


The partnered portfolio includes Movantik and Adynovate, which are licensed to AstraZeneca (NASDAQ:AZN) and Shire (NASDAQ: SHPG), respectively. 

Movantik won Food and Drug Administration approval in September 2014  for use in relieving opioid constipation, and Nektar Therapeutics reports that annual prescriptions jumped 270% year over year in 2016. Currently, Movantik is selling at an annualized clip of about $160 million, and according to the licensing agreement, Nektar Therapeutics receives a 20% plus royalty on U.S. sales, plus potential sales milestone payments.

Adynovate is an extended half-life therapy for hepatitis A that helps reduce patient dose burden, and that won FDA approval in 2015. Shire pays Nektar Therapeutics a single-digit royalty on Adynovate sales up until net sales of $1.2 billion, and then it pays royalties on sales above that point at a rate in the low teens.

Nektar Therapeutics is working  with Bayer AG (OTC:BAYR.Y) on an inhaled version of Amikacin, an anti-bacterial that if successful in trials could be used alongside standard of care to treat gram-negative pneumonia in intubated and mechanically ventilated patients. If it's eventually approved in the U.S., Nektar Therapeutics will receive a flat 30% royalty on sales. It's also working with Bayer on an inhaled powder formulation of Cipro that could be used to treat chronic lung infections in cystic fibrosis patients. Top-line phase 3 results on both drugs should be available this year.

The company's also licensed European rights to its breast cancer drug Onzeald to Daichii Sankyo Europe, and a conditional EU regulatory decision is expected this year. If it's approved, Nektar Therapeutics can earn milestones, plus a 20% royalty on EU sales and a 15% royalty on sales in Turkey. 

What's fast approaching

On March 20, Nektar Therapeutics reported results from phase 3 trials evaluating NKTR-181 as a treatment for chronic back pain, a potentially massive market.

In the trial, NKTR-181 successfully reduced pain relative to a placebo, and importantly, it did so without the similar euphoric effects associated with commonly prescribed opioids. Given that caregivers and patients have become increasingly concerned about the abuse potential of opioids, a potential FDA green light of this drug could significantly disrupt the market. 

Globally, about $20 billion is spent treating chronic pain, including $12.6 billion for opioids. With that much money at stake, label expansion studies that could expand NKTR-181's addressable patient population could conceivably turn this drug into a blockbuster.

Nektar Therapeutics is shopping licensing rights to NKTR-181 so that it doesn't have to do the heavy lifting of commercialization, so its take will depend a lot on those negotiations. If prior deals are any indication, investors should be OK modeling for a mid-teens royalty.

The company's also developing immuno-oncology drugs, and a drug targeting auto-immune disease is in the works. However, those studies are in the early stages of research and development. For example, Bristol-Myers Squibb (NYSE:BMY) is evaluating NKTR-214 alongside its megablockbuster cancer drug Opdivo in five tumor types, and initial data from a dose-escalation trial should be announced this summer.

An eye on the future

Nektar Therapeutics is building a solid track record for developing drugs that can make it across the regulatory finish line, but its peak revenue opportunity is limited by its licensing strategy. Nevertheless, management is targeting sales of between $375 million and $450 million by 2021, and at that run rate, this company could be profitable. Operating expenses were $279 million last year.

Undeniably, enthusiasm is quite high for this company right now, and this stock is no longer a bargain. However, if the trials with Bayer AG pan out, a good deal gets struck on NKTR-181, and if we see positive efficacy in the Bristol-Myers' cancer studies, it may not be a bad idea to buy any pullback in this company's share price -- especially if we see a pickup in industry mergers and acquisitions.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.