$NKTR: A Tale of Wall St. Manipulation More Sordid Than GameStop
By: Louis E. Metzger Iv
Tags: Hedge Funds, Investing, Clinical Trials, Biotechnology, Pharmaceutical

“Put simply, I hypothesize that Nektar is the subject of a short and distort scheme, kicked off by Plainview LLC’s hit piece and maintained by hedge funds employing all of the levers at their disposal, including paid message board ‘trolls,’ corrupted Wall St. ‘news’ entities and frequent manipulation of share price.”

The recent situation with GameStop (GME) has shed light on the shady practices of many institutional investors, including hedge funds. Building on that awareness, let’s examine a sector in which Wall Street manipulation is aided by the misrepresentation of scientific results: biotech. A prime example of this is the case of Nektar Therapeutics ($NKTR), which has promising fundamentals and compelling scientific and clinical results. I am long $NKTR, and have been adding to my position for 18 months. Please consider my comments with this in mind. As some of you know, I have written about my experience with scientific misconduct in academia, and about the institutional collusion employed to silence whistleblowers. Here, I discuss Wall Street’s treatment of Nektar, which I hypothesize is a particularly sordid example of a short and distort scheme. Hedge funds have taken large short positions in Nektar, and seem to be regularly manipulating this stock’s share price and narrative, aided by a sophisticated effort to flood online message boards with inaccuracies and by the gaming of algorithmic and high-frequency trading. As retail investors flee, large financial institutions scoop up discounted shares. Many retail investors are bamboozled and swindled, while Wall St. fat cats benefit from lax regulation and a culture of impunity. It is an operation that was kicked off by a short-seller’s (now discredited) report and maintained using all of the levers at Wall Street’s disposal.

3D Structure of interleukin-2 (IL-2) by “Swiss Model User” 26 Oct. 2019 fair use under Creative Commons Attribution-Share Alike 4.0 International, via Wikipedia

Nektar is essentially a platform company, with pegylated protein therapeutics and small molecules making up the majority of its pipeline. Pegylation is employed to modify these molecules’ half-lives, bioavailability, target engagement, etc. One of Nektar’s most clinically-advanced compounds is pegylated IL-2, known as NKTR-214 or bempegaldesleukin (“bempeg”). Various IL-2 constructs (famously Proleukin developed by Cetus and Chiron and later acquired by Novartis) have been used to treat certain cancers, both systemically and locally, but half-life and toxicity have often been limiting. While NKTR-214 is not efficacious for treating cancers as a single agent, a growing body of clinical data, supported by subsequent mechanistic investigations, suggests that NKTR-214 potentiates immuno-oncology (IO) therapeutics such as Opdivo (Bristol-Myers-Squibb $BMY) and Keytruda (Merck $MRK). It appears that NKTR-214’s pegylation both “pro-drugs” the IL-2 protein and affects its engagement with the IL-2 receptor complex in host cells. There’s a lot of peer-reviewed research on the subject, and I won’t attempt to review it here; the working hypothesis is that NKTR-214 in combination with certain IO drugs helps to prime patients’ immune systems to specifically destroy tumor cells without eliciting treatment-limiting systemic T-cell expansion. NKTR-214 is in a number of late-stage clinical trials. Preliminary data show that for indications such as metastatic melanoma, Opdivo combined with NKTR-214 elicits a complete response (e.g. clearance of detectable tumors) far more frequently than Opdivo alone, and far more frequently than the current standard of care, while the toxicity of the combination is indistinguishable from that of Opdivo alone. Intriguingly, NKTR-214 appears to induce responses in tumors that express low levels of PD-L1 (this PD-L1 “negative” expression is otherwise correlated to poor responses to treatment with Opdivo and Keytruda). The expansion of these IO therapeutics — as a consequence of coadministration with NKTR-214 to PD-L1 negative tumors — would itself represent a major differentiation from the single agents. Ongoing and newly-expanded clinical trials by BMY (maker of Opdivo) and NKTR show these companies testing the hypothesis that NKTR-214 is an IO potentiator for an array of tumor types besides melanoma. Building off of its in-house immunomodulatory expertise, Nektar is presently trialing a number of other investigational compounds designed to harness innate and adaptive components of patients’ immune systems to fight cancer and to treat autoimmune diseases. Despite its promising pipeline and about $1 billion in cash on hand (from its joint development agreement with BMY and from various milestone payments), NKTR trades at a fraction of what I feel is its fair share price. Over the last 18 months, in response to the release of clinical data that would send most other biotech stocks soaring, Nektar’s stock price briefly spikes and then rapidly declines. Why is this?

Having followed this therapeutic space (non-antibody protein therapeutics generally and cytokine therapeutics specifically) for a while, I had a small investment in Nektar in the summer of 2018, when its share price had run up as a consequence of its preliminary clinical results with NKTR-214. As is often the case for investigational molecules, the efficacy of NKTR-214 was lower than early trials with small numbers of patients initially suggested but was still significantly better than the standard of care for metastatic melanoma. Moreover, NKTR-214 was looking like a promising IO potentiator for other cancer types (as it still does). In October 2018, an entity called Plainview LLC, founded by one Aaron Wedlund, published a report punningly entitled “NKTR-214: Pegging the Value at Zero.” I eagerly read Wedlund’s manifesto, which disclosed Plainview’s short position in Nektar. Lengthy and technically dense, it looked damning to Nektar at first glance. Since I perform deep diligence on the science of my biotech investments, I was familiar with much of the body of literature surrounding IL-2. As I read and re-read Plainview’s “report,” I realized that out-of-context portions of figures from peer-reviewed papers and carefully-curated subsets of data were cherry-picked and woven together to support a short thesis at odds with the totality of IL-2 literature, and with Nektar’s and others’ well-controlled clinical data. In the research world, we call the selection of non-representative data to support a hypothesis “results fabrication,” and that’s what I believe happened here. After digesting Plainview’s Frankenstein-like “report,” my first thought was that it might be time to look for NKTR buying opportunities. On cue with the release of Plainview’s hit piece, Yahoo Finance’s Nektar “conversations” message board — the primary online forum for Nektar’s retail shareholders — started filling with a horde of new users who had eerily similar posts, with matching grammar, colloquialisms, etc. Attempts by others on the message board to dissect Plainview’s hit piece were buried by down-votes, by repetitious distortions, and by relentless ad hominem attacks on anyone who didn’t share the short thesis. This coincided with hedge funds’ taking large short positions, retail investors fleeing, and large institutions (including Invesco and Blackrock) steadily acquiring shares.

As the clinical trials of NKTR-214 rolled on into 2019, every data readout made Plainview’s report less likely to be accurate. The deepening of melanoma patients’ responses to Opdivo plus NKTR-214 relative to the control arm would only make sense if NKTR-214 worked. Biomarker data collected in order to elucidate NKTR-214’s in vivo mechanism(s) of action were likewise inconsistent with Plainview’s assertions. In the summer of 2019, Nektar disclosed a manufacturing error in some batches of NKTR-214. Manufacturing difficulties, especially for protein therapeutics, are not uncommon even in big pharma. Since a mix of “good” and “bad” NKTR-214 batches had been used in clinical trials, Nektar informed the FDA, and together they performed a retrospective data review that binned patients by batch. Moreover, Nektar disclosed the cause(s) and remedies for its manufacturing difficulty to the FDA and to its partner BMY. While Nektar stock sold off further on this news, and online message boards and Wall Street “news” outlets lit up with the short thesis, BMY and Nektar announced that the FDA had granted Breakthrough Therapy Designation for NKTR-214 plus Opdivo in metastatic melanoma. Such a designation suggests that Nektar, BMY, and the FDA were satisfied that the manufacturing problem was corrected and that the NKTR-214 plus Opdivo doublet showed sufficient promise to be put on a fast track toward potentially accelerated approval. Yet analysts and online news-propagating bots (e.g. “Simply Wall St.,” “BidAskBot,” and the like) made it seem as if NKTR was in terminal decline. Institutional ownership increased as retail investors ran for the exits. Through the remainder of 2019 and thereafter, positive results on subsequent clinical trials of NKTR-214 and other compounds in Nektar’s large pipeline have been followed by a barrage of online misinformation and by the creation of a narrative entirely at odds with Nektar’s clinical data and with the expansion of its trials based on these data. I hypothesize that this misinformation campaign is highly coordinated and that it is organized by hedge funds manipulating Nektar’s price. Every positive piece of news that should have led to a share price increase was followed by a modest rise and then decline, with trading patterns highly suggestive of hedge fund manipulation. If you don’t believe me, have a look at the charts and judge for yourself. When negative news unrelated to Nektar’s main pipeline arose (e.g. the FDA’s foreseeable rejection of NKTR-181, a pegylated opioid derivative that was designed to be a less-abusable pain medication), it was trumpeted by Wall St. “news” outlets, under titles like “Its opioid dissed by FDA advisors, SF drugmaker abandons program.” Yet positive news items related to Nektar’s most important pipeline — its oncology molecules such as NKTR-214 — were studiously ignored and/or systematically buried on message boards and by Wall Street’s various “news” bots and aggregators.

Put simply, I hypothesize that Nektar is the subject of a short and distort scheme, kicked off by Plainview LLC’s hit piece and maintained by hedge funds employing all of the levers at their disposal, including paid message board “trolls,” corrupted Wall St. “news” entities and frequent manipulation of the share price. Who might this scheme benefit? At present, Nektar is 97% institution-owned, and one can see from SEC filings that those institutions vacuumed up shares on the cheap as retail investors were scared away. Hedge funds benefit from a tiny retail float — which I posit that they, in a coordinated manner, helped to create — because it enables them to manipulate the share price and profit from its fluctuations. Big financial institutions, who hold the majority of Nektar’s shares, make some money by lending these shares to short-sellers, but continue to acquire and hold Nektar equity because they expect — contrary to the public-facing narrative — that Nektar will have clinical success. With a number of late-stage clinical readouts anticipated in 2021 and 2022, I think that positive news is likely on multiple fronts.

Having acquired bargain-priced shares throughout this putative short and distort operation, and planning to remain long as Nektar’s huge portfolio of investigational compounds matures, why did I write this piece? I did so because my experience investing in Nektar has given me insight into just how corrupt Wall St. may be. Hedge funds and large financial institutions not only have informational asymmetry with respect to retail investors, they also possess the resources to manipulate stock prices to fit desired narratives. In Nektar’s Yahoo stock forum, posters who are presumably aligned with the hedge funds have spent 18 months openly gloating about how they manipulate Nektar’s stock price, even accurately predicting when and to what extent the price will be pushed down on a given day. Could they be imposters? Sure. But I suspect that their gloating reflects the truth. With so many shares in institutional hands, hedge funds can have their way with companies like Nektar, making money off of share price movements that they create, and notably employing short-selling maneuvers. At the time of my writing, Nektar is one of the most shorted biotech companies, yet 97% of its shares are owned by institutions. Who are the losers? Retail investors who couldn’t evaluate the merits of the short thesis, and who sold their shares at discount prices. Nektar and its employees who for all of their missteps, have built what I feel is one of the most underappreciated pipelines in biopharma. It is ultimately patients who lose when headwinds are unfairly blown against biotechs like Nektar, a company that appears to be working in good faith to make cancer less lethal. In the discussion of short-selling and share prices, it is easy to lose sight of the fact that most businesses are groups of people trying their best to create useful things, whether consumer goods or cancer drugs.

I have heard short-selling defended as a tool with which markets can identify companies engaged in fraud, thereby protecting against distortions. How is it not distortion when short sellers create a thesis built on the misrepresentation of science, as I think was done to Nektar? How is honest market functioning served when it is in powerful financial institutions’ interests for such short and distort schemes to be created and maintained? I wonder if the ability to short-sell securities is creating more market distortion and perverse incentives than its proponents claim that it prevents. It’s not surprising that outraged investors have been targeting shorts’ manipulation of GameStop, giving the hedge funds a small taste of their own medicine. Whether retail investors will choose to punish the manipulators of biotech stocks remains to be seen. But anyone who discounts the armies of small investors, aware of Wall Street’s corrupt playbook, does so at significant peril.