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Nektar Therapeutics (NASDAQ:NKTR)

Q3 2008 Earnings Call Transcript

November 6, 2008, 5:00 pm ET

Executives

Jennifer Ruddock – Senior Director of IR

Howard Robin – President and CEO

John Nicholson – CFO and SVP

Randall Moreadith – Chief Development Officer and SVP, Drug Development

Analysts

Ian Sanderson – Cowen & Company

Sa'ar Yaniv – JP Morgan

Richard Meseri [ph] – DCM Fund [ph]

Rich Silver – Barclays and Co.

Operator

Good afternoon and thank you for joining us for the Nektar Therapeutics conference call. My name is Madge [ph], and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session toward the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now hand the call over to Nektar Investor Relations. Please proceed.

Jennifer Ruddock

Thank you. Good afternoon and thank you for joining us for Nektar Therapeutics third quarter 2008 financial results conference call.

Before we get started, please note that the following presentation contains forward-looking statements that reflect our current views as to the Company's business strategy, the value and potential of our technology platform, the clinical prospects of our proprietary and partnered products, future revenue potential of our partnered programs, our financial guidance for 2008, the anticipated closing of the Novartis transaction, and other future events relating to the Company. These forward-looking statements involve uncertainties and other risks that are detailed in Nektar's reports and other filings with the SEC, including our quarterly report on Form 10-Q filed with the SEC on August 8, 2008 and the report on Form 8-K filed today which included our third quarter financial results press release.

Actual events could differ materially from these forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information, future events or developments. A web cast of this conference call will be available for replay on the Investor Relations page at Nektar's website at www.nektar.com.

In the event that any non-GAAP financial measure financial measure is discussed on this conference call that is not described during the call, related information will be made available on the Investor Relations page of our website as soon as practical after the conclusion of the call.

With that, I'm pleased to hand the call over to our President and CEO, Howard Robin.

Howard Robin

Thank you, Jennifer, and thanks to everyone for joining us. Today we'll update you on the important progress we have made with Nektar’s business and our proprietary and partnered drug development programs, as well as review our financial results for the third quarter and year-to-date.

On October 21st, we took an exceptionally important step with the announcement of our sale of certain pulmonary delivery assets to Novartis for $115 million in cash. Under the asset purchase agreement Nektar retains ownership of our lead anti-infective programs, the Bayer partnered program, NKTR-061 inhaled amikacin entering Phase 3 next month and our proprietary program, NKTR-063 inhaled vancomycin, which is planned to begin Phase 2 in the first half of 2009.

Additionally, we retained our rights to royalties on sales of inherited Cipro, which is also partnered with Bayer. These anti-infective programs represent the potential for significant revenue streams to Nektar. Additionally, we retained all rights to our dominant inhaled insulin intellectual property.

The Novartis transaction underscores our ability to monetize assets that are no longer strategic to Nektar’s future. More importantly it also highlights the extraordinary value of the rest of the company when you consider that these assets represent only a mere fraction of the company and were sold for $115 million. We can know place our strategic focus squarely on the development of novel therapeutics using our advanced polymer conjugate technology platform or continuing to advance our inhaled amikacin and vancomycin programs.

This focus will allow us to rapidly and efficiently advance valuable product candidates into clinical development. The Novartis transaction also significantly increases our operating efficiencies and builds on the great progress we have made in this area. The transaction will effectively eliminate $45 million of P&L expenses resulting in a reduction of $30 million of cash usage associated with our pulmonary operations.

Now some great news. The planned cash from the Novartis transaction has allowed us to repurchase a sizable portion of our convertible debt. Since October 21, the date of the Novartis transaction announcement we have been successful in repurchasing $100 million of debt at an average price of $0.48 on the dollar. We will continue to monitor the market for our debt and may retire additional debt when strategically appropriate.

With the closing of the Novartis transaction, we plan to end 2008 with approximately $375 million in cash. We have monetized some of our non-strategic assets, significantly reduced our debt and significantly reduced our expenses. As a result, Nektar is in a unique position of financial strength.

Now I would like to update you on the progress of our clinical pipelines. First let me start with our two oncology programs NKTR-102 PEGylated irinotecan and NKTR-105 PEGylated docetaxel. Both represent large market opportunities for Nektar.

In October, we presented positive data on NKTR-102, which represents the first PEGylated small molecule to show therapeutic activity in humans.

The data presentation was authored by a lead investigator, Dr. Daniel Von Hoff, at the 20th EORTC triple meeting in Geneva. In the Phase I trial we demonstrated that we can achieve a pharmacokinetic profile with a significantly longer half life of the active metabolite of NKTR-102 relative to irinotecan.

The half life of the active metabolite of irinotecan is approximately 37 hours. The half life of the active metabolite of NKTR-102 was 50 days. In the Phase I study summarized in Geneva, 23% of patients demonstrated an objective response with NKTR-102, 12% of the patients experienced a tumor reduction as measured by resist criteria of at least 40% and as much as 58%; and 11% of the patients showed a response whereby the tumor shrank by 15% to 30%.

It is important to point out that these responses were observed within the first one or two courses of treatment underscoring the impressive potency of this compound. The patients in this trial had refractory tumors that had failed to respond to all prior available treatments. We’re currently conducting a Phase 2a study of NKTR-102 in colorectal cancer and we expect to begin dosing patients in 3 additional Phase 2 trials in breast, ovarian, and cervical cancers before year end.

Also in the fourth quarter, we plan to initiate a Phase 2b randomized trial of the evaluating NKTR-102 monotherapy versus irinotecan in second line colorectal cancer patients with the KRAS mutant gene. Specifically, this study will be a head-to-head comparison of NKTR-102 versus irinotecan with a primary endpoint of progression free survival.

Our second oncology development program is NKTR-105, PEGylated docetaxel. In October, we presented positive preclinical data for this compound at the 2008 EORTC symposium. The data highlights the superior antitumor activity of NKTR-105 in preclinical tumor models as compared to docetaxel.

As with NKTR-102 our technology platform can enable a substantially improved pharmacodynamic profile that potentially enhances therapeutic efficacy for NKTR-105. We’re on target to file an IND for this compound by year-end with plans to initiate a Phase I clinical study in the first quarter of 2009.

The current taxane market approximates a $4 billion opportunity and we believe NKTR-105 is an important compound that will further illustrate the value that can be created with our polymer conjugation platform.

I would now like to turn our attention to our CNS exclusion platform illustrated best by NKTR-118 oral PEG-naloxol. NKTR-118 is the first oral drug in our pipeline that uses our advanced polymer and conjugate chemistry to reduce penetration of drugs across the blood brain barrier and at the same time greatly increasing oral bioavailability.

NKTR-118 is a novel orally available triple opioid antagonist that we continue to advance into Phase 2. NKTR-118 is designed to address the debilitating problems of opioid induced bowel dysfunction a common problem for patients suffering from chronic pain who take opioids for relief.

We have optimized our oral formulation of NKTR-118 and are building on this important program to develop a next generation therapy NKTR-119. NKTR-119 combines an opioid with NKTR-118 to create an analgesic that doesn’t cause the debilitating side effects of constipation.

A market research and discussions with potential partners strongly suggests that this program could greatly improve the quality of life for patients in need of chronic pain therapy. We expect to begin proof of principal clinical studies of NKTR-119 in 2009.

Now I would like to briefly update you on our two antibiotic programs, which I want to reiterate were not included in the Novartis transaction.

Let me begin with NKTR-061 amikacin inhaled, which is partnered with Bayer. Amikacin inhaled is being developed for the adjunctive therapy of the very serious of growing problem of gram negative pneumonias in intubated patients. This patient remains on track to enter Phase 3 clinical trials next month and we expect to receive a $10 million milestone payment from Bayer 45 days after initiating this trial.

Nektar dosed the first patients in our Phase I clinical study evaluating NKTR-063 inhaled vancomycin in September. NKTR-063 is our proprietary program that uses the same liquid aerosol platform as amikacin inhaled and is designed for adjunctive therapy of moderate to severe hospital acquired gram positive pneumonias including serious MRSA infections. The potential to decrease mortality rates and lower the development of antibiotic resistance by delivering targeted high concentrations of the drug to the site of infection offers a unique therapeutic profile. We plan to initiate a Phase 2 clinical trial of NKTR-063 in the first half of 2009.

I’m extremely proud of the progress we have made this year to expand and accelerate the development of our clinical pipelines, which I will say again, is one I consider to be one of the most robust in biotech.

Now let me turn the call over to John Nicholson, our Chief Financial Officer, to review our financials. John.

John Nicholson

Thank you, Howard, and good afternoon.

Our third quarter GAAP cash used in operations was $18.6 million. Our non-GAAP cash used in operations was $18.5 million, an improvement from $18.7 million in the second quarter and $25.1 in the first quarter. Our non-GAAP cash used in the third quarter excludes $100,000 related to workforce reductions.

At September 30, we had a cash balance of $344.5 million compared to $373.9 million at June 30. In addition to our cash used in operations during the third quarter, we had capital expenditures of $4.7 million, and we had capital lease costs and other net uses of cash of $6.1 million.

Revenue was $21.4 million in the third quarter and $61.8 million year-to-date. For the full year 2008 we expect our revenue to be approximately $90 million compared to our prior projection of $95 million. This was primarily because of that less than expected (inaudible) manufacturing requirements by UCB and less than expected some of the manufacturing requirements by Pfizer. This lower manufacturing revenue is offset by an improvement in operating expenses and efficiencies for our ongoing business.

Other than the timing of the Bayer amikacin milestone that Howard mentioned earlier and a drop in our interest earned as a result of the current credit crisis, we would have a non-GAAP cash used in operations of $72 million, which is in line with our target of $75 million.

Since we now have to receive the $10 million amikacin milestone payment by early February of 2008, our non-GAAP cash used in operations will be approximately $88 million. Let me break it down for you, the $72 million I just mentioned less than $10 million Bayer milestone that we now receive early next year and the change in the interest spread of $6 million.

Our GAAP cash used in operations for 2008 is expected to be approximately $147 million, which includes the $53 million of cash payments made for the terminated inhaled insulin program and other related items in the first and second quarters, and planned cash transactions of $6 million related to the closing of the Novartis transaction in the fourth quarter.

We expect to close the Novartis transaction on December 31 2008, and receive the $115 million cash payment. As a reminder, on the agreement Novartis will assume ownership of certain Nektar pulmonary delivery technology and manufacturing assets including capital equipment and facility lease obligations. Approximately 140 Nektar employees will join Novartis.

As Howard just stated since October 21, the date of the Novartis transaction announcement we have been successful in repurchasing $100 million of convertible debt at an average price of $0.48 on the dollar. With this repurchase of our convertible debt and the remaining cash from the Novartis transaction, we expect to end the year with approximately $375 million in cash and one third less debt. And remember that is if year-end cash projection is after we have invested more than $50 million to advance our proprietary clinical programs in 2008.

As Howard has told you in the past, the new Nektar is living within our means and doing much more with less.

With that, let me turn the call back to Howard.

Howard Robin

Thank you, John. I want to close now with a key message for our investors and analysts alike. I told you that we would chart new course and as you can clearly see we have done just that. The turnaround at Nektar is now largely complete. We have created one of the robust pipelines in biotech, dramatically improved the company’s financial strength, assembled a new management team with a solid track record, and refocused the business around our powerful polymer and conjugate chemistry development platforms.

With that, I'd like to open up the call to questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Sa'ar Yaniv from JP Morgan. Please proceed.

Jennifer Ruddock

Do you have a question?

Operator

Your line is open.

Jennifer Ruddock

Let us go to the next question please, Madge.

Operator

And your next question comes from the line of Ian Sanderson from Cowen & Company. Please proceed.

Ian Sanderson – Cowen & Company

Hi, good afternoon. Thanks for taking the questions it is Ian Sanderson. A couple of pipeline updates that I don’t think were addressed on the call. NKTR-125, any update there and then PEGylated factor 8 program with Bayer?

Howard Robin

Well, thank you. Yes, the 125 program is still in development. We strongly support it. We haven’t said yet when we will file an IND, this is for PEGylated diphenhydramine using the same basic technology platform as NKTR-118 where we keep diphenhydramine from crossing the blood brain barrier and therefore have a antihistamine without sedation. That is still in our early preclinical stage. We are doing further work on that and we haven’t said yet when we expect to file an IND. With regard to our Bayer programs, excuse me our Baxter programs, they are moving forward with Baxter. I think we’re not in a position to comment specifically on the status of those programs but at this point I can imagine that it is very likely that these programs move forward in a very expeditious way and we’re very happy to continue our collaboration with Baxter.

Ian Sanderson – Cowen & Company

And you may have given this on the call and I missed it, but was there a reason that the Phase 3 – start of Phase 3 for inhaled amikacin got shifted into early next year?

Howard Robin

Well, it actually didn’t get shifted into early next year. What I said is it will start next month, which is December. So we expect – Bayer expects to start that money – that study next month. We talked about – originally we talked about dosing the first patient in November, which is this month and now it will be the first patient will be dosed next month. I think it may be shifted 3 or 4 weeks. I think the concept the reason we even brought it up is because we get a $10 million milestone 45 days after dosing the first patient. So had we dosed the first patient on November 15th, the $10 million would hit this year. If we dosed the first patient on December 1st, the $10 million hits next year. And that is the only reason we brought it up.

Ian Sanderson – Cowen & Company

Okay, that then clears my confusion. And one last question on the balance sheet as of September 30, the $43 million of assets held for sale. Should I presume that is the pulmonary assets sold to Novartis?

Howard Robin

Yes, that is correct.

Ian Sanderson – Cowen & Company

Okay, thank you.

Howard Robin

Thanks.

Operator

And your next question comes from the line of Sa'ar Yaniv from JP Morgan. Please proceed.

Sa'ar Yaniv – JP Morgan

Hi guys would afternoon. Thank you for taking my questions. I had a couple of questions. The first one is in regards to timing for the Phase 2 data for irinotecan and PEG-naloxol.

Howard Robin

Okay, maybe I’m going to turn it over to Randall Moreadith, our Chief Development Officer, to take those specific questions.

Sa'ar Yaniv – JP Morgan

Okay, great thanks.

Randall Moreadith

Yes, we remain on track for the NKTR-118 program to release that data on the Phase 2 trial in the first half of 2009.

Sa'ar Yaniv – JP Morgan

Okay, and the 102.

Randall Moreadith

Yes, we – as you know we’re launching 3 additional studies in ovarian, breast, and cervical cancer as well as the KRAS mutant study. We anticipate the results of those trials in the fourth quarter of 2009 as well.

Sa'ar Yaniv – JP Morgan

Okay and the Phase 2a.

Randall Moreadith

Yes. The Phase 2a program is still on track. We intend to complete enrollment in that study in the fourth quarter of this year with the anticipation of publishing those results and presenting those results in early 2009.

Sa'ar Yaniv – JP Morgan

Okay, great. Also how are you going to disclose the Phase 2a data with (inaudible), do you have any idea, have you decided on that?

Howard Robin

We haven’t decided how we will present the data. That will be a discussion once we complete the enrollment in the trial.

Sa'ar Yaniv – JP Morgan

Great. Thank you so much.

Operator

And your next question comes from the line of Richard Meseri [ph] from DCM Fund [ph]. Please proceed.

Richard Meseri – DCM Fund

Hi, yes. Thank you. I just wanted to say firstly though it is truly heartening Howard to see your management team taking such a prudent and creative approach to managing its cash and its liabilities. I mean you guys have basically reduced your debt and effectively increased your net cash by 50 million bucks. I mean it is great to see a management team that has concern for all its stakeholders. My question is have you given any thought in terms of the rank order of the compounds that you have got in development. As far as partnering are there any that you have thought about more likely that you want to partner.

Howard Robin

Yes, that’s a good question. And I think I have said in prior calls and I’ve talked to investors about this publicly a number of times is that we are always – we have the luxury of having an enormous amount of clinical opportunities because our platform lends itself to improving both large and small molecules. So, we’re always making the decision what do we want to carry through to the clinic ourselves. What do you want to partner early or mid-stage? At that point at this point I would say if you ask the question where are my priorities. I think the most likely compound for partnering at this stage is NKTR-118 and NKTR-119 and the reason I say that is because there are a number of very important companies out there who find the concept of NKTR-119, which is a combination opioid with NKTR-118 to make an analgesic that doesn’t cause constipation. A very, very attractive product opportunity if you look at the opioid market and imagine having a product that gets rid of the most debilitating side effects of new sites of therapy, you can imagine there are number of pain companies who would find this very interesting. And it also is a clinical design and a clinical expense that is probably is best suited at least in a Phase 3 setting to a large pain oriented company. So while I’m not suggesting that we’re going to license it out that is if you ask me where are my first priorities in finding a partner, I would say it is NKTR-118 and NKTR-119.

Richard Meseri – DCM Fund

Got it. All right, again I appreciate it.

Howard Robin

Thanks. Thank you very much.

Operator

(Operator instructions) And your next question comes from the line of Rich Silver from Barclays and Co. Please proceed.

Rich Silver – Barclays and Co.

Thanks. Hi, Howard.

Howard Robin

Hi, Rich.

Rich Silver – Barclays and Co.

UCB Cimzia understand of course it is their product in terms of regulatory but can you give us any update on the status for RA as far as PDUFAs in both in US and also Europe?

Howard Robin

Look, unfortunately based on our contractual obligations with them, we really can’t discuss that product. You saw that we had a little bit of reduction in revenues as a result of less manufacturing requirements for Cimzia. Most of those revenues by the way are offset by a reduction in related cost of goods. So it doesn’t have that reduction in that revenue base. It didn’t have much of an impact on Nektar this year, but unfortunately Rich I am not allowed to discuss in any kind of detail the status of that program.

Rich Silver – Barclays and Co.

Does the reduction have anything to do with assumptions on the regulatory side?

Howard Robin

You know, I couldn’t tell you he even if I knew all the details behind it. I will only tell you that that reduction is not terribly relevant to Nektar. I mean, it is certainly important in that we want to be successful with a partner but in the scheme of Nektar’s broad opportunities it is only a small piece right.

Rich Silver – Barclays and Co.

Okay. And then just on, a couple of line items on contract research and SG&A and we saw this quarter those good run rates, should we see them higher or lower, just any kind of sense on a go forward basis.

Howard Robin

Well, look what we have done this year I think is very impressive. We – our operating cash burn about $72 million and I know it’ll be somewhat higher than that because of the timing on the Bayer payment but that is an issue of whether it is December 31st or January 2nd, right. But our operating cash burn of $72 million leaving out the Bayer and leaving out the interest issue is rather remarkable considering we spent over $50 million in outside clinical costs. So we have gotten down – we have gotten Nektar down to fairly low numbers in terms of how we operate our company. If you take out the clinical costs of approximately $50 million, you are talking about a remainder of about $22 million net expense to operate his company. Now that doesn’t mean that is what will happen in future years because we are moving more and more programs into Phase 2. We are moving – will be moving programs either with partners or potentially by ourselves at some point in to Phase 3. And as we build this clinical pipeline, which I think is rather impressive there will be more costs incurred. So I can’t predict today. We’re not going to give out guidance today on what next year’s cash burn will look like but rest assured we’re very, very cautious on how we spend our money. We won’t be kids in a candy store and walk on every possible opportunity because that burns through cash at too rapid a rate. We have lots of opportunities. It is a true problem of luxury to say to be able to say what things we’re going to work on and here is five things we’re just not going to work on at the moment. And that is all driven by how we want to spend our cash. So I think we have done a great job in really being quiet injudicious on how we use our cash. In next year’s cash burn rate, I would project will be reasonable and something that everybody will clearly understand but also understand that we are moving more and more programs to the clinic and that does take money.

Rich Silver – Barclays and Co.

Okay, thank you.

Operator

And your next question is a follow up question from Ian Sanderson from Cowen & Company. Please proceed.

Ian Sanderson – Cowen & Company

Thanks for taking the follow ups and these may be unanswerable. But just to follow up Howard on the next year’s cash burn should we assume that it should be greater than the burn this year?

Howard Robin

Sorry go ahead.

Ian Sanderson – Cowen & Company

And the second question is probably also unanswerable, but just looking forward to next week, should we anticipate new pipeline programs being presented or is it mostly an update on the existing pipelines.

Howard Robin

So I think. Okay, let me answer the latter question first. I think next week at R&D Day you will hear – you will hear about our protease inhibitor NKTR-140, which I think we’re very excited about. You are going to see some early data and early discussion on that molecule. So I think that will be fun to talk about. With regard to your first question, look we haven’t finalized our budgets for next year. We’re looking at all of our critical opportunities. We’re looking at a number of things. I think it is important to point out that while I can’t give you the kind of guidance today. I think if you look at a net burn of $70 million, $75 million, $80 million, I mean $60 million you should expect that we will be in that range somewhere. And you know, we’re going to move towards a number that allows us to optimize our opportunities in the clinic, our opportunities in developing – in our research efforts, new and novel methods of applying our polymer conjugates, and because we have more opportunities than anyone could possibly handle and again a true problem of luxury. I think we would be very, very careful in how much we spend next year. So I think if you look at next Nektar’s spending this year and Nektar’s spending next year it is probably going to be just about the same although I’m not going to provide guidance of this point. One thing you should remember is when I talk about that number for this year, we talk about that number for next year that doesn’t include any opportunities we have for partnering, right. So that is –anytime we – if we do any partner deals this year or next year that would only bring that external or that net burn rate number down.

Ian Sanderson – Cowen & Company

Okay, and also does include the, presumably the capital savings from the divestiture of the inhalation business?

Howard Robin

Yes as I said there is probably about a $30 million a year cash burn that we’ve eliminated by divesting a large portion of these pulmonary assets but of course I would also expect to see our clinical programs grow, which is a good thing and that money may very well get used by clinical operations. And I think that is the great opportunity to reinvest. I mean the ability to take spending away from an area that was producing modest results and moving into an area where we can put many, many programs into the pipeline I think it is something very positive for investors.

Ian Sanderson – Cowen & Company

Okay, thank you very much.

Operator

And you have no questions at this time sir. And I would now like to turn the call over to Howard Robin for closing remarks.

Howard Robin

Well, thank you for your questions. Thank you everyone for joining us today. And I look forward to seeing hopefully all of you at next week on November 12th, at our R&D Day in New York City. Thanks very much.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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