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Executives

Jennifer Ruddock - Senior Director, IR

Howard Robin - President and CEO

John Nicholson - SVP and CFO

Lorianne Masuoka - VP, Clinical Development

Analysts

Cory Kasimov - J.P. Morgan

Rich Silver - Barclays Capital

Ian Sanderson - Cowen and Company

Robert Hazlett - BMO Capital Markets

Nektar Therapeutics (NKTR) Q4 2008 Earnings Call March 2, 2009 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the Nektar Therapeutics Conference Call. My name is Stacy, and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

Now, I would like to turn the call over to Ms. Jennifer Ruddock, Senior Director of Investor Relations for Nektar.

Jennifer Ruddock

Thank you, Stacy. Good afternoon everyone and thank you for joining us.

With us today is our President and CEO, Howard Robin; our Chief Financial Officer, John Nicholson; and our Vice President of Clinical Development, Dr. Lorianne Masuoka.

Before we get started, please note that the following presentation contains forward-looking statements that reflect our current views regarding the clinical status, clinical results and clinical plans for our proprietary products in various stages of development. The value and potential of our technology platform, our financial guidance for 2009 and other future events relating to the company. These forward-looking statements involve risks and uncertainties that are detailed in Nektar's reports and other filings with the SEC, including our Form 10-Q filed with the SEC on November 7, 2008 and a report on Form 8-K filed today with the SEC.

Actual results 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 webcast 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 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 am pleased to hand the call over to our President and CEO, Howard Robin. Howard?

Howard Robin

Thank you, Jennifer, and thanks to everyone for joining us. 2007 and 2008 were transformational years for Nektar. We set a new path forward for the company that focuses squarely on developing innovative drugs with our PEGylation and advanced polymer conjugation technology. The impressive Phase II results for NKTR-118 that we announced this morning, are a major milestone in the evolution of Nektar into a successful drug development company.

Now on to our exciting news. On the basis of overwhelming evidence of efficacy at two different dose levels we are terminating our Phase II NKTR-118 study. The results from this trail were highly statistically significant at the 25 milligram dose and the 50 milligram dose were the primary end points and a dose dependant increase is spontaneous bowel movements or SBMs after the first week of treatment observed with once a daily dose of NKTR-118 as compared to placebo. The p-value or the primary end point was less than 0.01 for all comparisons. Most importantly there was no reversal of analgesia and no increase in daily opioid use for the both the 25 milligram and 50 milligram dose cohorts.

Now I would like to turn the call over to Dr. Lorianne Masuoka, our VP of Clinical Development. And she will take you through the data in more detail.

Lorianne Masuoka

Thank you, Howard. We are extremely pleased with the results from our Phase II study of NKTR-118, as you may know opioid-induced constipation has a major negative impact on the health and quality of life of patients with moderate-to-severe chronic pain. The patients in our Phase II study were severely constipated with an average of just over one bowel movement per week and we are not adequately treated with currently available remedies which is what led them to enroll in our clinical trials.

The patients taking NKTR-118 in our trial experienced a marked improvement in bowel function as measured by an average increase of three to four spontaneous bowel movements per week during the first week of treatment. This degree of improvement was maintained throughout the 28-day treatment period. More specifically, patients in the 25 milligram dose cohort of NKTR-118 had an increase in spontaneous bowel movements from an average of 1.5 at base line to 5.1 at the end of the first week.

A somewhat larger treatment effect was noted for patients in the 50 milligram dose cohort of NKTR-118 who had an increase in bowel movements from an average of 1.6 at base line to 5.7 at the end of the first week. I just told you how patients taking NKTR-118 who are severely constipated have an improvement in bowel function to nearly normal after only one week of treatment.

Now let me tell you, how much better the NKTR-118 patients faired than the placebo patients. Patients receiving the 25 milligram and the 50 milligram dose of NKTR-118 had an increase of approximately 4 bowel movements per week as compared to the placebo group which had an increase of less than two bowel movement per week.

These results were highly statistically significant with the p-value less than 0.01 for both the 25 and 50 milligram dose group starting at the first week of treatment.

The results were sustained for the 28 day period overall with a P-value less than 0.01 for both dosing cohorts.

NKTR-118 did not result in an increase in pain and was not associated with an increase in opioids used at any time during the 28 day treatment period at any dose.

NKTR-118 was also not associated with opioid withdrawal as assessed by change in the clinical opioids withdrawal scale. The most frequent side effects observed in this study that led to discontinuation of medication were diarrhea, nausea and abdominal cramping. These GI side effects were most frequent in the 50 milligram dose cohort, occurred rarely in the 25 milligram dose group and are expected for a drug with this mechanism of action.

The lead investigator for our study is Dr. Lynn Webster who is the Medical Director of Lifetree Clinical Research. Dr. Webster is a leading expert in team management and is on the Boards of the American Academy of Pain Medicine and the National Pain foundation. He has evaluated many compounds in the field of pain management including drugs to treat OIC.

In his experience NKTR-118 was extremely effective in treating patients in the Phase II study who were on wide range of opioid doses spending to 30 to 1000 morphine equivalent units.

Up to 90% of pain patients develop OIC and other symptoms of opioid induced bowel dysfunction. Constipation can be extremely severe and many patients discontinued our opioid therapy as a result which is a challenge for clinicians treating these patients.

NKTR-118 targets the underlying mechanism of OIC without reversal of analgesia. This oral once-daily investigational drug had represented significant advance for both patients and physicians in the treatment of OIC.

The final result from our NKTR-118 Phase II study are being submitted for presentations at a appropriate scientific forums.

With that I would like to turn the call back to Howard.

Howard Robin

Thank you, Lorianne. As Dr. Masuoka stated the positive results for NKTR-118 is very promising news for patients taking chronic opioid therapy who are suffering from the debilitating conditions of opioids induced constipation. Based on our positive experience with NKTR-118 we have initiated the development of a new important clinical candidate NKTR-119.

NKTR-119 is a combination of long acting opioid with NKTR-118.

NKTR-119 represents an important new product concept, a novel analgesic that does not cause the serious GI side effects seen with opioids. We anticipate starting a Phase II proof of concept study with NKTR-119 in the second half of this year.

We have significant partnering opportunities for both NKTR-118 and NKTR-119. We estimate the potential market for NKTR-118 to exceed $1 billion and NKTR-119 to be substantially larger than that.

We are in discussions with a number of pharmaceutical companies and there is significant partner interest. The data we announced today is critically important to Nektar and our shareholders for another reason.

The Phase II results for NKTR-118 further validate the use of NKTR's advance polymer conjugate technology platform to create innovative small molecule drug. Our novel and proprietary platform can do three things. First, it significantly improves the pharmacological activity of small molecule drugs.

Second, it allows the creation of novel orally bioavailable therapeutic. And third, it enables preferential distribution of a drug within the body. This technology breakthrough is the result of our pioneering science in the field of polymer conjugation chemistry and PEGylation.

Nektar's platform has the potential to create new drugs with highly desirable pharmacologic properties that can significantly improve the treatment paradigm in areas of high unmet medical needs.

Now, I would like to talk about two other product candidates in the clinic, NKTR-102, PEGylated irinotecan and NKTR-105, PEGylated docetaxel. Both of these represent large market opportunities for NKTR.

NKTR-102 is the first PEGylated oncolytic to show promising therapeutic activity in humans. In January, we announced that dosing had begun in our Phase II trial for this key compound in platinum-resistant ovarian cancer.

Since then, we have also dosed our first patient in the metastatic breast cancer study and we have dosed patients in the randomized Phase IIb studies of NKTR-102 in second line colorectal cancer.

Regulatory and IRB approval have also been obtained for the Phase II studies of single agent NKTR-102 in metastatic cervical cancer. As we have said in our presentation at J.P. Morgan in early January, we expect that preliminary data from the breast and ovarian cancer studies will be available by the end of this year.

The randomized Phase IIb studies to valuate NKTR-102 monotherapy versus irinotecan in second line colorectal cancer patients with the KRAS gene mutation will enroll approximately 174 patients. This study is a study head-to-head comparison of NKTR-102 versus irinotecan with a primary endpoint of progression free survival. Data is expected in Q1, Q2 of next year.

We are excited about the potential of NKTR-102 in these multiple tumor settings. We presented positive Phase I data on NKTR-102 at the 28th year award EORTC triple meeting in Geneva in October, 2008. The data shows that our pro-drug polymer conjugate approach enabled us to optimize the PK profile of the active metabolite of NKTR-102 relative to irinotecan.

The half life of the active metabolite of NKTR-102 is approximately 50 days as opposed to only 47 hours with irinotecan. This results in sustained exposure of the tumor to NKTR-102. In our Phase I study a total of 14 patients out of 76 had evidence of significant anti-tumor activity with NKTR-102.

The Phase IIa study for NKTR-102 plus the tuximab is ongoing. To date we have about 4 patients with significant anti-tumor activity out of 12 patients. These responses were observed within just the first one or two course of the treatment. Our results thus far for NKTR-102 make us extremely encouraged about the expanded Phase II development program underway for the tumor therapeutic.

Now let's discuss NKTR-105 a PEGylated form of docetaxel. We recently dosed our first cohort of patients in the NKTR-105 Phase I study. This study will evaluate the drug in approximately 30 patients with refractory solid tumors.

As with NKTR-102, our technology platform can enable us substantially improved pharmacodynamic profile that potentially enhances therapeutic efficacy. We will be presenting additional preclinical data at the American Association of Cancer Meeting here in Colorado in April and we expect to have Phase I data for NKTR-105 by the end of the year.

Now let's discuss some of our preclinical programs. The NKTR-118 clinical results reinforce the potential of a number of product opportunities, including two problems for which we are already conducting preclinical studies, NKTR-140, our protease inhibitor candidate and NKTR-171 for the treatment of pain.

These products represent the use of our uniquely engineered polymers conjugated in stable linkages to small molecule drug to improve physical, chemical and pharmacological properties, modulate metabolism enable preferential distribution and increase oral bioavailability.

I want to talk for a moment about NKTR-140, our novel protease inhibitor candidates to treat HIV, and the next investigational oral drug in our pipeline. Using a similar polymer conjugation approach that we used in NKTR-118, we have desigedn NKTR-140 to avoid rapid and extensive metabolism. In addition, we believe that using our technology platform could result an increased potency to enhance binding affinity to the protease enzyme.

The products could eliminate the RITONAVIR boosting needed with current protease inhibitor therapy, which can have a serious side effects and result in drug-to-drug interactions. Use of NKTR-140 without the need for RITONAVIR may also reduce by bio resistance.

In our preclinical data in human hepatocytes, we saw substantially reduced metabolism in NKTR-140 as compared to a leading protease inhibitors that was rapidly metabolized. We also saw increased potency of NKTR-140 in HIV infected cells vitro and we are extremely encouraged about the potential for this drug. Preclinical studies are underway for NKTR-140, and we expect to file and IND by the end of this year.

NKTR-171 is another promising product candidate using the same technology approach as NKTR-118 in the area of neuropathic pain. We have observed promising preclinical results in, both in-vitro and in-vivo models. We are currently evaluating NKTR-171 and more advance model of pain and we will share more on this important compound as it progresses through development.

Now, I would like to turn the call over John Nicholson, who will provide financial guidance for 2009.

John Nicholson

Thank you, Howard and good afternoon. 2008 was a year of strong financial and operating performance for Nektar. We invested $82 million in clinical trails, we retired $100 million of convertible debt at a significant discount and we ended the year with $379 in cash.

Revenue for 2009 is expected to be between $65 and $75 million. This projection includes the anticipated exercise of a $31 million existing license option extension in December 2009. The majority of our revenue in 2009 is expected to be product sales and royalties. We are reiterating our 2009 guidance of non-GAAP cash using operations of $80 million.

This includes an investment of $68 million in a proprietary clinical program with $4 million in transaction cost related to Novartis transaction and $1 million of other payments, our GAAP cash use in operation is expected to be $85 million. Capital expenditures are expected to be approximately $20 million in 2009. We reiterate our prior guidance that we expect to end to end the year with $275 million in cash. This does not include cash from any potential new partnership.

With that let me turn the call back to Howard.

Howard Robin

Thank you, John. 2008 was truly a transformational year for Nektar. We are excited about the opportunities that lie ahead for our clinical pipeline in 2009 and beyond. Our ability to use our advanced Polymer Conjugate Technology and translated into opportunities with small molecules, antibody fragments, Hepatitis and nucleic acid, this is what makes Nektar truly unique and tremendously exciting.

I am exceptionally proud of our employees and the hard work that went in to building our pipeline and creating the company we are today. With one of the most robust pipelines in the biotech industry, a streamlined and effective organization, a strong cash position and a dominant intellectual property estate we are well positioned for success. I look forward to keeping you updated on the progress throughout the year.

With that I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from line of Cory Kasimov with J.P. Morgan. Please proceed.

Cory Kasimov - J.P. Morgan

Great, thanks. Good afternoon guys, thank you for taking the question. Few questions revolving around NKTR-118, first of all what triggered the early look at the data, were their built-in in term analysis for the study?

Howard Robin

Cory, I am going to let Lorianne take you through this very specific question. Lorianne?

Lorianne Masuoka

Thank you, Cory. Built into this trial was an evaluation by a dose escalation committee after the end of each cohort and at the end of the third cohort, dose escalation committee recommended that we not proceed beyond the 50 milligram dose and that is what triggered this analysis.

Cory Kasimov - J.P. Morgan

Okay, and then who comprises this independent committee or is this internal members of the clinical development team?

Lorianne Masuoka

This is an external committee with one member, who is not actively involved in the conduct of the study within Nektar so it is largely an independent group.

Cory Kasimov - J.P. Morgan

Okay, great. And then can you provide us with any other incremental data on the studies. I know you probably are saving for presentations or a scientific meet, but for example can you share with us the time to first bowel movement, % of that achieved that was in twenty four hours?

Lorianne Masuoka

We will be presenting that data at an upcoming scientific meeting and in order to preserve the integrity of those data for that meeting we need to not discuss any further details at this time.

Cory Kasimov - J.P. Morgan

Okay, safe to say that you are pleased with what you saw to the standpoint of the study was stopped early like this?

Lorianne Masuoka

Very safe to say.

Cory Kasimov - J.P. Morgan

Okay. And then lastly would you be willing to start a Phase III study without a partner or do you plan on partnering in [2009]?

Howard Robin

I am sorry, go ahead Cory.

Cory Kasimov - J.P. Morgan

It's going to stay and let down, just kind of bear the burden of the cost for Phase III development program?

Howard Robin

Well look, as I said earlier this drug and these results have caused great interest in potential partners and we have been speaking for a while to a number of companies who were awaiting the data. So, I think it’s safe to say that we are very much planning to find a collaborator for this program. Now that said, I don’t want you think of this as an out-license, this would be a program where Nektar retains significant ownership of this drug. So, you can think of it as profits worth, you can think of it as high royalty rates, however, you would like to calculate that, I think it would be beneficial to have a partner. I think this is a very large market that needs a fairly sizeable sales force and I think the right partner would do very well for us in this area. I think we will have those discussions and I would like to have a partnership completed this year.

Cory Kasimov - J.P. Morgan

Okay, so think along the lines of amikacin.

Howard Robin

I think that’s a good model for the way I would like to do deals.

Cory Kasimov - J.P. Morgan

Okay, great. Thanks for taking the questions.

Operator

Your next question comes from the line of Rich Silver with Barclays Capital. Please proceed.

Rich Silver - Barclays Capital

Yes, good afternoon and congratulations on the data.

Howard Robin

Thank you, Rich.

Rich Silver - Barclays Capital

Yes, just trying to get a better sense on the '09 guidance, considering the R&D and SG&A numbers in the fourth quarter, can you just comment on those numbers relative to the kind of spend we should be looking for going forward?

Howard Robin

Rich, I guess to answer to your question basically our R&D spend in last year was about $150 million and our R&D spend for this year will probably be in the $125 million to $135 million area. And from a G&A perspective this year were expecting in the line to somewhere in the neighborhood of $50 million to $55 million range.

Rich Silver - Barclays Capital

Okay. On the revenue guidance, what was the proportion of revenues between contract research product sales loyalties?

Howard Robin

You are talking about for 2008 or 2009?

Rich Silver - Barclays Capital

Sorry that’s 2009 guidance?

Howard Robin

Yes, basically in 2009 it is very little there in contract research most of it is product sales and loyalties.

Rich Silver - Barclays Capital

Okay. And any milestones?

Howard Robin

At this point in time approximately somewhere in the neighborhood of around $10 million of milestones.

Rich Silver - Barclays Capital

Okay. All right.

Howard Robin

Remember, Rich, I mean the paradigm for Nektar is very different now. We are not a delivery service provider; we are not a contract manufacturer, we are a company that is developing therapeutics. And to the extent that we work with partners, there will always be some level of partnership revenue, but for the most part the concept of Nektar receiving revenues to provide services is no longer really within our strategic model.

Rich Silver - Barclays Capital

Okay. Thanks very much.

Operator

Your next question comes from line of Ian Sanderson with Cowen & Company. Please proceed.

Ian Sanderson - Cowen and Company

Hi, good afternoon, and also congratulations on the data. On the partnering front, or I guess it would be in collaboration on NKTR-118, would you necessarily do a collaboration deal on the separate for 119 or would you most likely put these together?

Howard Robin

Well, I think that’s a great question. I think it is certainly possible that they can be done separately, but I would imagine that any potentially partner would be interested in both of them since it becomes a bit of challenge to separate them in terms of development and even in terms of marketing. That said, we are certainly willing to look at those types of transactions, but my guess is that it becomes a NKTR-118, 119 transaction and you can imagine, that has significant value for Nektar in both the short term effect, in terms of cash up front as well as the back side, which would have a substantial royalty associated with it.

Ian Sanderson - Cowen and Company

Okay. And then, you noted that NKTR-140 is the next oral drug candidate or is something happen with NKTR-125?

Howard Robin

Well, NKTR-125 is moving along in a preclinical sense. We have some more homework to do on it, and therefore I have not announced when we will be filing an IND for NKTR-125, it is still a very exciting possibility. At this point, we have seen such impressive results, at least preclinically with NKTR-140, and we are treating, we're dealing with a significant and important patient population, HIV that we expect to have that IND filed this year.

Ian Sanderson - Cowen and Company

Okay. And then, back on 118, I know the safety committees stopped at it 50 milligram dose, because they felt they didn't need to go higher, but have you ever looked at what the dose limiting tox might be for 118?

Howard Robin

Lorianne, would you like to follow-up on that?

Lorianne Masuoka

Sure. We don't have any form of dose limiting toxicity per se in this trial. What we did see was some of the patients had some abdominal complaint, which were some what more frequent in the 50 milligram group and very rare in the 25 milligram group. So we thought that we had a combination of a dose that was not only extremely active, but superbly well tolerated and this provides us a very good dose going forward into Phase III.

Ian Sanderson - Cowen and Company

Okay, thank you.

Operator

(Operator Instructions).

Your next question comes from line of Robert Hazlett with BMO Capital Markets. Please proceed.

Robert Hazlett - BMO Capital Markets

Thanks for taking the question. Maybe you have touched on this and maybe I missed it. With 118, 119 does PEGylation provide these resistant characteristics, or is that something that that might potentially be achieved out over the long haul, and I have a follow-up question 140 after that?

Howard Robin

Well, that's not the purpose of NKTR-118 or 119. I mean the purpose of NKTR, one, we really haven't explored that and that isn't really where we see the value of its drug, I mean the value of this drug is of course to treat the millions of patients who are taking clinic opioid therapy and have significant problem with their bowel function. In NKTR-119 is of course an opioid therapy itself that would not cause constipation, so I think those markets are very impressive, I think we see the market for both of these drugs well exceeding $1 billion annually.

I'll let Lorianne comment further regarding the potential for substance abuse.

Lorianne Masuoka

So, I think that the combination of NKTR-118 with an opioid would make it inherently unattractive for those who intend to abuse this product, because of course there is some peripheral reversal of effect and the method by which the drug abusing population uses these product would probably render it fairly unattractive with that population. So although that wasn't our specific intent, it doesn't appear to be a product that would have a significant issue with the abuse potential.

Robert Hazlett - BMO Capital Markets

Okay, thank you. On 140, the question is that when will we be able to find or which PI you are using, and I guess just any potential data presentation, I know the idea is coming up later this year, but I really want to do is just explore which PI and the data that you generated to date?

Howard Robin

Well, we haven't stated publicly which protease inhibitor we will be using in this formulation in this novel therapeutic. We will do it later in the year. And certainly, we will be making formal presentations to show our data and our selection choice. And as I said, we will have an IND filed by the end of the year. So we haven't stated it yet, but we will, and I don't have a specific timeframe for that yet.

Robert Hazlett - BMO Capital Markets

Okay. Thank you.

Operator

Ladies and gentlemen, we thank you for your participation in today conference. This does conclude your presentation. You may now disconnect and have a great day.

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