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A few weeks into 2012, it looks like investors are much more eager to take on some risk in their portfolios and biotechs are coming back into favor. With that in mind, it makes sense to check out some of the promising biotechs that languished a bit in 2011. Although Nektar Therapeutics (NASDAQ: NKTR) hasn't had much bad news in a while, in the world of biotech "no news" can be almost just as bad and it seems that the market has perhaps forgotten this name a bit.

Changing Course

Nektar has long been in the business of partnering with larger pharmaceutical companies and licensing its proprietary PEGylation technology. PEGylation basically introduces polyethylene glycol into a compound and alters its performance in the body - most notably by slowing the process of clearing in from the body. Companies including Amgen (NASDAQ: AMGN), Pfizer (NYSE: PFE), and Merck (NYSE: MRK) have licensed this technology for major drugs like Neulasta and PEG-INTRON, but Nektar gets only relatively small royalties for this technology.

Realizing the limits of how far technology licenses can take the company, management has been working on a pipeline for proprietary products for several years now and two of them - NKTR-102 and NKTR-181 are particularly worth noticing.

Two Interesting Proprietary (For Now) Programs

NKTR-102 is a modified version of irinotecan - a cancer drug that Pfizer marketed as Camptosar (in the unmodified form). A toposomerase 1 inhibitor-polymer conjugate, NKTR-102 has shown encouraging signs of efficacy in ovarian, breast, and colorectal cancer. A phase 3 study in breast cancer (BEACON) is already underway and a phase 3 study in ovarian cancer could begin in 2012 as well. If BEACON can reach its goal of 30% (or better) improvement in overall survival, NKTR-102 could definitely be a $1 billion/year drug.

So far, NKTR-102 seems notably efficacious in hard-to-treat breast cancers that have not sufficiently responded to prior treatments. That said, its efficacy in colorectal cancer is less certain. Management had hoped to partner this drug back in 2010, but has not yet found a deal to its liking. With Phase 2 data coming from an ovarian cancer trial (presumably Q1 of 2012), this data will likely go a long way toward determining whether Nektar can get a good partnership for this drug, or whether the company will have to contemplate dilutive financing.

Further behind is NKTR-181 - a long-acting drug for pain. Early studies have been encouraging, suggesting a half-life of about 12 hours. That's well ahead of the typical 3-4 hour half-life of oxycodone and the 8-hour half-life of long-acting formulations. Not only might NKTR-181 provide a longer-acting solution for pain, but the design of the drug is such that it should be difficult to abuse (a major concern with the FDA).

Nektar should begin phase 2 studies this year and good results could very well lead to partnership discussions. Pfizer has been very active over the years in partnering on pain drugs, and others like Johnson & Johnson (NYSE: JNJ) and Teva (NASDAQ: TEVA) could be logical partners as well.

More Doubt With Two Partnered Programs

The outlook for Nektar's two most advanced partnered programs is not quite as appealing. AstraZeneca (NYSE: AZN) is developing NKTR-118 (PEG-naloxol) for opioid-induced constipation and has the drug in a Phase 3 study called KODIAC. Unfortunately, this has become very crowded real estate, with other companies like Salix (NASDAQ: SLXP), Theravance (NASDAQ: THRX), Cubist (NASDAQ: CBST), and Alkermes (NASDAQ: ALKS) all developing drugs with this targeted indication. Unless the data from KODIAC is incredible (and early trial results don't suggest that), it may well be the case that competition limits the sales potential of this drug.

Bayer (OTCPK:BAYRY) is Nektar's partner on NKTR-061, inhaled amikacin for gram-negative pneumonia. Early results have been favorable and Bayer is expected to start a Phase 3 study in 2012, but this is a drug with relatively limited end-market potential.

A Pipeline Targeted At Bringing The Pain Relief

Beyond these high-profile programs, Nektar has several additional drugs in early clinical or preclinical studies. Three of these are for pain, with the the fourth targeted at solid tumors. While pain is very much a worthwhile clinical target, it will be a while before these drugs really factor into the valuation of the company.

Data And A Good Partner Could Lift The Stock

Right now, I see fair value on Nektar shares of around $8 a share - undervalued, but not dramatically so and arguably not undervalued enough to meet a margin of safety requirement. Investors should also note that the company has a convertible bond due in 2012 that is equal to about half of its cash resources. That obligation squeezes the company's liquidity today, and it is likely that management is weighing multiple options like a basic refinancing or monetizing other assets for repayment.

That said, that valuation could rise on some 2012 developments. Solid data on NKTR-102 in ovarian cancer would certainly boost the end-market sales estimate and increase the chance of a favorable partnership. It may be ambitious to hope that partnering NKTR-181 (pain) would be a 2012 event, but doing so will improve the company's liquidity projection and add some external validation to the nascent pain franchise.

All in all, Nektar shares are well worth a look. With some good news in 2012, fair value on Nektar shares could easily move into the low teens and offer a pretty decent return from today's prices.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Nektar Therapeutics: Often Forgotten, But Worth A Look