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Nektar Therapeutics (NASDAQ:NKTR)

Q4 2007 Earnings Call

February 27, 2008 5:00 pm ET

Executives

Howard Robin - President and CEO

John Nicholson - CFO

Tim Warner - SVP of Investor Relations

Analysts

Elizabeth Berntein - Banc of America

Cory Kasimov - JPMorgan

Ian Sanderson - Cowen & Co

Jim Reddoch - FBR.

Operator

Thank you for joining Nektar Therapeutics fourth quarter and year end 2007 financial results conference call. (Operators Instructions)

I would now like to turn the presentation over to your host for today's call Mr. Tim Warner, Nektar's Senior Vice President of Investor Relations. Please proceed sir.

Tim Warner

Good afternoon, and thank you all for joining us for Nektar's fourth quarter and 2007 year end financial results call today. Before we get started today, please note 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, future potential revenue in our partnered programs, the clinical prospects of our proprietary and partnered product candidate, the future potential of inhaled insulin programs, our financial guidance for 2008, corporate objectives for 2008, and other future events related to the company. These forward-looking statements involve uncertainties and other risks detailed in Nektar's reports and other filing with the SEC, including our most recent quarterly report in Form 10-Q and our annual report on Form 10-K.

Actual events could differ materially from the forward-looking statements. We assume no obligation to update 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, www.nektar.com.

In the event that any non-GAAP financial measures discussed on this conference call that is not reconciled to a GAAP financial measure, related information will be made available on the investor relations page in our website as well as soon as practical after the conclusion of this call.

A number of the company's executives have joined with us today including our Chief Financial Officer, John Nicholson, but now I'm pleased to introduce the President and CEO of Nektar Therapeutics, Howard Robin.

Howard Robin

Thank you, Tim. Good afternoon everyone. When I joined Nektar just over a year ago, I spoke to shareholders and employees about a new vision for the future of our company. I spoke of Nektar's power to build tremendous additional value by transforming to a focused, driven company with an impressive and growing proprietary pipeline. We had a very solid foundation to build on. Our PEGylation and Pulmonary Technologies are world class.

Every PEGylated therapeutic approved in the ten last years was enabled by Nektar's technology and many of the most innovative inhaled therapeutics and development are based on Nektar's Pulmonary technology. With these technologies we have created a partnered pipeline revenue stream of potentially more than $400 million by the end of 2012. This pipeline includes PEGylation drug development partners like Roche for Mircera, UCB for Cimzia, Affymax and Takeda for Hematide, and on the pulmonary side, it includes Bayer for both NKTR-061 inhaled amikacin, and inhaled Cipro and Novartis for inhaled tobramycin.

Now you can make your own assessment of the regulatory and market assumptions regarding these and other products in our partnered pipeline. This is not guidance. My point is this. The depth and breadth of this partnered program, partnered pipeline is unparalled in our industry. And the hundreds of millions of dollars of potential revenue of which a significant portion will be royalty and margin is an important and growing source of cash for Nektar.

Clearly Nektar has a proven record as a great partner and enabler of blockbuster drugs. In 2007 we entered in to two partnerships with Bayer for NKTR-061 and Baxter for PEGylated Factor IX, two important new collaborations with the best economics, Nektar has ever achieved. Still our company is much more than the sum total of our partnerships.

In 2007, we advanced our proprietary drug development pipeline providing us with the opportunity to recognize the full value of our technology platforms going forward. For the first time in the company's history, we have two proprietary products in Phase II clinical trial, Nektar-102 PEGylated irinotecan for colorectal cancer and Nektar-118 oral PEGylated naloxol for opioid-induced bowel dysfunction. These small molecule PEG programs are on track, and we continue to receive encouraging and enthusiastic participation from investigators and key opinion leaders.

In 2008, we will continue to advance these trials, and we will expand the development program for Nektar-102 with at least two new Phase II trials in solid tumors. Potential indications include ovarian, cervical and lung cancer. We continue to demonstrate the importance and advancement of our science and will be presenting three pre-clinical posters for Nektar-102 in April at the American Association of Cancer Research meeting in San Diego, as well we have submitted our Phase I clinical data on Nektar-102 to be published at ASCO in Chicago at end of May.

For NKTR-118 we have submitted data from Phase I multi-dose trial for publication at the American Pain Society Meeting in Florida in mid-May. Our pre-clinical and Phase I research for small molecule PEG oncolytics will continue in 2008, we plan to file an IND for a very significant product candidate, Nektar-105 PEGylated docetaxel before the end of the year.

With current taxane sales of more than $3 billion and the broad use of docetaxel to treat a number of tumor types, this represents a significant opportunity. Consistent with what we have learned from our work with PEG-irinotecan, we hope to demonstrate that PEG-docetaxel will have an improved pharmacokinetic profile, which will result in superior efficacy and more tolerable safety profile compared to docetaxel.

We are proud of the progress we made this year in our PEGylated small molecule research. We continue to advance this technology in other clinical applications. We have numerous pre-clinical programs in areas of blood brain barrier exclusion, the avoidance of first-pass metabolism and of course the improvement of oncolytics.

We are making important progress in our pulmonary business as well. Our pulmonary drug development partnerships are advancing. Novartis' Phase III program for inhaled tobramycin is on track and is expected to be filed next year.

Bayer recently announced that they anticipate the inhale Cipro Phase III studies to begin this year. Our collaboration with Bayer on NKTR-061, is progressing as planned. Bayer expects to initiate the Phase III program this year and we have submitted our Phase II clinical data on NKTR-061 for presentation at the American Thoracic Society annual meeting in Toronto this May.

Briefly, I want to address our ongoing effort to partner our inhaled insulin therapeutics. Analysts and investors tell me that they do not forecast any value in their models for Exubera and indeed our guidance for 2008, does not forecast any contribution from our inhaled insulin program.

Given the high level of interest from a number of potential partners, we are maintaining the technical capability to allow us to partner our inhaled insulin products. Discussions are continuing and we intent to enter into a partnership in the second quarter of this year. In the absence of a partnership, we will invest any further money in Exubera. However, and most importantly, we still own the dominant and highly valuable inhaled insulin patent.

We're excited about our existing pulmonary opportunities, including our partnerships with Bayer and Novartis, and this year we will drive the pulmonary business to expand the pipeline and introduce new programs that further leverage our platform and expertise. We are committed to building a high value pipeline and we will have new pulmonary programs.

To that end, earlier this month we created a new pulmonary research team that is charged with introducing new programs that capitalize on our technology and capabilities including inhaled anti-effective candidates and innovative therapeutics to treat lung disease.

Today, I'm happy to announce that we expect to file an IND this year for the first of these programs, Nektar-063, inhaled vancomycin. We believe that a specially formulated inhaled version of this antibiotic drug using our proprietary liquid delivery system has the potential to be an important therapeutic to fight difficult to treat gram positive pneumonias.

As I'm sure many of you are aware, antibiotic resistance is growing, in particular, the rise of MRSA infections is frankly alarming. Nektar-063 has the potential to help address this public health crisis. In addition to the creation of a new research team, earlier this month we announced that we significantly restructured our pulmonary organization by consolidating manufacturing, operations, research and pharmaceutical sciences into one unit under our head of the pulmonary business. This move allows us to achieve immediate efficiencies, as well as improve the overall productivity and alignment of our organization.

I am very pleased with these steps and believe that we are now properly structured to continue delivering on our current program as well as introducing new high value product candidates. I look forward to talking more about our pulmonary opportunities in the future.

I'd now like to turn the call over to our CFO, John Nicholson who will discuss our 2007 financials and projections for 2008.

John Nicholson

Thanks, Howard. And good afternoon everyone. We are extremely pleased with our financial performance in 2007.

For the first time in Nektar's history we had positive cash flow from operation. Cash flow from operations was $146.3 million in 2007. When you exclude the $135 million payment from Pfizer and restructuring cost of $7.8 million, we still achieve positive cash flow of $19.1 million.

As Howard said we have successfully transformed Nektar into a drug development company. We reorganized the company from 1100 to 500 physicians. If we had retained these physicians we would have incurred additional expenses of more than $100 million annually. The right-sizing now aligns the organization to fulfill our strategy to advance and build up a proprietary drug pipeline, as well as support our numerous partnerships and collaboration.

Our cash at December 31, was $482 million compared to $467 million at the end of 2006. Importantly, during 2007 we paid down $103 million of convertible debt.

In 2008, we expects our PEG and Pulmonary businesses to generate approximately $95 million in revenue. Excluding 2007 revenue from Exubera and the revenue from Ireland subsidiary that was spun off, this represents substantial growth of 12% compared to 2007.

We will continue to maintain our financial discipline as we invest in the advancement of our proprietary drug pipeline. For 2008, in our proprietary programs, we will invest $50 million to $65 million in four, Phase II and two, new Phase I clinical trial.

Even after this significant investment in clinical program, something Nektar has never invested in before, our non GAAP operating cash burn will be between $50 million to $75 million. This clearly demonstrates that we have streamlined our organization and reduced unnecessary spending, enabling us to make significant investment in the clinical development of our proprietary pipeline.

Additionally in 2008, we expect to pay approximately $32 million in termination payment to Exubera contract manufacturers, $8 million in contract manufacturing and accounts payable, $7 million in restructuring cost and approximately $8 million to maintain our inhaled insulin capacity for a future partner. With the addition of these specific items, our GAAP cash used in operation is expected to be between $105 million and $130 million in 2008.

It is important to remember that our $50 million to $75 million target of non-GAAP operating cash burn does not include any potential proceeds from new partnerships in pulmonary, PEGylation or our inhaled insulin program.

With that let me turn the call back to Howard.

Howard Robin

Thank you, John. At Nektar, we are the best of what we do. Leveraging our valuable technology platforms to create an important new pulmonary and PEGylated therapeutics.

We've made critical changes at Nektar, transforming our company into an efficient and focused drug development organization. We have expanded our pipeline with new high value propriety programs and entered into new partnerships each with significant economics for Nektar.

I told you a year ago that we would build a focused, efficient and driven company with an impressive and growing proprietary pipeline. We have accomplished all of our goals in more 2007 and I expect a great 2008.

Tim Warner

Thank you, Howard. Operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line Elizabeth Bernstein of Banc of America. Please proceed, ma’am.

Elizabeth Bernstein - Banc of America

Good morning. Good afternoon. I have a few questions. The first one is how much of your revenue and specifically contract revenue was Exubera related? The second one is I'm a little surprised that you didn't update your guidance, based upon the workforce reduction recently. Was that as planned and already embedded in the guidance.

And then on the clinical trial side, just curious in terms of 102, just where does enrollment stand on that Phase IIa and is Phase IIb still on target for mid year? Thank you.

Howard Robin

Okay, thanks. So I will answer the questions not necessarily in the order that you asked them. But first point is we haven’t revised the guidance because yes, the reduction in force and the streamlining of Nektar was anticipated when we gave the operating guidance of $50 million to $75 million. So we had anticipated doing that and that was the final step in adjusting the company to the size that we wanted to. So that was already baked in.

In terms of the Nektar-102 trial we are in the process of enrolling patients now. Patients have been dosed. We are moving forward right on track. And we do expect the Phase IIb component to start as planned. So everything is going according to scheduling. I am going to let John answer the question with regard to Exubera sales?

John Nicholson

Our Exubera sales last year it was approximately $133 million. Out of that $133 million, approximately $42 million of that was contract research.

Elizabeth Bernstein - Banc of America

And in the fourth quarter specifically?

John Nicholson

That is for the full year all of 2007.

Howard Robin

We can get back to you shortly with the answer for the fourth quarter. Let us go on to the next question. Then we can come back to that.

Operator

Your next question comes from the line of Cory Kasimov of JPMorgan. Please proceed sir.

Cory Kasimov - JPMorgan

Thanks. Good afternoon guys and thanks for taking the questions. Just a really quick follow-up on the fourth quarter revenue number. You submitted that, you file that 8-K back in November after Pfizer paid the $135 million, guiding for 4Q revenue of $39 million to $43 million and then reported today $66 million, could you just remind us where the discrepancy comes from?

John Nicholson

Yes, just give us one second on that.

Cory Kasimov - JPMorgan

Okay, I can go and…

John Nicholson

Yeah, go ahead, we'll calculate that for you.

Cory Kasimov - JPMorgan

Okay, Howard can you talk a little bit about the IP that you have around your small molecule PEG programs and I know there are other companies in the space who are working on this as well and how you maybe protected there?

Howard Robin

Yeah, Well, look, we believe we have the dominant IP in small molecule PEGs. We've been working on it longer than anybody else in the small molecule there are many pieces of IP that surround how one formulate small molecule PEGs, how one prepares linkers and designs linkers, so it's a combination of the actual molecule, the linker technology, as well as the application technology.

So, we have intellectual property that covers both the chemistry as well as the use of PEGs in various applications to improve molecules, and I think the different technologies that are used to create small molecule PEGs, which you know are rather complicated because of the challenge of putting a very, very large molecule like PEG on a very small molecule, that work has been pioneered by Nektar and I think we are clearly ahead of everybody else in terms of our invention there.

Cory Kasimov - JPMorgan

Okay, and then finally on the partnership front, a couple of questions here, one on Exubera and one on the rest of your pipeline. In terms of how you're going to notify the Street in the event that you don't reach a partnership, is this just something you guided for the three to six month timeline. So now you're saying second quarter. so does that imply that if we get through the second quarter and we don't hear anything, do we assume that nothing happened or you come out publicly say something about it.

And then as far as your earlier stage proprietary pipeline is concerned, do you have any intention on partnering any of those compounds at some point in 2008?

Howard Robin

Well okay, I think with regard Exubera, I still am hopeful that we will have a collaboration and partner with Exubera inhale or NGI. Of course there is as I said, today on the call, there is a point in time which we will stop supporting Exubera NGI and at that point I guess we will make it known publicly. I do believe that if we have partner it will happen in the first half of this year. And we're working actively towards that goal. But yes, I think it is reasonable to say, at some point if we shut down work on Exubera it will be well known to the public.

I think with regard to -- what was the second part of your question again, I am sorry.

Cory Kasimov - JPMorgan

Whether you intend to have any desire at all, to partner any of the earlier stage proprietary programs this year?

Howard Robin

Yes look, there is tremendous value to the company in terms of taking programs for through Phase II into Phase III. But in the final analysis, it is always an issue of economics and value. So, we're always looking, we are talking to partners right now about opportunities. You can imagine that in the two products that we're working on in Phase II, 102 and 118, there is tremendous amount of partnership interest.

So obviously, if one can make a PEGylated irinotecan, a drug that already has sales in excess of $1billion, there should be a great market for that and there are number of companies that are highly interested. Same with opioid induced bowel dysfunction, a very, very critical medical need.

So, would we partner those early? It strictly becomes an issue of economics. I don’t think Nektar has to make a decision today as to whether we would partner those, based on early Phase II data, late Phase II, Phase III data or maybe the decision at some point to take one of them to the market ourselves. In any case it becomes an evaluation of the opportunities in front of us. As of today, we have not made a decision to partner either of those two program. But I think it is perfectly reasonable to think that we could. And I doubt we would partner both of them. But it is entirely possible that we might partner one. Let us see how it evolves.

Cory Kasimov - JPMorgan

Okay. And then…

Howard Robin

And for the financial questions that were asked by Elizabeth and you Corey, we are calculating that and we will get you an answer shortly. Did you have another question?

Cory Kasimov - JPMorgan

No, I was just going to circle back to that. All right. Great, thanks for taking the questions.

Howard Robin

Let me see if John can answer the last question here.

John Nicholson

Yes, Howard, in answer to the question. Cory, to answer your question, our total revenue from Pfizer in 2007 was $182 million. That consisted of three pieces. There was $133 million from products, $43 million from contract research. And $6 million for Exubera readiness. And to answer the initial question on the fourth quarter revenue out of those numbers, basically the total was $40.3 million and that consisted of Exubera $15.3 million, contract research of $25 million. And Exubera readiness of $6 million.

Cory Kasimov - JPMorgan

All right. Great, thanks for taking the questions.

Operator

Your next question comes from the line of Ian Sanderson of Cowen & Company. Please proceed, sir.

Ian Sanderson - Cowen & Company

Good afternoon. Thanks for taking the questions. Howard you mentioned for partnering on Exubera that you mentioned, either Exubera and or NGI. And would that package necessarily be partnered together because of the IP and the NDA rights?

And secondly on the, can you just refresh us what the litigation settlement charge is here in the quarter? What that is for? And should we assume that the cost of idle Exubera manufacturing capacity is the number that will be incurred in the second quarter as well?

Howard Robin

Okay. Thanks, Ian. So, in terms of Exubera and NGI, I think we have a number of flavors in front of us after having discussions with the various companies. There are companies that clearly want both, there are companies that are only interested in NGI and I've said publicly a number of times that it could be an Exubera or an NGI deal, excuse me, it could be an Exubera NGI deal or an NGI deal, I don't imagine there will be any Exubera only deals.

So I don't think it's necessarily an issue of IP or capacity or capability that's more an issue of NGI is such a remarkable product. I mean, you've all seen the NGI device, there's no doubt that the NGI device is by far the superior inhaled insulin product being developed. It's the smallest, it's the most elegant and it clearly from the best, we can tell works the best. So I think the companies that are talking to us are very, very interested in NGI, and if inhaled insulin is to be a success and I think it still will be, then the NGI device from Nektar is in my mind, by far the best. So, that has of course the most traction. There are companies that are interested… Sorry, go ahead.

Ian Sanderson - Cowen & Company

To follow-up on that, my understanding is that at least when this was in Pfizer's hand, one of the attractions to NGI was to the abbreviated regulatory process because they could bridge a lot of the Exubera data, now if you were to license NGI independently, will that still be the case?

Howard Robin

Yes, that would still be the case, because NGI is Exubera with fewer excipients. Same excipients, but fewer excipients. So it is a very, very abbreviated process, and we do expect that NGI would be approved, at the same time frame or contemporary with the other products in development. So I don't think we're behind anybody else.

Now there are companies that are also interested in Exubera along with NGI and there are certain advantages of that in that you develop a larger safety database. Remember Exubera already has a significant human safety database. In any case, I think you could sight the either flavor and that’s going to be a function of what the desires of that particular partner are. John, could answer Ian's question regarding litigation.

John Nicholson

Yes. Ian, on your litigation question, we paid out $1.6 million between the fourth quarter of '07 and that related to a number of employee-related matters.

Ian Sanderson - Cowen & Company

Okay. And then the cost of idle Exubera manufacturing capacity, again is that a number that we should expect to be incurred in the second quarter as well?

Howard Robin

Yes, let me answer that question, but before I do, just to add to John’s point. That litigation regarding various employee matters, it dates back two to three years. And that’s resolutions of issues that happened years ago. Okay. With regard to the cost of maintaining Exubera capability, we are spending some money to enable us to continue to manufacture and supply Exubera because we believe that they always great partner interest. That will probably continue, that will continue to the point where we decide that we are going to spend any more money on Exubera, as I said in the absence of a partnership.

So, we are spending on that money, I think it’s a great investment in the sense, without spending that money to keep NGI in the clinic and to keep our manufacturing capability available to us. It would be very difficult to find a partner. It would be sort of be a self fulfilling property, we shut it all down. So, we're going to keep it running while we are process of discussions and I think it’s a vice investment. At some point, and I said in the first half of this year, at some point if there is no evidence that a partnership is likely, we will shut it down.

Ian Sanderson - Cowen & Company

Okay. Thank you.

Operator

(Operator Instructions) And your next question comes from the line Jim Reddoch of FBR. Please proceed sir.

Jim Reddoch - FBR

Hi. Good afternoon. Thank you for the question. Novo I think a couple of months said that they were not going to move forward with mealtime inhaled insulin. I guess that was to say Eradyme technology. And so they were only going to go forward with a basal inhaled or inhaled basal. Is your technology amenable to basal? And has that changed the tenor of your discussion with potential partners at all? Thanks.

Howard Robin

Yes, first of all we all know that the Eradyme technology would not be ideal technology for delivering, delivering inhaled insulin. And I think it is pretty obvious to me why Novo didn’t want to proceed with that. In any case the technology that Nektar has, is clearly capable of delivering basal insulin as well and we actually have done a significant amount of work over the past years in basal insulin. So when we talk about programs that could be useful in diabetes, basal insulin, GLP 1, Nektar has a tremendous capacity to do that work. And we are having those discussions with partners as well. And as we have Exubera discussions, we are also having discussions on GLP 1 and we are having discussions on basal insulin. And we have to see what the total program looks like.

Jim Reddoch - FBR

Great. I muted myself accidentally. What is the expense of keeping Exubera and NGI partnerable?

Howard Robin

Let me just make sure we have stated that publicly. Hang on one second.

Jim Reddoch - FBR

And I am just also wondering that if you, are you saying that if a partner is not signed by June 30th, say end of 2Q that this expense of keeping it partnerable would also go away?

Howard Robin

Yeah, we will spend approximately $2 million a month to keep Exubera viable for a partner that includes manufacturing capacity, packaging capacity, clinical -- keeping certain employees in place, as well as the clinical studies for NGI. So that costs us roughly $2 million a month and as I said earlier, I think that's a valuable spend, given the discussions we've already had with partners. If we get to the point where a partnership is not likely, we will shut that down and I'm not going to give a hard stop to it but I said, we believe we will find -- if we're finding a partner it will be in the first half of this year. So at some point, you could interpret that as a cutoff date and I’m not giving you specific cu-off date, but we obviously will not continue to spend $2 million a month indefinitely.

Jim Reddoch - FBR

Okay, got you. Thank you.

Operator

It appears to be have no further questions. I will now turn the call over to Nektar CEO, Howard Robin, for closing remarks.

Howard Robin

Well, okay thank you very much for the great questions and I think overall I am very pleased with the year Nektar had. I’m very pleased with the employees, the scientists, the staff at Nektar everybody has just done an absolutely amazing job to achieve all of our goals and I think this company has progressed remarkably and is on a very, very important path forward and a successful path forward. So, I want to thank all of our investors for all the support and wonderful questions over the year and I expect that 2008 is going to be an absolute great year for Nektar. So, thank you very much.

Operator

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

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