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Executives

Tim Warner - SVP, IR

Howard Robin - CEO

John Nicholson - CFO

Analysts

Corey Kasimov - JPMorgan

Rich Silver - Lehman Brothers

Brett Hazlett - BMO Capital Markets

Nektar Therapeutics (NKTR) Q1 2008 Earnings Call May 7, 2008 5:00 PM ET

Operator

Good day ladies and gentlemen. Welcome to the first quarter 2008 financial results conference call for Nektar Therapeutics. (Operator Instructions).

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

Tim Warner

Good afternoon and thank you for joining us for Nektar Therapeutics first 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 platforms, the clinical prospects of our proprietary and partnered products, the future potential of our inhaled insulin programs, our financial guidance for 2008, and other future events related 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 annual report on Form 10-K for the year ended December 31, 2007 and the Form 8-K we filed with the SEC today. 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 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 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 at our website as soon as practical after the conclusion of this conference call.

Now I'm pleased to introduce the President and CEO of Nektar Therapeutics, Howard Robin.

Howard Robin

Good afternoon. Thank you for joining us. Today we're going to update you on the important and exciting progress in our proprietary and partnered drug development programs along with our financial results for the quarter. But first, I would like to take a minute to address the termination of inhaled insulin.

We believed that we would enter into a license agreement for inhaled insulin. We were engaged in active negotiations that could have yielded significant economic benefits to Nektar. Unfortunately, the concern over new data analysis from ongoing clinical trials, the increased number of lung cancer cases, and the FDA mandated warning resulted in the termination of all negotiations with potential partners.

On our last conference call I committed that Nektar would cease all spending on inhaled insulin in the absence of a partnership. As John Nicholson will discuss in a moment we've kept this commitment. Importantly, there are no new unexpected charges related to the termination and our financial guidance for 2008 remains unchanged.

Let me make it perfectly clear Nektar has moved beyond Exubera. We continue to focus all of our efforts on capitalizing on our core strengths and building one of the most exciting product pipelines in our industry. Nektar's technology platforms give a significant competitive advantage by allowing us to greatly improve known molecules, providing us with a steady stream of new and important product development opportunities. With our 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 UCB for Cimzia, Affymax and Takeda for Hematide, Roche for Mircera, and for pulmonary it includes Novartis with inhaled Tobramycin and Bayer for both inhaled amikacin and inhaled Cipro. As I've said before, 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 dept and breadth of Nektar's partnered pipeline is unparalleled in our industry.

For example, the recent approval and launch of Cimzia in the US by Nektar's partner UCB highlights how our polymer technology can enable a new class of therapeutic proteins. Cimzia is the first approved PEGylated antibody fragment and offers great promise to patients who suffer from the devastating effects of Crohn's disease. This product would not have been possible without Nektar's technology and we believe that there will be more opportunities to enable antibody fragments with our PEG platform.

Make no mistake Nektar is the leader in the discovery, design and scale-up of PEGylated molecules. Every PEGylated product approved over the last decade has been enabled using Nectar's advanced PEGylation and polymer chemistry. Our leadership is further evidenced by our broad patent estate.

Nectar has built the dominant intellectual property position in the PEGylation field, with patents in large and small conjugated molecules, linkers, reagents, methods and manufacturing. We are the first company to invent, develop and pursue new applications for small molecule PEGylation. Our patent estate is large and growing.

We believe our proprietary position covers not only our own products such as NKTR-118 and 102 but other similar molecules being developed by competitors. Furthermore we continue to execute on an aggressive patent filing strategy to further expand our dominant position in this.

Now I would like to give you an update on two of our most promising small molecule PEGylation candidates both in Phase 2 clinical development. Oral NKTR-118, and peripheral opioid antagonist, is an excellent example of the use of Nektar's advanced PEGylation chemistry to inhibit membrane transport. It utilizes our technology to reduce penetration of drugs across the blood brain barrier and thus limit unwanted CNS affects.

This morning we announced new clinical trial data for NKTR-118. In the multiple dose trial being presented this week at the American Pain Society Meeting NKTR-118 will be delivered in a tablet form was shown to be orally bioavailable and rapidly absorbed. More importantly, using our advanced PEG chemistry we've dramatically extended the half life of NKTR-118, 10-fold when compared to non-PEGylated naloxol. This long half life for NKTR-118 will support a once daily dosing regime as an oral therapy.

Nektar's PEG technology has been used successfully in the past to extend the circulating half life of large molecules such as Neulasta. Now for the first time we have demonstrated that our small molecule PEG platform technology can be applied to oral drugs to significantly extend their half life. As you know most small molecules can benefit from an improvement in their pharmacokinetic profile. This creates enormous opportunity for Nektar.

Recently the first injectable peripheral opioid antagonist was approved in the US and recommend for approval in the EU. As market awareness grows about this large unmet need, we believe that our oral drug NKTR-118 will be embraced by medical professionals and patients. And a number of playing companies have come to us with strong interest in NKTR-118 for both treatment and prevention of opioid-induced bowel dysfunction and other side effects associated with opioid use.

The next program I am extremely excited about is our lead small molecule PEG oncolytic, NKTR-102 PEG irinotecan. By PEGylating irinotecan, we significantly extend its half life and increase sustained exposure of irinotecan to the tumor. In January we initiated the first part of our Phase 2 study to evaluate NKTR-102 in the treatment of second line colorectal cancer. The study compares NKTR-102 and cetuximab to irinotecan and cetuximab.

We believe that NKTR-102 has the potential in colorectal cancer and beyond. In our Phase 1 study, we observed multiple responses and anti-tumor in a number of tumor settings. Based on this very encouraging data and our pre-clinical success, this year we plan to initiate additional Phase 2 studies for NKTR-102. Indications we are considering include non-small cell lung cancer, breast cancer, ovarian cancer and gastric cancer.

On June 2nd we will present our comprehensive clinical development plan for NKTR-102 during the ASCO meeting in Chicago. We will host an event that will feature a presentation of our Phase 1 clinical trial results by our lead investigator Dr. Daniel Von Hoff of the Translational Genomics Research Institute. We are looking forward to seeing many of you in Chicago and sharing our enthusiasm for the potential of NKTR-102.

Important progress in our pulmonary business continues to generate significant value as we advance our proprietary development programs and build on our successful partnerships with Bayer and Novartis. The development partnership with Novartis for Tobramycin inhalation powder to treat lung infections in cystic fibrosis patients continues to make progress. As you may have seen, following an interim analysis an independent data monitoring committee recommended that Novartis halt the placebo controlled studies.

The non-placebo controlled study is continuing and both Nektar and Novartis are excited about the potential for this important therapeutic. Novartis is on track to file an NDA in 2009.

This afternoon we announced that the US Patent Office issued a broadly applicable patent to Nektar for our Tobramycin Inhalation Dry Powder program giving the product exclusivity through 2022. The Patent covers compositions of not only Tobramycin but other dry formulations of amino glucoside antibiotics that could be delivered using Nektar's pulmonary inhalation platform. This clearly demonstrates Nektar's leadership in the important and growing area of targeted antibiotics.

I am pleased to report good progress and our collaboration with Bayer for NKTR-061 inhaled amikacin, a potential breakthrough therapeutic for the treatment of gram-negative pneumonias. These pneumonias represent a significant unmet medical need in healthcare facilities and are associated with a high mortality rate. Bayer plans to start the Phase 3 clinical programs later this year, and the FDA has granted this program fast track designation.

The Phase 3 study is a superiority trial in patients with risk for multi-drug resistance. The primary end point for the trial will be improvement in clinical cure rate compared to standard of care. Secondary end points include reduction of the number of days spent in the ICU; decreased time spent on mechanical ventilation, and decreased IV antibiotic use. Nektar and Bayer will present Phase 2 trial results for NKTR-061 at the American Thoracic Society meeting on May 19.

Antibiotic resistance and the problem of gram-positive hospital acquired pneumonia is similarly growing with a sharp rise in MRSA infections. To address this significant healthcare problem, Nektar is developing NKTR-063 inhaled vancomycin, which targets gram-positive pneumonias using the same proprietary aerosol platform as NKTR-061.

In April Nektar filed a Phase 1 trial application in the UK for NKTR-063. This will be an open label dose escalation trial to assess pulmonary distribution PK intolerability of NKTR-063 in healthy human volunteers. Dosing is scheduled to start in the third quarter and we plan to file an IND this year with the FDA to commence Phase 2 clinical trials in the United States.

As you can see, we are making excellent progress in the clinic, and I am very proud of the immense effort and commitment of our employees.

Now, I'd like to turn the call over to our Chief Financial Officer, John Nicholson, who will address the financial results for the quarter.

John Nicholson

Thank you, Howard and good afternoon. There are a few things I will highlight for you today from the press release and financial tables. As Howard said, there were no new unexpected charges related to the termination of inhaled insulin, and our financial guidance for 2008 remains unchanged.

First, I would like to summarize the financial impact of the termination of inhaled insulin. Our first quarter financial results include cash payments of $36 million related to the termination and maintenance of inhaled insulin. In the second quarter we made final payments of $10.3 million. Included in these payments were $8 million to maintain inhaled insulin manufacturing capabilities.

It is important to note that all these payments were previously accrued as expenses in 2007, or included in our 2008 guidance as provided on our last conference call.

As a result, our first quarter GAAP cash use in operation was $65 million. Our non-GAAP cash use in operation was $25.1 million. Our non-GAAP cash use in the first quarter excludes the following specific payments related to the maintenance and ultimate termination of inhaled insulin programs. $3.6 million to maintain manufacturing capacity, $32.4 million to terminate contract manufacturer agreements, and $3.9 million related to work force reductions at Nektar.

For the rest of 2008, we expect our cash use in operations to be significantly lower than our first quarter run rate primarily because of anticipated significant cash receipts for milestones from our existing partnerships and the positive impact of our work force reductions. At March 31 we had a cash balance of $412.6 million compared to $482.4 million at the end of 2007. Our capital expenditures in the first quarter were $5.3 million and other net sources of cash were $500,000.

Revenue was $20 million in the first quarter. Based on projected timing of milestone payments, our revenue guidance for 2008 remains unchanged and we expect to generate revenue of approximately $95 million. For our projected cash use in operations, we remain committed to our prior financial guidance for the year. We continue to expect a non-GAAP cash use in operations for 2008 of between $50 million and $75 million. This excludes all spending associated with inhaled insulin. $36 million was paid in the first quarter and $10.3 million has been paid in the second quarter.

With additional of these specific items work force reduction costs and other payments of $8.7 million, our GAAP cash use in operation for 2008 is still expected to be between $105 million and $130 million. When you include approximately $20 million of capital expenditures our projected ending cash balance at the end of 2008 is expected to be between $330 million and $355 million. Let me point out that our target operating cash burn does not include any potential proceeds from new collaborations that could be signed this year.

Our 2008 plan reflects our commitment to invest in our proprietary clinical development pipeline including $50 million to $65 million in four Phase 2 and two new Phase 1 clinical trial. In addition, we will fund research that will allow us to move new, potentially valuable drug candidates into our development pipeline all this will maintain a financial discipline.

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

Howard Robin

Thank you, John. Over the past year, we identified our strengths and completed important restructuring that allows us to build on our unique competencies. Our core value lies in our platform technologies, our robust partnered pipeline and our proprietary drug development programs. We continue to move forward with clarity and competence and we are firmly in control of our destiny and we are strategically positioned to succeed as we build an exciting and valuable company.

I thank you for your continued support of Nektar and I look forward to updating you on our progress throughout the year.

Tim Warner

Operator, please open the call for questions.

Questions-and-Answers Session

Operator

(Operator Instructions). Our first question comes from the line of Corey Kasimov from JPMorgan. Please proceed.

Corey Kasimov - JPMorgan

Hey, good afternoon, guys. Thanks for taking the question. First of all on 102, can you just update us with regards to the Phase 2 status there and when we may see data either from the 2a part, the dose optimization in combination with [arbutoxin] and expectations for the 2b where it's randomized?

Howard Robin

Well, thank you Corey. We are, as you know making progress in the 2a component of the trial and we said that we would be starting the Phase 2b program later this year. We haven't given any specific dates for that. Overall, we expect that we will have data from the Phase 2 program by the end of third quarter, fourth quarter 2009. That's what we're targeting for at this point. So we're making good progress in enrollment in Phase 2a and as soon as that is complete which should be, I would say over the next few months, we will be looking into starting our Phase 2b program.

Corey Kasimov - JPMorgan

Okay and then another question getting at clinical milestones this time on the pulmonary side. What are expectations either from you or from Bayer with regards to inhaled amikacin? I guess two parts to this question. First, the number of patients expected in the Phase 3 and then how long that study may last?

Howard Robin

Well, actually I can't go into detail specifically about that program because under confidence with Bayer. I can say that we do expect it to start this year. I can't give you the specifics but it is a fairly acute usage of the drug, so this is a 7-day or so dosing regimen in an ICU setting. So you should be able to see results from that trial relatively quickly in the sense that it is not chronic usage. But I can't give out the specifics on that.

Corey Kasimov - JPMorgan

No, I understand. That's what I figured. And then lastly, with regards to vanco, can you update us on your thoughts regarding potential partnership there?

Howard Robin

Well, at this point, it's a very important product and it's reasonably likely to work and it should work just as well as what we've seen with amikacin. We are certainly have had a number of companies talk to us about a high level of interest in inhaled vancomycin and we haven't discussed as publicly any partnerships or specifics yet, but you can imagine that there are a number of companies that are highly interested in it and if amikacin, which has looked good through Phase 2 and we expect will show promise in Phase 3 and show positive results in Phase 2, then this is essentially the same type of formulation, the same delivery device.

So, one would expect that we can deliver vancomycin to the lungs just as effectively as we deliver amikacin to the lungs. So whether we take it through the clinic ourselves or whether we partner it, I think it has tremendous value for Nektar.

Corey Kasimov - JPMorgan

Okay. Thanks for taking the questions.

Operator

Our next question comes from the line of Rich Silver from Lehman Brothers. Please proceed.

Rich Silver - Lehman Brothers

Just one question on the R&D spend, which at least relative to our model looked like it was a bit higher than we expected in the quarter. Is that a good run rate to be using going forward or was that maybe a little bit unusually high as you look at the quarters for the year?

Howard Robin

Well, I'll let John Nicholson answer that. I think as we said earlier in the call that what you've seen, the first quarter of 2008 was not representative in terms of an operating cash use or a run rate because of the specific costs associated with the wind down of Exubera. Now, we will be spending a much greater sum of money than in past years on our clinical programs, having four Phase 2 programs and two Phase 1 programs, something Nektar has never had before. So overall, if you look at our spending and you factor into our spending that this year we will invest as much as $50 million to $60 million in clinical programs, something Nektar has never done and then you look at an overall non-GAAP cash usage of somewhere between $50 million and $75 million, I think that says a lot about how efficient we've become and how we have executed on our plan to reduce expenses at Nektar. But I'll let John answer that even more thoroughly.

John Nicholson

Yeah, right now we're anticipating to have a run rate of approximately $35 million per quarter going forward.

Rich Silver - Lehman Brothers

So does that mean that the Exubera portion in the first quarter was the difference? The wind down of Exubera that Howard was referring to.

John Nicholson

Yeah, approximately that difference was that and it also included a little bit of a reduction in the force from the standpoint of people that were working on those programs.

Rich Silver - Lehman Brothers

Okay. I may have missed this did you make any comment about discussions for additional products to be partnered and announcements on that before the end of the year?

Howard Robin

Well, we haven't said, look, we haven't said publicly anything about partnerships. Actually what we've said is in none of our numbers, in none of our guidance is any -- are any deal revenues included. Now that doesn't -- we're not talking about milestones that from existing partnerships. Certainly, we expect to see milestones from existing partnerships this year, but any new deals that we do, whether there's a vancomycin deal, whether there's a NKTR-118 deal, whatever comes about this year, those would be incremental in terms of revenues.

Rich Silver - Lehman Brothers

Sorry, less about the financials, excuse me and more just about managing our expectations as to whether you expect additional partnership announcements and how many.

Howard Robin

Well, I would say this; there are many companies that are highly interested in NKTR-118. There are many companies interested in 102 as well as vancomycin. One has to make a decision as to what stage to take a financial deal with a company relative to keeping that product in the pipeline for Nektar. So we're always evaluating our economic situation, we're evaluating the value of the deal terms and we are evaluating, as most companies do at our stage, when you license products and at what stage you license them out.

I think there is certainly -- it is certainly reasonable to assume that Nektar would do another license deal this year of substance, but I certainly thing it depends on the product and it depends on the opportunity in front of us. We're fully capable of taking NKTR-118 and NKTR-102 through Phase 2 and we're certainly capable of taking vancomycin through Phase 2. We certainly have the economic means and the internal resources to do that. So, if the deal terms make sense, then we will consider them. If deal terms are not to our liking, then we're more than happy to stand by our products and take them through Phase 2 and build additional value.

Rich Silver - Lehman Brothers

Thank you.

Operator

(Operator Instruction). Our next question comes from the line of Brett Hazlett from BMO Capital Markets. Please proceed.

Brett Hazlett - BMO Capital Markets

Thanks. Thanks for taking the question. Howard, in your prepared remarks you made a comment about NKTR-102 and the patent estate with regard to PEGylation small molecules. Could you repeat that because that seems maybe a little bit ominous in terms of potential competitors out there, I know there is other folks that are PEGylating similar molecules? Could you just repeat that and add a little bit if you care to there?

Howard Robin

Well, okay. I can certainly do that and I think what I know what I've said and I'm very clear on this, that we have built the dominant intellectual property position in the PEGylation field with both large and small molecules and we are the first company to invent, develop and pursue new applications for small molecule PEG. Now, we believe that we not only have freedom to operate in the area of NKTR-102, but that we have the dominant position in PEGylating small molecules as well. So, if this requires more discussion, we can try to have that but I think, I'm pretty clear on that.

Brett Hazlett - BMO Capital Markets

Okay. Well, we'll let it sit there for now. And I guess the question, following up on Rich's line of questioning. As you're considering 102 and 118 and 63 to inhaled vancomycin, my question would be why partner any of them if you're -- if you feel that strongly in these technologies? Thanks.

Howard Robin

Well, let me first go back to the other issue because I want to give you some further clarification. When you look at Nektar's PEGylated pipeline and Nektar's work that we've done in PEGylating small molecules and large molecules, I think if you think about that every PEG molecule that's been approved in the last decade has come from Nektar, let's use an example as we talked about, let's look at UCB and Cimzia. We are the only company that has had anything to do with Cimzia. We have invented that drug, we have an exclusive arrangement with UCB, no one else does, no one else has any kind of relationship with UCB, no one else has worked on Cimzia. We invented it, we scaled it up, we manufacture it, nobody else.

Now, there are companies that get a tiny, that get a very small royalty from Nektar because of cross licenses that were done in the past and yes, we do have an occasional small royalty to pay out to somebody. But, if you're talking about cross licensing, well, companies do cross licensing and companies take license to patents all the time.

Now, if you talk about as a, so as a patent issue, sure Nektar has cross licenses and Nektar has taken rights to certain IP that we have to pay small royalties on, rather small I would say. Now, if you separate that from the business of PEGylation, now let's use Cimzia as an example. Nektar, Cimzia is Nektar's drug and UCB's drug, nobody else and nobody else has that relationship and nobody else manufactures it, etcetera, etcetera, I think I've made my point on that. Now, let's go to your question about, if we believe so strongly in 102 and we believe so strongly in 118 and vancomycin, why partner them now?

Well, I'm not saying I would partner them now, but it's strictly an economic decision. I mean, we have such a broad set of opportunities ahead of us, based upon what we've demonstrated in PEGylating small molecules and improving their half-life and their bioavilability and now what we've specifically been able to do with NKTR-118 in terms of greatly increasing the half-life of an oral drug, we have so many opportunities to work on, I want to make sure that we aren't -- that we've built a pipeline of many, many programs and that takes funding and funding comes from partners. So I am a very strong believer in partnerships and I do want to continue doing partnerships.

Now, these partnerships aren't going to be partnerships that get you a 5% royalty. Look at the partnership we put in place with Bayer on amikacin. That's a 30% flat royalty in the US, that's in essence a 50-50 profit split. Those kinds of economics, that's not a problem for me. If we can partner our programs and get royalties in that category or similar to that, then I think that's the same as sharing the cost of developing a drug and owning half of it.

So it's all an issue for me of what type of economics these deals will bring and if they're not satisfactory then absolutely we will continue the development of those drugs ourselves or if we could share the risk and bring in some funding to allow us to start program four and program five and program six, we want to fund PEGylated docetaxel, NKTR-105, we want to fund PEGylated diphenhydramine, NKTR-125, we want to fund a combination program with PEGylated naloxol NKTR-119, which is the combination of naloxol and an opioid.

There's so many things we can work on by this wonderful, wonderful platform technology we have, that bringing in revenues early is a very reasonable thing to do and therefore we will consider, we will always be partner. Does that help?

Brett Hazlett - BMO Capital Markets

That does. Thank you and just one other point of clarification. You had mentioned, I think that 102 was going to finish Phase 2 in 3Q or 4Q 2009, is that correct?

Howard Robin

I would say it's probably more like the fourth quarter.

Brett Hazlett - BMO Capital Markets

Okay. Thank you.

Operator

There are no further questions. I would now like to turn the call over to Howard Robin for closing remarks.

Howard Robin

Okay. Well, thank you everybody, for joining us today and I know you'll expect and will see a lot more great things coming out of Nektar. So, thanks very much. I look forward to seeing you all in person. Bye-bye.

Operator

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

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