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Nektar Therapeutics (NASDAQ:NKTR)

Q2 2008 Earnings Call

August 6, 2008 2:00 pm ET

Executives

Jennifer Ruddock - Senior Director of Investor Relations

Howard Robin - President, Chief Executive Officer

John Nicholson - Chief Financial Officer

Analysts

Corey Kasimov - JP Morgan

Ian Sanderson - Cowen & Company

Jon LeCroy - Natixis

Dave Steinberg - Deutsche Bank

San Mon - Mon Family Investments

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 Nektar Therapeutics Financial Results Conference Call. My name is Gwen, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct 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 like to turn the call over to Ms. Jennifer Ruddock, Nektar's Senior Director of Investor Relations. Please proceed, ma'am.

Jennifer Ruddock - Senior Director of Investor Relations

Thank you, Gwen. Good afternoon, and thank you for joining us for Nektar Therapeutics second 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 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 May 9, 2008 and the report on Form 8-K filed today which included our Q2 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 webcast of this conference call will be available for replay on the Investor Relations page at Nektar's website at nektar.com.

In the event that any non-GAAP financial measure financial measure is discussed on the 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.

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

Howard Robin - President, Chief Executive Officer

Thank you, Jennifer. Thank you everyone for joining us. Today we're going to update you on the significant achievements we've made in the second quarter in both our proprietary and partnered drug development programs, and we will review our financial results.

Nektar has made exciting progress over the last 18 months. A year and-a-half ago, Nektar's value was exclusively based on Exubera. Despite the Company's robust validated platform technologies, it had no significant proprietary clinical programs under way. It was not investing in the advancement of a pipeline, and the company's cash burn was exceptionally high.

If you look at Nektar today, we've evolved into a completely different company. We have a significant program moving into Phase III development, five Phase II development programs, and important new product candidates moving into the clinic. We are focusing our efforts in drug discovery and drug development using our proven technology platforms. Clearly, Nektar has one of the most impressive pipelines in our industry. We will no longer be a drug delivery service provider or a reagent supplier.

Before we begin our detailed discussion, I would like to emphasize that as stated last quarter, all spending and charges associated with the termination of the Exubera inhaled insulin program are behind us. What is truly exciting is that Nektar has now created a path forward that positions us to capitalize on our two validated platform technologies in PEGylation chemistry and pulmonary therapeutics.

Our proven platforms give us very special edge that most other biopharmaceutical companies do not have, the ability to generate a steady stream of high-value product opportunities, importantly our platforms have broad applicability to small molecules as well as biologics, both novel and established, across a wide range of therapeutic areas. This competitive edge is what I believe makes us an exciting and valuable company.

An important and unique asset for Nektar is our pipeline of partnered programs that represents a significant future royalty stream. This diverse pipeline could produce an annual revenue run rate of between 3 and $400 million by the end of 2012. While this is not guidance and you can make your own regulatory and market risk assumptions, my point is this, that Nektar's partnered revenue potential is significant. This partnered pipeline includes programs such as amikacin and Cipro with Bayer, Cimzia with UCB, Hematide with Affymax, Mircera with Roche, and Tobramycin with Novartis.

One of the keys to executing on our strategy is the continued addition of strong drug development expertise and management talents. To that end, we are excited about a number of new seasoned executives that have recently joined our team. Bharatt Chowrira, Ph.D., J.D., joined our company in May as Chief Operating Officer and head of the PEGylation business unit. Bharatt brings a unique background as a Ph.D. in molecular biology as well as an experience patent attorney. He's had a proven track record of success at Merck and Sirna, driving business strategy, creating strategic collaborations and building valuable intellectual property as such. His focus and expert leadership will be highly valuable as we drive promising research candidates in the clinic.

We announced today that Randall Moreadith, MD, Ph.D., has joined us as Senior Vice President Drug Development and Chief Development Officer. Randall is a highly experienced product and clinical development executive with an impressive track record of accomplishments. As Co-founder and CMO of Thrombogenics, he advanced seven compounds into clinical development over the course of six years. Randall will be responsible for overseeing all aspects of Nektar's drug development activities and will drive clinical and regulatory strategy. His strong leadership and extensive experience will add enormously to our product development efforts.

In addition, Lorianne Masuoka, MD, is joining us as Vice President of Clinical Development. Lorianne has significant drug development expertise and worked with early clinical through commercial stage products in both CNS and Oncology at Berlex and Chiron. Most recently, she was VP of Clinical Development at Five Prime Therapeutics. The recruitment of Bharatt, Randall and Lorianne to Nektar completes my vision for building a great management team at our company, one that has the talent, leadership and expertise that will enable us to successfully execute our strategy.

With the elements we have put in place over the last 18 months our technology platforms, growing pipeline, leading pulmonary and PEGylation patent estates and a new and seasoned management team with deep pharmaceutical experience, we are truly positioned to drive future value for Nektar shareholders.

Now, let me spend a few minutes updating you on the exciting advancements we are making with our platform technologies and our clinical development programs. Let me first start with our advanced PEGylation platform, one of the most profound advances in drug conjugation technology. A significant number of important pharmaceutical products have poor physiochemical properties, toxicities and pharmacokinetics. As a consequence, these products have a low overall efficacy and less than desirable product profile.

Our powerful PEGylation platform offers an extremely attractive opportunity to significantly improve and enable these compounds. By carefully linking the appropriate size PEG and other polymers to small or large molecular weight drugs, we can modify drugs to dial-in and dial-out pharmaceutical effects. With this, we may better in part efficacy and solubility, chemical stability, greater oral bioavailability and selected tissue targeting.

The novel advances in our PEGylation and conjugation platforms invented by our scientists are allowing us to uncover new applications for this technology in areas such as peptides, antibody fragments, antivirals, immune therapies, avoidance of first-pass metabolism, and SIRNAs. This is something that I believe only Nektar is uniquely qualified to do as the world leader in PEGylation and molecule engineering.

We have a proven technology platform that has created highly valuable commercial successes. A perfect example of this is Neulasta, the PEGylated version of Neupogen. Neulasta helps countless numbers of people, is superior to the original Neupogen molecule and sells over $3 billion a year. While the economics to Nektar from this collaboration are not impressive, my point is this, the only difference between Neupogen and Neulasta is Nektar's PEGylation technology. That is the only difference.

In fact, every PEGylated molecule that has been approved for marketing in the past 14 years has originated from Nektar's technology. There is no doubt that Nektar is the world leader in PEGylation chemistry.

Our PEGylation technology is a proven platform. However, in the past Nektar did not focus or invest in our PEGylation business or optimize our PEGs for their true potential and breadth of applications. Today, our invention of new molecular structures, linkers and conjugates allows us to efficiently and effectively pegylate both large and small molecules. Our new PEG small molecule programs in oncology and our new PEG small molecule programs in the inhibition of membrane transport are excellent examples of the powerful potential of this technology.

Now I'd like to review the status of our programs in clinical development. In June, we presented at ASCO data on NKTR-102 PEGylated irinotecan that demonstrates that we can use Nektar's advanced polymer chemistry approach to create a unique conjugated chemotherapeutic and bring forward the first PEGylated small molecule that has shown therapeutic activity in humans. This data is critically important because we now know that Nektar's specific methods and approach with small molecule PEGylation work and we know other companies have attempted to do this and failed.

There are many significant drugs that can benefit from the application of PEGylation to greatly improve their intrinsic activity. Furthermore, Nektar has the dominant IP estate covering these innovative new forms of PEGylation technology. Dr. Von Hoff's presentation of our NKTR-102 data at ASCO contrasted the 16% response rate observed with NKTR-102 in our Phase I trial with the 4% response rate typically seen in a classic single agent Phase I study. It is important to point out that the patients in the NKTR-102 study all had unresectable metastatic cancer and had failed all other therapies.

We observed tumor regression and anti-tumor activity in a number of important tumor settings including breast, ovarian and non-small cell lung cancer. We are currently studying NKTR-102 in a Phase 2a dose ranging study expected to be completed shortly. One of the biggest pieces of news at this year's ASCO was that the net data presented -- there was new data that presented that showed that colorectal cancer patients with KRAS mutation gene status do not derive any benefit from EGFR therapies, such as cetuximab.

We believe this is an appropriate setting to compare the single agent activity of NKTR-102 head-to-head with arinotecan. To that end we have designed a Phase IIb randomized trial to evaluate NKTR-102 in second line colorectal cancer and we plan to initiate this trial in the fourth quarter of 2008.

Our Phase IIb trial design is a randomized head-to-head comparison between NKTR-102 and arinotecan with a primary endpoint of progression-free survival. Positive data from this trial will allow us to enter into a Phase III pivotal study with a high level of confidence that we will be successful. This is an example of Nektar's clinical development strategy and it sets us apart from many other companies who have not designed their Phase II trials to be predictive of Phase III results.

In addition to our Phase IIb study in colorectal cancer, based on the positive and significant anti-tumor activity we observed in Phase I, we will also begin Phase II studies in the fourth quarter in three new indications, platinum resistant ovarian cancer, metastatic breast cancer and first line cervical cancer.

The next promising PEG onycholytic that we plan to advance into the clinic is NKTR-105 PEGylated docetaxel. Docetaxel is approved in a number of indications in the current taxane market represents a $4 billion opportunity. In our preclinical studies of NKTR-105 we have seen significantly higher levels of anti-tumor activity with NKTR-105 as compared to Docetaxel.

We also saw improved pharmacokinetics and lower myelosuppression, which is a dose limiting toxicity for docetaxel. Nektar will present the results from our NKTR-105 preclinical studies at the ENA triple meeting in October.

In addition to advancing the oncology molecules that utilize our releasable PEG pro drug small molecule platform, Nektar is making significant progress with small molecule PEG in the area of inhibition of membrane transport. NKTR-118 a novel peripheral opioid antagonist, represents the first oral drug in our pipeline. NKTR-118 is an excellent example of use of Nektar's advanced PEGylation chemistry to inhibit membrane transport and to reduce penetration of drugs across the blood brain barrier and thus limit unwanted CNS effects.

In this application, PEGylation of naloxone, a well-known and safe drug, is being developed to address the serious and debilitating problem of opioid-induced bowel dysfunction. The data for NKTR-118 validates that our unique PEGylation chemistry can be used to develop a stable oral drug that has substantial oral bioavailability, a linear reproducible pharmacokinetic profile and an extended half life.

These discoveries are allowing us to actively conduct research on an opioid combination product, NKTR-119. This combination product may potentially provide a new opioid analgesic that does not cause opioid induced bowel dysfunction. This program is generating significant interest from potential partners.

Our Phase II placebo controlled study to evaluate NKTR-118 is enrolling as planned and we expect to have conclusive data available from this study in the middle of 2009.

Now I want to spend some time discussing our PEGylated large molecule programs. During the second quarter, Nektar's partner, Baxter, presented exciting preclinical data for PEGylated Factor VIII in an oral session at the World Hemophilia Congress. The new data shows that PEGylated Factor VIII, which is an innovative and releasable PEG conjugate drug designed by Nektar scientists, works by enabling partially inactive precursor recombinant Factor VIII molecules to regain biologic activity in vivo.

PEG Factor VIII also showed a statistically longer half life compared to unmodified recombinant Factor VIII and as compared to PEG Factor VIII conjugates that use less advanced PEGylation techniques. PEG Factor VIII may offer a longer acting therapy and potentially fewer infusions for the management of hemophilia A. Nektar is also working with Baxter on a PEGylated Factor IX program for hemophilia B. Importantly, these programs represent the innovative new work we are doing with biologics in combination with our advanced PEG architectures.

Equally important are the advancements we have made and our scientists have made with our inhaled anti-effective programs that leverage our novel and proprietary pulmonary technology platforms. Lung infections are a leading cause of death in the world today. Nektar is focused on targeting these infections with four inhaled anti-effective programs utilizing our aerosol and dry powder technology platforms.

The most deadly of ICU lung infections are caused by gram positive and gram negative bacteria. The incidence of these pneumonias in ventilated patients has been shown to be up to 20 fold greater than in non-ventilated patients and gram negative pneumonia carries a mortality risk as high as 50%.

Our NKTR-061 amikacin inhaled program, partnered with Bayer, is designed to address this growing problem. During the second quarter we achieved a critical milestone for NKTR-061 with the successful completion of two additional safety studies in renally impaired patients. The data from these safety studies has reinforced that the product is safe and well tolerated and we expect to receive a $10 million milestone payment this month.

Bayer and Nektar are preparing for pivotal Phase III studies that will commence in the fourth quarter. The Phase III trials for NKTR-061 will be superiority studies and the primary end point will be an increase in clinical cure rate over standard of care. In June Nektar and Bayer presented three posters at the American Thoracic Society Meeting in Toronto. Among the positive data points is that NKTR-061 achieved over 1,000 times greater lung exposure to the antibiotic as compared to IV administration.

Targeting antibiotic therapy to the site of infection may offer superior bacterial eradication and increased efficacy which may result in a higher likelihood of survival. In addition, we hope to demonstrate that administration of NKTR-061 could counter the problem of antibiotic resistance by reducing the overall antibiotic load delivered to the patients in the ICU setting.

Resistance and the challenge of gram positive pneumonias in the ICU is also growing with a sharp increase in MRSA infections. To combat this problem, we are developing NKTR-063, our proprietary inhaled vancomycin product that utilizes the same innovative aerosol technology platform used in NKTR-061. This platform can be integrated into patient's ventilator systems and can also be adapted to use as a hand-held device.

In June, we filed and received approval for a clinical trial application in the UK for an open labeled dose escalation study of NKTR-063. Dosing is scheduled to start in September. The study is designed to assess pulmonary distribution, PK and tolerability and NKTR-063 in approximately 25 healthy volunteers. We expect to complete the trial by the end of the year which will enable us to bring this important program into Phase II development in the US ahead of our original target.

We are pleased with the excellent progress we made in the second quarter. Our proprietary programs are advancing and achieving positive visibility in the medical community and industry. Our platform technologies have the potential to yield a large number of product opportunities, more than Nektar could ever pursue on its own. We intend to enter into strategic collaborations with industry leaders in order to fully optimize the value of our technology. We're committed to signing new partnership agreements with economics that are beneficial to Nektar and our shareholders.

With that, I will turn the call over to our Chief Financial Officer, John Nicholson, to review our financial performance for the second quarter.

John Nicholson - Chief Financial Officer

Thank you, Howard, and good afternoon, everyone. As I told you on our last conference call, all financial payments related to the termination of inhaled insulin are now behind us with the final payments of $10.3 million made in April. With these final payments, the financial books on Exubera will close.

I will now review our financials for the quarter. Our second quarter GAAP cash used in operations was $31.5 million. Our non-GAAP cash used in operations was 18.7 million down from 25.1 million in the first quarter. Our non-GAAP cash used in the second quarter excludes the following specific payments, 10.3 million for final inhaled insulin payments, 1.5 million related to workforce reductions, and a $1 million settlement paid to the University of Alabama.

At June 30, we had cash balance of $373.9 million compared to $412.6 million at March 31. Our capital expenditures in the second quarter were 5.1 million and other net uses of cash was 2.1 million.

Revenue was $20.4 million in the second quarter, which includes the recognition of 1.8 million from a $10 million clinical milestone for the completion of the renal safety studies for NKTR-061. There will also be an additional $10 million milestone received this month, as Howard mentioned earlier.

Our revenue guidance for 2008 remains unchanged. We expect to generate revenue of approximately $95 million. Our revenue in the second half of 2008 will be substantially higher than in the first half of the year because of the recognition of $8.2 million related to the balance of the clinical milestone for NKTR-061 program and higher PEG product shipments occurring in the fourth quarter.

For the second half of 2008 on both a GAAP and non-GAAP basis, we expect to use less cash in operations than we did in the first half. Consequently, we remain committed to our guidance for the year that we have provided on our last two conference calls.

Our 2008 plan reflects our commitment to invest in our proprietary clinical development pipeline, including 50 to $65 million in five Phase II studies, two of which are underway and three of which are expected to begin in the fourth quarter, as well as two Phase I clinical trials. In addition, we also intend to invest another 30 to $45 million in research and preclinical work that will allow us to move new potentially valuable drug candidates into our clinical pipeline.

Our projected non-GAAP cash used in operations for 2008 is still expected to be under $75 million even with the addition of three new clinical studies for NKTR-102. This excludes cash payments related to inhaled insulin, including $6.4 million to maintain inhaled insulin manufacturing capability and 39.9 million to terminate inhaled insulin, as well as $5.8 million of workforce reduction payments and $1 million paid to the University of Alabama.

With the addition of these items, GAAP cash used in operations for 2008 is still expected to be under a $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 at least $330 million. This cash balance guidance is consistent with our guidance from last quarter.

As we have stated many times before, we have not included any new potential partnerships in our guidance. Let me reiterate what Howard said earlier. Nektar has more pipeline opportunities than any company of our size could afford. We have every intention of pursuing strategic collaborations and partnerships in order to generate revenue and fund these important clinical opportunities.

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

Howard Robin - President, Chief Executive Officer

Thank you, John. I'm proud of our employees and their hard work and commitment to excellence that is evidenced in our achievements in the first half of 2008. Our company is no longer dependent upon the success of a single out licensed product. Instead, we have chartered a new course and created a robust clinical and preclinical pipeline with significant revenue potential. We've built this impressive pipeline while maintaining financial discipline, significantly advancing our clinical programs without any dilutive financing. That is value creation.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Corey Kasimov with JP Morgan. Please proceed, sir.

Corey Kasimov

Hey, good afternoon guys. Two questions for you. One big picture, one just specific. The pig picture question, Howard, could you go into more specifics regarding your thinking of monetizing any of these assets? I mean, you talk about how big this pipeline is and as John just said you can't develop all of it so what's your thinking these days with partnering.

Howard Robin

Well, look, as I pointed -- as I have said in the discussion, we are certainly actively in discussions with a number of companies on lots of different topics. Nektar has the advantage of having a very very important platform technology and one of the struggles we have is not what drug to work on next because there are no opportunities but there are too many opportunities, so it's difficult to sometimes decide which program you want to work on next with all the different choices. And I think to optimize these technologies we want to work on numerous programs and we've done that this year. I mean, like I said, look at Nektar a year or two ago when there were very few programs. It was essentially the Exubera company. And today you look at Nektar and we have seven clinical programs and a very very extensive preclinical pipeline. So a lot of progress has been made but you can't keep expanding the company without partnerships and without increasing your revenues. So there are a number of things we can do. We are actively talking to companies because I think the value of our technology and the recognition that we really do have a proven technology is there. I think the pharmaceutical marketplace respects Nektar and I think there's an opportunity to do a number of collaborations to further advance our programs. On the other side of the equation are assets that are not necessarily strategic to Nektar and assets that are very very valuable but may not necessarily fit perfectly with our strategy and those assets can be monetized. They could be royalty streams that we monetize, they could be assets that we are not using that could be very valuable to somebody else. So I think there are a number of ways for us to continue to raise capital without having to dilute shareholders.

Corey Kasimov

Okay. Now as far as the buzz around the pipeline is concerned, it seems like most of the attention is focused on your PEG irinotecan. Is that a product you are willing to partner at this point or is that off the table until you get more data?

John Nicholson

Well, I think this. I've said we are -- let's contrast that with NKTR-118. We've said that there is a high level of interest in partnering 118 and there is a number of companies that are interested in that. And I think that's certainly because NKTR-118 clearly leads you to NKTR-119, which is an opioid that has been modified to not cause opioid induced bowel dysfunction and that involves working with controlled substances and it involves perhaps technologies which Nektar is not yet best suited to handle and, therefore, I think a partnership collaboration of 118 makes a lot of sense. And if the economics don't look right, we will continue the program ourselves for sure, but there is a place where a partner could bring value.

If you look at NKTR-102, I think that's a program that Nektar can easily handle and move through the clinic and I don't have any intention of partnering NKTR-102 right now. Now, that's not to say that we wouldn't enter into a collaboration on either product for Phase III because at some point if Nektar were sitting with only one or two programs, well of course my answer would be we are going to take them all the way through the clinic, we are going to bring them to the market or at least we are going to partner them after we have Phase III results and an approved drug. With the luxury that Nektar has of having such an impressive pipeline and really a proven technology platform, there is no need for Nektar to take huge risks in Phase III development when I think the Phase II programs are being designed to be predictive of Phase III results. So at this point, I'm pretty comfortable in saying that partnering programs in Phase III, at least at this stage of Nektar's evolution, makes a lot of sense and I think perhaps partnering some of our programs even earlier makes sense but we will have -- suffice it to say that we will be partnering everything from the preclinical stage all the way through Phase III selectively and based upon selectively and based upon what makes sense at the moment.

Corey Kasimov

Okay. And then lastly, when and how might you release the results from the IIa study of 102?

Howard Robin

I am going to ask Theresa to comment on that because I don’t know her exact timeframe.

Theresa Neumann

Thank you, Howard. The Phase IIa is currently advancing. The Phase IIa is currently advancing. We have excellent activity that we are observing and we should be wrapping that up in a few weeks. What has happened is, as you know, the Phase IIb randomized trial is really the important trial for head to head comparison with irinotecan and so we're excited about pursuing that in the K-Ras mutant population, which is the newly identified population in colorectal cancer with a very important unmet medical need. There is no standard for that group.

Corey Kasimov

Okay. But you will still release the IIa results that are being done in combination with Erbitux?

Theresa Neumann

Yes.

Corey Kasimov

Okay. Thank you.

Operator

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

Ian Sanderson

Good afternoon. Thanks for taking the questions. On 102, it sounds like this Phase IIb trial is well I think an interesting opportunity, potentially pushes the timeline out a little bit and have you relooked at this sort of revenue projection that you are giving or revenue target whatever by the end of 2012 with some of the new -- in light of some of the new timelines on the internal development pipeline? Secondly and related to that, could you go through the timing again on NKTR-118, the PEG-naloxol, and when do you expect to initiate Phase II trials there? And third on NKTR-119, could you talk a little bit about exactly how that's working since the PEGylation presumably keeps the molecule from crossing the blood brain barrier. I am not sure how you get analgesia out of this?

Howard Robin

Okay. Well, let's talk about 102 first. We haven't our position on we will have Phase II data. We said we would have it by the end of next year and actually moving to the K-Ras mutant population doesn't slow the process down, it actually speeds it up. And these are patients that now have no opportunity to use (inaudible) so quite frankly -- and that's about half the population, actually. So I expect that, if anything, that speeds up development doesn't slow down development. So we are standing by our position that by the end of next year we will have data from the Phase IIb study in NKTR-102. With regard to NKTR-118, NKTR-118 is already in Phase II. It's enrolling according to plan and we will have data by the middle of next year. I will let Kevin speak for a few moments on the issue of combination opioid and NKTR-118.

Kevin Corkery

Yes, the 119 program is actually a simple application of the 118 technology aimed at the prevention of OIC in combination with an opioid product. We are looking at several opportunities to treat chronic pain with the prevention of OIC together. The molecule -- the opioid molecule is actually not PEGylated, it's just in formulation with the PEG-naloxol compound and the two work together to provide the pain relief and then prevent the OIC.

Ian Sanderson

So it's simply a combination dosage form, only one portion of which is PEGylated?

Kevin Corkery

That's correct.

Ian Sanderson

Okay. Very helpful. Thank you.

Operator

Our next question comes from Jon LeCroy with Natixis. Please proceed, sir.

Jon LeCroy

Thanks for taking my call. On the amikacin payments, the 8.2 you are going to book and then I think you said there is another 10. Does that mean there is going to be 18 million or so recognized in the third quarter?

John Nicholson

No. Basically in the third quarter we recognize 8.2. The $10 million even though that will be cash flow into the company we will not recognize that as income due to the fact that as part of the Phase III study that Bayer will be conducting, we will have to contribute $10 million to those studies.

Jon LeCroy

So will that show up anywhere on the income statement over time or offsetting R&D or anything like that?

John Nicholson

No. Well, basically it won't show up on income statement because we will be accruing those expenses on the income statement. So it's kind of a wash.

Jon LeCroy

Okay. Thank you.

Operator

Our next question comes from David Steinberg. (Operator Instructions).

David Steinberg

Yeah, thanks. Dave Steinberg at Deutsche Bank. Couple of questions. You laid out, Howard, your revenue outlook I think for 2012 and I was just wondering if you could also share with us your outlook for profitability during that time? I know previously maybe before you got there, management discussed when they might turn profitable and what key product would drive in the profitability. So could you share with us perhaps when you might turn profitable vis-à-vis that 2012 period? And then secondly, are you still intending on building a sales force and if so what year should we start building that into our model and could you just remind us of how many sales reps you intend to hire at that time?

Howard Robin

Okay. Let's address the second half of your question first. Nektar has no plans at this stage for building a sales organization. I think that's premature and at this point quite unnecessary. That doesn't mean that we won't do it at some point. That doesn't mean that we actually wouldn't take a drug like NKTR-102 to market. But at this point, the company -- in my strategy is not a specific requirement that we actually market a drug in the next four years. So right now I have no plans to build a sales organization. Now let's go to the first part of your question, which is profitability. Look, it is very difficult for a company who is conducting -- a small company which does not have products on the market to be profitable especially when they are conducting significant amounts of research and development activities. As a matter of fact, I can't think of any companies that have no marketed product or even outlicensed product with royalties that are profitable on the basis of those royalties. So looking back at Nektar and Exubera royalties, it's unlikely that Nektar would have been profitable in that scenario.

Now one can make the company very profitably quickly. One can say let's just collect our royalties, let's not do any more research and development and we could be profitable in the very very short order, but it would look like a very very boring company and there would not be much of a future other than to clip coupons on our royalties. So what are we doing -- what are the two ways to think about profitability? Well, you could think about profitability in terms of earnings per share and you could say well, we earned $1 in total or we earned $10 million or $5 million and equate that to an earnings per share number or you could look at -- but you could look at profitability in a different way. For a biotech company doing pioneering research, you can say, we have been so efficient in cutting our spending and making our company more efficient and more effective over the last 18 months and at the same time we have significantly increased our work output. So now we have, as I said earlier, seven programs in the clinic, we have numerous partnered programs, including partner program such as amikacin that didn't even exist a year-and-a-half ago and we have an extensive pipeline of preclinical programs moving for research that we will be able to bring to the clinic or find partners for.

All of that work has been done without any need for further financings. We haven't come to the shareholders for any additional money. We have said, look, we have done all of this, we haven't asked for additional funding. We have done it by putting in place strict financial controls, changing the culture of the organization and allowing us to do a lot more with a lot less. That's not just cutting cost. That's cultural as well. It's changing the phase of the organization, changing the strategy of the company, changing the behavior of the company. So we have done a lot of this. In the last 18 months, we put in place a really experienced executive team. We have changed the culture and we put numerous programs in clinical development as well as preclinical without any dilution of shareholders. So that's for me a very very different, but very very viable way of looking at profitability. It's called value creation. So I don’t have a plan to say Nektar is going to be profitable next year but I think in terms of a company that managing itself well from a financial point of view as well as moving one of the most impressive pipeline in the biotech industry forward, I think the shareholders should be very happy with that kind of performance.

David Steinberg

Okay, thanks.

Operator

Our next question comes from the line of San Mon with Mon Family Investments. Please proceed.

San Mon

Hi Howard. I guess I have a question on although it seem though, you want to not think about earnings or value near term, I will ask you the question why we would not with the future that you project, why would we not do some share buyback or buy back some of the converts that we have now at a large discount? Fairly obvious that the cash burn with your new efficiencies would last us way into the future before we even have a need for additional cash.

Howard Robin

Well, look, it's something and I think I talked about this before. It's something we always consider. I think at this point companies our size with numerous opportunities in research want to reserve our cash for these research opportunities and you can look at the whole issue of buyback of stock in two different ways. Yes, you buy back the stock and you use your cash to do it and you in theory increase your value of the company that way, but there's other ways to increase the value of the enterprise and my view is can you take that cash and can you put it into additional programs and increase the value of the enterprise that way. So there is no magic rule for doing this. I happen to think that we have so many opportunities in front of us that I don't want to give up the cash that could allow us to get any one of these to work because, as we all know, if Nektar's work on seven or eight or nine or ten or nine or ten different programs, one successful program changes this into a very very different company and I think we have so many shots on goal and I don't mean shots on goal in a very cavalier way where you have one drug and you're studying it seven different ways. We have numerous programs moving through preclinical and clinical development. And I think it only takes one or two really important ones to change the whole face of the company. Now, there are other reasons -- there are other regulatory reasons and commercial reasons why buying back shares are not appropriate right now. But, suffice it to say, that it's something we always consider but right now I think the opportunities in front of us for using our cash to develop drugs is so great that I don't want to use it in a financial engineering sense.

San Mon

Okay. Second question is you have always been very forthright and very able to predict near-term contracts or partnerships. We have heard not a lot in the last several months. Is there something that you would like to anticipate, discuss in more detail about what we can expect with some of these programs on partnerships?

Howard Robin

Well I would like to anticipate lots of things but, look, I always worry about giving guidance toward getting deals done because they are not really under your control and you know that you could be in extensive negotiations with a company and they decide at the last minute not to pursue the opportunity any longer. So I think it's always a bit dangerous for CEOs to make deals a specific public goal. That said, what I try to do is make it clear in this call and other calls that I've had and other presentations I've made to investors in that we are committed to doing partnerships. We have lots of opportunities. We talk to lots of companies. There are lots of discussions going on with small and large pharmaceutical companies in terms of Nektar's portfolio. But telling you that next quarter one will get done, next month one will get done or next year one will get done, I think the timing of that is very very difficult to predict. I think the important thing to understand is that management has a philosophy and is committed to collaborating with major companies and it is baked into everything -- every part of our culture. So we do want to get deals done. I strongly believe that Nektar will get deals done in the future, but setting a very strict guidance for when a deal will get done I think is counter-productive.

Operator

Our next question comes from Ian Sanderson. (Operator Instructions).

Ian Sanderson

Just a quick followup on NKTR-125, can you just give us an update in terms of where that stands and the clinical timeline there?

Howard Robin

NKTR-125, which is PEGylated diphenhydramine, is still in preclinical. We are still evaluating it and we haven't said publicly when we will file the IND but I can tell you it's progressing through the preclinical stages and we will be giving you more information on that as it evolves.

Ian Sanderson

And as similarly on 061, the amikacin with Bayer, when they plan to start enrollment of the Phase III?

Howard Robin

Well, we have said that we expect to start enrollment before the end of this year and it's always a little difficult to give out information from a product that we have partnered. But we did say publicly that we would start -- we would expect to start enrollment before the end of the year.

Ian Sanderson

Okay. Thank you.

Operator

This concludes the question and answer session. I would now like to turn the call over to Mr. Howard Robin for closing remarks.

Howard Robin

Well, in closing, I want to thank everyone for their support and interest in Nektar. We look forward to seeing you at the upcoming Investor Relations event including the UBS Conference in September and the Natixis Conference in October and our R&D which will be held on November 12th in New York. So thank you very much and I appreciate you spending the time with us this afternoon.

Operator

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

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Source: Nektar Therapeutics Q2 2008 Earnings Call Transcript
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