Nektar Therapeutics (NKTR) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Nektar conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session.

I would now like to turn the call over to Mr. Robert Chess. Mr. Chess you may begin.

OK. Thank you. Welcome to the Nektar Therapeutics analysts conference call to review our fourth quarter and year end results. This is our first conference call under our new name, Nektar, rather than Inhale Therapeutic Systems.

I'm Rob Chess, Chairman of Nektar. Joining me today are Brigid Makes, our Chief Financial Officer, Ajit Gill our President and CEO and Milton Harris the President of our Nektar Molecular Molecule Engineering Division at Huntsville, Alabama.

Before we get started, I need to read our safe harbor statement. The following presentation and discussion contains forward looking statements that reflect our current views as to the company's business strategy, future products, product development, clinical trials, manufacturing scale up and other future events and operations related to the company. The forward looking statements also involve uncertainties and risks that are detailed in Nektar's reports as Inhale and other filings with the Securities and Exchange Commission including our Form 10-Q for the quarter ended September 30th, 2002. Actual results could differ materially from these forward looking statements.

So, with that done, get on the deed of the conference call. We are pleased today to discuss our results at Nektar. Our new name that reflects our broadened capabilities and approach to drug delivery.

Before we get started, I'd like to make a few comments on our new name and why we chose Nektar. We wanted a name that meant something. A real word. A name that denotes a benefit. We also wanted the name to be short, unique and distinctive in drug delivery, much like Inhale had been for years.

That is why we spell Nektar with a K, which is the Greek spelling of nectar. Nectar is the drink of the Gods giving them strength and everlasting life, much like we intend for the drug products we work on. Nectar is essential to nature to create, diversify and evolve plant life, an essential element to life.

In this way, we intend Nektar, our company, to provide essential ingredients and ways to improve and transform drug products. In addition to changing our name, we made tremendous progress in 2002 to position ourselves to achieve our of becoming the leading broad-based drug delivery company.

Three products using our technology were approved this year in the U.S. and Europe, two new products entered stage three, or pivotal trials, and we announced 11 deals on 13 molecules, including our most recently announced collaboration with the Straumann Group. It was the most productive year in the history of our company.

The next step of our growth strategy is to accelerate our pipeline and improve our economics by significantly increasing our focus on proprietary products. Ajit will discuss this later in more depth. First, however, Richard will review our financial results for the fourth quarter 2002, and then provide financial guidance for 2003. Brigid will then review our progress towards reviewing our long term vision in building the leading broad-based drug-delivery company, and our intermediate-term goal of reaching profitability in 2006, given our current business assumptions using our current cash.

Ajit will first provide a summary of our progress in 2002 from our partner-initiated collaborations and pipeline advances. He will then describe both the proprietary products program, its opportunity and milestones, and he'll conclude with our milestones and guidance for the next two years.

I'll then provide a summary at the end. I'd now like to turn the call over to Brigid to discuss our financial results.

Thanks Rob and welcome to everyone on today's call. First, I will provide an overview of the fourth quarter results and then give some guidance for 2003. Our first quarter results were within, were better than the guidance provided on our previous conference calls.

In the three months ending December 31, 2002, Nektar reported a net loss of 31.1 million, or 56 cents per share. Included in the fourth quarter 2002 loss is a 2.6 million restructuring charge associated with the December announced reduction in force of 75 employees, that was approximately 10 percent of our total employee base. Our results were also charged with a net loss of 28 and a half million, or .51 cents per share. For the twelve months ending December, 31st, 2002, the company reported a net loss of 107.5 million, or one dollar and 94 cents per share, which, again, was within our guidance provided throughout the year.

We reported revenues of 22.6 million for the three months ending December 31, 2002, as compared to 24.2 million for the same period in 2001. Fourth quarter revenue was in line with our expectations, though somewhat lower than fourth quarter last year, primarily due to the sales of clinical supplies to our customers. The year-to-year difference of revenues for 2002 totaled 94.8 million, an increase of 22 percent over 2001. Of that 22 percent, the increase in reported revenue, approximately nine percent is attributed to expanded funding under the company's existing collaboration agreement, and the remaining 13 percent is attributed to Nektar's molecule-engineering PEGylation product sales.

As of December 31st, the company reported cash and investments totaling approximately 294 million, as compared to 313.6 million at the end of the third quarter. The net cash usage for the three months ending December 31st was 19.6 million. The usage was comprised of 12.7 million used in operating activities and almost 7 million used in investment or financing activities.

Our year end cash reserves are higher than our projected balance, primarily due to the timing of certain partner payments for funded activities totaling approximately 20 million, as well as achieving targeted spending reductions both for expenses and capital expenditures. The cash balance for the year decreased 50 million during the year. 90 million was used to fund operations, capital spending and interest payments, and 50 million came in as a result of the Enzon equity investment in January of 2002. Overall, 2002 was a very successful year. We met a number of critical milestones in the business in addition to achieving our financial plans. We met or beat our financial guidance and ended the year with a strong cash position totaling 294 million.

We'll now look ahead to 2003 and provide some guidance, financial guidance on the operating plan. As we have discussed, we are managing the business to achieve profitability in 2006 with our current cash reserve. 2003 will be another pivotal year for Nektar. We recently announced our new growth strategy and have a very exciting and challenging set of objectives to achieve to progress towards our overall goal of building a leading, broad-based, drug delivery product company. We have put together an operating plan for 2003 that we believe moves us towards strengthening our pipeline with new programs, and progressing our current programs through the clinic. In 2003, we expect our net loss to be somewhat less than 2002. We are targeting our net loss for the year in the range of 97 to 100 million, as compared to 107.5 million loss in 2002. Let me discuss some of the key drivers of our 2003 operating plan.

First, let me comment on revenues for 2003. Reimbursements from our partners for funded activities and product sales are expected to increase by approximately 5 to 10 percent over 2002. Product sales are expected to increase by as much as 50 percent due to product launches and the progress of products moving through the clinic, while contract revenues are expected to remain relatively flat. Next we expect our operating expenses to remain relatively flat in 2003.

The decrease in spending associated with our workforce realignment announced in December, in addition to the elimination of some charges we incurred in 2002, will be offset by some incremental spending on new initiatives associated with our growth strategy and the reallocation of certain resources. To summarize, our spending can be categorized into a few major groupings. These include partner-funded projects, proprietary funding, I'm sorry, Nektar funded projects, technology, commercialization and infrastructure. Our partner-funded expenses have a direct correlation to our contract revenues.

As noted in our growth strategy announcement, we plan to invest in our own proprietary products to expand our pipeline and prove our product's economics. We will be spending approximately 18 to 20 million on our proprietary programs this year. Technology spending will be reduced in the coming year, while commercialization and infrastructure costs remain somewhat constant. Net interest expense and other expenses will increase in 2003 by approximately 5 to 7 million over 2002, primarily due to lower average cash reserve and lower interest rates. We expect capital expenditures to be less than prior years with our targeted spending for 2003 to be in the 15 to 20 million range. The most significant capital spending is for manufacturing capacity expansion at our PEGylation business and GMP manufacturing scale up for our Bradford business. We expect our net loss for the first quarter to be in the range of 22 to 24 million. This quarter, it is expected to be somewhat favorable compared to the rest of the year, primarily due to the timing of the expenses in revenues.

We expect the net of these activities to have a reduction in our cash reserves of approximately 100 to 105 million for the year that would leave us with approximately 190, 195 million at the end of 2003.

As noted previously, we ended 2002 with cash reserves of about 25 million higher than planned due to the timing of parent payments and lower spending. This has resulted in having timing differences of certain cash flows between 2002 and 2003.

To summarize, we have a plan that we believe should allow us to move forward and meet several significant milestones in 2003 that Ajit will discuss shortly. It will also leave us well positioned to achieve our broader corporate goal of achieving profitably by 2006.

Before closing, I would like to comment on some key points that I think are important to explain. We talk about achieving profitably in 2006 with our current cash reserves. The key drives in achieving this goal of reducing our net loss, which will in turn reduce our net cash usage in the next few years is going to be a result of the following: decreased product sales from our already approved products, such as new , Pegasys and Somavert in Europe. In addition to possible product launches in 2004 to 2006, the of CDP 870 for rheumatoid arthritis, Confluent spray gel for surgical adhesions and the Straumann Group dental implant product as well as Macugen for macular degeneration and possibly one or more of our own products in Phase I or II testing.

In addition, it is possible the Exubera may launch in this time frame, though our cash usage and profit planning is done independently of the timing of Exubera.

Reduced capital expenditures in 2004 to 2006 as most of our capital expenditure requirements will be complete for our manufacturing facilities.

Commercialization and certain infrastructure costs associated with Exubera will be either removed to cost of goods or discontinued with a product launch, or eliminated due to a need to restructure.

Decreased unfounded R&D will result as a part of partner in proprietary projects in the 2004 to 2006 time frame. For those products that are, or programs that are already underway, they're expected to be started in the coming year.

These actions above will result is significant reduction in our cash usage in 2004 through 2006 and it should allow us to achieve our cash management goals.

I'll now turn the call over to Ajit, who will update us on our 2002 achievements and to discuss our 2003 milestones. Ajit?

Hi, we would like to welcome all of you to the first Nektar Therapeutics conference call. 2002 was an outstanding year for us, with possibly the most productive year in the history of our company.

First, let's review our partners' products business. In the past year we announced partner collaboration than in the history of the company, 11 partners for 13 molecules across all of our technology platforms. Just last week we announced a collaboration for a unique type of product for Nektar, a dental implant application with the Straumann Group, one of the two largest dental implant companies in the world. Straumann is developing a state-of-the-art dental product based on our that would be used by dentist to support tissue and bone regeneration involved in dental surgery.

They expect to have the first product line using our technology to market in 2004. We will receive manufacturing revenues, milestone payments as well as royalties. The implant industry is estimated at about $800 million and growing at 10 to 15 percent annually over the past 5 years.

Straumann, who is estimated to have about 20 percent market share of the dental implant business announced their 2002 revenue last Friday at about 380 million US dollars. They expect this new PEGylation implant product to add incremental revenue to their business, not cannibalize revenue from other products.

In addition to our many new collaborations in 2002, we strengthened our already leading position in PEGylation through our reliance with Enzon. Through this alliance we are now the exclusive marketer to third parties of Enzon's PEGylation portfolio. Enzon will also be developing three products with us. The first one is inhaled and they made a 40 million dollar equity investment in Nektar.

In 2002 we made additional progress with our pipeline of partnered products using our technology. Several products advanced from the clinic and on to the market. These products are the key components that we expect will contribute towards reaching our profitability goal in 2006.

Let's start with the three products approved in the US and in Europe in 2002. First, once per cycle product for decreasing infections associated with many types of cancer chemotherapy treatments was approved early in 2002. launched the product in the second quarter and reported 2002 revenue of 464 million dollars for .

For the full year, combined sales of and the unPEGylated version of the product were 1.8 billion dollars. An increase of 57 percent over only sales for 2001. is a good example of how our technology can be used to improve and extend the life cycle of a drug product and help increase its sales.

In addition, Pegasys as a mono-therapy and the Pegasys combination product for the treatment of Hepatitis C were approved in the US and Europe. Further, Pharmacia's for was approved in Europe and is awaiting approval in the US.

With these approvals Nektar now has 6 products using its technology approved in the US and or Europe.

Next, let's look at partnered molecule engineering products based on our PEGylation technology that made progress in late stage clinical development. We now have three products in late stage clinical development that use our molecule engineering technology including Eyetech's Macugen, Pharmacia's EDPH 70 and Confluent's SprayGel. Each of these products advanced to a new level in the past year.

The continued progress of our partners' drug products through the development pipeline shows how our PEGylation technology can play a central role in creating high valued, therapeutically important drug products.

First Eyetech Pharmaceuticals, a private buyer technology company located in New York, whose focus is the treatment of eye diseases, announced the completion of enrolment in it's Phase 2/3 clinical trials for the use of its anti- in the treatment of related macular degeneration. The leading cause of blindness among Americans over the age of 55.

related macular degeneration accounts for approximately 200,000 new cases annually with a prevalence of 1.2 million cases in the United States alone. In addition, Macugen is in Phase 2 testing for diabetic macular edema which affects approximately 155,000 Americans with diabetes each year and is the leading cause of blindness in adults under the age of 55.

In December, Pfizer and Eyetech signed a joint development and commercialization agreement for Macugen. Pfizer will make initial payments of 100 million dollars and potentionally 195 million dollars more in milestone payments based on world-wide regulatory submissions and approval.

One of the larger deals ever done for the product . We will receive milestone payments and royalties on net sales of this exciting new product, and we are the exclusive supplier of the reagent. Another product using our PEG technology that has to create three trials is Pharmacia's CDP 870, rheumatoid arthritis.

CDP 870 is the highest in the humanized PEGylated antibody fragment, targeted at TNF alpha, a key mediator of inflammation being developed by Group, in collaboration with Pharmacia corporation under a world-wide and growth agreement announced in March 2001.

Pharmacia initiated the large Phase III clinical testing program in the fourth quarter of 2002. Assuming that the Pfizer-Pharmacia merger holds, Nektar will have four products with Pfizer-Pharmacia including Exubera, CDP 870, Macugen, and Somavert. We are pleased to have such a strong marketing partner for so many of our products.

Another product using Nektar's PEGylation technology that moved into pivotal testing this year in the US is Confluent Spray Gel, which uses our PEG Hydro-Gel to prevent surgical adhesion. This product is approved in Europe.

We are also seeing progress with our PEGylation-based-product . First, I would like to note that we have one Phase I project drop out last month. This was for an unnamed product being developed by a partner for an unnamed indication, and was one where we believed the eventual revenue potential for us on launch would have been small. The product that was recently added to our clinical pipeline has far higher potential.

InterMune announced last week that it has initiated a Phase I clinical study to evaluate PEG alpha con, a PEGylated version of , , as a potential new treatment for chronic hepatitis B virus. With the help of our molecule-engineering team in Huntsville, we developed a PEGylation process. This product was moved from concept to clinic in one year. This is our third interferon alpha program, and shows how PEGylation is becoming the industry-standard method for improving product performance in this area and many others.

I'd like to leave the PEGylated products area and turn now to a discussion of our Exubera Inhaled Insulin program. Exubera continues to be a key focus for us. It represents a huge commercial opportunity, and we believe it will be a major revenue driver for us and our partners, Pfizer and Aventis, once launched. Last week on Pfizer's quarterly investor conference call, Pfizer commented that it is unlikely that they and Aventis will file Exubera for approval in 2003.

Subsequent to that call we spoke to Pfizer senior R and D management in order to better understand the current situation and determine what guidance we can provide to our investors. Based on our discussion with Pfizer, we can share the following information.

First, the data is compelling, and Pfizer has said that they have demonstrated very good with this product. Second, Pfizer has stated to us that none of the data today suggests a problem with Exubera. This is consistent with Pfizer's comments last fall, when they characterized the small differences seen in pulmonary function tests, between a limited number of Exubera control patients as non-progressive and without clinical manifestation.

They further stated that instant analysis of a one-year study showed non-deterioration in lung function relative to subcutaneous insulin. Third, based on discussions with regulatory authorities, Pfizer is generating long term controlled safety data in both type I and type II patients. They type II studies were initiated 2001 and the type I studies were initiated in 2002. The long term controlled safety data available thus far is from the type II study. Pfizer believes that at least one year of type I data will be needed for our filing. These and other studies are ongoing currently. Please keep in mind that completion of all studies beyond one year is not a prerequisite for filing and that some studies likely will be continuing to the time of product approval and launch. The filing date will be determined based on ongoing analysis of data, as it becomes available along with further discussion with regulatory authorities. Our responsibility for the Exubera filings related primarily to the provision of the chemistry, manufacturing and controlled portion of the dossier.

We view our job at Nektar as being prepared so that when Pfizer and Aventis decide to file, we will be in a position to support their efforts. Over the past year and for 2003, Pfizer has funded us to be prepared for the earliest possible filing date so that when they choose to file, Nektar is not holding up the filing process. Last fall, our partners reiterated publicly their strong commitment to Exubera. Their spending continues to be consistent with their belief in the potential of the product and likelihood of its approval and commercial success. We expect Pfizer will be providing Nektar over 40 million dollars for Exubera R&D funding in 2003.

Pfizer and Aventis's total spending on the program will be far higher since clinical trials, product launch preparation and insulin manufacturing and costs are paid directly by our partners and are not included in the 40 million dollars plus paid to us. While a large dollar investment does not guarantee success, we believe it is a strong indication of our partner's commitment to the program and its high potential to be a major blockbuster for them. I'd like to conclude my statements about Exubera by saying that we continue to be excited about the opportunity for this product. We believe that this will be a breakthrough product for the millions of patients who suffer from diabetes and will have a significant impact on how diabetic patients treat their disease. So far, we discussed our partner pipeline and collaboration progress in 2002 and how it will contribute to our profitability. I'd like to turn now to a brief discussion about our growth strategy.

When we announced our new name, Nektar Therapeutics, we also announced the next step in our growth strategy towards becoming the leading broad-based drug delivery product company. We intend to increase significantly our investment and focus on proprietary product that we will develop through phase I and possibly early phase II before partnering. First, I'd like to define these proprietary products as being delivery-based products to address significant unmet needs. We will focus on using our technology to create highly differentiated version of already approved drug products. What we'll be able to offer the partners as a result of this program will be products that have an already developed commercial formulation, pre-clinical efficacy and safety package, a regulatory and clinical strategy and clinical data from phase I and in some cases, phase II.

What we will get in return is a faster build up of our product pipeline, accelerated adoption of our technology and improved financial return. In addition, we will continue to offer partners a wide range of technology licensing and development capabilities, including product, clinical and regulatory expertise that can be applied to partner originated compounds. We believe proprietary delivery dates products represent an outstanding business opportunity for us and our partners. We plan to focus on our already approved molecules where our delivery technologies can be used to create highly differentiated products with improved efficacy, safety or convenience or enable you indications. We also plan to examine opportunities where products were far along in clinical testing and sale for delivery related issues.

We expect products that we develop to generate a minimum of $40 million annually in royalty and manufacturing revenues through Nektar, based on us receiving between 10 to 25 percent of our eventual partners' revenue.

We have already identified and started work on several potential products that meet these criteria and cover the range of our three technology platforms. We believe this business has the potential to generate over time several $100 million annually for us, and to be a low to moderate risk business proposition on a product-by-product basis, since we typically will be working with existing molecules and usually proven approaches, plus we would have shorter development time frames.

We have used this approach in the past and have seen success with several company initiated programs including , which is partner to Pfizer where we did the initial Phase I for for partner with Pfizer. Inhaled , which has been partnered with , and inhaled , which is partners to Enzon.

Let's look at our milestones for this proprietary products program. First, we're already partner in with Enzon and inhaled with . These were accomplished last year.

Our next objective was to establish a business unit dedicated to the creation of these proprietary products. We established the proprietary products group with specialized clinical science and regulatory expertise. The group, led by Bob Gerety, MD, PhD, aims to create product opportunities for Nektar to develop into clinical testing. Bob has been serving as our Vice-President of Regulatory Sales. He has expensive expertise in pharmaceutical product development. He held executive positions in regulatory, research and development at several biotech and pharmaceutical companies, including and BioGen and has 15 years experience at the U.S. Food and Drug Administration and at the National Institutes of Health.

We believe that Bob brings a depth of experience to drive the success of the program. Our next objective will be to expand our clinical, regulatory, and product identification expertise. We've already initiated several programs and plan to start work on at least 10 potential products in 2003 and 2004, and move at least three of these programs into the clinic in that same time frame. Further we expect to have partnered at least one more proprietary program by the end of 2004.

When you add in the proprietary products business, we believe we have three distinct multi-$100 million opportunities at Nektar, each with its own distinct upside and risk profile. First, there is the opportunity represented by our current exit group through the pipeline and new partner initiated program. We currently have 18 product other than Exubera that are marketed, filed or in human clinical testing. This product is relatively, this business is relatively low-risk, because the number of, because of large number of products in diversity. It would generate a few $100 million in annual revenue three to five years out.

Second, Exubera can be viewed as a distinct businesses. While the timing of the Exubera filing and launch is still uncertain, assuming continued clinical success and product approval Exubera has the potential to generate 200 to 400 million dollars of revenue for Nektar.

Third, our new proprietary products business, while at the earliest stage of it's would also be a several hundred million dollar revenue source once first products start to launch in 4 to 5 years with a relatively low to moderate risk profile.

When added together, we believe these -- this could generate over a billion dollars in annual revenue by 2010.

Let's review our significant milestones for the next few years. That's for 2003, 2004 for our pipeline of partner initiated products. First, we expect Pharmacia's Somavert to be approved in the US this year which would bring the total number of US approved products using our technology to 5.

Confluent intends to finish clinical trials for SprayGel this year and file for approval either this year or next. This would add a sixth US approved product to our list. The Macugen Phase 3 trials should be completed. We are not aware of any public guidance yet on filing timing.

We anticipate that one to two products will move to Phase 3. This means there could be 4 to 5 products using our technologies in Phase 3 development or filed for approval by the end of next year and we expect an additional 1 to 3 products will move to Phase 2.

Further, as many as 4 to 7 partnered products could enter the clinic this year and next. Several of them in 2003. We expect a strong phase of signings to continue and anticipate several additional collaborations in addition to our Straumann deal this year.

With regard to Exubera, we expect that additional data will be presented and it will Pfizer progress disclosures and possible NDA filings, although, of course, the filing timing is still to be determined and is not expected in 2003.

As for the proprietary products, we believe that you'll see 3 to 4 products into Phase 1 including 1 to 2 this year. In total, we expect at least 7 to 11 proprietary and partner initiated programs to enter clinical testing by the end of 2004 which would result in a pipeline of more than 25 products approved, filed or in the clinics. We anticipate that we will have partnered our first new program -- our first new proprietary product program in this time frame.

With that, I'll turn the call back over to Rob who will provide a summary and then we'll be glad to take questions.

Great. Thank you Ajit. Before I conclude, however, I'd like to comment on my future involvement in investor relations. As most of you know, I have gradually evolved my role at Nektar from President to CEO to Co-CEO and then to Executive Chairman.

Now that the integration of our Shearwater and acquisitions are complete and we have put in place the management systems and strategies to take the next step in realizing our goal of becoming the leading broad-based drug delivery products company, Ajit, along with portions of the management team, will be able to devote more of their time to shareholder communication.

In the future, Ajit will be taking the leading role in hosting conference calls and analyst meetings. This will allow me to take more of an advisory role in this area.

I plan to continue being actively involved in Nektar as Chairman and assisting Ajit and his team in growing our business. In addition, I plan to continue my work on industry issues including serving as Chairman of the Emerging Companies Section Board of the Biotechnology Industry organization, Co-Chair of Medicare and Drug Reimbursement Committee and serving on Bio's executive committee.

So, while you'll be seeing and hearing more of Ajit and less of me, please feel free to contact me at any time with anything I can do to assist you.

With that said, let's take a minute to review what has been a tremendous year for the company, and its prospects that lie ahead for us in 2003 and 2004. We have now booked three strong businesss bases. A thriving partner-initiated pipeline of blockbuster potential with Exubera, and new opportunities based on applying our leading-edge delivery technologies to improve molecules, and taking the products further into development to improve our economics and accelerate time-to-market.

We have had success in getting products approved that use our technologies and progressing products in the clinic and in signing collaborations in the way we believe is unprecedented in our industry.

Further, we have a strong cash position that will enable us to execute on our vision. We look forward to many milestones and product approvals, clinical advances, duly-announced products, and new collaborations that investors can use to measure our progress through this year and next. With that, I'd like to thank everyone for listening, I know we had a lot to talk about today, and I would like to open up for questions.

Thank you. We will now begin the question and answer session. If you have a question you will need to press the 1 on your touch tone phone. You will hear an acknowledgement that you have been placed in queue. If you question has been answered and you wish to be removed from the queue, please press the pound sign. Your questions will be queued in the order that they are received. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if there are any questions, please press the one on your touchtone phone.

Our first question is from Cindy Glass of ThinkEquity Partners. Please state your question.

Hi, good afternoon, I have a question about the proprietary program and thinking about how many projects, well actually it's got two parts, one, how long does it take, or how long do you think it takes for you to source a product or an idea and get into the clinic and how many projects do you think you can manage at a time.

You know the proprietary products, I think, in terms of sourcing ideas, I mean, we've been working on that for a while, I think it typically will take up between twelve and eighteen months depending on the particular product, you know, the indication and the technology being used to take that product into the clinic.

And how many-

In terms of how many products we can manage at any given time, you know, I think we are capable of managing several products at any one point in time, I think what the number really depends on is what stage of development they are in. But we've internally managed several products at one time ourself already.

Thanks.

Our next question from , please state your question.

Hi, folks, you've done a very nice job this year financially. I also commend you on your workforce reduction going forward. I have a couple of questions about your percentage of revenue on your PEGylated products in the pipeline. The PEG Macugen could be a big drug, and at least it's going to be an early drug-to-market.

The rheumatoid arthritis drug will now be the fourth drug assuming it gets approved. What I'm just wondering about is what are your percentages of your royalties on these products, and can you give us any estimates, knowing the size of the market, of what you might expect in 2004 and 2005.

Let me comment a little on that and let Ajit and Brigid might want to add some . Typically, on the products that we're signing, that have been more recent deals, Macugen and CDP 870 both fall into that category. We're getting mid single digits between royalties and manufacturing revenue on those products. So, given the size of those markets, is, we think, actually, that could be quite substantial. We have estimated that anywhere, that they could generate anywhere between about 25 to 50 million dollars per product in sales force at peak levels. So, as far as, you know, on the introduction time, I think that is really for our partner, in this case, I guess, you know, the Pfizer Pharmacia merger goes through it'll be Pfizer to really give guidance on the specific timing of introduction.

Okay. Thank you.

Our next question is from of Leerink Swann. Please state your question.

Hi. Good afternoon. at Leerink. I had two questions. One was you mentioned during your discussion of R&D and cap ex that at some point you have planned for, or there is a scenario where the Exubera expenses will be eliminated due to a restructuring and if you could just expand on that. And give us some idea of what it costs Nektar now, each year, just to simply maintain the equipment and the personnel that are associated just with this program and I've got a follow up question. Thanks.

Okay. Hi, Mike. In terms of the cost to support the equipment and the people, we are probably spending in the 25 to 30 million dollar range at this point in time. As we continue to move forward, when the product is prepared to launch for commercialization, we would expect some portion of those expenses to actually be removed and discontinued and then another portion of those expenses would be sort of transferred into cost of goods. It's basically so if you're manufacturing a that are supporting manufacturing.

Those expense, you know, they are treated as operating expenses and once we have a commercial launch then the manufacturing and quality portion would obviously, become part of cost of goods and get covered by that piece. In terms of what the restructuring, that, I think the point just was that assuming Exubera launches, these costs either go away or get reclassified as cost of goods and if for some reason Exubera is not going to launch, then we would end up restructuring the organization to deal with that issue. That's all.

Okay. Thanks. And then, just quickly on the Shearwater's driven revenues. What percent of those revenues in fourth quarter were attributable to the bulk PEG sales versus royalties and if you can give us some idea of how that was different from the previous quarter, the third quarter and the year ago period.

Mike, we have not disclosed what product sort of for the raw material versus royalty. Again, I know that as you look at those sales, they continue to be, I think it was quote, "lumping us in those sales" and that will be continuing sort of until we have a steady stream of product for shipments for commercial products as well as clinical. There is a mix issue that we deal with because some products have much higher, sort of, gross margins. You know, sort of in a combination. But we don't break out the details of that.

I think it is important to note that in general, the product sales from that area are going to increase significantly over the last year. I think when Brigid gave guidance that we anticipate a 50 percent increase, you know, really attributable, principally to you know, increase in the Neulasta sales from it being out there for the full year, PEGASYS launched, and some additional clinical supplies.

Right. And then as you look into 2004 and beyond with additional products being approved, the thing that is going to make the big difference in our cash usage is exactly those product revenues increasing significantly over the next several years.

Great, and lastly I just, I missed the revenue, the top line guidance for '03, over, I guess the 94, 95 million that you printed in '02?

Yes, , we said that the top line would grow five to 10 percent and we said that the product sales would grow up to, you know, approximately 50 percent and the contract revenue sales would be relatively flat year over year.

OK, thank you.

Our next question is from Rich Silver of Lehman Brothers. Please state your question.

Follow up on Exubera, when you talked about capital spending in '03, can you, I don't know if you mentioned this, but can you give us some sense of the delta in the spending related to Exubera and any sort of changes in that number relative to what we have been looking for the recent news from Pfizer?

Actually there's no change in the number relative to Pfizer's announcement. What we did say about cap ex is that we thought spending would be in the 15 to 20 million range, and that's primarily the bulk of that spending for 2003 will be for expanding sort of the manufacturing capacities and our capabilities more at our pure water, or our Huntsville, plant, as well as our Bradford location. And obviously we'll have some cap ex spending here in San Carlos, but most of the spending associated with the Pfizer scale-up has been completed.

And actually represents more change from sort of what we've been saying, the bulk of the capital investments for Exubera to support our program has already been put in place.

All right. Thank you.

Our next question is of . Please state your question.

Thank you. When I was a shareholder, I've expressed this before, but just continue to be concerned that your plan is greater than your balance sheet, and that you have a lot of great products and potential that you've talked about I'm just wondering if I'm sure the expected returns can't be the same on all the list in your portfolio, and maybe the prudent thing to do here would be not only the ten percent reduction, which you did, but also to cut back on the proposals that show the least results going forward and to give yourself a better guarantee of benefiting from all the great things that should come in the future, particularly considering that that Exubera obviously has been pushed out from here you initially thought it was going to be.

Thank you.

In terms of, you know, sort of the cash position and do we have sort of in a sense, too many programs, as you might try to put it, first, most of our clinical pipeline, I mean it's all partnered programs at this point, so the partners are picking up really the bulk, if not all, strictly saying it's not all, but for most of them, it's almost all of the expense related to those programs. So our investment is a very, very modest investment. Many of they products in clinical development are PEGylated products and they're -- you know what it costs us to support an incremental program is extremely small number. It's -- it's a very, very small level of resourcing. Almost small enough that even if you, sort of, dropped 1 particular program it wouldn't have any material impact on -- on headcount levels.

In terms of, sort of, the proprietary products, looking forward -- I mean, on of the things that we, sort of, like about that -- about that business is you can think of it as an -- flexible investment model. The number of programs that we start and take into the clinic is really within our control and we can manage that number up or down as we see fit.

Second, once we do a Phase 1, you know, we are not, sort of, committed to taking that any further if we don't want to and we might not want to because -- you know, for a whole variety of reasons. So we've got, sort of, multiple decision points in terms of incremental investment and once we partner any of those programs, once again, partners pick up, you know, on-going costs for that particular program.

And that -- that's, sort of, really why we feel, sort of, fairly comfortable with the strategy that we've laid out.

Thank you.

Our next question is from of Merrill Lynch. Please state your question.

Yes. Just a couple of odd -- odds and ends here. Just in terms of the restructuring charge that you took in 2002, could you just point out where you have it actually recognized in the quarterly income statements; that's the first one?

Second one is the size of the dental opportunity if you can give us a sense of, you know, how -- how big this market might be and, you know, what size of product we're looking at here?

And, thirdly, whether you -- it relates to Macugen whether you have -- to Macugen and also CDP 870 whether you have to share any of your PEGylation royalties there with Enzon?

OK. Harry, I'll take the first question which was the restructuring charge of the 2.6, approximately 80 percent of that, 2.1 million of that was in the R&D line, if you will. And the remaining 20 percent or about .5 million was in the G&A.

That's the fourth quarter numbers?

Yes.

On -- on the Straumann side, Harry, let me first give a disclaimer. I don't think any of us are very expert in the dental implant market. Having not had product there before or nor personally any of us having had dental implants, but, you know, kind of our estimate of that product, you know, is it seems to be products in that area, I mean, judging from Straumann, you know, can sell up to, you know, a few hundred million dollars. You know, and, you know, it's a product that when we look at it, it is, you know, clearly not in the ballpark of the two you mentioned CDP 870 or Macugen as far as products that could generate, you know, 25 to 50 million dollars per piece for us, you know, at, you know, peak revenues.

It's clearly, you know, in the lower categories in that. So, it's harder for us to estimate precisely because, as I say, I don't feel like we have the expertise in that marketplace that we do in many of the drug markets.

And then in response to, sort of, the final part of your question on the Macugen product, yes, we will share royalties with Enzon there.

Same with CDP 870?

I don't believe we -- we will do that on that one also.

Sorry, you will?

Yes. We will.

OK. Thank you.

Though, to keep in mind is the deal on those is significantly different than Pegasys and it's a much lower percentage of -- of revenue than it is on the Pegasys.

That is correct.

Thank you.

Our next question is from of . Please state your question.

My questions have been answered. Thanks.

Our next question is from David Steinberg of Deutsche Bank. Please state your question.

hi, good afternoon. Two questions. First, on alpha one, could you give us an update, at last check you planned to go into the clinic in '03, but Aventis was possibly going to a merger with Bayer and that could complicate it. That's number one.

Number two, with regard to Bradford, which was an acquisition you made a couple years ago, could, are you still very enthusiastic about that? I know you talked much more about the share water assets, and when might the first Bradford product reach the market?

David, I'll answer the alpha one question and Ajit will talk about Bradford and super critical fluid processing technology.

On alpha one, it's hard for us to give specific guidance right now, really for the reason you exactly mentioned is that until their merger with Bayer is complete, we know that that product, you know, is not going to be going forward until that's complete. You know, once that's done, we then expect them to sort of get back to us on the start of the clinical testing. As you know, the Phase I, you know, B was quite encouraging. It's a very significant market need and you know, we're hopeful that, you know, that kind of, you know, in the post-merger time if the product will come out positively, but, you know, until that merger's complete, it's hard for us to give specific guidance on it.

And regarding Bradford, you might recall, we've always in early-stage technology, and therefore it would take longer to sort of get both products into the clinic and to the market. And do we remain enthusiastic about that? Absolutely. I think it's a technology that will ultimately make a significant difference. It is an earlier-stage technology, and at this point, we haven't sort of made any projections for, you know, when those products will come to market.

Is there anything in the clinic with Bradford technology, and if so you know, how many products and where might they be?

You know, actually there is, but we haven't sort of made any, we haven't sort of disclosed any of the details on that yet, and you know, we may do that at a later date.

OK. Thank you.

OK?

Once again, if there are any questions, please press the one on your touch-tone. We have with CIBC on line with a question. Please state your questions.

Yes, thanks very much, and I apologize if I missed this, because you gave out a huge amount of information, which is great. But what percentage of your R&D this year do you anticipate being funded by partners, and do you peg in your, if you look at your sort of forward strategic efforts to budget out, do you peg what you're going to spend based on a percentage of proprietary spending to partner spending?

You know, on the latter question, we don't peg the two as a percentage. What we do on the, called the proprietary spending, I mean we sort of manage that as a discreet dollar number, because that obviously goes, you know, to the bottom line, and in fact, our cash usage. So that was one of the reasons why for this year, we decided to do the reduction in force, because with the opportunity that we saw ahead of us on the proprietary products program, we just decided to fund that by reallocating resources as opposed to just increasing those resources.

So, we view the two, you know, sort of separate and distinct.

Okay.

And as far as what percent is funded, clearly, as I noted, that funded R&D sort of tracked through our contract revenues. So it would be, it would probably in excess of about 60 percent. 55 to 60 percent is funded.

Okay. Thank you.

Our next question comes from Leah Hartman of CRT Capital. Please state your question.

Hi. Just wanted to check, Brigid, on the restructuring charge that you did take in the fourth quarter. I think the previous estimate had been roughly 3 million dollars, and are you -- was that all the charge that you took being the 2.6 in the fourth quarter or will we see a little bit slide into '03?

Yes. The total charge was taken. The 2.6 does round to 3, so that is the complete charge.

And the savings were still expected to be roughly 8 million a year?

Um-hum.

Okay. Thanks.

You have no further questions at this time. Were there any concluding remarks?

Okay. We'd just like to thank everyone for participating. We know it was a long call, and hopefully it provided you a lot of information of why we are so excited about the years coming forward and Ajit and I and Brigid would be delighted to answer any further questions that people may have.

Thank you.

Thank you.

Thank you, everybody.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for participating. You may now disconnect.