Nektar Therapeutics (NKTR) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Nektar conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Ajit Gill, Chief Executive Officer of Nektar Therapeutics. Mr. Gill, you may begin.

Thank you, operator. Welcome to Nektar Therapeutics analyst conference call to review our performance for the fourth quarter and for the year ended December 31st, 2003. (technical difficulty)--.

Hello? I am Ajit Gill, President and CEO of Nektar. Joining me today are our Chairman Rob Chess, our CFO Ajay Bansal and our Vice President for Corporate Development Chris Searcy. Before we get started, I would like to say that the following presentation contains forward-looking statements that reflect our current views as to the Company's business strategy, future products, product developments, funding, clinical trials, manufacturing scale up, and other future events and operations 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 annual report on Form 10-K for the year ended December 31st, 2002 as amended and our quarterly report on Form 10-Q for the fiscal quarter ended September 20th, 2003. Actual events could differ materially from these forward-looking statements.

I would also like to remind you that the Web broadcast of this conference call will be available for replay through February 17th, 2004 on the Investor Relations page at Nektar's Website at www.nektar.com. In the event that any non-GAAP financial measures discussed on this conference call that is not described in our earnings release, related complementary information will be made available on the Investor Relations page at our Website as soon as practical at the conclusion of this conference call.

2003 was an exciting and fruitful year for the Company. We started the year with a new name, Nektar Therapeutics, to better reflect our (inaudible) capabilities behind pulmonary delivery. During the year, we saw substantial progress in several areas. Our partners moved an additional four products into the clinic. Pfizer received approval for Sumewor (ph) for the treatment of acromedlie (ph). Pfizer and Aventis presented additional Phase III Exubera data. One of our proprietary products began Phase I clinical trials, and we improved our balance sheet from a series of convertible debt transactions.

We have begun 2004 on a strong note as well. Today we announced that Roche's CERA uses Nektar's PEG. Earlier in January Celltech announced the initiation of Phase III trials of CDP 870 for Crohn's Disease. In addition, we have made further progress in reducing our convertible debt. We will discuss these further during our prepared remarks.

First, Ajay will review our financial results. Next, Chris will review progress for the Exubera program, our partner products other than Exubera, and finally our proprietary products program. Following Chris, I will close by reviewing our anticipated milestones for 2004 and 2005. Finally, I will open the call to questions.

Now I will turn the call over to Ajay to discuss our financial performance.

Thank you, Ajit, and welcome to all of you on the call. I will briefly review our financial results for the year, and then I will follow with more detail on both the year and the quarter and share with your our guidance for 2004.

Company results for the year. Our 2003 revenues were 106.3 million. The net loss for 2003 was 46.7 million or 84 cents per share. This included a gain of 31.2 million from debt-related transactions, and we ended the year with a cash balance of 286 million.

I will now discuss our financial results in more detail in the following order. First, our 2003 revenues and expenses. Second, I will review our convertible debt transactions in 2003. Third, I will review our net loss for the year and our net profit for the fourth quarter of 2003. Next, I will discuss our cash balance and cash usage. Then, I will comment on our debt-related transactions in January of this year, and finally I will conclude with an overview of our guidance for 2004.

So let us first look at our revenue. For the year ended December 31, 2003, the revenue was 106.3 million compared to 94.8 million in 2002. In 2003, Nektar reported product avenues of 27.3 million compared to 18.4 million for 2002, and contract revenues were 79 million for 2003 compared to 76.4 million for the year ended December 31, 2002. The increase in total revenue of 12 percent for the year is due primarily to higher product sales. For the year, our product revenues grew by slightly under 50 percent.

For the three months ended December 31, 2003, the Company reported revenues of 25.6 million compared to 22.6 million in the same period in 2002. In the fourth quarter of 2003, product revenues were 5.9 million compared to 5.2 million in 2002, and contract (inaudible) revenues totaled 19.7 million compared to 17.4 million in 2002.

Now let us look at our expenses for 2003. Total operating costs and expenses decreased from approximately 195 million in 2002 to approximately 172 million in 2003. For the three months ended December 31, total operating expenses and costs decreased from 52 million in 2002 to 46 million in 2003. Most of this reduction was driven by lower R&D expenses, which were 132 million in 2003 compared to 157 million in 2002. This 25 million reduction in R&D expenses in 2003 resulted primarily from a) deferral of (inaudible) expenses from 2003 to 2004, b)better expense management, and c) 2002 expenses related to our collaboration with Alliant (ph).

I would now like to spend some time reviewing our convertible debt transactions in 2003. As you are aware, in June and July of 2003, net (inaudible) convertible notes due 2010 in the aggregate principle amount of 110 million. Second, convertible insurance on the June 2010 north Nektar purchased 20.5 million of October 2007 notes and privately negotiated transactions which resulted in a gain of 4.3 million. Finally, in the fourth quarter of 2003, in a privately negotiated transaction, 87.9 million of October 2007 notes were exchanged and cancelled for 59.3 million of June 2010 notes, which resulted in a gain of 26.9 million. Together these transactions resulted in a gain of 31.2 million in 2003.

Let us now discuss our net loss. For the twelve months ended December 31, 2003, the Company reported a net loss of 46.7 million or 84 cents per share compared to a net loss of 107.5 million or $1.94 per share for the year ended December 31, 2002. As mentioned before, the 2003 net loss includes 31.2 million in gain from privately negotiated debt repurchase and debt exchange transactions.

For the three months ended December 31, 2003, Nektar reported net income of 3.5 million or 6 cents per share compared to a net loss of 31.1 million or 56 cents per share for the same period in 2002. Again, as mentioned before, the fourth quarter 2003 net income includes a 26.9 million gain from privately negotiated debt exchange transactions.

Next, our cash balance and cash usage. Our cash balance, which includes cash, cash equivalents and short-term investments, at the end of the year was 286 million compared to 304 million at the end of the third quarter 2003. In the fourth quarter, cash used by operating activities were 16.5 million. An investment in property, land and equipment was 8.1 million. This 24.6 million usage of funds was partially offset by 6.4 million of funds generated by other investing and financing activities.

For the year, cash used by operating activities was 80.1 million, and investment in property, land and equipment was 18.7 million. This 98.8 million usage of funds was partially offset by cash generated from financing and other investment activities of 90.8 million for a net decrease in cash, cash equivalents and short-term investments for the year of 8 million.

Before turning to our 2004 guidance, let me now review our 2004 debt-related transactions. In January, in a privately negotiated transaction, Nektar exchanged $9 million of outstanding October 2007 notes into 575,605 shares of common stock. Also, last month Nektar entered into privately negotiated transactions with a limited number of holders of outstanding June 2010 notes to convert 36 million aggregate principle amount of such note into approximately 3.2 million shares of common stock in exchange for cash payments of approximately 3.1 million in aggregate. As a result of convertible debt purchase and exchange transactions during 2003 and January 2004, we have reduced our liability for outstanding convertible notes and debentures debt due at or prior to October 2007 from 299.1 million at the beginning of 2003 to 181.7 million at the end of January 2004. Total convertible debt and liability now stands of 315 million, of which approximately 182 million is due at or prior to October 2007, and approximately 133 million is due in 2010.

I would now like to discuss our guidance for 2004. First, revenues. We anticipate revenue growth in 2004 of approximately 10 to 20 percent. We expect full-year 2004 revenues between 115 and 130 million.

Second, net loss. We expect a net loss in 2004 of approximately 85 to 95 million. This is higher than the 2003 net loss because of a projected increase in proprietary products expenditures from 2003 to 2004. Chris will discuss our proprietary products program in more detail, but I would like to add here that we are pleased with the opportunities we are developing in our proprietary business unit, and we believe that this increased investment will provide us with excellent returns.

Also note that 2003 had 31.2 million in securities-related gains.

Finally, cash, cash equivalents and short-term investments. We expect to end the year with approximately 200 million in cash, cash equivalents and short-term investments.

I would now turn the call over to Chris Searcy, who will review our progress this quarter in our key business segments.

Thank you. Let's turn now to review our three business areas -- Exubera, our partnered product programs other than Exubera, and our proprietary products program.

First, let us look at Exubera. We continue to be confident in the future of Exubera. In June, Pfizer/Aventis presented additional Phase III data at the American Diabetes Association conference in New Orleans comparing Exubera to Rosaglitezon (ph), and oral hypoglycemia agent used to reduce the body's resistance to the action of insulin as a way of lowering blood glucose. The data suggested that Exubera may provide acceptable glycemic control to significantly more subjects than Rosaglitezon (ph) in Type II diabetic patients not optimally controlled on diet and exercise.

As you are aware, advanced stage clinical trials are continuing for Exubera. As we have said previously, the determination as to if and when to file for approval will be made by Pfizer and their partner, Aventis. We continue to believe that Exubera will offer an attractive option for diabetic patients.

Next, let us discuss our partnered products other than Exubera. We announced today the existence of a collaboration with Roche under which Nektar has licensed a proprietary PEG reagent using the manufacturer of Roche's product, CERA, or continuous aretroparesis (ph) receptor activator. Under this three-year old collaboration, Nektar received milestone and manufacturing revenues during development and will receive royalty and manufacturing revenues upon successful commercialization of the product.

The next milestone for CERA will be to enter Phase III trials. This is the second collaboration with Roche as our PEG reagent is also used in PEGASYS, a PEGylated interferon Alpha 2A product developed by Roche for the treatment of hepatitis C, a leading cause of cirrhosis and liver cancer and the number one reason for liver transplants in the U.S.. Although PEGASYS was one of our earlier PEGylation deals and payments to Nektar are lower (inaudible) than more recent collaborations, we are pleased to say that as of mid-October PEGASYS accounted for 38 percent of total prescriptions and an even higher of percent of new prescriptions for hepatitis C in the U.S..

Nektar's PEGylation is also being used in Amgen's new Lafta (ph), a PEGylated version of Neupogen to treat neutropenia (ph). Prior to the introduction of Neulasta, growth of Neupogen sales was modest. With the addition of Neulasta, the combined sales of the two products grew 37 percent in 2003 to 2.5 billion. Worldwide sales of Neulasta launched in the U.S. in the second quarter of '02 were 1.3 billion for 2003. The Neulasta case shows the role PEGylation can have in life cycle management and providing important new benefits to existing therapies.

In January 2004, Chiron had their anticipated Phase I results in the Inhaled Tobramycin trials in the first half of 2004, and they may move directly to Phase III testing possibly as early as the end of this year. This was Nektar's first application of our pulmonary technology for treatment of lung infections, an (inaudible) patient that we believe has tremendous opportunities. We believe the inhaled powder version of Tobramycin delivered through a handheld device will offer patients a more convenient way to treat this disease, which could lead to improved compliance.

Also in January, Celltech announced the initiation of Phase III trials for CDP 870 for Crohn's Disease, a chronic digestive disorder of the testine (ph) sometimes referred to as inflammatory bowel disease. In the U.S., approximately 500,000 people have Crohn's Disease. The growth rate is estimated at 3 to 4 percent.

CDP 870, which uses Nektar PEGylation, was also tested in Phase III trials for rheumatoid arthritis by Celltech's partner, Pfizer. The two companies for business reasons agreed that Celltech will regain their rights to CDP 870 for this indication and have indicated they are seeking a new partner.

In November, high-tech pharmaceuticals presented the first data from the pivotal trials of Macugen, a potential treatment for AIDS-related macro degeneration. Macugen, which has been end-licensed by Pfizer, has been granted fast-track status for the treatment of the wet form of AIDS-related macro degeneration, as well as for diabetic macro edema because of the (inaudible) suspected potential to fulfill a significant unmet medical need.

During 2003, in addition to the products already mentioned, Nektar partners reported progress on the following. InterMune's PEG AlphaCon (ph) for hepatitis C entered Phase I. Celltech's CDP 791, a PEGylated antibody fragment for cancer, also entered Phase I. Unimed's inhaled Meranol (ph), Nektar's first NBI application, entered Phase I, and Celltech's CDP 860, a PEGylated antibody fragment drug in testing for cancer, completed a small Phase II proof-of-concept study.

In summary, during 2003 our partners have initiated Phase I trials on four products that use our technology -- Tobramycin, Marinol, CDP 791 and PEG AlphaCon. And a number of the other products have advanced to mid to late stage trials, including CDP 870, CDP 860, Macugen and CERA.

Let us turn now to a discussion of our third leg of the business, the proprietary products program. The proprietary products program applies Nektar technologies and their know how to create highly differentiated versions of already approved molecules. By developing these products through Phase I or II clinical trials prior to partnering, we expect to be able to capture a larger share of the future economic value when we partner them.

We continue to make progress with the proprietary products program, which currently has two products in the clinic for which Nektar has full ownership. We will disclose more about these programs in the future as we meet certain key milestones.

In addition, the proprietary products group is working towards enabling the filing of investigations through drug applications or INDs for additional products by the end of the year as part of the Enzon alliance. These include the previously disclosed inhalable Leuprolide product opportunity, plus another small molecule given by inhalation. We believe all of these products if successful will represent significant improvements in the treatment of their respective diseases.

So in summary, our clinical pipeline across three revenue drivers -- Exubera, the partnered pipeline, and our proprietary products -- now includes five products approved in the U.S., one additional product approved in Europe, four including Macugen, Exubera, CDP 870 for two indications, and SprayGel are in Phase III trials. Four are in or have completed Phase II trials and eight products have concluded or are in Phase I clinical trials.

I would like to conclude by saying that we continue to be pleased with the progress and clinical development of both our partnered programs and the proprietary products during the quarter. I would like now to turn the call back to Ajit to provide an update on 2004/2005 milestones and to provide a closing summary for our prepared remarks.

Thanks, Chris. I will now review our milestones in each of our three business segments for the next 12 to 18 months. First, we continue to be optimistic that the Exubera program will make progress. As we have said, any decision with respect to if and when a filing for regulatory approval is made will be made by Pfizer and Aventis based on their ongoing analysis of data and regulatory discussions.

With respects to our other partnered product pipeline, we project the following (inaudible) during the next 12 to 18 months. Eyetech plans to file for approval of Macugen in the third quarter of 2004 according to their prospectus filed with the SEC in January 30, 2004. An additional one to two products could enter Phase III trial suggesting that Nektar's partners would have a total of six Nektar enabled products, five are in Phase III of clinical testing by mid-2005, including Chiron's inhaled (inaudible), Roche's CERA, Pfizer's Exubera, (inaudible)'s SprayGel, Eyetech's Macugen and Celltech's CDP 870. An additional one to three products are anticipated to move to Phase II in the same timeframe.

Furthermore, we continue to see interest in our technology platforms for major pharmaceutical and biotechnology companies, and we anticipate additional partnership dues due in 2004. As such, between now and mid 2005, we have multiple milestones to anticipate.

Taking a brief look back, we are pleased with the progress in 2003. First. our revenues grew 12 percent, and product sales grew almost 50 percent, and we were able to reduce our operating expenses significantly from approximately 195 million in 2002 to approximately 172 million in 2003. Next, either our partners or we advanced a total of six products into initial or later stage clinical trials, in addition to receiving approval for (inaudible). Third, our partners presented new data for three Nektar-enabled products. Finally, we are pleased with the improvement in our balance sheet as a result of our convertible debt transaction.

I will now turn the call over to all of you for questions. Operator, poll for questions.

(OPERATOR INSTRUCTIONS). Jim Revak (ph), Friedman Billings Ramsey.

A question on your Celltech partnered products. Are those the same terms as your Roche/Amgen partnered products in terms of milestones and royalties?

(multiple speakers). We have not disclosed the exact terms on the Celltech or any of our partnerships, but we do get better economics on the Celltech products than we do on some of the earlier trials, including PEGASYS and Neulasta. What we have said on some of our later staged deals, although we have not given exclusive guidance on Celltech, is that we get to the low to mid single digits including royalties and manufacturing on some of these deals that were done other than the products that are currently on the market.

Great. Your guidance on revenue for the year is I believe 10 to 20 percent growth. Can you say what that is in terms of milestones versus recurring payments?

The growth that we have anticipated, revenue growth of 10 to 20 percent, is going to come from both our increase in contract revenues, some modest milestones and growth in our product revenues. So all of those will combine to give us the growth that we talked about.

I am just trying to get a sense of the lumpiness of it, or would it not be as lumpy since the milestones would be amortized?

It is probably worth pointing out the way that we treat milestones is when we get a milestone in, we don't record that complete milestone as revenue in that quarter. Basically it will get amortized over a period of time based on application of accounting principles and the time it is applicable, so you don't get the lumpiness associated oftentimes that you see other accounting methods and milestones.

The lumpiness actually comes more from product sales where partners will oftentimes order large quantities of products that will be sufficient for their needs for maybe two, three, even four quarters at a time. That is actually what is causing the lumpiness in our revenue at this point in time.

And lastly I had a pipeline program, and I will get back in the queue. In 791 and 860 -- I really intrigued with your cancer products -- you said that 860 had finished a Phase II proof-of-concept trial? Do you know when might we expect to see the data on that, and also any time that we might see the data on your anti Vegjef (ph) 791 ?

You would have to talk to Celltech to get guidance on that. We are not aware that they have given any specific guidance on either of those (inaudible) in terms of next milestones.

Michael Hearle, Leerink Swann.

A few questions. Just drilling down a little bit further on your revenue expectations for the year. You showed growth somewhere on the order of 50 percent on the product line in the past year. Is that something -- you can give us a range of what you expect for product sales growth in the next year or in '04?

Yes. I think product sales as you said might grow almost 50 percent in 2003. And again as Ajit said, some of this growth can be lumpy quarter to quarter since our partners do often order in batches. With that said, we don't expect this level of growth in 2004. In total, we expect our PEG revenues to grow by 10 to 20 percent.

Great. And then on the CERA deal, was this deal signed by Nektar or by Shearwater prior to the acquisition?

That was signed by Shearwater prior to the acquisition.

Okay. Great. Will we see then really any financial impact this year from this announcement, or will we be able to detect any movement besides the milestones that could hit this year?

The impact this year should be pretty minimal with respect to sort of any big milestones or anything like that.

Okay and then just two questions on Exubera. I realize you cannot comment on timing of filing, but can you give us some idea of how your inhaled insulin team is spending its days currently given the development stage? Can you give us any insight into additional data or plans for data at this year's ADA? Thanks.

In terms of the additional information at the ADA, Pfizer has historically always presented additional data at the American Diabetes Association meeting, and they typically have not preannounced what that data is. So I think the first time there will be visibility around that when the abstracts are published for that particular meeting.

In terms of how our staff is spending its days or the insulin team is spending its days, all we can say is that they are very busy and have been for the last several years, so I cannot really cannot really give you anymore insight into that.

You didn't expect that we would really tell you something, did you Mike?

Mike, on the CERA, that as Chris mentioned, that was a deal that was designed by Shearwater, and it was one of the ones in the 25 to 50 million of big sales in a revenue band if you recall our roadshow presentation, and it was one of the ones that was listed as confidential.

We should note that the economics of it are better than some of the very early deals such as PEGASYS and Neulasta.

And just lastly, there has been some question as to when or how the street will find out about the Pfizer filing for Exubera. At what point is the actual filing material to Nektar is the acceptance of the filing? Can you give us some idea of how we will hear about it? It will be directly from Pfizer?

Yes. When a filing is made, the decision to make an announcement over there is clearly going to be Pfizer and Aventis. My guess is that is where the first news of any filing is likely to come from.

David Steinberg, Deutsche Bank.

Good afternoon, guys. Questions on three items. First on CERA, since you mentioned the deal was struck three years ago, why was it disclosed now? Was a milestone reached, or are you just getting too many questions from the financial community or any other reason?

Secondly, another a on Exubera. If Pfizer does file, do you think they would file globally, or would they file in Europe first or in the U.S. first? And then thirdly, could you just remind us, assuming all the converts actually do convert, what would your fully diluted share count be?

Okay. On CERA, Chris?

On CERA, the deal was struck originally between Shearwater and Roche on that product. As you know, in many of the licensee licenser deals, there is certain language that dictates what can be disclosed when. In many of our deals, we can disclose information simultaneously or shortly after the partner discloses data. So it was really governed by the language in that particular contract more than anything else in terms of when we disclosed that PEGylation was being used on that product.

And the decision to disclose at this point was really driven by Roche's decision to make an announcement, which then gave us the right to also make a disclosure.

As far as your Exubera-related question, David, I think the decision on -- all decisions related to filing and whether it is global, U.S., Europe and the timing of that filing is really completely in Pfizer and Aventis' hands. So this was their decision, and so we are referring you to them for any further clarification on what their thinking is regarding that. And then as far as some of the converts are concerned, Ajay?

Our shares outstanding, David, at the end of the year were 56.2 million, and the two announcements you had regarding the debt transaction changed a little bit, so let me walk through that detail. The conversion that took place of the 9 million 2007 notes added 575,000 shares approximately and the conversion of $36 million of 2010 notes added roughly about 3.2 million shares. So the total shares outstanding as of the end of January are 59.9 million shares.

Now the other part of your question was, what if the outstanding converts convert into equity? So if we look at the 2010 outstanding notes as of now, the 143 million, they convert into roughly 11.3 million shares, which would bring the total outstanding shares to 71.2. The debt that is due prior to October '07 is that rating strike prices -- just to remind everyone, we have 7.8 million notes outstanding, which are due in October '06 -- they convert into roughly .5 million shares. The notes that are due in March of '07 are 61.4 million. They will convert into roughly 1.5 million shares. The strike price there, the conversion price is $38 approximately. And the notes that are due in October '07 out of all the 113 million strike price of 50.5, so they will convert into roughly 2 million shares.

So other then the all 10 conversions, if the rest of the notes converted as well, they can add another 4 million shares to bring the total from 31.2 and the conversion of 2010 notes to about 75.3 million shares or so.

Thank you.

Kerry Sebasaman (ph), Merrill Lynch.

In terms of your SG&A cost at this point in time, I assume you are still carrying the commercial readiness cost for Exubera somewhere in that $30 million range per annum. Could you give us a sense of at what stage that actually comes off your P&L and goes to Pfizer's P&L? Is there something specific that triggers it? Does your guidance for this year actually include that or exclude that?

Right. So (inaudible) the SG&A cost that you see in our announcement, I am just looking for the precise number that we have in the announcement. The SG&A costs that you see are $26 million for '02 and $22 million for '03. The SG&A costs do not include the bulk of costs associated with the Exubera program. As you mentioned, your estimate is on Exubera. Our out-of-pocket spend is about $30 million.

Obviously as the program progresses further and assuming that the product is filed and further assuming that once the product is filed, sometime after that, we get an order for providing current devices at Pfizer and Aventis begin to build up their loan supplies, etc., and then, of course, if and when the product is launched, we start generating some royalties and more contract manufacturing revenues, you will expect the number to start going from your estimate of $30 million to lower and lower and finally becoming profitable for us. And we have not provided any specific guidance with respect to when do we expect again your estimate of $30 million, how do we estimate the impact on that number over time?

So currently it's not included in your numbers at this point in time?

No. All of our -- we receive a fairly significant amount of revenue from Pfizer. Right? And over and beyond the amount of revenue we receive from Pfizer from our Exubera program, we include additional costs beyond what they pay us, and you estimated those costs at 30 million. And so this year again we will expect to incur some costs related to the Exubera program. We will not start making money on the Exubera program, but we have not provided specific guidance on what that number was last year or what that number is anticipated to be this year.

Fair enough. The other thing is just maybe in terms of supercritical fluids, that particular segment, could you give us maybe a little bit of color what type of business development activities you have done there and how that division is coming along?

A couple of comments. One is that technology, as you know, is earlier stage. It has lots of different potential applications. What we can tell you is that the focus right now is really looking at one or two applications where we think it will deliver the most value, and we are trying to demonstrate that through some specific product opportunities that we are working on there. That is one thing that we are working on.

The second thing is basically scaling up the technology. It was at small lab scale. We've done one scale-up, and we are in the process of doing another scale-up. So between focusing on a couple of applications where we think it will have the highest value and scaling up the technology, we believe that that technology has the potential to generate significant value to the company in the near-term.

Thank you.

Craig Savanivich (ph), CIBC World Markets.

My question has to do with convertible debt, the extinguishment of debt. You have recorded a number of gains over the past six months or so related to extinguishing of some debt that is outstanding. I was just I was just wondering could you guide us as to what this trend might be as we go throughout '04? In other words, the pattern that we have seen in the fourth quarter and your activities so for in January that is something that the Company intends to continue doing.

Let me give a short answer, then Ajay can add to it. You know I don't think we are in a position to provide any guidance on whether we would continue doing those types of transactions. I think what our aim has always been is to start dealing with the '06/'07 debt, and we have chosen to do it in manageable amounts as the opportunity presented itself, and that is really what we were trying to do last year, and then even the most recent ones is done in January of this year. I would really just fall into that pattern.

How much further we will continue to do those, when we will do those or in what sort of magnitude, we actually are not in a position to offer any guidance on that. Ajay, you want to say anything else?

That is a pretty complete response to your question.

One quick follow-up. I know in the past the company has talked about, if I remember correctly, profitability as a goal for sometime in '06. Is the company still committing to that stated target?

What we have said over the last several conference calls and I think we have discussed this on one on one as well, basically at this stage we are already confident in the process of successful Exubera. And with respect to our profitability, in that success in Exubera, we expect profitability within twelve months of a wide Exubera launch. And again just relating as you know the decision as to when to file and where to file will be made by Pfizer and Aventis, and we cannot provide any assurances as to when such a filing will be made. And at present, we are not commenting on profitability without Exubera.

And again, as you know, for us to reach profitability in the absence of an Exubera launch, we would need to restructure. And we plan to make any such decisions if and when we have to make them. So again, we feel pretty confident at Exubera and expect profitability within 12 months of a wide Exubera launch.

Just to recap -- no guidance on profitability in the absence of a successful Exubera launch?

At this point, that is right because absent Exubera, as Ajay said, we would have to restructure the company. If it came to that, I think we would deal with that. But at this point, we feel very comfortable about the prospects for Exubera, and so our planning has really been focused on a scenario that includes Exubera.

Having said that, getting to profitability within that twelve posts launch remains an important objective for us.

Jason Cowen, SunTrust.

A couple of quick questions. First, I wanted to clarify on the revenue guidance, I think you folks were saying about 10 to 20 percent. I think that was for all-in and for the PEG business as well. I just wanted to clarify that.

Second, a couple of questions on CERA. First off, what is the official indication being served by Roche, and what is the potential development timeline there ? Additionally, have you folks been receiving revenue from that product on the reagent side of the business already?

(multiple speakers). Yes. Jason, the revenue guidance that we provided of 10 to 20 percent was actually in both contacts, so we are looking for total revenue increase of 10 to 20 percent, and we also expect our product revenues, which are PEG product sales, also to be in that range.

In terms of the CERA (inaudible), because that is a Roche product, we really have to defer to them to comment on the specifics regarding that product.

I will say, as we mentioned earlier, the one thing that they have said they do plan to move to Phase III trials during the course of 2004.

Thank you.

Richard Silver, Lehman Brothers.

Back on the question about Exubera spending. It is pretty clear that you will be spending? You're not quantifying what that will be, and we should assume that as part of your plan that the project is moving forward, and therefore, perhaps there could be an NDA filing that is built into your assumptions on spending on the product? Is that correct?

Do you want to take the first part?

As we have said, we have been pretty confident in the prospects for successful Exubera, so I think it's a fair assumption to make that the project is moving forward.

I think the second part of your question was, based on that, can you assume an NDA filing in '04? As Chris and Ajit mentioned a few times during their remarks, we cannot provide any color, any comment on any projected filing date, if any, by Pfizer and Aventis.

I certainly understand it has been the mantra forever that we have to defer to Pfizer. We know that. But I guess what I'm trying to understand is in the spending plan you must have an assumption as to where Exubera will be by the end of the year.

Clearly we have some assumptions you have to make when you develop a financial plan. Obviously I think we cannot share those with you in this regard for obvious reasons having to do with deferring for any public comments to Pfizer and Aventis.

But the answer to the original question, there is Nektar spending on Exubera, but you are not going to quantify that for this year?

That is right because we have certain responsibilities in the agreement. So our share of the spending reflects in those areas.

Okay. Any additional detail on SprayGel beyond that it will be in Phase III this year in terms of the timing on how long that would take and when it might complete?

Nothing more specific than that. They plan to continue Phase III trials, but there is no specific guidance in terms of completion or filing on that at this point.

That is it. Thank you.

Leah Hartman (ph), CRT Capital.

A few kind of disjointed questions. D&A for the year was what number please?

D&A for the year was $22 million -- $22.01 million for 2003.

And you gave a CapEx number, but I could not hear it. I apologize.

We said that our investments in properties, land and equipment were -- just bear with me for a second.

Is it 18.7?

18.7. Yes.

Back to the questions you have been asked with respect to your spending on Exubera, can you give us a percentage of what might be reimbursed versus out-of-pocket Nektar? You have shared way in the past some sort of dollar amount.

We are really not in a position -- (multiple speakers)

Order of magnitude.

Yes. We really are not in a position to give you that type of guidance, other than to say, well over 50 percent of our costs have been reimbursed. If you just look at sort of the historical financials where Pfizer revenue to us has been in the $50 million range. That is will give you an idea that well over 50 percent of our total spending has been reimbursed.

There is no reason to believe that kind of relationship of spending and percentage of reimbursement would be altered in '04?

No. Not in any (multiple speakers) not in any big way. No.

On the product sales and the product gross margin, should we expect continued pressure on that margin?

As we noted, our product gross margin declined from '02 to '03, and that was the result of product mix changes. I think in '04 we would expect a slight improvement in the gross margins.

That is helpful.

That, again, is a result of product mix.

Lawrence Bloomberg, Bloomberg Capital.

Squeezing me in at the end here. In the context of your overall comments about about your time to profitability, etc., what are your thoughts or what can you tell us at all about your thinking about your balance sheet and cleaning up your debt or what plans do you have at all?

I think -- you know as we have remarked previously our plan is to continue to work to improve our balance sheet. We will do that as opportunities arise. So we will look for opportunities to restructure, convert. Our payback, our '07 debt, that will be the strategy. And with the 2010 debt, we have a soft convert feature and when the opportunity arises, the timing is right, we might want to take advantage of that as well.

I guess the speculation about the timing of an Exubera filing and/or FDA action seems to have a trajectory that looks like it will intersect with the time that the first (inaudible) on the notes are due or within a year of it. I am just trying to think through whether you guys -- I guess that would be asking you about when you think Exubera will on the market, which you won't answer.

I'm sorry we cannot be of more help to you on that.

I appreciate it. With that said, the comment that you would be profitable within 12 months of a broad launch of Exubera, does that imply that very clearly should I assume that Pfizer and/or Aventis are looking to target a very broad label initially and (technical difficulty) --

Actually when we chose to question the way we did, should not be interpreted at all in any way one way or the other in terms of what sort of label Pfizer and Aventis are likely to be seeking. Okay?

Thanks for squeezing me in at the end.

Chris Penanka (ph), Archer Capital.

Thanks for taking my call. Is there a point when Pfizer has to either decide to file Exubera or let it go, or could they just kind of keep you waiting for years?

Contractually there is no point at which they have to decide to file or let the product go. But you know having said that, I will say one should continue to look at the way Pfizer continues to support the program. They continue to support the program quite nicely, and we continue to remain confident about that program. So our expectations are that this program is moving and will continue to move ahead quite nicely.

I also refer you to Pfizer's public statements specifically relating to the product over the last several months, which I think can probably give you some indication of their feelings on the program.

You said that if Pfizer decides not to file Exubera that you would have to restructure the company. At what point would you make a unilateral decision to restructure if you had not heard anything from Pfizer?

That is sort of a hypothetical question that is really difficult to answer. I think our profit at this point has really been on making the program successful and trying to make sure we capitalize on the success of that program. You know, I think in any business you evaluate things periodically as you go along. But as long as the program continues to move forward nicely, I think that is what our energies will continue to be focused on.

Hosein Akwamie (ph), Serosa Medical Research (ph).

Thanks for taking the call. One single question on CERA. Is it reasonable to assume that there was an indemnification clause in the original Shearwater/Roche agreement in case of down the road litigation between Amgen and Roche?

We actually cannot comment on any of the contractual terms that we have between Roche and ourselves, or really for that matter any of our partners and ourselves.

(OPERATOR INSTRUCTIONS). Seth Shar (ph), an investor.

Thank you for taking my call. I just had one quick question about the size of the Exubera market. What do you expect that the size of that market is assuming it does eventually get approval by the FDA? Thank you.

We have not nor do I believe Pfizer have given very specific guidance on that. Although historically Pfizer said they believe Exubera is a blockbuster type drug and they define blockbuster has being billion dollar plus in terms of revenue. If one looks at the insulin market and the diabetes market in general, it is a very large patient population, underdiagnosed and probably undertreated. So we think that the product has significant potential in terms of product revenues if it gets approved with broad labeling. But other than the blockbuster status that Pfizer has quoted Exubera having, we have not given any other nor have they given any other specific guidance.

I think the other thing to look at there is that the number of diabetics, for example, just in the U.S. diagnosed and undiagnosed is over 17 million. That would leave over 12 million who have been diagnosed. The product -- Pfizer has published clinical trials on the product relating to both Type Is on insulin, Type IIs on insulin and Type IIs on orals.

So I think depending on the final label, there is a very significant need for the product in terms of both improving therapy for people on insulin and also people who are not on insulin, and it is a market where there is very significant growth going on both in the population base.

Thank you very much. I really appreciate you taking my call.

Thank you. At this time, we show no further questions.

Thank you very much everybody for listening in on this conference call and bye-bye.

Thank you. Ladies and gentlemen, this concludes today's conference. You may all disconnect at this time. Thank you for participating.