Nektar Therapeutics (NKTR) 2005 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. Please note that this conference is being recorded and I will now turn the call over to your host Mr. Ajit Gill. Mr. Gill, you may begin.

Thank you, Jim. And welcome, everybody, to Nektar Therapeutics conference call and Webcast to review our performance for the year and fourth quarter 2005. I am Ajit Gill, President and CEO of Nektar. Joining me today are our new CFO, Lou Drapeau; our Vice President of Corporate Development, Chris Searcy; and our Executive Chairman and soon to be acting CEO and President, Rob Chess. Nektar is entering 2006 with the key elements in place for growth. Exubera has now been approved in the U.S. and the E.U. and has been cited as a breakthrough in diabetes therapy. What a tremendous accomplishment for everyone here at Nektar and for our partner, Pfizer, and what a great benefit for diabetes patients.

We have told you that we expect that Exubera will bring Nektar to profitability. However, we knew many years ago that we wanted more than just to reach profitability. We wanted Nektar to develop a diversified product portfolio in order to deliver long-term sustained growth. To do this we have invested over the years in our technology, human capital, and other capabilities. We are now positioned to grow Nektar into a successful biopharmaceutical company and continue to carry out our mission of making medicines better by exploiting our strengths in drug delivery. Therefore, in addition to Exubera and our other partner products, we are hard at work developing our own proprietary products. Today we have two products in the clinic and two more in preclinical stages. All these represent future potential breakthroughs in their own right.

So by focusing our expertise on meeting the needs of patients we are increasing -- capturing increased value for Nektar, whether we partner these products or bring them to market ourselves, our patients and stockholders and Nektar itself will benefit. To assure our progression to a more product-focused company it is critical that we also have the financial strength to fund our growth. We ended 2005 with $566 million in cash and cash equivalents, and so we are in a good position and do not anticipate any additional financing needs through profitability. In the meantime, our partner pipeline also continues to advance and includes three late-stage products using Nektar technology that are expected to be filed within the next eighteen months. With Exubera approved, our proprietary products program in place, a healthy balance sheet, and a strong management team in place, we are well-positioned for long-term sustainable growth.

On our call today first Lou will review our results and provide guidance for 2006, then Chris will update you on some activities in both our proprietary and product pipelines -- partners product pipelines, and finally, Rob will make some concluding remarks. With that, I will turn the call over to Lou, our new Senior Vice President of Finance and our Chief Financial Officer. Lou joined us in January of this year from BioMarin where he was CFO for three years and also acting CEO for almost a year. Before BioMarin, Lou had spent 30 years at Arthur Andersen and was a Managing Partner for twelve of those years. He has deep experience as a finance and accounting executive, and we are pleased that he has joined Nektar. I believe he will be a great asset to our management team as we grow. Lou?

Well, thank you, Ajit, for that introduction. I am pleased to be here as CFO of Nektar. As Ajit has pointed out, Nektar is poised for profitability and growth, and I am very excited about being part of the next stage in the growth of this innovative company. But before I get started, please note that the following presentation contains forward-looking statements that reflect our current views as to the Company's business strategy, future products, product and technology developments, funding, collaboration arrangements, clinical trials, manufacturing scale-up, regulatory approval status and progress, and other future events and operations relating to the Company. These forward-looking statements involve uncertainties and other risks that can be detailed in Nektar's reports and other filings with the SEC, including our Annual Report on Form 10-K and our most recent Quarterly Report on Form 10-Q. Actual events could differ materially from these forward-looking statements. We assume no obligation to update any forward-looking statement as a result of new information or future events or developments. I would also like to remind you that the web broadcast of this conference call will be available for replay through March 14, 2006 on the "Investor Relations" page at Nektar's website at www.nektar.com. In the event that any non-GAAP financial measure is discussed on this conference call that is not described in our earnings release related information will be made available on the Investor Relations page at our website as soon as practical after the conclusion of this conference call.

Now, let's get going. First, let's briefly review our results for the year and the fourth quarter of 2005. Beginning with revenue, our total revenue for 2005 was 126.3 million, compared to 114.3 million in 2004. The increase in revenue in 2005 over 2004 was principally due to product and royalty revenue of 29.4 million in 2005, compared to 25.1 million in 2004, and 15.3 million of Exubera commercialization readiness revenue. Contract research revenue declined to 81.6 million, compared to 89.2 million for 2004 due to the transition of the Exubera program from contract research and development to commercialization readiness. Our revenue for the fourth quarter 2005 was 32.9 million, compared to 31.4 million in the fourth quarter of 2004.

Now, let's turn to our net loss. First, for 2005, we reported a net loss of 185.1 million or $2.15 per share. This includes a total of 73.2 million of special non-cash charges. These charges consist of an impairment to goodwill and certain fixed assets associated with Nektar U.K., formerly Bradford Particle Design, of 65.3 million, and a 7.9 million of purchased in-process research and development associated with our acquisition of Aerogen in October of 2005. The Nektar U.K. charge was due to slower-than-anticipated product progress at this unit. Excluding the special charges of 73.2 million, our non-GAAP net loss for 2005 was 111.9 million or $1.30 per share, compared to a net loss of 101.9 million or $1.30 per share for 2004. No special charges were included in the Company's 2004 results of operations. For the fourth quarter of 2005 we reported a net loss of 108.2 million or $1.23 per share, including this 73.2 million special charge. Excluding the special charges, the Company's non-GAAP net loss for the fourth quarter 2005 was 35 million or $0.40 per share. Aside from the special charges, our net loss increased year-over-year and quarter-over-quarter was mainly from an increase in operating costs and expenses related to both R&D and general administrative costs. Specifically this increase came from our proprietary product development, investments in technology, salaries resulting from increased headcount, legal and accounting expenses, and Exubera commercialization readiness costs.

Before I turn to a discussion of our guidance for 2006 I would like to say a few words about the material weakness in our internal controls over financial reporting that we reported last year. We believe that we've made progress during the past year in strengthening our internal controls over financial reporting, particularly as related to reorganizing and hiring key personnel in our finance organization. We're continuing to strengthen our internal controls over financial reporting and have established a new internal audit function. In addition, we have recently made two very important hires, a new controller, and a new head of our cost accounting group. Both of whom will join our team this quarter. While we are still evaluating the results of the control testing for 2005, and have not yet made a determination as to whether or not our internal controls over financial reporting were effective as of December 31, 2005, I believe that with these new hires and other changes, we have made significant progress toward addressing the material weaknesses in our internal controls over financial reporting that we previously identified and that we are demonstrating the commitment as an organization to developing an effective system of internal controls.

Now, let's turn to guidance for 2006. We currently expect that revenue for 2006 will be in the range of 160 to 109 million. Our estimate for the manufacturing and royalty revenue related to Exubera are in the range of 60 to 80 million for 2006. The bulk of this revenue will be generated by sales of inhalers and insulin powder to Pfizer. As I will explain in a moment, very little of the Exubera revenue this year will be from royalties because of the launch timing and also the fact that we will record the royalties a quarter after Pfizer's end product sales are recorded. We expect that the remaining 100 to 110 million of Nektar revenue in 2006 will be divided fairly evenly between contract revenue and revenue from product sales other than Exubera. Our 2006 net loss is projected to be in the range of 115 million to 130 million, including approximately 15 million of stock-based compensation charges. In addition to the stock-based compensation charges, included in this net loss are estimated expenditures of approximately 80 to 90 million for the development of Nektar's own products and technology platforms that includes clinical trials for amphotericin B inhalation powder and inhaled antibiotics programs, the initiation of a Phase I trial for a third proprietary product and additional programs in earlier stages of research and development. We estimate that the investment in our proprietary products will be approximately 60 to 70% of the 80 to $90 million. The remainder will be for our technology programs. We anticipate ending the year of 2005 with cash in the range of 415 to $440 million -- 2006. I apologize.

Now, I would like to clarify some of the economics of Exubera for Nektar. In 2006 we anticipate, as Pfizer has already disclosed, that Exubera will launch the United States in several markets in Europe. Nektar will receive revenue from Pfizer for the manufacture of all of the Exubera inhalers, the insulin release units, and approximately half of the insulin powder processing at cost plus a small mark-up. We will report this revenue in the same quarter in which we ship these products. You should expect a sharp increase in these sales in the near-term as Pfizer will be ordering enough product for the initial launch. Nektar will also receive revenue from royalties at a percentage of Pfizer's end product sales. Nektar is not at liberty to project royalty revenue for Exubera at this time, and there will be a quarter lag in our reporting this revenue from the time the sales occur which generate it.

And now let's turn to our guidance for profitability. As we've been saying for some time now, we are targeting profitability, excluding stock-based compensation, four quarters after a broad Exubera product launch in the U.S. and major European countries. As we discussed earlier, we received manufacturing revenues for inhalers, inhaler components, and powder processing, as well as royalties on Exubera. We have previously disclosed that Nektar's combined manufacturing and royalty revenue across its pulmonary partnerships would be in the range of 10 to 20% of end product sales. Similarly, our gross margins resulting from the combined manufacturing and royalty revenue as a percentage of our partners' sales would be in the range of 8 to 12%. Of course, Pfizer is responsible for the launch and commercialization of Exubera, and as such, we don't have great visibility at this time on how it will all unfold. However, we expect that the actual commercial results for Exubera will begin to become evident to all of us in the next several quarters or so. While we don't have control over the launch and commercialization of Exubera, we do have control over the discretionary costs that we incur.

As I noted before, this year we're planning to spend 80 to 90 million on our proprietary products and technology platforms which include one product that we anticipate will enter its pivotal clinical trial in the first half of 2007, another that is currently in a Phase II trial, and two other preclinical programs one of which is expected to move into the clinic in 2006. We believe these are solid investments that have the potential to provide high future returns to the Company. Our decision on how far we take these products on our own will depend on the clinical results, as well as the Exubera sales ramp. The better the ramp, the more flexibility we will have to carry these products forward ourselves while still managing to profitability and growth.

Let me give you two examples of how we might manage the Company to profitability four quarters after launch. For example, if Exubera quarterly end product sales exceed 250 million, we could continue to develop our lead proprietary programs on our own and achieve profitability. On the other hand, if Exubera quarterly end product sales are projected to be between 125 million and 250 million, we will likely need to partner one or perhaps both of our lead proprietary products. To summarize, in order to reach profitability and growth thereafter, we'll need to adjust our spending on our proprietary programs based on how Exubera and the rest of the business are performing. Now, I will turn the call over to Chris who will update us on our proprietary and partner programs.

Thanks, Lou. As I hope you all know, Exubera inhaled insulin has been approved for Type 1 and Type 2 adult diabetics in the E.U. and U.S. We are, of course, very excited about this and look forward to the planned launch in the U.S. around mid-year. We believe that Pfizer is a great marketing partner, and we're pleased with the commitment that they are showing to the product. As you know, Exubera is approaching the marketplace and the answers to many of the questions you have asked us will become clearer after the product launches. In addition, Pfizer is responsible for the marketing and sales of Exubera so as the product moves towards launch we will increasingly refer related questions to them, and our communications regarding Exubera will focus on the financial significance of Exubera to Nektar.

I would like to take this opportunity to spend some time reviewing both our proprietary and our partner pipelines. As you know, our proprietary product strategy matches our technologies and expertise in drug delivery with established medicines to create innovative, novel products that have the potential to demonstrate one or more of the performance attributes of better efficacy, safety, and ease of use. In September 2005 we announced two of our proprietary products in clinical stages of development: inhaled amphotericin B and inhaled antibiotics. Amphotericin B Inhalation Powder is being developed by Nektar for the prevention of pulmonary infections in patients at risk for pulmonary aspergillosis secondary to immunosuppression therapy. This inhalable amphotericin B powder is intended to address the significant mortality rates in patients with pulmonary fungal infections and the increasing incidence of aspergillosis in immunocompromised patients receiving organ or stem cell transplants or being treated with chemotherapy or radiation for hematological malignancies. This potential new therapy could be a breakthrough in antifungal medicine when mortality rates can exceed 50% in certain patient populations that develop this infection despite the introductions of new classes of drugs to treat this pathogen. We estimate that there is approximately 150,000 patients at risk for aspergillosis in the U.S. and E.U. collectively. Amphotericin B, as an intravenous infusion, has long been considered the "gold-standard" for treatment of aspergillosis despite its common dose-limiting systemic toxicities.

Our pocket-sized powder inhaler is a unique delivery method designed to enable the inhalation of therapeutic concentrations of amphotericin B directly to the lungs at levels similar to or greater than lung concentrations achieved by intravenous dosing of amphotericin B or lipid associated amphotericin B products. By targeting amphotericin B directly to the site of potential infections, Nektar's inhalable amphotericin B could potentially eliminate life threatening lung fungal infections while minimizing common dose limiting toxicities associated with current intravenous therapy. Our easy-to-use inhaler could also encourage long-term compliance that could result in significant cost benefits for this high-risk patient population. The product has demonstrated efficacy in the preclinical study of animals, animal survival in an immunocompromised rabbit model and it has completed two Phase I single-dose toleration [intel] finding studies. We currently have long-term toxicity studies under way to support the planned pivotal trials in the first half of 2007. Earlier this month we announced that the FDA has granted orphan drug designation to our amphotericin B inhalation powder for prevention of pulmonary fungal infections in patients at risk for aspergillosis due to immunosuppressive therapy. Orphan drug products are developed to treat diseases or conditions that affect fewer than 200,000 people in the U.S. The Orphan Drug Act provides its seven-year period of marked -- of exclusive marketing for the first sponsor who obtains marketing approval for a designating orphan drug. We expect to file the product for approval some time in 2009.

I would like to turn now to our second proprietary product in the clinic, inhaled antibiotics. Originally this program was in proof-of-concept to target prevention of ventilator-associated pneumonia, which is a form of nosocomial or hospital-acquired pneumonia. With Aerogen we acquired a Phase II treatment program for hospital pneumonias. After evaluation of these two programs in the fourth quarter, we believe that the best path to market is the treatment approach using amikacin for a variety of reasons, including market acceptance in the status of the clinical and regulatory development. We are now continuing to enroll patients in a Phase II study that Aerogen had initiated. The new inhaled antibiotics program leverages the proprietary OnQ Aerosol Generator from Aerogen which delivers highly-efficient aerosolized antibiotics within a ventilator system or off the ventilator. The Phase II dosing study under way is a double-blind, placebo-controlled trial to evaluate the safety and tolerability of aerosolized Amikacin for the adjunctive treatment of gram-negative pneumonias in ventilated patients diagnosed with hospital- or ventilator-associated pneumonia. Gram-negative bacteria account for most hospital-acquired pneumonias and can have a high mortality rate of 25 to 50%. The study will also include patients that start on ventilators and are taken off ventilators over the treatment period. Target enrollment for the multi-center study is approximately 100 subjects and a total of 46 patients have been enrolled to date. We expect preliminary Phase II data from this study in the first half of 2007.

For our partner pipeline I would like to provide an update on milestones. UCB expects to submit the regulatory filing in the first quarter of 2006 for CIMZIA for the treatment of Crohn's disease, and the fourth quarter of '06 or early '07 for rheumatoid arthritis. Roche's CERA is expected to be filed for approval in 2006 for renal anemia. Both of these products use Nektar PEGylation. Tobramycin inhalation powder, a product that we've been developing with Chiron, started Phase III trials in October of '05 and is expected to file for approval some time in 2007. Each of these three late-staged products in Phase III is expected to bring peak annual revenues of 25 to 50 million to Nektar. Looking ahead to the end of '06, if you combine our expectations for Exubera, our partner pipeline and our proprietary pipeline, we could see Exubera launched and being used by diabetic patients in Europe and U.S., two additional key partner products filed for approval, a total of four other partner products in Phase II or III trials, inhaled Amphotericin B ready to start pivotal trials in the first half of '07, inhaled antibiotics trial is completely enrolled and ongoing, and a new proprietary product entering human testing. I would now like to turn the call over to Rob Chess who will make some concluding remarks. Rob?

Great, thank you, Chris. I wanted to take this opportunity to say a few words about Ajit who announced his retirement earlier this month. Given all the good news that we discussed here today it seems a fitting time to discuss his legacy. I have had the privilege of working with Ajit since 1992. Ajit has done a terrific job in transitioning Nektar from an early-stage, single-platform company to one with a broad product line, multiple technologies, and a potential blockbuster product that has just gained approval. He led Nektar through the development of the first inhaled insulin product and built a strong base for future success through the initiation of our proprietary products programs and broad number of partner collaborations. In addition to Ajit's excellent business leadership of Nektar, he has set a standard for integrity, fairness, and honesty that all of us at the Company admire and hope to live up to going forward.

I would like to give you a brief overview of the CEO search. We have formed a Board Search Committee that I am chairing. We've hired Steve Israel, the Head of the Korn/Ferry's biopharmaceutical practice to assist with the search. While we are in the very early -- very early in the search process, the initial reaction from candidates has been very positive. Nektar is in an extremely attractive situation, a potential blockbuster product developed by Nektar was approved, we have a broad pipeline of proprietary and partner programs along with leading-edge technology platforms, the Company has more than 560 million in cash and is heading towards profitability, and we have a strong scientific and management team in place. This is the type of opportunity that everybody wants but rarely comes along. Our goal is to find a CEO who can manage our transition to profitability, grow our proprietary pipeline and bring products to market, and ensure we execute on Exubera manufacturing. We also want to assure that the new CEO is a fit for our Company culture. With regard to timing, CEO searches at this level typically take from five to nine months. Given the attractiveness of the opportunity, I fully expect we will have our choice of any one of a number of terrific candidates. Again, our thanks to Ajit. With that, we would be happy to take your questions. Jim, could you please poll for questions?

Thank you. [OPERATOR INSTRUCTIONS]. We have Rich Silver from Lehman Brothers on line with a question. Please state your question.

Yes, good afternoon. The manufacturing revenues, you said that this was for launch quantities. Do you have any sense of what that actually translates into for Pfizer as far as budgets and product sales?

Rich, we don't. I mean, and that type of information is obviously confidential and to the extent that it is ever disclosed, it would really be for Pfizer to disclose that type of information. This information plus a whole variety of other types of questions, they're really Pfizer's to decide whether they want to share that type of information or not.

And in terms of -- you did say that the royalties represent a small percentage, part of that of course being the timing and how the royalties are accounted for. Are you getting any sense of whether this is sort of the expected, sort of true demand or are they being -- I'm just trying to get a sense if this is just kind of a baseline and something that they will be looking to, to revise -- level of conservatism, I guess?

Rich, it is Chris. I think at this stage you can't read into the revenue numbers we're seeing on Exubera relative to what sales ramp or adoption will be. I think it is just the way to look at it is the initial sell into support commercial launch, and I don't think you can extrapolate that any further than that.

Okay. Thank you.

And our next question comes from Jami Rubin from Morgan Stanley. Mr. Rubin [sic]?

Thank you. It is Ms. Rubin. Anyway, my question for you is this: Exubera was approved late January, full approval, yet the launch is not expected until mid-year; probably we're hearing June. Can you just review with us your responsibility with respect to manufacturing? I understand you're manufacturing the inhaler and the dry powder insulin. My question relates to the fact, just was wondering if there are any bottlenecks in your responsibility for the manufacturing and really just trying to get my arms around why the lag between the full approval and the actual launch, and if manufacturing, and your role in that manufacturing has anything to do with it? Thanks.

Jami this is Ajit. In terms of sort of the launch and why it is in June as you refer, I think that, again, it is really a question for Pfizer to answer. Pfizer has all the responsibility for the marketing and commercialization of this product, and so the other ones who determine and are in control of all of those marketing and launch plans.

In terms of on the manufacturing part of your question, I mean at one level by definition there is always a bottleneck. I mean there is always something in your system that's a bottleneck. I think the question, though, is are we ready to support the demand for the launch, and we believe we are absolutely capable and ready to support the demand for the launch. We've been working at this for quite awhile, and we believe our systems are ready for that.

Okay, thank you.

Our next question comes from Hari Sambasivam from Merrill Lynch. Please go ahead.

Yes, thank you. Just a -- it is a two-part question. One is following from the last question, and you don't do the final sort of assembly of the units -- and I am just wondering -- do you do the final assembly of all the units or do you actually send that somewhere else and it is assembled somewhere? And I am just also trying to get a sense of what is your involvement in the actual powder processing? Are you the final spot for actually the final powder processing, the filling and the processing -- the packaging and the filling or does that go somewhere else? Are you an intermediate is what I am wondering in both processes?

The second question I have relates to the Nektar U.K. I notice you've got a $65 odd million write-off for that. And I'm wondering -- that was at a cost -- that was purchased as a cost of, I guess over about $200 million and I am wondering what remains in that particular operation at this point in time?

Let's take the first part. And maybe the way to answer your question, Hari, is to do a quick review of the supply chain?

Yes.

The bulk insulin is all manufactured by -- out of Pfizer facility in Germany, and approximately half will get shipped to San Carlos and the other half will get shipped to a Pfizer facility in Indiana. We will -- the part that we get we will convert that into the insulin powder and ship it to the Indiana facility, and there all of the powder will then get filled and packaged with Pfizer doing the other half of the powder processing also.

On the device side we have got two device manufacturers, one in England and one in the U.S. who will be responsible for delivering completed devices -- finished devices and those will eventually get shipped to the same Pfizer facility where everything will then get packaged in whatever form of packaging Pfizer determines, and then Pfizer will be shipping that out into its distribution channel however they decide to do that. So --.

Do the inhalers come to Nektar first and then they go from Nektar to Pfizer or do they go directly to Pfizer from Bespak and whoever else?

They will probably just go directly. I mean these days if you want to inspect those types of things, you're much better off doing the inspection at the facility instead of just having them shipped to an intermediate facility to inspect them only to turn around and ship them with [inaudible] facility. So we've had a very, very close working relationship with both of our contract manufacturers over the years, and so anything that we need to do in that regards we'll just do at the contract manufacturer's facilities and that way the devices will be ready to ship directly from there to Pfizer.

That's great. And the second question about the powder processing?

On the powder processing -- on the Bradford question --.

On the powder processing. He was asking about the powder processing, I'm sorry.

Sorry, I was asking about Bradford Particle Technology.

Oh, okay. Hari, let me take that [inaudible]. We've written-off essentially all of the goodwill associated with Bradford at this time, and a portion of the long-lived fix assets. But the operations are going to continue there because we have [technical difficulty] and we have products that are under development there. And while we are exploring several different options on what to do, we haven't made any decision at this point, and at last I would like to tell you there are 32 employees there that are continuing to do their job on a daily basis.

And just to sort of how to put this in a little bit broader context, you all might recall that, oh, about this time last year we said we were sort of focusing that operation and that technology on some very specific applications, and we've done that. We've generated data on a few products, and we are sort of coming towards the end of that evaluation, and then based on that data we'll sort of make the necessary determinations and move ahead.

The Bradford acquisition was one of several acquisitions that we've made over the years, and while the results at Bradford haven't been quite what we would have liked, I think our track record on all of our other acquisitions in terms of integrating the organization, the technology, and the extracting value of Shearwater, which is the PEGylation Technology we acquired, part of the processing technology, Aerogen, we've acquired technology in terms of formulation technology, all of the other acquisitions have actually worked out quite well for us over the years. And so on this one, depending on the data, we'll deal with it.

Thanks.

Our next question comes from Jim Reddoch from FBR. Please go ahead.

Hi, this is David [Anselin] for Jim Reddoch. Just a couple of quick questions. On the manufacturing component on the P&L, do you see any quarter-to-quarter lumpiness in that line item? And then I guess the second question is: Do you have a sense of how much inventory Pfizer will be carrying sort of on a steady state basis? Thanks.

David, this is Lou Drapeau. As I mentioned in the script part of it, there will be a spike due to the sell-in of product to Pfizer in preparation for their launch, and so I think for the next couple of quarters there may be some revenues that are abhorrent in that sense. But as far as how much inventory or sell-through that Pfizer has, that's really a question for them.

Okay, thank you.

We have Rich Silver on line again from Lehman Brothers. Please go ahead.

Yes, just again on the decision that you make in terms of profitability and how you're going to spend, and you laid out two examples. At what point in time do you make the decision to either partner or to fund yourself, how much sort of lead time do you need in terms of the sales of Exubera to be making those kind of decisions?

Rich, I mean at one level partners -- those types of partnering deals take some time to complete, and so one needs to be working -- start working on those well in advance, and that's exactly what we'll do. I think the way to think about it is along the way the factors that would really determine what -- how we go with the decision, one is, so what's the data look like for those particular products, and what sort of terms can we get for those products? If one is able to get really, really good terms, you might just say let's just partner these.

The other side is what's the Exubera ramp and to some extent, at some point we'll be making some, hopefully, some educated guesses on how things are going, and based on that we'll make -- I think have to make the call as to whether we partner one, partner two or none of the -- zero products. But the ability to partner one or two products I think gives us the ability to control our discretionary spending, and so if we need to bring that down in a significant way, that is the way we will do it, and thereby, adjust our spending levels to match the revenue growth levels.

The reason I ask that is because you've said four quarters after global launch on Exubera and that doesn't really provide a lot of time to be making the assessment of what's the appropriate Exubera run rate in order to be funding your own programs versus partnering, that's all.

True. But we don't have -- the only decision we sort of have to make right now is, are we going to initiate and work on trying to find a partner. The amphotericin product should enter pivotal trials in the first half of next year and so that will be a significant milestone.

And so let's say we were thinking about partnering that product independent of the profitability question. We would probably want to partner it after we've initiated -- started the pivotal trials because I think we would get a much better deal that way. And so that would still I think give us plenty of time given that we'll initiate those discussions well before that. I think it will still give us plenty of time to make, hopefully, a very educated guess -- decision in terms of should we partner for profitability reasons or not.

And then just one more regarding the manufacturing at San Carlos versus the manufacturing in Indiana. Is it 50/50 right from the start or is it mostly Indiana first and then as that comes on stream then San Carlos begins to pick up?

We've never sort of gotten into that level of detail. I think the key thing is that boarder the facilities I think will be capable of support, doing appropriate manufacturing. And I think if you look at sort of the entire supply chain, I think the entire supply chain should be absolutely ready to supply this product.

Okay, thanks.

Our next question comes from David Steinberg from Deutsche Bank. Please go ahead.

Thanks. Good afternoon. A couple of questions. First on just picking up on Rich's question about proprietary products, I think you said you're going to spend 80 to 90 million on proprietary products plus technology platforms. Could you give us a little more granularity on what percent of that will be on proprietary products?

And then secondly, in looking at your P&L line items, royalty and product revenues and licensing income excluding Exubera, do you expect that your non-Exubera royalty and product revenues will actually increase '05 to '06? And also could you help quantify the drop-off in licensing income you would have between '05 and '06 as the Pfizer licensing income goes away and turns into product sales?

By licensing did you mean contract research, David?

Yes, sir, contract research. Sorry, yes.

Did you move --?

I don't know, I've lost the first question. Can you say the first question again, David?

The 80 to 90 million in spending on proprietary products and technology platforms, what percent could you help us with would go into just your proprietary products.

Yes, it's about 70/30, with 70% going into the proprietary products.

Okay.

And the thing to keep many mind also is that supports four programs, two of which are in clinical development, one is Phase II, the other one should enter pivotal trials in the first half of next year, and then out of the two clinical programs -- preclinical programs, we expect at least one of those two will enter Phase I before the end of this year. And then there's obviously, there is a bunch of some earlier stage stuff before that, but that's what that spending is supporting.

Okay.

Our next question comes from Robert Hazlett from SunTrust. Please go ahead.

Hi, guys, it is Nadav Hazan with Robert, and sorry if I missed this I popped on late, but just a quick question on the amortization. There is a sequential bump-up and I know there was an acquisition during the quarter. What's the outlook for that line item on the P&L going forward? Should we think of this as the run rate, the 1.26 million?

Right. Our total amortization for this year was about $4.9 million, and I would expect that that would -- this is of intangible assets -- and I would expect that that level would continue into next year. Our total recurring amortization of non-cash is about 27 million this year, and again, I would expect that to be continuing next year. But we will have the non-cash charge associated with stock compensation of about 15 million for next year. Included this year was the approximately $8 million in-process R&D and the $62 million of impairment charge that we incurred this year that we're not expecting to occur again next year.

Thank you, that's helpful.

We have John Debs from Bodri Capital Management. Please go ahead.

Thank you. Two quick questions. One, is Nuvelo a part of Nektar or is that -- have you [Laughter] subleased out that space?

They just happened to -- it is an independent company. They're a public company also. We just happen to share a building with them.

Okay. And I didn't hear much about -- I used to hear a lot about PEGylation in past calls. I didn't hear much today. What can you tell me about your outlook in the PEGylated products?

Chris?

Sure. I mean I think we reviewed some of the late-stage products that actually use PEGylation including, most notably, CIMZIA and CERA, the UCB and Roche product. In terms of PEGylation we continue to look for partners with PEGylation. However, as we've previously stated, we are focused more on high-value products than sort of total number of deals.

I think you can recall last year we did a very interesting deal with Baxter for hemophilia A, where the economics on that were much higher than our typical economics in terms of total milestones and payments over the life of the products and royalty rate. And we did that as a result of investing in specific research on that, filing IP, and then looking for a partner. And we will continue to look for those sorts of product opportunities as we move ahead, so focused on more high-value products than just total number of deals on PEGylation. But that business continues to be a very interesting business and we see that as continued growth for Nektar.

Thank you.

Once again we have David Steinberg from Deutsche Bank. Please go ahead.

Yes, hi, just wanted to see if I can get the second part of my previous question answered about the breakout of the non-Exubera revenues in terms of royalty and product sales and also license income?

Right. Sorry about that.

I am glad you asked. We were --.

No problem.

We, again, realized we had forgotten to answer that and we were going to answer it when we got a chance. So let's do it now.

Sorry. David, we anticipate that our royalty revenue for non-Exubera will go up principally through the Macugen royalties.

Right.

And our contract research revenue will likely go down because the Exubera component of that will be no longer there.

If you recall, probably about a year ago we were telling everyone that a portion of our contract research and the R&D expense that was related to that would end up going into cost of goods. And so in part because of that and in part because the program is now approved, the contract research revenue will decline.

Okay. And then when you do show royalties, I guess we would start seeing them in the fourth quarter. Should we just apply that same of royalty to end market sales in '07, '08, '09, or is this a royalty that would slide with the attainment of certain sales levels by Pfizer?

Well, we will probably not be separately disclosing the royalty this year because it won't reach that level of materiality that the SEC would require us to break it out separately. But we anticipated at some point in the future that will happen. The royalty will change over time and we're just not at liberty to give you any more granularity around that than we already have. Our gross margin from all of our pulmonary product partnerships is as I mentioned in the 8 to 12% category.

So our expectation would be that over time the royalty rate will improve.

Okay, thanks.

Once again we have Jami Rubin from Morgan Stanley. Please go ahead.

Thank you. Can you give us some general guidelines on what we should expect for general and admin expenses this year? Did you hear me?

Yes, we do.

Okay.

We're thinking.

Because it wasn't meant to be a trick question.

Right.

About 50 million.

Okay. Thank you.

Our next question comes from Andrew Forman from WRH. Please go ahead.

Yes, I jumped on the call late so this might be redundant. Could you walk us through how you plan on communicating updating guidance given that you're supplying the pipeline fill for Pfizer in the U.S. and Europe?

And I guess, specifically, for many years you've been reluctant to comment on what forward looking revenues could be because Pfizer is in control, but now that this is material to Nektar's revenues and earnings, if in fact Pfizer updates their forecast. And if it were up for some reason, would that be -- would that result in a change of guidance from where you are, say if given say three to six months after the launch? How are you going to be communicating differently than you have in the past?

Andrew in terms of the guidance that we've given for this year, we've actually included some of the Exubera-related revenue in that. Will we update our guidance if Pfizer updates their guidance? First, we don't know and it will be their decision as to what level of -- how much detail they go into in terms of providing guidance related to Exubera. But assuming they do, we may or may not have to update our guidance, every day based on -- just because they update theirs. We may have to. We may not have to. In part because there is a timing difference.

If you sort of take our revenue, there is two parts to it, right? There is royalty, which is based on sell-through which is -- and end product sales, and our manufacturing revenue, which is based on when we ship product and that may turn into royalty revenue eventually, after some number of months, and that some number of months will really will be determined by our partner, so --.

Well, I guess the question Ajit is to what extent can we use the last two quarters? You have got 5 million in the September quarter, 15 million in the December quarter, as a leading indicator for really the Pfizer cost of goods line of the Exubera launch. Obviously, the royalties will really, in fact, be a lagging indicator. I am trying to get a sense of to what extent is that a fair reflection of the pipeline fill of the launch?

As Lou was saying earlier, the first couple of quarters won't necessarily provide a clear trend. I mean often times there is -- you ship product for all sorts of -- I mean there's -- you're filling the channel. There is samples and a variety of things like that. What we supply Pfizer is only going to be a portion of the total product. They will -- they manufacture all the insulin themselves, and then they will do a significant part of the processing and all of the filling packaging themselves and in these types of products packaging costs can actually be quite material as a percentage of total cost of goods. So early on --.

Here is a question, Ajit --.

Early on I wouldn't -- I mean I don't think that you should assume that our numbers will be a great predictor of what's going to happen.

Well, here is a different way to look at it. So as a percentage of the cost of goods, if in fact Exubera is let's say at the 75% margin product including the royalty, just hypothetically.

Okay.

What percentage of your contract revenue manufacturer -- what percentage of the cost of goods is that, roughly? And the second question is, has Pfizer changed their forecast or their contract revenue -- essentially you're an OEM. Has that changed since the approval date and is that updated in the contract every month or every quarter?

Yes, both of those are questions that we aren't in a position to answer. I mean that's confidential information, and we really wouldn't be in a position where we will share those types of details.

And the last question, Ajit, is what's the shelf life of Exubera, both the device and the blister packs, the disposable? Two years?

Yes, Andrew, you can look in the product labeling, but the device is scheduled for a year. And the insulin is for two years. Look in the product labeling for that.

And then, again, I am sorry I jumped on late. Is this scheduled for launch around the ADA meeting, is there any more color you can provide from what Pfizer said a few weeks ago?

Andrew, I just want to clarify. Once the device is put into use it is meant to last a year, is the clarification on that.

Okay.

And what was your last question?

Well, just in terms of the color on the actual timing of the launch from what Pfizer seemed to intimate is that in the Q2, is this assumed to be an ADA early June launch?

All they said is around mid-year, so they haven't given any more detail than that.

All right. Thanks, guys.

[OPERATOR INSTRUCTIONS]. And we have Hossein Ekrami from Sturza's Medical Research on line with a question. Please go ahead.

Hi, thanks for taking my question. Just one quick one. If we were to hear about second-generation devices would that occur this year, and I am referring to Exubera, second-generation devices?

Hossein, we're not going to make any specific comments on next-generation insulin devices really for competitive reasons. So the answer to your question is, you shouldn't expect to hear anything in terms of next-generation devices here.

Okay, that's fair enough. And so I will slip one more in there. In terms of the R&D spend for Ampho program, do you have a dollar estimates for the R&D spend for that program alone for this year?

No. We just don't break it out at that granularity. I am sorry.

Okay, fine. And I just wanted to wish Ajit the very best of luck also from all of us here.

Thanks very much.

Thanks. Take care.

Okay, at this time I am showing no further questions.

If there is no further questions, then let me just wrap-up. And thank you all for your participation and as you can see I think Nektar is well-positioned. We've made a lot of progress in this last year, and I think we look forward to a great 2006. And I would like to take this opportunity also to thank all of our investors, analysts, our partners and our employees who have helped bring Nektar to the stage it is at. Thank you very much.

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