Nektar Therapeutics (NKTR) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the year-end and fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Please note, that this conference is being recorded. I will now turn the call over to Ms. Joyce Strand from Nektar Therapeutics. Ms. Strand, you may begin.

Thank you. Welcome to Nektar Therapeutics conference call and webcast to review our performance for the year and fourth quarter 2006. I'm Joyce Strand, the Director of Corporate Communications here at Nektar. Today you'll be hearing from Howard Robin, our new President and CEO; David Johnston, our Senior Vice President of Research and Development; and Lou Drapeau, our Senior Vice President of Finance and our CFO. In addition, available on the call are John Patton, our co-Founder and Chief Scientific Officer; Hoyoung Huh, our Senior Vice President of Business Development and Marketing; Nevan Elam our Senior Vice President of Corporate Communications and General Counsel; and Chris Searcy, our Vice President of Corporate Development.

Before we get started, please note that the following presentation contains forward-looking statements that reflect our current views as to the Company's business strategy, the value and potential of our technology platforms, the clinical prospects of our proprietary and partner products, Exubera market potential, our financial guidance for 2007 and other future events relating to the Company. These forward being looking statements involve uncertainties and other risks that are detailed in Nektar's reports and other filings with the SEC including our annual on Form 10-K and 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 statements 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, 2007, on the Investor Relations page at Nektar's website at 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 information will be made available on the Investor Relations page at our website as soon as practical after the conclusion of this call.

Today I'm very pleased to introduce the new President and CEO of Nektar, Mr. Howard Robin who brings to Nektar more than 25 years of progressive experience in the commercialization of drug products. Most recently, Howard was the President and CEO at Sirna Therapeutics where he relaunched the Company and created significant shareholder value that led to their acquisition by Merck for $1.2 billion. Howard had a number of great opportunities following the Sirna acquisition and we're pleased that he chose Nektar. I'll now turn the call over to Howard.

Thanks, Joyce. It's a pleasure to be here today as the President and CEO of Nektar. Before we start our discussions of Nektar's programs and performance, I'd like to share with you why I made the decision a little over a month and a half ago to join Nektar. As many of you know, Nektar has been historically very conservative in its dissemination of information regarding its programs and technology, and therefore, I had to do considerable due diligence to fully understand the potential of the Company. Today, there is no doubt in my mind that Nektar leads the industry in developing true broad and powerful technology platforms that have consistently brought drug products for partners into the clinic and to the marketplace. At the end of the day, the reason I joined the Company is that I am convinced that tremendous additional value can be created by leveraging these innovative technology platforms into a strong and differentiated product pipeline for Nektar.

Now, let me tell you why I find this Company quite remarkable. Over the years, Nektar has built a strong, diversified business with a rich pipeline of partner and proprietary programs developed from leading edge pulmonary and PEGylation technology. Using our pulmonary and PEGylation technology, platforms, we and our partners have developed nine products that are on the market and there are an additional 14 partnered programs in clinical trials or filed for regulatory approval spanning a broad spectrum of indications and therapeutic areas. Most importantly, we are using our skills and expertise to develop our own proprietary products and have five programs ready for the clinic or in the clinic. In fact, I'm not aware of any biopharmaceutical company that has consistently enabled or developed this number of product opportunities, a testament to the quality and strength of this organization, a truly truly impressive Company.

Now, I'd like to spend a few minutes on Exubera. We recognize that there are a lot of people who are tracking weekly prescriptions and are disappointed that there has not been faster adoption. Frankly, we share that frustration; however, we are not discouraged about the long term prospects for the product and believe that Exubera will be very successful for several important reasons. First, there has been, still is, and will likely be for a very long time, a significant unmet need for more aggressive treatment of diabetic patients. The fact is that fewer than 50% of diabetic patients, including insulin using patients, reach targeted hemoglobin A1C levels. Insulin is the most potent drug to combat elevated glucose caused by inadequate secretion and insulin resistance yet there are many type two patients who are reluctant to use insulin after failing orals. When they do, they are often on dosing regimens that deliver inadequate drug in an attempt to minimize the number of injections per day. Exubera has the potential to make a significant impact on this important unmet medical need.

Second, Pfizer is a committed partner who has a track record of establishing and growing new products in already entrenched markets. While they have gotten off to a slow start with Exubera, we believe they will be successful in this market as well. Their level of committment for Exubera is strong as evidenced by their substantial investment in ongoing clinical trials, manufacturing capacity, and life cycle management.

Third point, is that despite what you might hear in the marketplace from people who do not have all the facts, Exubera is a great product. Exubera was designed to be intuitive and convenient to use, provide visual feedback, provide room temperature stability for insulin and work across a wide range of patient segments. The clinical data have shown the product to be effective and well tolerated. Patient satisfaction data from clinical trials show that overall, patients had greater satisfaction with Exubera than comparative treatments. There is lots of evidence in this industry that patient satisfaction ultimately predicts long term product successes for reasons of both choice and compliance. We believe that the level of patient awareness at this point is low but will grow with time as more patients share their experience with other patients and when Pfizer begins a direct-to-consumer communications program this year.

Lastly, having had extensive discussions with Pfizer, there is no doubt in my mind that they are fully committed to Exubera and to follow-on inhaled insulin products. We know there are a number of examples of important drugs that got off to a slow start and through diligent efforts went on to become drugs of major significance. Nektar and Pfizer strongly believe that Exubera will become a great success. While partner programs are important way to grow the Company, it is essential that we develop our own products to significantly increase shareholder value. This means that we will advance programs further in the clinic, co-develop them at later stages as appropriate, and ultimately bring our own products to market.

Now, I'd like to make something very very clear. It's important to me that our investors fully understand our science, our technology, our programs, and how we spend money. Beginning next month, I will be providing more details about our proprietary programs and our transition to a therapeutics company. In advance of that, I'd like Dr. David Johnston, our Senior Vice President of Research and Development, to provide a brief summary of our technology and its potential.

Thanks, Howard. As Howard already mentioned, the strength and breadth of our pipeline and our partnership base is built on our leadership position with our pulmonary and PEGylation technology platforms. These technology platforms differentiate us and will enable us to develop products that the are unique and competitive. There are numerous technology platforms, but I've never seen two with such breadth and potential as pulmonary and PEGylation. Nektar's current pulmonary platform is based on a pioneering research in the area of dried particle engineering. Our uniqueness lies in our ability to produce, characterize, and handle these specialized powders which have unique aerodynamic properties and then to combine them with a variety of efficient dry powder inhalers to provide superior product performance. The result is a very flexible approach that is now being considered or used for the treatment of a variety of diseases.

One particular advantage of our powder technology is the ability to rapidly deliver relatively large quantities of therapeutic agents directly to the lungs. As one example, we are working with Novartis on the development of Tobramycin Inhalation Powder, TIP, which is currently in Phase III studies for the treatment of patients with cystic fibrosis. Other anti infectors can be delivered equally conveniently to the lung and are currently other stages of development. For example, Citrifluxin Inhalation Powder. We are leveraging the same technologies for our [Inaudible - highly accented language]. We are leveraging the same pro technologies for our [Inaudible] for our Amphotericin B inhalation powder which is being developed by Nektar for the prevention of invasive pulmonary fungal infection in patients who are at risk for such infections as a result of receiving immuno suppressive therapy. AVIP has successfully completed three Phase I studies evaluating tolerability, safety, and pharmacokinetics. New pharmacokinetic data from the most recently completed Phase I study, a multiple dose study in healthy subjects, will be presented next week on March 7, at the focus on fungal infections 17th annual conference in San Diego.

Regard powder inhalation technology is not the optimal approach for patient care, we have also developed the highly efficient on cue aerosol generator technology. This revolutionary and broadly applicable technology enables liquids to be efficiently aerosolized without the introduction of gas. Unlike meter dose inhalers or nebulizers, our technology allows delivery of high doses of therapeutic agents in a relatively short period of time, thereby greatly enhancing the pharmacodymanics and clinical utility. We're currently applying this technology in our inhaled antibiotics program to deliver highly efficient aerosolized antibiotics to patients with pneumonia, one of the leading causes of death in hospitalized patients.

Upcoming presentations are the American Thoracic Society in San Francisco in May 2007. We'll describe lung levels and systemic levels [Inaudible] achieved using our [Inaudible] platform and the ability of aerosolized amikacin to reduce the requirement for IV antibiotics in patients with [Inaudible] pneumonia. We have also recently completed additional Phase IIa pharmacokinetic studies and these data will be analyzed and reported later this year. I've been talking to you so far about particle engineering, now I'd like to discuss molecule engineering. That no doubt occurs, I mean PEGylation.

PEGylation chemistry is applicable to almost every therapeutic protein on the market and indeed has been called a [Inaudible] for protein therapeutics. Two of these products, versus pegasys for hepatitis C and Amgen's Neulasta for neutropenia, each have reached more than $1 billion in sales due to the improvements made to already developed products by using our PEGylation technology. The successes that we have already achieved and the diversity of opportunities that we are working on is a reflection of the unique skills and competencies that we have developed at Nektar. Our research and development into the selective PEGylation of target proteins, the selection and characterization of the optimal drug development candidate profile, and our ability to scale the relevant processes from research scale through commercialization is unmatched.

Additionally, our [Inaudible] from this work have enabled us to extend the technology successfully to small molecule applications. In 2006, two products using nitrous PEGylation technology were filed for regulatory approval in the U.S. and Europe, Versa's Narciva for renal anemia and UCV Cimzia for Crohn's disease. Both of these products are also being tested in Phase III trials for other indications, anemia associated-cancer, and rheumatoid arthritis respectively.

Now, in addition to our PEGylation partner pipeline, we are developing our own proprietary product by applying our PEGylation technology to existing small and large molecules to create superior power. During 2006, our PEG oncology program and our PEG inhalation program have been fully evaluated in both preclinical safety and efficacy models and have advanced to be ready for clinical evaluation. We will be discussing these two programs in detail beginning next month.

In summary, we are very excited about the potential of our technology platforms and their broad application across multiple therapeutic classes and we are focused on building a strong and robust proprietary pipeline at Nektar. I look forward to providing you with regular updates on our progress in the future. And with that I would like to turn the call over to Lou Drapeau, our Chief Financial Officer.

Thank you, David. I'd like to briefly review some highlights of our financial results. First, I'd like to point out that our results are in line with our guidance provided for 2006. Both our total revenue of 217 million and our Exubera related revenue of 110 million exceeded the high end of our guidance. Both GAAP, net loss of 154.8 million and non-GAAP net loss of 92.3 million were less than what we had estimated. Our cash balance of 467 million also exceeded our guidance. As Howard stated earlier, we intend to be more transparent and make it clear how we spend our money. To that end, I want to share with you our R&D expenditures for 2006 which will be included in our 10-K which will be filed tomorrow.

Our total GAAP R&D expenses for 2006 were 149.4 million, of which 51 million was spent on partnered programs, 81 million was spent on our proprietary products and technology platforms, and 17.4 million was spent on our next generation inhaled insulin program. We recognized GAAP revenue of 56.3 million from partners for our efforts on these partnered programs. I'll now give you some details of the remaining 81 million of GAAP R&D spending on our proprietary products and technology platforms.

The fully burdened costs incurred in 2006 in connection with our major proprietary programs are as follows-For our pulmonary programs, inhaled Amikacin, 13.6 million. Amphotericin B Inhalation Powder, 24.3 million. Other pulmonary proprietary research programs, 9.1 million, and the Pulmonary Technology platforms 12.2 million. For our PEGylation programs, our PEG oncology product, we incurred 5.5 million, for the pain related PEG product, 2.7 million, and for other PEG related research activities, 10.6 million.

Our guidance for 2007 is unchanged from what we provided at our third quarter conference call. We estimate that our total revenue will be in the range of 210 to 250 million. Our estimate for Exubera revenue representing mostly manufacturing revenue is in the range of 110 to 130 million, and our non-GAAP net loss is estimated to be between 75 to 95 million, while our GAAP net loss is estimated to be between 110 to 130 million, which includes 25 million of stock based compensation and 10 million for Aerogen restructuring costs, and with that, I'll now turn the call back to Howard.

Thank you, Lou. I hope you get a sense of why I'm so excited about being at Nektar. We have lots of opportunities but also some challenges and over the next few months, I'm going to take the following actions--First and foremost, I will do everything possible to encourage and support Pfizer in making sure Exubera is a commercial success. Historically, there has not been a strong relationship between Nektar and the Senior Management at Pfizer. I am now building that relationship and in fact, I'm in frequent contact with Senior Management at Pfizer to assure that Nektar has an active voice in the commercialization of Exubera, and I'd like to note that I'm really encouraged by the recent management changes at Pfizer.

Second, we have to define and clarify our mission and strategy, establishing the proper balance between partner and proprietary programs. Third, we will address our cost structure. I'm not happy with the high level of spending at Nektar and I'm not comfortable with our projected net loss. We need to increase our productivity, do more with less, and focus on activities that generate the highest value. Fourth, I plan on managing the Company by creating a high value proprietary pipeline while at the same time closely managing cash flow to avoid future expensive financings. I know that the Company has historically committed to profitability upon Exubera reaching $1 billion in sales. I have a different philosophy. The best way to create shareholder value is to create a robust and exciting therapeutic pipeline that we control. When Nektar turns profitable, I want to assure that we will have a pipeline that will sustain earnings growth for years to come. Let me be very clear that we intend to build our pipeline while managing our cash and maintaining financial discipline. In other words, we're going to scrutinize how we use our cash and live within our means.

Lastly, we will improve communications to make sure that current and potential investors understand our programs, our spending, and ultimately, our value. Thank you very much for participating in this call and I look forward to meeting many of you at the upcoming investor conferences. Now, the team and I would like to open the call to your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Rich Silver from Lehman Brothers. Please State your question.

Good afternoon. Can you hear me?

Yes.

Hi, Howard.

Hi, Rich.

Howard, just on one of your last points regarding profitability, can you maybe explain what that really means in terms of the previous statements about the Company reaching profitability by '08, assuming 2 billion in -- or assuming a billion in sales of Exubera. I mean, does this mean that there's any change in the time frame and perhaps -- or does it just mean that the same time frame but the way you'll reach that profitability might be less dependent on where Exubera sales will be at that time?

Well, I can't comment on the specifics of the time frame because that will involve the completion of the strategic plan and the way we want to move forward as a company. I think this -- the Company had given guidance that the Company would become profitable upon $1 billion of Exubera sales whenever that happens to be. I think they backed away from 2008 in the past -- some time last year. I'm saying something somewhat different. What I'm saying is that it's hard for me to imagine a company to show profits on the basis of a product that is essentially out licensed and a company that has no products of its own on the market. So I think profitability is also a rather difficult number to gauge because it's for me a matter of really whether you can fund your development activities with your cash flow as opposed to looking for profits in the short-term. So I like to think of it as if we spend no more than we take in and we can build a very successful and important pipeline off of our technology platforms, without having to go to the market for expensive financings, without having to cause any further significant dilution to our investors, I think that builds sustainable strong value.

I would be very concerned about a profit approach that is linked to sales of a product that we actually don't control and I think without a strong pipeline to back it up, it might be that you're profitable for a period of time and then as you move forward into the clinic with other programs, you lose that profitability. So I think it's much better to take a viewpoint that we're going to behave very very carefully with our cash. We're going to make sure that over time, we don't spend more than we take in. We're going to be very conscientious there. We're going to not plan on any expensive financings, and at the same time, we're going to build a robust and important pipeline which I will start speaking about next month in detail, and I think that is the best way to demonstrate the value of the Company.

Okay, just a follow-up to that, which is you said that you're unhappy with the cost structure that you see today. Now, back in the second quarter of last year, the Company did announce a cost efficiency plan that was going to be implemented '07 and '08, so can you comment on that plan, the status of the plan, and whether that plan alone is sufficient to reach the kind of goals that you believe in right now or whether you have to go above and beyond what has already been announced as a plan to reduce costs?

Well, look, I don't know that that plan is sufficient to achieve what I'd like to achieve, and I'm not telling you now that I have a plan in place in my head that will get us there, but we're very actively working on it and I think we will have things to talk about in the not too distant future. Suffice it to say that when you look at the anticipated loss and burn for 2007, it is much higher than I would like to see, and therefore, we're going to strive to reduce that burn for 2007, that loss for 2007, and do the same thing in 2008, and yet at the same time, at the same time, manage to build our pipeline of important proprietary programs which I think is essential. So, companies can't save themselves into success, nor am I even trying to save ourselves into success, but we do spend more money than I'd like to see. We don't have the procedures and processes in place to make us terribly efficient, and I think we're going to have to do that this year, and I do expect that we will, and I certainly can't tell you by how much, but I certainly do expect that we will see a significant impact on our spending this year.

Okay. I think I'll step out and let someone else ask a question. Thank you.

Thanks, Rich.

Your next question comes from Bert Hazlett from BMO Capital Markets. Please state your question.

Hi, Howard. Thanks for taking the question.

Hi, Bert.

My question has to do with the inhaled antibiotic and the inhaled anti-fungal. I think I may have asked this question a little bit ago, but the question is--Has the decision been made whether or not you're going to consider licensing these programs or whether or not you're going to consider with them internally in terms of developing them and if you could, could you give us an understanding of the timeline for these programs? Again, it's maybe jumping the gun for the discussion of your pipeline a month from now, but a little bit of clarity in terms of timing and how we need to think about these programs would certainly be helpful, thanks.

Yes. I think it is highly likely that these programs become partnered programs, and that is we are talking to a number of companies right now about those two programs that I think there's a high likelihood that we see an important collaboration this year, and to that end, I'm going to ask Hoyoung Huh to describe that in a little more detail.

Great. In terms of the two antibiotic, the anti-fungal and the antibiotic program, we have been in active discussions with a number of very strong potential partners and we are in active discussions at the moment in collaborating and bringing these products to market. In terms of the timing, we're looking at a 2010 time frame for these products, 2010, 2011 time frame for an NDA and potential go to market. So that's the approximate timing and we hope to see some active partnerships in progress for these two programs.

I would add to that that I think what is terribly exciting is that when I look at our platform technology, I look at it fairly broadly. Not just that we have a specific program that is either a liquid or a powder inhale, but that we have the opportunity to use our technology in a wide variety of pulmonary therapeutics. So these companies that we're talking with see that value as well and I'd like to think that our collaborations extend beyond these two specific programs and I think that builds and brings tremendous value to the Company.

Thanks very much. Appreciate the clarity.

Our next question comes from Hari Sambasivam from Merrill Lynch. Please State your question.

Yes, thank you. Howard, just a quick couple of questions on the Exubera manufacturing to date. You have manufactured a considerable amount of Exubera material for Pfizer and are projecting to again manufacture call it 110 to 130 million in 2007. Knowing what we know at this point in time in terms of Pfizer's launch, should we expect a back end loaded number for this manufacturing number and that's the first question. And the second question is that given the slow start to date, is there a risk of you having to write down any of your product that you've manufactured so far in terms of stability issues?

Well, to answer the second part of your question first, we don't see any need to writedown this inventory from stability or otherwise and quite frankly, I do think Exubera is going to do quite well in this product, this inventory that we do hold for Pfizer will be used. In terms of what we look like in future years, yes, one could always say that if Exubera does not do well that this poses as a problem in future years but I don't see that as a likely case and it's an obvious -- it's a great question and it's obvious that we've produced a lot of inventory and manufacturing would be less necessary in 2008 if there weren't a real drive or need for the drug. We don't believe that's the case. Pfizer doesn't believe that's the case. As a matter of fact, Pfizer is concentrating now on how to increase capacity for Exubera, so quite frankly, it's not something that at this point I think is going to be a major concern for the Company. We haven't forecasted what 2008 is going to look like yet, but at the moment, I feel very strongly that Exubera is going to do quite well.

Actually, I was just more curious about the quarterly numbers for '07. So are we -- should we expect a reasonably even type of manufacturing for '07 or do you expect some lumpiness is what I was curious in terms of '07 manufacturing?

Right. Thank you, and I am going to have Lou clarify that for you, thank you.

Hari, as you know, we have firm purchase orders in place through the first half of this year and we have a forecast for the entire year. I anticipate that the manufacturing because of the scale up, we're running three shifts a day, for example, it's going to be pretty constant throughout the three quarters. What could alter it, if the sales take off in the latter half, we could get more royalties but that is the wildcard.

Thank you.

Your next question comes from Jami Rubin from Morgan Stanley. Please State your question.

Thank you, just follow-up on the Exubera manufacturing revenues. Howard, I'm not even sure if I'm calculating this correctly, but you reported 110 million of all manufacturing revenues. We know that Pfizer did not report any sales for 2010, so is it wrong to assume that that implies about 7 to 800 million in Exubera end market sales and then you're reporting or targeting another 110 to 130 million in manufacturing revenues so we're talking 1.6 billion in product out there somewhere that we haven't seen any pull through yet. So just want to confirm if my math is right if I'm thinking about it correctly.

Secondly, Lou, you said you had firm orders from Pfizer through the first half. I think that was the update you gave at the end of the last quarter. We've seen prescription trends that have not really changed despite the fact that Pfizer is now launching to the bigger GP market so I'm wondering if your confidence in the full Exubera manufacturing number for the full year and then my third question relates to the shelf life. How long is it? I think the risk is Pfizer decides to rundown its inventories because of the shelf life, but if you could address those questions, I'd appreciate it.

Well, let me start by saying that your numbers are essentially correct. There is a substantial amount of inventory out there, but we're running at full capacity and we're even -- Pfizer is actually looking for additional capacity and the fact is you're correct when you say, and I think we all know this, that the scripts haven't evolved the way we would like them to evolve and Pfizer has not really started in any great capacity marketing this product yet. That will be starting, they're working on it. They're putting effort into it, but I would not say that they're working at the highest possible energy level yet and I've had a lot of discussions with them on that topic and they will be doing it shortly. So I think if you make the mistake of translating the last three or four months and extrapolating that and saying that's what Exubera looks like, I think you're going to be in for quite a surprise when this drug takes off and we're acting as if this drug is going to be very successful because we believe it will be. Pfizer is acting like this drug is going to be very successful because they believe it will be and I think a lot of people are going to be very surprised six, or eight, or ten months from now when this drug is in very high demand. I'll let Lou confirm the issues around the individual purchase orders for the product.

Yes, so, Jami, maybe you misunderstood what I was saying. What happens at the first of every quarter, Pfizer gives us a purchase order for not that quarter but for the following quarter, so on the 1st of December, we got a purchase order for the second quarter of 2007, so that's why we've locked in through the first half. In addition, they give us a forecast for the entire year which is very consistent with the first half and although in the second half they do have some ability to cut us back, but because of the way our contract works where there in effect is a cost plus and we're going to get reimbursed for our fixed cost in any event, volume has relatively little impact on the amount of revenue that we receive from our manufacturing.

But at this point, would they normally give you firm orders for the third quarter or would you not expect that at this point?

We'll get that on April 1, Jami.

On April 1, okay, thank you.

One thing, Jami, one thing I'd like to point out and I'm going to ask Hoyoung Huh to give you a couple examples, but I think I think it's probably dangerous at this point -- dangerous at this point to start thinking of Exubera as a product that is in serious trouble. I would say that the product has not been adequately marketed and Pfizer knows this, but I think that generally from everything we can see, this product is very very well respected and liked by patients and I think once we start marketing this effectively and efficiently, this product is going to become a very very important drug for treating diabetes and Hoyoung could you give a couple examples of products that have run into the same problem and then become blockbusters?

Sure, Howard, a couple of examples that -- which many of you may be very well aware of that we've been tracking is Remicade and Zithromax, two very large and successful products in the market, but in the early days of its launch actually ran into some issues and a good example is Remicade where it was approved and launched in 1998 and 1998 for Crohn's and rheumatoid arthritis but the fact that the rheumatologists were not used to infusion of products and were not set up for infusion centers made it very difficult for J&J to launch that product in the early years, but through active education of rheumatologists and active reimbursement and coding education, this product has become a very very strong product in the market as well as for patients with severe diseases in this setting. So we believe given some of these examples, a very successful product that have had some early issues, we believe Exubera is in that category and given the patient demand and the hemoglobin A1C profile we are very bullish.

To use Remicade as an example, I believe in 1999 the sales were about $35 million and today they're in excess of 3 billion and it was not linear by any means so I wouldn't be thinking of Exubera as a problem product.

Thank you very much.

The question comes from Ian Sanderson from Cowen & Co. Please State your question.

Yes, thanks for taking the question. So Howard, with your increased communication with Pfizer, it sounds like maybe they've allowed you to say a bit more. Do they share with you the Exubera salesforce training plans as they convert over the cardiovascular salesforce and if they do, can you share with us where that stands? Secondly, the $17.4 million spent last year on the next generation device, is that all, well, I guess first of all, is that all next generation Exubera device and secondly, this is a relatively large number for a prototype, so maybe you could elaborate on where that money is being spent if there's some clinical trials going on here?

Well, okay so good questions. To take your first one, we are now -- the relationship between -- as I said earlier, the relationship between Pfizer and Nektar had always been a little bit lacking in communication and definition. We've gone a long -- we've made some great progress over the last few weeks in changing that, partly because of our desire not to sit back and watch Exubera be less than a tremendous success and secondly, because there's been some significant management changes at Pfizer that we're very pleased with. I can tell you that as CEO of Nektar, I am not going to sit back and just observe what happens to Exubera. We're going to play an active role and we're going to do what's necessary to make sure that Exubera is everything that it can possibly be. That said, we are sharing lots of information back and forth with Pfizer and yes, we will have and we do have -- are privy to a lot of their programs and their information but that's not something that I can share publicly, so do we look -- will we be looking at advertising campaigns, salesforce training, salesforce positioning, expected call rates, salesforce bonus, absolutely, and this will transition to a very very powerful strong sales approach that I believe they're putting in place right now and while I can't share it with you and you could understand that I don't have the ability to start providing information that's confidential relative to Pfizer, I can tell you that they're be having extremely well in sharing that information with us and there are are a few of us at Nektar, of course, that have tremendous experience in launching and developing drugs, developing and launching drugs, and Pfizer, at least certainly is developing a relationship with Nektar that will allow for a very very good cross-pollination, if you will.

Now, in terms of the $17.4 million, which is essentially next generation aerosolized inhaled insulin, not aerosolized, pardon me, next generation powdered insulin, we are working actively on that program with Pfizer. We do expect to be moving forward with an improved version of Exubera. The cost is not simply for the device and the devices are obviously considerably smaller than the current device. I would say that our current device is actually impressive. I'm always shocked when I hear people talking about how large it is and how uncomfortable it is and how complex it is, it took me about seven seconds to learn how to use it and it fits in your breast pocket so I'm not sure that the size of the device is a big obstacle, but in any case our new device an the devices that we're working on together with Pfizer are considerably smaller, maybe some of the smallest devices on the market and we're very proud of that, but some of the costs of the program is not simply for the device. It's also for the chemistry and the engineering necessary to formulate an improved powder to work in such a small non-powered device if you will. So I think we will be making further comments as time goes on on the next generation insulin product and we do expect it to be extremely competitive and perhaps in my mind, better than the first generation product of any of our competitors.

And are you still expecting that to be available at or near the time of the launch of your competitors?

Well, I can't give you specifics today, I would say yes, I do.

Okay, and one final question. You mentioned that Pfizer is investing heavily in " Ongoing clinical trials" for Exubera. Can you elaborate on what they are looking at here?

Chris, Would you like to take that, please?

Yes, Rich, it's Chris. They have some 20 ongoing trials. If you go to FEA.gov and look at the clinical trial database you'll be able to pick up the specific clinical trials that they have ongoing. I think you saw at both the ADA and the EASD, two year looks at two five year studies, one in type one insulin and one in type two insulin where you are starting to see differentiation in those programs with lower fasting glucoses, a trend towards lower weight gain and a trend towards lower hypoglycemia events and they will continue to report out on those data to get long term data and they've also talked about trials looking at the mechanism of action of the pulmonary function changes. They've talked about expanding the label to pediatrics so there's a number of those trials listed. You can go to the database and look at those and the way they've characterized that is they are looking at trials to be able to look at the most correct way to use this drug in patients and I think they've also mentioned that some of the trials they are undertaking will start to look at differentiation to help the cost argument, especially to support pricing discussions in Europe, so a lot of stuff will come out of that program. We don't know exactly what's going to get presented when, but you can get a pretty good idea by going to that website and look at the trials that they do have ongoing.

Thanks, Chris.

Our next question comes from [John Laploy] with Natexis. Please State your question.

Yes, have you spoken with Pfizer at all about how reimbursement is going for Exubera? Is there any headway being made on that front?

Yes, John. This is Chris again. Pfizer has stated publicly that they have been pleased with the reimbursement thus far, and that getting on most formularies and it's getting on tier three I think in a lot, it's also surprisingly gone out in tier two in a number of formularies and that's not any different than most of the novel be it insulin analog or [Vyatta] when they came to market started on tier three and over time have moved down to tier two, so we would expect over time as they create the data to show the differentiation that this would move from tier three to tier two and that's essentially where most of the existing novel diabetes agents exist today. Insulin pens also were on tier three for a long time and I think are moving to tier two so we would expect a similar pattern with Exubera. We can't tell you quantitatively how many formularies have it on, three or two. We don't have that level of detail.

Okay, thanks.

Our next question comes from Rich Silver from Lehman Brothers. Please State your question.

Yes, I'm sorry. During your formal remarks, you mentioned that there will be data presented on inhaled Amphotericin B. Can you just repeat that again?

Yes. I said that there will be data presented, let me just give you the specifics of the conference. This is the focus on fungal infection conference, San Diego and it's in March.

Next week.

Next week.

And I think what will also be important, Rich, is that starting next month, we will start to share data on a number of our programs. Our oncology program, our pain related program, I'd like to start presenting both some pre-clinical and clinical data on these programs and I think you'll be very interested to see the kind of work that's going on at Nektar and I've made a committment to the investor community that we will start becoming more transparent and you will start, we will make sure that all of our programs are open for viewing and I think it's such an impressive amount of work going on here that I want to make sure everybody understands how much potential is in this company.

Can you tell us how many we're talking about and how many of these are already in the clinic that you're talking about being disclosed for the first time?

Well, I think I'll probably talk in addition to what we're doing in next generation insulin. I will probably talk about five programs. I guess three of which are in the clinic, one moving into the clinic, so I think there's some pretty good information to share with you, but I think it's also very useful to show you pre-clinical data because in many instances, these animal models are fairly predictive of the results that we expect to get. So I think it's important that as we evolve beyond simply the Exubera Company and I think it's Exubera is exceptionally important to us, on the other hand as we evolve beyond the Exubera Company and you see the value of what we can do with our platforms both pulmonary delivery and PEGylation, I think it's important that we start sharing the proprietary programs and the work that we're doing internally.

So of the ones in the clinic, the only two that have been disclosed are Amikacin and Amphotericin B?

That's correct.

Thank you.

Your next question comes from Bert Hazlett from BMO Capital Markets. Please state your question.

Thanks for taking the follow-up. I guess the question that I had was regarding your last statement, the next generation insulins. In general terms, have you been working with PEGylated insulins attempting to PEGylate insulin and is that something that having long acting insulins through an Exubera-type delivery device, is that something that's been pondered Previously? Thanks.

Well, look. This is not something that I'm prepared to talk about today. I think that we're always fairly careful from intellectual property point of view to discuss in detail what we're working on. There are certain programs that I'm happy to start sharing with everybody openly and drilling down into the data. There are certain ideas and other programs that it's premature to talk about publicly. I would just state that when it comes to long acting sustained release insulins, inhaled insulins, et cetera, we are probably as good as it gets and I'm going to leave it at that.

Thank you very much.

Our next question comes from Jami Rubin from Morgan Stanley. Please state your question.

Thank you. Lou, this is for you. Your proprietary R&D spend in '06 was was 81 million and I appreciate the break down of that. Where do you see that going in '07 and recognizing that your plan is to partner the inhaled antibiotic and anti-fungal, should we anticipate that this line item is going down, stays flat, continues to grow with your proprietary technology base? If you could provide some insights that would be very helpful.

Jami, what we said was we intend to partner our lead anti-infectives program so we're counting on that, but other than that, you can expect that our spending will be flat to down.

Okay, thanks.

Our next question comes from [Nathan Sehege] from [High Sight]. Please state your question.

Hi, guys. Thanks for taking the question. Actually, if you can just walk me through sort of what the -- more specifically sort of what the issues are really with Pfizer. I mean, I recognize the historical examples of Remicade and what not but maybe just give us a little more granularity on what is really, why they aren't, I think as you said, sort of working at the maximum level yet. I mean, what is sort of the key sticking point?

It's a great question. I've been in this company for six weeks now and I've probably asked that question twice a day. I'm not sure anyone knows exactly what the issue is there. I think they went through a significant management change. I think they probably launched the drug with the wrong salesforce. There's a lot of -- there was some early insulin supply issues early on in the process, it's very difficult to pinpoint the specifics of what took them so long. I would say this, there's nothing that we know about and there's nothing that we've discussed with Pfizer or with patients that give us any sense at all that there's a problem with the product. As a matter of fact as we said earlier when you do patient surveys they absolutely love this program and we have almost no drop off rate and there was almost no drop off rate in the clinical studies.

So I can't comment on why they have or why Pfizer has not put more muscle into this but they assure me that they will, and it's not just idle assurances. They've actively working. We look at what we're doing. We're very close to the programs they're putting in place. Clearly, any time you launch a new therapy, you have to put tremendous training into the process, and they haven't really done that yet, and even though it should be -- it's obvious to us that inhaled version of insulin, which could be used much earlier in the treatment regimen for this disease and therefore clearly reduce the morbidity associated with the disease by having patients start taking therapy earlier, that's so obvious to us but the fact is to many physicians, they have a practice habit that is such that they're very comfortable with injectable insulin and they need the training and the patients need the training and the nurse trainers need the training and I think any time you launch a new or novel product, one must put in that effort, and I can't tell you where -- why it has been slow, but I don't want -- I can't analyze the past very well.

I can only tell you that our discussions with Pfizer are such that they recognize this. I think they feel bad about it. They have stated to me in no uncertain terms that this is one of their, if not their most important drugs. It is going to be in a very important salesforce position in terms of call frequency, and they have exceptionally high hopes for this program. So I'd like to give you a clearer answer. I wish I could understand specifically why there was a bit of a lack of attention for some time. I chalk it off to a change over from old management to new management, and I can only tell you that I strongly believe they're going to be behind this product a thousand percent.

All right okay, thank you.

Our next question comes from Hari Sambasivam from Merrill Lynch. Please state your question.

Yes, thank you. Just a quick question, Howard, on the pulmonary function tests. In your -- as you look at Pfizer's new plans, is there a new strategy in terms of facilitating pulmonary function tests, Howard, whether it be helping primary care docs do this, I'm just kind of wondering, is this common practice in your opinion for primary care docs to have this kind of expertise? If not, is there another step that is required and I'm just wondering, have you sort of thought about how you, as Pfizer's partner, could sort of influence this issue. So that's the first one. And secondly, I'm just wondering whether reimbursement companies are asking for any kind of what is the sort of conversation regarding pharmaco economic data on this particular product, because -- or are they going to sort of require in many cases special authorizations, et cetera, I'm just wondering what actually moves them from tier three to tier two over a period of time. I mean, it's there on tier three but why should they go to tier two over a period of time is my question.

Well, look, take your first question, initially. Look, the pulmonary function testing is something that primary care physicians are very comfortable with. They have the device. They do it regularly. I don't see any complexity to having primary care physicians provide that very very brief exam. Of course, for endocrinologists it's a bit more complicated because endocrinologists aren't used to providing that. The last time they thought about such an exam was when they were in medical school.

So there is a certain challenge initially to making sure that endocrinologists can provide that very simple test, but it shouldn't be a problem at all for the primary care physicians who are doing it every day. So I think as the community becomes more educated on the benefits of Exubera, as endocrinologists understand that starting patients early, patients who refuse to inject themselves but would easily take an inhaled powder, when the endocrinologist understand that that will have a significant impact on the morbidity of this disease, I think the pulmonary function test becomes a rather simple process and as I've said primary care physicians are very very comfortable with this. I'm going to allow Chris to comment more on the reimbursement process. Yes.

In terms of Pfizer facilitating that, Hari, I think there may be an issue with them actually providing devices to physicians in their particular offices; however, the whole issue of pulmonary function, there's a logistical issue that you have to solve. They have to get it done someplace. Once you solve that, we don't see that being a big issue and I think there's multiple ways of solving it. One is for the physician to have a device in their office and there is actually a code for reimbursement of pulmonary function test that they may be able to use and get reimbursement for or alternatively they are in a practice that has pulmonary function test and they just have to figure out who does it, how they actually get it right for that, get it done but once you get it done it's not a big deal and I think you're fully aware of what it takes to do an FEV-1 and it literally takes 30 seconds to blow into a device. So we don't think that it's going to be a big issue ultimately. But it is a logistical issue that people have to get comfortable with.

Could you talk a little bit about what triggers the move from tier three to tier two, Chris, or Howard?

Yes. I think they are going to have to generate data through their clinical trials that start to look at the differentiation of the product versus the alternative standard of care and I think you know in the clinical trials, the whole clinical trials were looked at equivalent outcomes. I mean, that was the basis of the whole NDA, and when you do clinical trials for approval, the agency wants you comparing apples and apples but in real-life, what happens is patients are on standard care and are not doing well and if you put them on something like Exubera that is really meant to be meal time insulin that facilitates the physiological way that you should be treating diabetes, we believe that you'll be able to start to show better outcomes in those patients, and certainly they have shown some trends when you put type two's on on insulin, they do much better, but even in a real world setting and that is what are they currently taking? If you put them on Exubera will they do better? They weren't allowed to do those trials in a real world type of setting during the NDA trials and I think it's going to be those types of trials that start to show the benefit in terms of better control, better toleration, and therefore, better outcomes, but the data today really talks in the pharmaco economics today have really been patient preference leading to better compliance, but they have to get the data to be able to support that, sort of that leap. If you look at the whole NYSE argument, that was the issue that NYSE had and they agreed that there was improved patient preference on Exubera but the leap to better compliance, they didn't have the data to document that.

And I think there's also some other examples. Merck's Fosamax and the need for bone density testing, David , would you like to comment on that a bit?

Yes, I'm not sure whether you recall, Fosamax has been around awhile now, [Inaudible] it went to the same advisory Board process and one of the concerns was what is the long time effect of dosing this particularly on bone density and Merck's response was we'll get the training to the clinical practitioners, we will provide them with bone densitometer and today it's obviously being retained globally, [Inaudible] bone density measurements done, otherwise Fosamax might never have been approved and it's a multibillion dollar product ten years long.

So I don't think that the need for a 30 second pulmonary function test is going to have any real impact on the growth rate of Exubera.

Thank you.

Our next question comes from Ian Sanderson with Cowen & Co. Please state your question.

Couple of questions. First, is -- should we anticipate updated 2007 spending and financial guidance some time in the first half of this year following the completion of your strategic planning process? I believe Howard, you said that you may try to cut the spending guidance a bit? And secondly, should we anticipate some time this year data in patients with mild to moderate pulmonary disease for Exubera and in sort of an attempt to broaden the label?

To your first question, yes. In the first half of this year, we will be readjusting guidance to give you -- to match it more efficiently and effectively with our revised strategic thinking as well as reducing expenditures in the Company. In terms of the clinical program, I'm going to again let Chris bring you up-to-date on that.

Ian, Pfizer's running a study they call the real world study where they are actually taking more patients that do have a history of pulmonary disease, they are sort of taking all comers and looking at their ability to take the drug and how they do on the drug. In terms of when data will be available for that, I think Pfizer has mentioned that sort of a mid-year, they would expect some data from that but we don't have confirmation of when they might actually present that.

Okay, thank you.

[OPERATOR INSTRUCTIONS] At this time, I'm showing no further questions.

Okay, thank you very much. I'd like to thank everybody for joining in on the call, and I'm committed to all of our Investors to share information with you and make sure that what Nektar does is quite transparent. And I look forward to a lot more of these enjoyable calls, and I think you're going to see a very new Nektar emerge as we make great progress this year. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.