Nektar Therapeutics (NKTR) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nektar Therapeutics second quarter 2007 financial results conference call. My name is Maria, and I will be your audio coordinator for today. At this time, all participants are in listen-only mode and we will be facilitating a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) At this time, I would now turn the presentation over to Mr. Tim Warner, Senior Vice President of Investor Relations. Please proceed, sir.

Hello, and thank you for joining Nektar Therapeutics' second quarter financial results call. Howard Robin, President and Chief Executive Officer of the company, will be our speaker today and senior members of our management team and Investor Relations team are on hand as well. Before we get started, please note that the following presentation contains forward-looking statements that reflect our current views as to the revenue potential of our existing partnerships, the market potential of the future, and the future potential of our partnered and proprietary products and product candidates, the value and the potential of our technology platforms, the clinical prospects of our proprietary and partnered products, our financial guidance for 2007, and other future events relating to the company. These forward-looking statements involve uncertainties and other risks that are detailed in Nektar's report and other filings with the SEC -- including our current report, Form 8-K filed today with the SEC, and our annual report on Form 10-K, and most recently, quarterly report on Form 10-Q. The actual events could differ materially from these forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information, future events, or developments. The webcast of this conference call will be available for replay on the Investor Relations page at Nektar's website, www.Nektar.com. In the event that any non-GAAP financial measures 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 call. After a brief presentation, we will address any questions you may have. With that, I am pleased to introduce Nektar Therapeutics' President and CEO, Mr. Howard Robin.

Thanks, Tim. This was a very productive quarter at Nektar. As a business we are operating much more efficiently and we continue to make great progress on the research and development and business development fronts. Something that many of you have told me is that you don't believe the value of Nektar is reflected in our current share price. Well, I agree. In today's call, in keeping with our commitment to be more transparent about our business, I would like to give you more insight into our impressive pipeline and why I believe our company has tremendous unrecognized value.

First, look at our two technology platforms, which are based on world leading expertise in PEGylation chemistry and ground-breaking pulmonary delivery of therapeutics. So what do these two things mean? It means we are the best company in the world at taking existing drugs and making them better. NKTR-061 is a perfect example of making an existing drug better, and this week, we announced the significant partnership with Bayer Schering Pharma, which benchmarks the value of our platform technologies. Now, I would like to walk you through the economics of many of our key partnerships and the revenue and contribution that they will bring us in the coming years. When I'm done, I am confident that you will better understand the opportunity in front of us. You will see that Nektar has one of the best pipelines in revenue opportunities in the biotech business.

Let's begin with our pulmonary therapeutic delivery programs. The obvious place to start is NKTR-061 inhaled amikacin. On Monday, we announced the collaboration with Bayer Schering Pharma. This collaboration will generate $175 million of development in commercial milestones, which include an upfront payment of $50 million. NKTR-061 will move into Phase III clinical studies next year, and we estimate that this product will be launched in the 2010 to 2011 timeframe. Nektar has the option to copromote this product and will receive 48% of the profits from sales in the U.S., or if we choose not to copromote, we could opt for a flat 30% royalty on U.S. sales. Outside of the U.S., we will receive an average royalty of 20%, with a maximum of 30%. NKTR-061 is currently in Phase II trials for the treatment of gram negative pneumonia. Amikacin is traditionally delivered intravenously with severe toxicity at the high doses needed to be effective in the lung. We have reformulated amikacin to allow it to be used with Nektar's leading liquid pulmonary delivery technology and with the potential to deliver high concentrations of the antibiotic deep into the lung without significant toxicity. When approved, NKTR-061 should be extremely well received in the marketplace, as there is an enormous need for an effective therapeutic to treat gram negative pneumonia.

Today in the U.S. and in Europe, there are approximately 600,000 patients on ventilators each year who contract pneumonia and that number is expected to grow to 800,000 patients by 2015. Unfortunately, there is significant morbidity and mortality associated with this disease, and in fact, approximately 30% of these patients will die in spite of current treatments. We believe that NKTR-061 inhaled amikacin can become the standard of care in treating this high unmet medical need. In the U.S. market alone, using what we believe to be conservative pricing estimates, inhaled amikacin could generate revenues of $0.5 billion or more with another $0.5 billion potential in Europe. NKTR-061 is potentially a $1 billion drug treating a devastating medical condition. NKTR-061 is the first program in our portfolio where we have retained promotional and commercial rights, and we stand to earn substantial revenues and sustained revenues of $250 million or more annually. The Bayer deal is the first of what we believe will be a number of important partnerships in the pulmonary delivery of antiinfectives. The potential for other powerful antibiotics to be delivered through Nektar's liquid pulmonary delivery technology has been underappreciated and is an important part of our R&D initiatives.

We just talked about the Bayer deal. Now I would like to describe the value of the rest of our portfolio. As I said earlier, we lead the world in the pulmonary delivery of therapeutics. Inhaled tobramycin and inhaled Cipro are prime examples of the application of Nektar's technology. Both of these drugs are in the clinic for treatment of infections associated with cystic fibrosis. The combined market potential of these products is in excess of $600 million in annual sales, with annual revenue potential to Nektar of $150 million. Inhaled tobramycin from Novartis, currently in Phase III, is expected to be on the market by 2009, and inhaled Cipro from Bayer, currently in Phase I, is expected to be on the market by 2012. Thus, our current pulmonary antiinfective franchise has the potential to generate revenue for Nektar of $400 million or more.

Now let's talk about our PEGylation technology platform. As I said earlier, Nektar is the world leader in PEGylation chemistry, and we have enabled all of the PEGylated products approved by the FDA over the past 10 years. Now, let me describe to you some of the most exciting partnerships in our PEGylation portfolio. Let's start with our hemophilia A partnership with Baxter for the development of a long-acting Factor VIII. This product candidate is an excellent example of the application of our PEGylation technology. We expect that Baxter will move this product into Phase I in 2008, and we anticipate that sales potential of a long-acting Factor VIII is $1.5 billion annually. Nektar stands to earn up to $170 million per year from our partnership with Baxter.

We're also excited about our other PEGylated programs and some of the recent advances in these programs -- Mircera, Cimzia, and Hematide. Again, there is significant unrecognized value from these programs. Mircera, our partnership with Roche, was recently approved in Europe and is pending approval in the U.S. for the treatment of anemia associated with chronic kidney disease. Mircera significantly reduces the dosing frequency of current therapies, and it is anticipated that worldwide sales will reach $2 billion. Nektar stands to earn up to $50 million annually from our collaboration with Roche. Cimzia, which we partnered with UCB, is filed in the U.S. and Europe for Crohn's disease, with additional indications in rheumatoid arthritis and psoriasis. Nektar's PEGylation technology reduces immunogenicity and improves the PK profile of the drug. It is anticipated that worldwide sales of Cimzia could reach $2 billion annually. Nektar stands to earn up to $70 million in annual revenues from our collaboration with UCB. Hematide, which is partnered with Affymax, is in Phase III clinical trials for the treatment of anemia. Nektar's PEGylation technology has transformed this short-acting peptide mimetic to have prolonged duration of action. It is anticipated that this product will be approved in 2011 and worldwide sales of Hematide could reach $2 billion and Nektar stands to earn up to $100 million in annual revenues from this collaboration with Affymax.

These PEGylated programs have the potential to generate sustained annual revenue of almost $400 million for Nektar. Now, you can make your own assessment of regulatory and market assumptions, but this is how we think about it. When you combine the $400 million of annual revenue potential from our PEGylated programs with the $400 million of annual revenue potential from our pulmonary antiinfective partnerships, Nektar could earn almost $800 million in annual sustained revenues, largely from royalties. These revenues could reach $350 million by 2012 and $450 million by 2013. It is very important to understand that these numbers exclude any development milestones, any contribution from Exubera, any contribution from next generation inhaled insulin and any contribution from our PEGylated small molecule proprietary programs.

That leads me to talk about something that we are particularly proud of. As I'm sure you know, the pharmacokinetic and pharmacodynamic profile of most small molecule drugs could stand to be improved. As the world leader in PEGylation chemistry, we are breaking new ground in applying our technology to small molecule drug developments. Our lead product candidates, NKTR-102 PEGylated irinotecan and NKTR-118 oral PEGylated naloxol, have blockbuster potential, and we plan to initiate Phase II clinical trials by the end of this year. NKTR-102 is progressing according to plan in the clinic. By PEGylating irinotecan, we have the potential to significantly improve its pharmacokinetic and pharmacodynamic profile. The potential result is prolonged exposure of the drug to the tumor without the side effects associated with non-PEGylated irinotecan. As we announced recently, on September 27, we will present preclinical data focused on the antitumor activity and PK of NKTR-102 at a poster session at the 14th Annual European Cancer Conference. NKTR-118, an oral drug being developed for opioid induced constipation. Using our small molecule PEGylation technology, we are able to keep drugs from entering the CNS, thereby antagonizing the GI side effects of opioids without reduction of analgesia. In September, we will present Phase I data at the American College of Clinical Pharmacology Conference, and at the American Academy of Pain Management clinical meeting. Not only do these two drugs each have $1 billion market potential, but we expect that they will validate our ability to PEGylate small molecules and will allow Nektar to build a robust pipeline of breakthrough therapeutics.

Now let's review our second quarter results. We had a great quarter. Revenue increased in the second quarter of 2007 to $65.9 million versus $60.2 million in the second quarter of 2006. Revenue for the first half of 2007 was $150.9 million, compared to $89.2 million for the first half of 2006. We reported a net loss of $27.5 million, or $0.30 per share in the second quarter of 2007 compared to $62.8 million, or $0.70 per share in the second quarter of 2006. As a result of our efforts, we ended the second quarter with an increased cash position. Cash was $406.8 million at June 30, 2007 compared to $398.3 million at March 31, 2007. If you look at the first six months of 2007, cash used for operations was $14.7 million, which includes $5.2 million in severance payments. This means that our net operating cash burn was $9.5 million for the first half of 2007. We achieved this by managing our costs, improving our efficiency, and maximizing our partnership economics. Nektar has an excellent cash position. We plan to pay off our $67 million debt in October of this year, and we have no plans for financings any time soon.

As far as guidance is concerned, our 2007 revenue of $236 million to $276 million remains on track. Our net loss outlook has improved to $105 million to $115 million, mostly as a result of the operating efficiency plan announced in May. This net loss guidance takes into account depreciation, stock-based compensation expense, and deferred revenue. We anticipate ending the year with only $10 million to $15 million less cash than we started with, exclusive of debt repayments and capital expenditures.

While I'm not providing guidance for 2008, people have asked me about our Exubera assumptions. We believe that Exubera will increase its market penetration, largely due to the DTC campaign that was just launched. But for planning purposes, in order to be conservative, we minimized Exubera revenues in our forward projections. In the event that Exubera's market performance seriously deteriorates, our maximum exposure in 2008 is approximately $20 million of margin. Nektar has $400 million in cash, and under the Bayer agreement, we will receive an additional $50 million this month. As I have said all along, the performance of Exubera does not change our outlook for this company, and is not strategically relevant to the future success of Nektar.

Our fundamentals are solid. Our pipeline is robust. Our commercial prospects are promising, and we are delivering results on schedule, above and beyond expectations. Show me another biotech company that has a broad partnered portfolio of $1 billion products based upon proven therapeutics and also is the leader in two platform technologies that can produce a rich pipeline of breakthrough therapeutics. Thank you very much for listening to me, and I would now like to take questions from the audience.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jami Rubin with Morgan Stanley. Please proceed.

Thank you, Howard. Don't want to bring up a controversial subject, but I, but curious to know what your thoughts are on how we should model Exubera manufacturing revenue next year. And also, if you could provide us what Exubera manufacturing was this quarter, and what your expectations are in the fourth quarter. Thanks.

Well, Jami, for next year, I said I'm not giving guidance, but what I've said is, if you look at how Nektar has modeled next year, and how we have planned for next year, I've said that in the event that Exubera seriously deteriorates, our maximum exposure is $20 million of margin.

Can you explain how you get to that number and what your assumptions are for manufacturing? Never mind end market sales. That's something that we project ourselves, but what are your expectations for manufacturing revenue and assuming worst case, which it sounds like you are, if you can just give us a sense for what that manufacturing revenue number would look like.

Okay. We -- we basically planned on $64 million of revenue from Exubera, which would generate $20 million in margin. And that's the way we're thinking of Exubera this year.

So the $64 million is the -- is the combination of manufacturing and end market sales, or is that manufacturing revenue?

That's a combination of -- that's a combination of manufacturing revenues and royalties. That's a worst case position. We took that to be conservative. So for 2008 planning purposes, we plan for $64 million of revenues with a margin of $20 million.

Okay, great. And what was the manufacturing revenue this quarter?

Let me, let me defer that to Lou for a moment.

Thank you.

We're going to have to get back to her. We did not disclose it in our Q this quarter, Jami.

Okay. So let me get back to you on that.

Okay, but my assumption is that that's a pretty big proportion of product sales and royalties?

Yes, that's true.

Okay, but it was not disclosed. All right. Thank you.

Your next question comes from the line of Ian Sanderson with Cowen and Company. Please proceed.

Thanks for taking the question. Actually, Howard, can you repeat the net loss guidance for 2007, and actually on the revenue breakout -- and maybe you are not going to break it out any further than it is, but in case so -- is there in that number any prelaunch manufacturing of Mircera for Roche, for their European launch? And then finally, if you could explain exactly how you got to cash flow positive in Q2?

Okay. Well, we said our guidance for 2007 for revenues was $236 million to $276 million, and we said that our net loss would be approximately $105 million to $115 million. Of course -- and then we also stated that we actually grew cash in the second quarter, and we did that by a number of things, including being more efficient. Remember, we reduced costs significantly via an efficiency operation program. We were able to do that. We were able to improve economics in certain, in certain partnerships, and overall, we're very pleased that we were able to increase our cash position. So remember, the loss for the year of $105 million to $115 million has things such as depreciation, stock-based compensation expense and deferred revenue built into it, which are making up the major components of that $105 million to $115 million loss. From a cash basis, we said by the end of this year, we will only have burned -- if you leave out the debt repayment and capital expenditures, we will only have burned approximately $10 million to $15 million for the entire year. And if you look at the first half of the year, we only used cash for operations of $14.7 million, of which $5.2 million of it was severance. So we only burned in the first half of the year $9.5 million in cash as a result of our operations.

Okay, and does your net cash flow for the year incorporate the upfront payment from Bayer, or is that excluding that upfront payment?

Well, not the first -- it includes it for the second half of the year. That's correct. It does not include it obviously for the first half, because we're just receiving it this month.

Okay. Thank you.

Your next question comes from the line of Hari Sambasivam with Merrill Lynch. Please proceed.

Hi, yes, thank you. Howard, I'm just wondering -- could you provide a little bit more detail in terms of the proposed clinical development plan for amikacin? Just trying to get a sense of how big the clinical program is going to be for the Phase IIIs, roughly when you propose to begin and patient numbers -- just as sort of a broad picture would be useful.

Well, the challenge there of course, now it's a partnered program and we have certain restrictions on how we can describe this relative to our relationship with Bayer. I would say that we're looking to develop this drug in Phase III, as the new standard of care for treating patients with gram negative pneumonia and I think it will have a -- it will have a patient population and a size that is befitting that. Recognize that these are not extensive long-term trials, because you're talking about -- you're talking about courses of therapy that run in the course of 14 days, so this is not chronic therapy. It's acute therapy, and we plan to start Phase III in the U.S. and Europe in 2008. This is an ICU drug. It's got a 10 to 14-day course of therapy. It's readily measurable as to whether you have knocked down the bacteria or not. So therefore, I think these are pretty straightforward trials.

And the NDA filing timeframe, sometime in '09 or '08, or how would you characterize it?

We said the drug should be on the market by [10/11].

Thank you.

Your next question comes from the line of John LeCroy with Natexis. Please proceed.

Yes, thanks for taking my call. I just want to touch on the '07 forecast. Again, I'm having trouble getting to the net loss you're talking about. Assuming cost of goods drops in the second half as Exubera manufacturing declines, it seems to imply that your R&D and maybe G&A go up substantially in the second half. Is that -- am I missing something there?

Well, one -- it depends what you mean by substantially. I would expect that in the second half of the year, you do see probably an increase of approximately $10 million because we're ramping up clinical studies in NKTR-102 and NKTR-118. So you will see increases as a result of clinical trials. But if you say we anticipate ending the year with only $10 million to $15 million less cash than we started with, that is generally because in the second half of the year, we'll probably incur $10 plus million of additional tox studies and clinical studies.

And then you are including that $50 million payment as earnings in the third quarter, or is that --?

No, it's not an earnings at all.

It's just the balance sheet.

Yes, that $50 million is not in the, is not -- is definitely not supporting the $105 million to $115 million loss.

Okay, that fixes it.

It's complete -- it's deferred revenue.

All right, thank you.

Your next question comes from the line of Bert Hazlett with BMO Capital Markets. Please proceed.

Thanks. Good afternoon, everyone. Just a brief question, Howard. Can you talk about how you plan to differentiate PEG [kantizar] from the native, just a little more detail there, maybe the clinical program in terms of the way you plan to differentiate it versus the native molecule. And then in terms of just a question with regard to the Bayer agreement -- that, as I believe we read it, is it strictly for gram negative? Is there potential for other inhaled antibiotics utilizing the technology in that agreement, potentially for a broader spectrum antibiotic use in that technology, and the potential for other agreements down the road? Thanks.

Well, let me answer your second part of your question first. The agreement with Bayer is only for amikacin. However, there are a number, as you properly stated there, are a number of other gram negative and gram positive antibiotics that could work very well with our pulmonary delivery technology, and we're actively working on those. And I think I've said publicly that we're talking to a number of companies for collaborations for gram positive and other gram negative antibiotics. The deal that we have, the collaboration we have with Bayer is only for amikacin. Those economics are only for amikacin and it is perfectly reasonable to think that there will be other antibiotics delivered through our system. And those will be, those will be the subject of future deals. With regard to, with regard to irinotecan, I mean what we're going to do is design a study that demonstrates the advantages of PEGylating irinotecan. It principally means that we should be able to see some mix -- and we haven't designed the study yet -- but we should be able to see either equal efficacy with significant reduction in neutropenia and diarrhea, or we should be able to pump up the efficacy to significant, to significant levels and tolerate similar levels of diarrhea and neutropenia, when compared to irinotecan or something in between. So we haven't finished designing the study yet, but what we're going to be looking for in essence is better efficacy with less of the toxicities associated with the drug.

Okay. Thank you.

Your next question comes from the line of Rich Silver with Lehman Brothers. Please proceed.

Question on the cost, on the $7.7 million count reduction charge. Can you tell us where that's reflected in the P&L?

Lou, let me ask you a question. Would you please answer that, where that's reflected?

It's basically where the people were recorded. So to the extent they're in G&A, it's in G&A. To the extent they were in operations, they're in operations and cost of goods sold, and to the extent that they were R&D, they're R&D. So it's not a separate line. It's where they were shown. If you look in [note 404] to our soon to be filed 10-Q, we give the details there.

Okay. So it will be in the Q.

Yes.

And then Howard, I know earlier this year when you joined the company, had a series of meetings with Pfizer and trying to understand exactly their level of commitment and just kind of get on the same page and hopefully part of that effort was to improve communication. Can you give us kind of an update on the nature of the relationship now and what, what level of interaction and frequency of interaction you're having with Pfizer at the senior level, as well as maybe the marketing level, since we haven't heard much on that front.

Well, look, I believe we have a very good dialogue going on with Pfizer. Last -- within the last two weeks, I've had extensive meeting with Ian Reed and he has assured me that he is absolutely committed to making Exubera work and they are firmly behind Exubera and firmly behind next generation Exubera, and at this point they have launched a very impressive DTC campaign. There will be more. And as he has said to me very clearly, Pfizer is absolutely committed to making Exubera a success.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) There is a follow-up question from the line of Ian Sanderson with Cowen and Company. Please proceed.

Yes, a couple of accounting questions for Lou, if I may. The first on the $50 million upfront, you'll be booking it as deferred revenue. Will you be recognizing an amortized amount each quarter of that, and secondly, what compromise -- what comprises the current $43 million deferred revenue account?

Yes, Ian, first off, on the $50 million upfront, we will be putting that in deferred revenue when we receive it and we'll amortize it over the expected life of the agreement. We haven't decided exactly how long that is, but we will during this quarter and disclose it in our next 10-Q. In the $43 million, the largest item in there is the Pfizer NGI agreement payments that we've received, and it's also disclosed in the Q. Also, if you recall, we received a payment almost a year ago from Affymax that currently is about $14 million.

Okay. And can you provide, or maybe it will be out in the Q, any additional breakdown of the product sales and royalties number for the quarter?

There's more detail in the -- in the Q.

Okay.

And while I've got the floor here, I can answer Jami's question on the total Exubera-related revenues. Year to date, they were $93 million. Q2, they were $35 million. Q1, they were $58 million.

One thing I wanted -- and Jami, the thing I wanted to point out about that, and for everyone on the call, while of course it's going to be substantially less for next year, as I said, in our planning process, we only planned on $64 million worth of Exubera revenues and $20 million of margin. And we feel very comfortable that we can build our company very successfully without taking Exubera into account and if -- if you look at the -- if you look at the historic burn of Nektar and the reductions that we've made for next year, the $65 million of expenses that we've cut out next year, in all that we factored only $20 million of margin from Exubera. And that is of course, that is of course a worst case scenario and we're very -- we still believe that Exubera can do well and that's tremendous upside for Nektar.

Your next question comes from the line of Andrew Forman with WR Hambrecht. Please proceed.

Howard, do you have any sense of how much Pfizer is spending on DTC that we've been seeing? It seems to be all over the place in a multiple venues, primetime? And then is that expected to continue through the balance of this year? And then the follow-up question would be -- you put this $800 million stake in the ground, potential revenues in 2012. Remind us again what are the key assumptions are? And I guess most importantly, what are the major milestones in the next 12 to 18 months for these key programs that will improve the probability of that outcome?

Okay. Let me take the latter part of that question first and then I'm going to turn it over to Nevin to talk a bit about Exubera. The $800 million was the potential for everything we're working on by 2015 to 2016. What I said was by 2012, we should be seeing $350 million a year of annual revenues. By 2013, about $466 million of annual revenues. I think I didn't mean $350 million. I meant $350 million and $466 million. And that is a result of the timing on all of the programs comprising that $800 million that sequences over time. So those programs are made up of drugs that are approved in 2009 and 2010 and 2011, '12. And as they become approved, that's the revenue stream and the timing that we feel comfortable with.

So let's just look at the next few. I think that's probably a safer place to play, but if you just look at Roche and UCB and I guess Bayer now, what are the key assumptions on the launch times for those programs?

Well, if we look at something -- if we look at, for example, Cimzia, we expect that to be approved in 2008 and we're looking at revenues that -- that become substantial in 2012, 2013. So what I don't want to do now is -- I can't give you guidance on a product by product basis. I think on a year by year basis, because we're not that precise. But I wanted to give you some comfort level and some understanding, because people have constantly said: we don't understand the value of Nektar. We look at Nektar and all we've been thinking about is Exubera. And now I want to show you a company that has taken products that are highly likely to work -- I mean there's no guarantees here -- but highly likely to work because we're taking existing molecules and improving them. And we can look at 2012, 2013, even as early as 2011, and start to see these products generate significant revenues for Nektar. So $350 million a year in 2012, $450 million in 2013, and growing from there. So look at the pipeline we have. Look at the programs we have. Look at the, look at the $1 billion potential for these different drugs, and Nektar gets a substantial piece of that. That's something that I think is greatly, greatly underappreciated and these are not MCEs. These are not questions of whether they will work or not. It is -- it is highly likely that these products all become approved. So Nektar's pipeline in that sense is very, very valuable and certainly not recognized in our current market (inaudible).

In your $350 million for 2012, that assumes what products launches -- this is all ex Exubera, right?

That has nothing to do with Exubera. That assumes Cimzia, Hematide, Mircera, current program current product Neulasta, [Toby] and Cipro. And NKTR-061. I specifically said that in that number, there are no milestone payments. Any milestones from these collaborations are in addition to that. It does not include Exubera, it does not include next generation insulin and it does not include any of our proprietary small molecule programs, which should be on the market by then as well.

Last question --.

-- I wanted to make it clear that we have a potential by 2012 for $350 million a year of annual revenue, much of it as royalties, that has nothing to do with our proprietary programs or milestones.

Since you mentioned Neulasta, does your agreement with Amgen -- are you actually supplying the PEGylated product itself as a supplier, or are you just capturing the royalty on what they manufacture?

At this point, at this point, it's a combination of both, but that's rather small relative to the other programs in any case.

If you stopped supplying Neulasta tomorrow, could they continue to make product?

I think they would have a difficult time.

Don't you think you should follow up on that?

Well, Andrew, we're, we're actually -- as the new Nektar, we're actually thinking of lots of different things. So I take, I take your comment very seriously.

Finally--.

Comments on that?

Sure. Andrew, this is Hoyoung. As we're looking at our portfolio, especially on the PEG business unit side, number of the collaborations were forged very early on in the history, in the early '90s and mid '90s, and the contracts were not that favorable to Nektar economically.

That's an understatement.

That is definitely an understatement. So what we're doing now is basically reevaluating those partnerships, both from a strategic and an economic perspective. Having the dialogue with our partners to renegotiate and reconfigure the collaboration, given where we are today as a company. And with those dialogues ensuing, we hope to see much better economics from our existing portfolio of partnerships.

Terminate the Amgen agreement. Your stock will double.

Look, Andrew, I mean there's -- what we're doing is radically changing the way Nektar behaves.

Good.

And I think the amikacin deal with a 30% royalty demonstrates that and there's lots of homework to be done around here, but I think the company has tremendous value. And that's what a number -- a number of shareholders and investors and analysts have said to me, that they don't -- that we haven't done a great job in making very clear to the world -- and I want to start making it very clear to the world. I want the world to start to understand that we have multiple -- multiple billion dollar drugs that we will get a substantial royalty from and those drugs are highly likely to work and on top of that, we have milestones and our own proprietary technologies that we're moving forward. So if you look at Nektar and what the potential is for Nektar, it's simply, it's simply significantly larger than we're currently -- have a value ascribed to us. And that's what I want to start doing in terms of giving that comfort and education to folks.

What were the Neulasta royalties in the first half of the year? Neulasta revenues, I'm sorry, to Nektar?

They are very -- they are very small. It's not really worth discussing. They are very small. And we're not -- I don't think we give out that number in detail. So it's a small number and if you're saying that that was a contract that was not one of our better contracts, you're probably right.

So then finally, I guess with respect to your last question on the DTC impact and where that's going, I think there's a couple of things. First, the way to think about the DTC with respect to Exubera, is that it is commensurate with any broad launch of a pharmaceutical product that we would expect from a large pharmaceutical company. So in that respect, we would -- I think you've seen it in print and seen it on television as well, and we would expect for that to continue. One thing to make about DTC, particularly in this case, is that no one should expect a spike in prescriptions immediately, as it takes time for the DTC to have an impact and that's part of the plan for it to continue on, Pfizer putting a lot of money and effort behind that.

Thanks.

Your next question is a follow-up from the line of Rich Silver with Lehman Brothers. Please proceed.

Just so we're clear, when you refer to the $20 million in margin, it's simply -- your revenues, subtracting out the cost of goods, is that correct?

That's correct, Rich.

Nothing else. And then with these revenues, long-term revenue forecasts -- I know you've been reticent about talking timeframes on profitability, but can you give us some sense at least of at a certain revenue level, might we expect profitability, or is that something still you would rather not discuss? And if not, when will you maybe be in a position to discuss that excluding Exubera?

Look, at this point, I've not -- I mean profitability is of course very important, but if you look at the way the company is currently functioning, based upon the way we have optimized Nektar, the way we're now conducting business, look at the first half of the year. If you exclude capital, we've only -- in essence, we've only burned or used $9.5 million worth of cash. Now, that is for me very close to operating an ongoing sustainable business. What I said when I took over as CEO is we were going to live within our means. Profitability isn't so much -- isn't so much for me the driver for a company that has early and mid-stage research and development programs, and what I've said is the key thing is that we live within our means. We accelerate our programs. We do more with less, and we drive the company forward and we don't have to do financings to accomplish all that. So here what we've done now is we moved two programs. We're accelerating two programs through the clinic. We have worked with a number of very, very important partners to build -- to build a very, very robust partnership program, pipeline, as well as our own internal pipeline. We have an upside for Exubera in the -- that we're hoping for, but we planned conservatively without that large upside. And with all of this, we expect to -- we expect to end the year with only $10 million or so less than we started the year, regardless -- leaving out, leaving out repayment of capital. So overall, I think we're operating now for the first time within our means. We're not looking to further dilute shareholders to run our business. We're making extraordinary progress, and when I look at the overall ability for Nektar to honestly generate a company that -- to honestly generate $800 million a year in revenue streams over the course of the next ten years, I think that's actually a very, very successful company. And I think there are very few companies in biotech that can match what we're doing at Nektar, quite frankly.

That's very helpful. And how about just in terms of the burn, as some of these programs ramp up, even on a partnered basis? Would you -- would you expect the burn to increase, even if it's marginally so?

Well, and for example, on NKTR-061, it's Bayer's responsibility to pay for the vast majority of the development costs, so that shouldn't impact us significantly. We -- there are probably $10 million to $15 million of device scale-up and program costs that we have to pay over the coming three years, but, but the -- certainly the vast majority of the costs of developing 061 falls, falls on Bayer. And I think if you use that as an example of the kind of deals and collaborations we'll put together in the future, I think we can shield ourselves from the cost of the late stage clinical development, which is extremely expensive, by leveraging the technology that we have. We will do our part very efficiently, very effectively in any of these future collaborations, but overall, I think that we can -- we can develop these drugs in a very, in an accelerated fashion, move programs forward, with great dispatch. And I think we're working an area or multiple areas where if the technology works, our own proprietary technologies, if we can PEGylate successfully small molecules -- and at this point I believe we can -- then the potential value for those programs is enormous. And when you combine that with a steady stream of revenues from partnerships -- as I said, I think this company's truly one of the gems of biotech.

One more, Howard. You previously said that you plan to partner one inhaled product and one PEGylated product this year. Is that still the case, that you're planning to partner a PEGylated product?

Yes, we are actively discussing a PEGylated product with a number of companies and I do believe we will consummate a transaction this year.

And at this time, there are no further questions in queue. I would now turn the call back over to Tim Warner.

Thank you, everybody, for joining us today. Please give us a call and check in on our website for additional information. With this, we'll say have a good day, and talk to you later.

Thank you, everyone.

Thank you for your participation in today's conference, ladies and gentlemen. All parties may now disconnect. Enjoy your day.