Nektar Therapeutics (NKTR) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter Nektar Therapeutics earnings conference call. My name is Shawnsalay, and I will be your facilitator for today's call. (OPERATORS INSTRUCTIONS)As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Tim Warner, Senior Vice President I would now like to turn the call over to Mr. Tim Warner, Senior Vice President of Investor Relations and Corporate Affairs. Please proceed, sir.

Good afternoon, and thank you for joining the Nektar Therapeutics third quarter financial results call. Before we get started today, please note the following presentation continues forward-looking statements that reflect our current views as to the company's business strategy, the value and potential of our technology platform, the clinical prospects of our proprietary and partnered products, the future potential of inhaled insulin programs, our financial guidance for 2007 and 2008, and other future events related to the company. These forward-looking statements involve uncertainties and other risks detailed in Nektar's reports and other filing with the SEC including annual reports on Form 10-K and most recent quarterly report on Form 10Q.

Actual events can differ materially from the forward-looking statements. We assume no obligation to update forward-looking statements as a result of new information, future and developments. A 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 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. A number of the company's senior executives are joining us today, including Tim Harkness, our Chief Financial Office, Dr. Hoyoung Huh, our Chief Operating Officer and Head of our PEGylation Business unit, and Nevan Elam, the head of our pulmonary position. I'm please to introduce the President and CEO of Nektar Therapautics now, Mr. Howard Robin.

Thank you, Tim, and thank you everyone for investing your time in Nektar today. Today we will update you regarding the results of the third quarter of this year and provide guidance specific to the rest of the year and how we were thinking about 2008. As well, we will update you on the progress we're making with our propriatary product candidates and our partnerships. First, as many of you know, Nektar is seeking to gain greater clarity and eventual closure regarding our inhaled insulin relationship with Pfizer. These efforts are rooted in our confidence that inhaled insulin is a medically important breakthrough for diabetics and those seeking to treat this dangerous disease that threatens millions of lives throughout the world. Nektar is the world leader in the field of inhaled therapeutics and there continues to be significant interest from patients and the pharmaceutical industry for inhaled insulin. Many of you have seen our next generation device.

Key opinion leaders tell us that Nektar's NGI device combined with our propriatory inhaled insulin is the most promising product candidate of its type in development. We understand the importance of Exubera to diabetics and their loved ones and many patients and their families have written to us expressing the positive impact this product has had on their lives. I'd like to share some of those with you now. Sue from Indiana recently wrote to us about the importance of Exubera in her life. "I have hated needles all my life, so to find out that I was a candidate to be able to inhale the insulin was a God send. I was ecstatic. No more taking insulin pen and paraphenalia to the restroom and trying to find a clean, private area to give myself a shot when we were out dining. I felt like I had a new lease on life."

Ellen from Delaware told us that she remembers the date of her first use of Exubera because it was the first time in 32 years that she didn't have to face an injection first thing in the morning. She wrote to us, "finally freedom, me controlling the disease instead of the disease controlling me. Exubera is the only thing in the 33 years of living with diabetes that actually made a difference in the quality of my life." There are many more stories from people like this in the United States and throughout the world who are eager to utilize Exubera. At Nektar, we strongly believe in the value and the promise of inhaled insulin to patients. Because we're in discussions with Pfizer and potential partners regarding Exubera, there's not more I can say at this point. We are in close contact with Pfizer senior management, and based on our discussions to date, I'm optimistic that in the near future we'll find a positive pass forward.

It is important for you to understand that Nektar remains focused on much more than inhaled insulin. We have productive partnerships with many industry leaders, including Bayer, Baxter, Nevartis, and Rosche, and we are anticipated striking additional important partnerships. In our pulmonary business unit together with Bayer, we have launced the joint development committee for NKTR-061 inhaled (inaudible), and our teams are actively pursuing a plan to move this differentiated therapeutic into Phase III trials next year. The medical community is recognizing more and more the dangers of hospital-acquired pneumonia and the importance and demand for safe and targeted antibiotic products that can treat this life threatening condition. In addition, Nektar is exploring other important antibiotics such as NKTR-063, our inhaler vancomycin product candidate with the goal of addressing this large unmet medical need. In the PEGylation business unit, our propriety and partner programs are making great progress in clinical trials. Of significant importance is our collaboration with Affymax on hematide for the treatment of anemia in chronic kidney disease. Affymax just released impressive Phase II data for this drug and has dosed their first patient in their Phase III clinical trial. In our hemophylia A collaberation with Baxter for PEG factor eight, we anticipate phase I clinical trials will commence in 2008. As I promised, we are on track to complete a new PEGylation partnership deal by year-end.

Now let's talk about something exceptionally important to Nektar. Our proprietary pipeline of small molecule PEGylated products. For NKTR-102, PEGylated irinotecan, we recently unveiled at the AACR conference in San Francisco and the echo conference in Barcelona, important preclinical data demonstrating the anti-tumor activity and unique pharmacokinetic properties of this potentially innovative cancer therapy in multiple solid tumor settings. These data demonstrate the potential of our small molecule PEGylation technology platform to improve a wide range of oncolytics in critical cancer treatment regimens. Based on the results of the ongoing dose escalation Phase I clinical trial in multiple tumor settings with NKTR-102, we plan to advance this program into Phase II trial by year-end.

We're extremely encouraged by positive Phase I study results for NKTR-118 PEGylated miloxal. This data was recently presented at the Annual American Acadamy Pain Management Meeting and the American College of Clinical Pharmacology conference. The data demonstrates NKTR-118's potential to treat opioid bowel dysfunction, and we're on track to start Phase II clinical trials before the end of the year. PEGylating small molecules and controlling membrane transit across the blood brain barrier are examples of the importance of Nektar's PEGylation platform and its wide applicableability. Expect to learn more about Nektar's technology platforms and programs at our R&D day in New York next week. We look forward to seeing many of you there. Now I'm pleased to introduce our Chief Financial Officer, Tim Harkness, to discuss our financial results.

Thanks, Howard. Good afternoon everyone. From a financial perspective, we met our plan in Q3. We are on track to exceed our objectives for the year. Our goal for this call is to provide greater visibility starting with the top line. Reported revenue was 56 million for Q3 and 207 million for the first nine months of the year. Excluding exuberant-related product and contract research revenue of 34 million and 140 million respectively during these periods, revenue was 22 million for the third quarter and 67 million for the first nine months. In 2006, comparable revenue, excluding Exubera related revenue, was 24 million for Q3 and 59 million for the first nine months, which means that on a year-to-date basis, non-Exubera related revenues increased by 13%.

In the fourth quarter, we expect to realize Exubera revenue of approximately 30 million in the normal course of business. In addition, we will realize 23 million of deferred revenue from Pfizer related to NGI that would have been amortized over the life of the next generation development program. Please keep in mind that the deferred revenue recognition is a non-cash balance sheet adjustment only. We also expect to recognize approximately 16 to 20 million of revenue related to our base PEG and pulmonary businesses. From a spending perspective, total operating costs and expenses decreased to 76 million this quarter from 94 million last quarter and 111 million the first quarter of this year. Our current expectation is the total OpEx will increase slightly in absolute dollars in Q4 as we continue to invest in our proprietary clinical programs. The business also continues to generate cash on an operating and free cash basis. Operating cash flow was 54 million for the quarter and 40 million year-to-date. CapEx was 9 million for the quarter and 21 million for the first nine months, which means that free cash flow was 45 million in Q3 and 19 million for the year. We paid off 36 million of convertible debt in the first quarter and subsequent to the end of Q3 we paid off an additional 67 million of debt. Based on our current revenue and spending plans, we expect a loss of from operations of approximately 9 to 13 million and capital expenditures of approximately 10 million in Q4.

Before I briefly touch on our plans for next year, I want to summarize our current expectations for 2007. For Q4, we expect revenues of 69 to 73 million, cash burn of 19 to 23 million, and a fully diluted loss of $0.06 to $0.10 per share. For the full year, we expect revenues of 276 to 280 million, cash burn of 0 to 4 million, and fully diluted loss per share of $0.84 to $0.88. This is the first time in Nektar's history that we expect to essentially have no operating cash burn for the year. We plan to end the year with 364 to 368 million in cash after paying off 103 million of debt during the year. Finally, we believe it's useful to give you a sense of current expectations for the business for 2008.

At this time, we have not completed our detailed budgeting process for next year and, as Howard discussed, we're exploring our options for inhaled insulin. We are comfortable, however, making a broad commitment to target our 2008 cash burn at 50 to 75 million as we believe that we can manage to this important operating metric. Importantly, we believe that we'll be able to support the Phase II clinical trials for our two lead propriatory programs, NKTR-102 and 118, at this burn level. Finally we expect PEG and pulmonary businesses will generate approx 80 to 90 million in revenue in 2008. Any revenue generated by Exubera or MGI from new partners would be incremental to this estimate. So in summary, our preliminary 2008 guidance, excluding any potential new partnerships for inhaled insulin, is 80 to 90 million in revenue and a cash burn of between 50 and 75 million. With that, let me turn the conversation back to Howard.

Thank you, Tim. I'm very optimistic and confident about the long-term future of Nektar. As Tim's analysis demonstrates, our company is performing better than it ever has. Achieving or exceeding our financial and operational objectives, we are now a much more focused, efficient and driven company with a new management team possessing the experience necessary to realize the tremendous value and promise of our technology platforms. Our future revenue growth is promising as well with a robust pipeline of partnered programs that will likely result in at least one product approval each year for the next five years. As we discussed last quarter, these products promise to generate significant royalty revenue to Nektar as they grow to peak potential in sales. Near term, as I said earlier, the overall performance will continue to improve and I'm optimistic that we will achieve clarity and closure with Pfizer regarding the future of inhaled insulin. As you will learn at our R&D day in New York next week, our scientists and drug development experts are among the best in the world and I look forward to seeing many of you there. Now I'd like to open the line for questions. Operator?

Yes, sir. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Elizabeth Bernstein of Banc of America. Please proceed.

Good afternoon. Thank you for taking my question. A couple quick questions. The first is on your '08 topline guidance. Does that revenue guidance include contract research revenue? My second question is, in terms of your manufacturing capacity on your dry powder operations, how are you going about evaluating it in terms of the next steps there? I know you can't speak a lot, but what's your process? And then, third, has Bayer expressed any concerns on the inhalation technology itself for 061? Thank you.

So, Elizabeth, Thank you. Let me have Tim start with the first question.

The simple answer is yes, it includes contract research, generally, our, contract research is about 40%, you should assume it's about 40% of total top line.

So, Elizabeth, on your second question you asked how we're evaluating our manufacturing capability. As I said, I can't discuss this in great depth because we're still having discussions with Pfizer about how we will proceed to the benefit of both companies. I would only say that I believe Exubera has still significant potential and we want to be in a position to manufacturer it. At this point, I think we are the world leader in dry powdered manufacturing. We have programs both Novartis with Bayer in that area. I think we will continue to be the world leaders in dry powder manufacturing. I would like to have Nevan Elam answer your last question regarding the Bayer.

Sure. With respect to Bayer, actually, Bayer is very excited about our technology and what we will be bringing to the table there. In fact, there have been no concerns, in fact just the opposite. We're actively engaged on our development plan and pushing forward into Phase III next year.

And your next question comes from the line of Ian Sanderson of Cowen and Company. Please proceed.

Yes. Thank you for taking the question. First, Howard, I don't know if you can respond to this, but can you, there seems to be some confusion over what assets that Nektar ultimately owns out of the deal, out of the Exubera partnership and, secondly, so, I don't know if you can describe roughly who owns the CNBA for both the first and second generation programs, and secondly on the air, or inhaled (inaudible) program, is that using a dry powder, and same with the inhaled vancomycin, or is that using the liquid aerosol technology that came from Aerogen?

I'll answer your second question first. The pulmonary program with Bayer for amikacin and our own program and vancomycin both use liquid aerosol technology. They are not dry powdered technologies. With regard to your first question, it's certainly premature for me to discuss where Nektar will come out regarding assets and ownership of Exubera. As I said, we're having extremely progressive discussions with Pfizer. We're very pleased with the direction the discussions are going in. I think in the near future we'll be able to answer that question with much more clarity.

Okay, thank you very much.

And your next question comes from the line of Jamie [Rubin] of Morgan Stanley. Please proceed.

Thank you. Howard, a little bit confused about the cash burn projections for 2008, 50 to 75 million. Is that down from 200 million in 2007? Just want to make sure I have my figures right. And secondly, what does that imply for R&D spending -- proprietary R&D spending for 2008 and does that incorporate the $60 million cut that you announced earlier this year? Or is that more than what you had already announced?

Let me see if I can, certainly the $65 million cut is in our projection for next year. Now, let me see if I understand your question correctly. When you asked if the spend or net burn for next year of 50 to 75 is down from 200 this year, our net burn for this year will be almost zero. As Tim said earlier, this is the first time in the history of Nektar that our net burn from operations is somewhere between 0 and $4 million. That's a great achievement for the company. That, as I said when I took over this job, we're going to learn to live within our means and we're now doing that very well. The net burn for operations for 2007 is very close to zero, break even. Now, next year we anticipate somewhere between $50 and $75 million. The reason it has increased over this year is principally two-fold. One, there was a contribution, there was a margin associated with Exubera that we will no longer have and, secondly, we are expanding our clinical trials and we will have two programs moving through Phase II next year, which does cause additional funding requirements. That said, depending on where we come out with Pfizer, in terms of moving forward with Exubera, any future potential Exubera revenues, partnership revenues are not built into those numbers.

Right. No. I understood that, but what does that imply for proprietary, help me to think about proprietary R&D spend for 2008. And then my second question again was, does this imply further cuts to what you had already announced earlier this year before Exubera was terminated by Pfizer?

We're not prepared to give you detailed budgets on what we're spending specifically on proprietary programs. Suffice it to say, we believe within a 50 to 75 million burn, we will be able to move NKTR-102 and NKTR-118 through the clinic. We'll be able to advance other programs that we talked about, such as such as NKTR-105, PEGylated (inaudible) and move vancomycin forward as well. I think without the specifics, we can do that done within the burn rate that we discussed. With regard to Exubera and manufacturing, clearly in terms of reductions of workforce or changing the nature of the company, if we continue to manufacturer Exubera, if we continue to be involved with Exubera in some sense, then there's very little change necessary. Obviously it goes without saying if there is no more Exubera, there are significant changes that have to take place. I think that's obvious. We'll see how that evolves. As I said, I'm hopeful we'll find a favorable path forward with Exubera

Thank you.

Your next question is from the line of Elliot Wilbur of CIBC World Markets. Please proceed.

Thanks. Two quick questions. With respect to guidance of 50 to 75 million cash burn next year, would you be willing to give us some indication of what is embedded in there with respect to Exubera, in terms of just what you need to spend or to keep spending to keep those various programs alive until you can figure out what to do with those at some point, and then secondly, understanding it's not your development program, but in terms of 061, can you tell us whether or not the Phase III's are actually being run in the U.S. and how the evolving thinking in terms of endpoints on antibiotics may or may not effect the development program there?

Great. I will have Tim answer your first question and Nevan answer your second question. Tim --

The guidance is intended to be without Exubera both on a top line or from a continuation, a transitional period of spending. I guess Howard suggested we're trying to resolve the situation as quickly as possible. We'll make the appropriate decisions. I think our commitment remains to be within a $50 to $75 million burn no matter what the outcome of those decisions are.

This is Nevan. With respect to your question on our 061 program with Bayer, we, as we mentioned, are moving aggressively into Phase III next year and our current thinking, and of course obviously subject to working our plan, is looking at a broader set for clinical sites beyond the U.S. and as well looking at some of those key endpoints being some of the things that we can expect. The big here -- key here is don't do therapy. And what we expect to be able to show is improved clinical cure rate as well as shorter hospital stays, secondary endpoints and a variety of other measures. A lot we're working through now. Very excited about the progress we've made.

And your next question comes from the line of Stan [Maun] of [Maun] Family Investments. Please proceed.

A couple of questions. One, you said that you have a drug in final trials, or introduced each of five years going forward, '08, '09, '10, '11 and '12. Can you define that schedule by drug?

Yes, I did that at the last earnings call. And what I, these are not, these are Nektar partnered programs. So if you, to give you some flavor for that, we have a collaboration with Roche for MIRCERA, which is a 2008 product, we have a partnership with UCB in Cimzia which is a 2008-2009 launch, with Novartis and tobramycin which is a 2009 launch Hematide, which is a 2010 launch. As we talked about Bayer NKTR-061 with Bayer which is 2010-2011 launch. We have a collaboration with human growth hormone with Pfizer, which we expect to be 2010 - 2011 launch. We have a partnership with Cipro with Bayer which is a 2011 launch and, lastly, a partnership with Baxter for factor 8, which is about a 2012 or so launch. So you can see the programs that we have substantial input into and substantial financial interest in are launching over the next five years and what we said at the last earnings call, is that if you look at the royalty/margin revenue stream from those programs, it probably falls at some steady state. When all of those programs reach a steady state of sales somewhere in the $400 million a year range. Which is primarily margin, not all of it of course. So we're very pleased with that flow and I can't think of another biotech company that has such an impressive list of partnerships and such an excellent success rate in developing drugs.

You said 400, I thought at the UBS meeting you said 400 to 800 million.

I think it depends on what years you go out. I'm looking at 2011, 2012 and saying that's probably in the 3 to 400 million range. If you move to 2014, 2015 it starts accelerating, of course.

Okay the last question is, any, any incremental gain from Pfizer would reduce the 50 to 75 million burn?

Yes.

You're assuming a zero sum from the Pfizer settlement if any?

I will let Tim handle that.

That's correct. Anything that comes from any type of agreement would be in addition.

Yes, and I would not characterize anything as a settlement. Anything that comes as a result of the final contract with Pfizer would, would further decrease that burn, that's correct.

Okay. Great. Thank you.

And your next question comes from the line of Richard [Mensleri] of DCM Funds. Please proceed.

Hi yes, thank you. Few questions. One, can you just give a bit of an update on the PEGylated or in the (inaudible) program. You said that you expect to be in Phase I by the end of the year. Can you just give an approximation as to how many patients you've been treating, what kind of doses? Anything that can kind of fill in those blanks would be helpful?

Yes. I'll have Hoyoung Huh, head of our PEGylation Business Unit do that. I think you meant we'll be in Phase II by the end of year.

Yes, forgive me.

Okay. Good. Hoyoung --

Great. So as Howard mentioned, we are currently in Phase I clinical trials with PEGylated irinotecan and KPR 102. It's a dose escalating a trial in multiple solid tumor types. It's an open label trial as you can imagine in the Phase I setting for us to ascertain the right type of tumors to go after in our Phase II study design. It's an open label design and so far the results have been positive enough that we feel confident in moving into Phase II trials by the end of the year. The results of the study and the summary of that study have not been published yet and as soon as we have an official report, obviously we will share with the shareholders and scientific community at large.

I would just add what we're hoping to see there and what we expect by PEGylating irinotecan is that we, indeed, increase the efficacy because we're keeping the drug in circulation much longer and we should see significant diminishment of side effects which are primarily neutropenia and severe diarrhea. That's what we're hopeful of clearly defining in our Phase II study.

I'm wondering if you could comment on how that might compare and contrast with PEGylating SN38, which there is another company that is PEGylating SN38 and there was another company that tried a lysomal formulation of SN38. Can you speak to why you chose the irinotecan route to PEGylate?

Great question. As you know, in our evaluation of different oncolytic targets and molecules, we actually examined both PEGylated irinotecan and PEGylated SN38 as product candidates. In our evaluation of both in vitro and invevo preclinical studies, we felt that both in terms of the half life, the activity and the pharmacokinetic profiles, we were able to achieve better results with PEGylated irinotecan versus PEGylated SN38, and we have published some of the preclinical data recently at both AACR and at Echo to demonstrate the very unique profile of our drug candidate. In terms of other conjugation technologies, such as liposomal and others, we are in constant evaluation of other technologies and see them as potential options for oncolytics. As you know, liposomal technologies have been around for 20 or 30 years and the success rate of liposomal drugs have not been as positive as folks in the community have anticipated. We are following both the scientific and clinical data of our competitors very, very closely in designing our Phase II clinical trials based on some of the learnings of competitors that have failed in the clinic.

Okay, thank you. And lastly, in terms of the split between the inhalable platform and the PEG platform, are those managed as discrete business units?

Well, in a sense. They're not subsidiaries and they're not competing with each other, but they do have separate research groups. They do have separate business unit heads and I think that allows them to focus very, very clearly on their respective businesses. There is, of course, shared G&A, there is, of course, shared support services that only makes sense, of course, but we do try to look at our PEGylation business and our pulmonary business as part of an overall corporate portfolio but with the need to keep them focused on their work.

Is there one in particular? Are you seeing one incremental interest on the partnering front on the pulmonary side or the PEGylation side or is it about even, in terms of your potential partnership arrangements going forward?

I would say it's about even. If you look, as an example, if you look at the partnership revenue stream that I just described earlier, that's a fairly good mix between both pulmonary programs and PEGylated programs. This year, of course, we added to that with a major program with, with Bayer where we were able to get a $50 million up front payment and 30% flat royalty. That shows the strength of what we're doing in inhaled antibiotics. But if you look at what we're doing in PEGylation technology, I think, as I said, we expect to do another deal this year. We have a number of programs that are moving forward with partners in PEGylation. I think both businesses are very strong for Nektar.

Understood, thank you.

And your next question comes from the line of Kevin Tang of Tang Capital. Please proceed. Mr. Tang, your line is open at this time, sir.

Sorry about that. Can you hear me, guys? Thanks for taking the questions. Can you help me understand, did you state a year-end '07 cash position?

We did and that was 364 to 368 million.

Okay, sorry and that's net of the debt you paid in the last couple weeks?

Correct, that's after paying off all of the debt this year.

That's net of 103 million in debt.

Okay. So you'll still have 315 million of debt at the end of the year?

The other way Kevin. After we pay 103 million we'll have 364 to 368 million of cash.

What is your debt balance at the end of year?

315 million.

Which is due in 2012.

Can you help me understand on your burn guidance for '08 again. You're assuming no positive or negative contribution from Exubera, correct?

That's correct.

So, and trying to understand the, how likely that is. So for this year, you have something like 200 million of revenue and maybe 175 million of cost associated with Exubera. Is that roughly -- it's about two-thirds of your revenue and there was very small margin on that, right?

That's about correct, yes.

So I guess my question, Tim, is, when all of a sudden the checks don't come in from Pfizer and you have 175 million of overhead and materials costs and so forth, can you really turn that off without having any incremental costs for that in '08?

Kevin, this is Howard, look, there may be some minor exposure there as we, as we would shut things down, but I think, I think if it was a complete shut down, yes, there might be some exposure such as severance and final payments on, on rental properties and such but, overall, you have to leave it within the skill set of the management of the company to get through that. In the end, if there is no longer an Exubera, then the cost of Exubera will be shut down very, very rapidly. Now I'm hopeful that we can construct a process with Pfizer and other companies that Exubera moves forward, but that, but in the absence of having that clarified yet, I would say that in a worst case scenario if Exubera were to be shut down completely, we would have to do the right thing as management and make sure the costs move away. Could there be a little exposure? There might be, but I think we can do a good job of managing that to a good endpoint.

Okay. I appreciate that and I don't want to belabor this, but I'm just trying to get a sense -- just given the sheer magnitude of that infrastructure, if it's a $175 million annual infrastructure, how do I get comfortable that that's a "small modest amount" that it wouldn't cost $20, $30 million to shut all that down.

Well, a portion of that is cost of goods. That automatically goes away from raw materials point of view and such. I can't get into details specifically on how this would work. I can only tell you that there's, there's no way that Nektar is going to, in the end, lose money on Exubera. I committed to that early on in my stay as CEO of this company and I continue to stay with that point of view. We will not lose money on Exubera. We'll do what is necessary to make sure that Nektar remains whole relative to Exubera. I'm still hopeful that we find a path forward that obviates the need for any of that worst case scenario.

And the path forward would be another licensee? Is that the idea?

It could be one of many, many things. As I said, we're in discussions with Pfizer regularly. Jeff [Kindler] and I talk almost every day. I believe that Pfizer is behaving like an excellent partner and I'm very pleased with the results to date. I think we can come out of this, both companies exceptionally well.

Okay. Great. Then last question, going through this list of products, the third one is inhaled toby, I thought might be discontinued based on the data at (inaudible) recently. Can you give me an update on that? Am I thinking of the wrong product?

I think what you're referring to, this is Nevan Elam again, on toby is placebo hold that is currently under way. There was a degradence that we had in part of the study and we've been working with our partner, Novartis, and the FDA through that and actually expect to get that resolved towards the end of the year, at least our arm of the study by, again, end of year or beginning of January, still targeting for end of year next year filing. That program has not been cancelled and is pushing forward. I think we have it well under way.

Please note, what he said is extremely important. The problem is with the placebo, not the active drug

Okay. Thank you.

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

Some clarification. You mentioned Exubera generated 34 million in the third quarter. I'm backing into what that means for the rest of the revenues, sales, royalties of 3 million. That seems to be low relative to what we saw in the second and the first quarter. Can you just clarify, maybe we're missing something there?

Not sure where you're getting the 3 million from.

The, well the, you did say Exubera was 34 million correct?

Correct. That's correct and we said the rest of the revenue was 22 million, so X Exubera 22 million.

Okay.

So are you looking -- help me understand the question a little better.

We'll move onto the next question. On, sorry, on, in terms of the fourth quarter, you said it would be 34 million?

The fourth quarter, in terms of revenue, we said total revenue for Q4 we expect 69 to 73 million and of that we expected two different -- three different pieces. We expected 23 million of deferred revenue coming off the balance sheet related to MGI, we expected about 30 million related to normal course Exubera revenue and we expected 16 to 20 million of revenue related to base PEG and pulmonary business.

Okay and the 10 million in CapEx, what kind of CapEx are you-- ?

Has to do with facilities and partnered programs.

Okay. Okay, thanks very much.

And your next question comes from the line of Ian Sanderson.

Thanks for taking my question. Followup. First on inhaled vancomycin. Is this a proof of concept program or do you intend to take this program at least through Phase II? My question is related to the other aminogycoside antibiotics and could there be some interest in, once you prove the principle by applying this technology somewhere else? And the second question is on the IP around the PEGylation technology, seems to be a lot more activity in this area. Could you just talk about, is there a core set of patents that are still applicable here or are you just patenting each of the applications separately?

Taking your first question on inhaled vancomycin program NKTR-063. This is one that we're very excited about and definitely going to take forward. This has the opportunity for us to expand our offering using our aerosol generator and our technology and our formulation capabilities to address the other side of the equation. Namely gram-positive. The gram-positive bugs that are out there, particularly a lot of attention on methicillin-resistant bugs, we believe our solution really has the opportunity to solve a true unmet need. So this is one that we're bullish on and will take forward and that's our current plan and we, this is not just a group concept that we're looking at, but I think you'll hear a lot more on our specific plans for inhaled vancomycin as we push forward towards the end of the year into next year.

And do both of these, the inhaled vancomycin and the amikacin, go beyond ventilative patients?

Yes, there's definitely the opportunity. The entire concept of hospital-acquired pneumonia or community-acquired pneumonia, is beyond the ventilative setting. We've chosen to focus on the ventilative setting because of its acute nature and the significant morbidity and mortality and demonstrating, I think, the power of the solution there is a key, is a key point, but you're absolutely right. We're looking broader than just the ventilated setting, looking at the hospital as well as in the community as well. Those are definitely expansion points.

Ian, this is Hoyoung. I'll cover the PEG IP question. In terms of the IP position in the PEGylation space, we believe we have a dominate IP state in the industry. Some of the areas that we currently cover include not only the PEG polymer structures themselves, both straight chain, multi-arm and segmented, but the actual linkers and the different linker chemistry of attaching different [PEGmoyties] to both large and now small molecules. So it's the expansion of the IP state from the large molecule amino which many of the traditional players have played in and moving that on to the small molecule space and covering the different molecule classes and applications classes has been our PEG strategy over the last number of years. Currently, we are focusing on specific mechanisms and areas in research, both the blood brain barrier transit, which we described for NKTR-118, the oncolytic platform which we described for NKTR-102, and some of the other areas that we're working on include first-pass metabolism, oral bioavailability and specific tissue targeting. So in all, we currently have about 490 applications filed and 55 U.S. patents issued which we believe makes us a dominate force and a dominant player in the PEGylation space.

Thank you very much.

And your next question is a follow-up question from Jamie [Rubin] or Morgan Stanley. Please proceed.

Thank you, to follow-up on the guidance again. Do you mind breaking out the 22 million? What percentage of that was contract sales? Tim, you said about 40%? Is that about right? So about 9 million of that is contract sales?

I'll get that for you in just a second, Jamie.

Okay, and then of the 80 -- yes, I would be interest did in that broken out. Also, Howard, you're predicting 400 million of -- I guess is that royalty sales from your partnered products?

Yes, Jamie I said that somewhere in 2012, 2013--

Okay could we go through that. It seems the biggest royalty generated projects are Cimzia (inaudible) and inhaled toby. (inaudible) lost a court case so not likely to be launched in the U.S. Inhaled toby probably delayed, Cimzia maybe the same thing. I'm wondering if you could walk through your expectations for these and most importantly timing and does your guidance next year, 80 to 90 million include revenues or royalties from these opportunities?

It doesn't, I can tell you it doesn't, next year 2008 doesn't include any royalties from those opportunities. To go through them with some flavor, and I can't give specific royalty rates and numbers, I can only give you --

That's fine, just timeline would be helpful. Because these products have all flipped.

Yes, when I talk about 400 million or so in 2012, that was based upon [CERA] of approximately $50 million, and these are all royalties/margin. Most of this, these are revenues but primarily royalty and margins. I would say 80 -- 75% of this is margin for the company. The rest is revenues, cost of goods component. We looked at [CERA] in 2012 approximately $50 million.

So that would $1.2 billion in end market sales roughly, give or take?

Correct.

Okay. That would seem to include U.S. sales, no?

We would expect that to include U.S. sales.

You're assuming U.S. sales in that?

When we said that, that's right. We have to see what Roche does with sales in the U.S. give [visive] the legal action and settlement. So we said Cimzia would be approximately $70 million in 2012.

Okay.

We said tobe would be approximately 75 million in 2012 and while toby might be, while toby might be delayed six, seven, eight months, the fact is that at that point it's already at a steady state. Whether it launches in 2009 or it launches in 2010, by 2012 it should be up to some steady state. I don't think the delay affects the 2012 numbers, certainly would affect the 2009 number. We talked about Hematide as being about $30 million in 2012. We talked about NKTR-061 with Bayer being approximately $75 million in 2012.

75 million. Okay.

Human growth hormone with Pfizer about $30 million in 2012. And Cipro with Bayer about $20 million in 2012. That adds up to approximately, and then other PEG programs that are already ongoing approximately $40 million, so that adds up to somewhere $390, I think if my numbers are right, about $390 million. Discount that any way you'd like. It jumps probably another 100 million in 2013 because programs like NKTR-061 advance greatly, programs like Hematide advance greatly as they gain market share. I didn't want to give guidance out of this, Jamie. This was to give you flavor for the overall view of what Nektar could look like. Whether it's 390, whether it's 450, whether it's 350, 320, I can't say for sure. I don't think anybody can make a 2012 prediction that's at all --

And lastly, I don't mean to be a pest here, just in terms of the three nearest term opportunities are Cimzia, [CERA] and inhaled toby, can you give the best estimate of the timing when these products hit the market, when they hit your P&L?

Okay. Nevan, would you like to give some timing on that.

Sure. With respect, I will give timing on toby for you. First off, I think we're still pushing forward as we looked for a filing, potentially by the end of this coming year, 2008, actually next year and then looking at a 2010, 2011 I think is how it outlined, is when a lot of the timing will hit and the revenues will begin to achieve. So assuming we launch in 2009, we would expect to see that ramp through 2010 and into 2011. I'll let Hoyoung comment on the other two programs.

Great. On the PEG programs, with [CERA] and Cimzia, Jamie, as you mentioned there have been some regulatory sort of hold-ups for those programs and the legal action with (inaudible) will certainly affect the launch and the ramp up for MIRCERA. So we are observing those time lines and we believe the impact for both programs will not be significant in the next 12 to 18 months and the financial contributions will really start hitting in the '09, '010 timeframe.

So, Jamie, let me circle back to your first question. In Q3, contract research revenue, non-Exubera was about $11 million. Which is about half. You can make the same assumption for Q4. It's safe to make the assumption of 80 to 90 at this point as well. We will tighten that direction up as move closer to next year.

So about 40 -- about 40 million or so to 80 to 90 million.

Yes, that's a fair assumption.

Okay. Thank you.

There are no further questions in the queue at this time.

Thank you everybody. I look forward to seeing as many of you as I can in New York next week. Thanks very much. Bye Bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.