Nektar Therapeutics (NKTR) 2007 Q4 法說會逐字稿

Thank you for joining the Nektar Therapeutics fourth quarter and year-end 2007 financial results conference call. I'll be your coordinator for today. At this time, all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I'd now like to send a presentation over to your host for today's call, Mr. Tim Warner, Nektar, Senior Vice President of Investor Relations.

Good afternoon, and thank you all for joining us for Nektar's fourth quarter and 2007 year-end financial results call today. 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 strategies, the value and potential of our technology platforms, future potential revenue and our partnered program, the clinical prospects of our proprietary and partnered product candidates, the future potential of our inhaled insulin programs, our financial guidance for 2008, corporate objectives for 2008, and other future events related to the Company. These forward-looking statements involve uncertainties and other risks that are detailed in Nektar's reports and other filings with the SEC including our most recently quarterly report on Form 10-Q and our annual report on Form 10-K.

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. A webcast of this conference call will be available for replay on the Investor Relations page at Nektar's website at www.Nektar.Com. In the event that any non-GAAP financial measure is discussed on this conference call, that is not reconciled to a GAAP financial measure, related information will be made available on the Investor Relations page on our website as well as soon as practical after the conclusion of this call. A number of the Company's executives have joined with us today including our Chief Financial Officer, John Nicholson, but now I'm pleased to introduce the President and CEO of Nektar Therapeutics, Howard Robin.

Thank you, Tim. Good afternoon, everyone. When I joined Nektar just over a year ago, I spoke to shareholders and employees about a new vision for the future of our Company. I spoke of Nektar's power to build tremendous additional value by transforming to a focused, driven Company with an impressive and growing proprietary pipeline. We had a very solid foundation to build on. Our PEGylation and Pulmonary Technologies are world class. Every PEGylated therapeutic approved in the last 10 years was enabled by Nektar's technology and many of the most innovative inhaled therapeutics and development are based on Nektar's Pulmonary Technology.

With these technologies we have created a partnered pipeline revenue stream of potentially more than $400 million by the end of 2012. This pipeline includes PEGylation drug development partners like Roche for CERA, UCB for Cimzia, Affymax and Takeda for Hematide, and on the pulmonary side, it includes Bayer for both Nektar 061 inhaled amikacin, and inhaled Cipro and Novartis for inhaled Tobramycin

Now you can make your own assessment of the regulatory and market assumptions regarding these and other products in our partnered pipeline. This is not guidance. My point is this. The depth and breadth of this partnered program -- partnered pipeline is unparalleled in our industry. And the hundreds of millions of dollars of potential revenue of which a significant portion will be royalty and margin, is an important and growing source of cash for Nektar.

Clearly, Nektar has a proven report as a great partner and enabler of blockbuster drugs. In 2007 we entered into new partnerships with Bayer for Nektar 0 61 and Baxter for PEGylated Factor 9, two important new collaborations with the best economics Nektar has ever achieved. Still, our Company is much more than the sum total of our partnerships. In 2007 we advanced our proprietary drug development pipeline providing us with the opportunity to recognize the full value of our technology platforms going forward. For the first time in the Company's history, we have two proprietary products in Phase II clinical trials, Nektar 102, PEGylated irinotecan for colorectal cancer and Nektar 118, oral PEGylated naloxol for opioid induced bowel dysfunction. These small molecule PEG programs are on track and we continue to receive encouraging and enthusiastic participation from investigators and key opinion leaders.

In 2008 we will continue to advance these trials, and we will expand the development program for Nektar 102 with at least two new Phase II trials in solid tumors, potential indications include ovarian, cervical, and lung cancer. We continue to demonstrate the importance and advancement of our science, and we'll be presenting three pre-clinical posters for Nektar 102 in April at the American Association of Cancer Research meeting in San Diego, as well, we have submitted our Phase I clinical data a on Nektar 102 to be published at ASCO in Chicago at the end of May. For Nektar 118 we have submitted data from our Phase I multi dose trial for publication at the American Pain Society meeting in Florida in mid May.

Our pre-clinical and Phase I research with small molecule PEG oncolytics will continue in 2008. We plan to file an IND for a very significant product candidate, Nektar 105, PEGylated docetaxel before the end of the year. With current Taxane sales of more than $3 billion, and the broad use of docetaxel to treat a number of tumor types this represents a significant opportunity. Consistent with what we have learned from our work with PEG irinotecan, we hope to demonstrate that PEG docetaxel will have an improved pharmacokinetic profile which will result in superior efficacy and a more tolerable safety profile compared to docetaxel.

We're proud of the progress we made this year in our PEGylated small molecule research. We continue to advance this technology in other clinical applications. We have numerous pre-clinical programs in the areas of blood brain barrier exclusion, the avoidance of first path metabolism, and of course, the improvement of oncolytics.

We're making important progress in our pulmonary progress as well. Our pulmonary drug development partnerships are advancing. Novartis's Phase III program for inhaled Tobramycin is on track and is expected to be filed next year. Bayer recently announced that they anticipated the inhaled Cipro Phase III studies to begin this year. Our collaboration with Bayer on Nektar 061 is progressing as planned. Bayer expects to initiate the Phase III program this year, and we have submitted our Phase II clinical data on Nektar 061 for presentation at the American Thoracic Society annual meeting in Toronto this May. Briefly, I want to address our ongoing effort to partner our inhaled insulin therapeutics.

Analysts and investors tell me that they do not forecast any value in their models for Exubera and indeed our guidance for 2008 does not forecast any contribution from our inhaled insulin programs. Given the high level of interest from a number of potential partners, we're maintaining the technical capability to allow us to partner our inhaled insulin products. Discussions are continuing and we intend to enter into a partnership in the second quarter of this year.

In the absence of a partnership, we will not invest any further money in Exubera; however, and most importantly, we still own the dominant and highly valuable inhaled insulin patent. We're excited about our existing pulmonary opportunities, including our partnerships with Bayer and Novartis, and this year we will drive the pulmonary business to expand the pipeline and introduce new programs that further leverage our platform and expertise. We are committed to building a high value pipeline and we will have new pulmonary programs. To that end, earlier this month, we created a new pulmonary research team that is charged with introducing new programs that capitalize on our technology and capabilities including inhaled anti-effective candidates and innovative therapeutics to treat lung disease.

Today, I'm happy to announce we expect to file an IND this year for the first of these programs, Nektar 063, inhaled Vancomycin. We believe that a specially formulated inhaled version of this antibiotic drug using our proprietary liquid delivery system has the potential to be an important therapeutic to fight difficult to treat Graham positive pneumonias. As I'm sure many of you are aware, antibiotic resistance is growing in particular the rise of MRSA infections is frankly alarming. Nektar 063 has the potential to help address this public health crisis.

In addition to the creation of a new research team, earlier this month we announced that we significantly restructured our pulmonary organization by consolidating manufacturing operations research and pharmaceutical sciences into one unit under our head of the pulmonary business. This move allows us to achieve immediate efficiencies as well as improve the overall productivity and alignment of our organization. I am very pleased with these steps and believe that we are now properly structured to continue delivering on our current programs as well as introducing new high value product candidates. I look forward to talking more about our pulmonary opportunities in the future.

I'd now like to turn the call over to our CFO, John Nicholson who will discuss our 2007 financials and projections for 2008.

Thanks, Howard and good afternoon, everyone. We are extremely pleased with our financial performance in 2007. For the first time in Nektar's history, we had positive cash flow from operations. Cash flow from operations was $146.3 million in 2007. When you exclude the $135 million payment from Pfizer and restructuring cost of $7.8 million, we still achieved positive cash flow of $19.1 million. As Howard said we have successfully transferred Nektar into a drug development Company. We reorganized the Company from 1100 to 500 positions. If we had retained these positions, we would have incurred an additional expense of more than $100 million annually. The right sizing now aligns the organization to fulfill our strategy to advance and build a proprietary drug pipeline as well as support our numerous partnerships and collaborations. Our cash at December 31, was $482 million compared to $467 million at the end of 2006. Importantly, during 2007, we paid down $103 million of convertible debt.

In 2008, we expect our PEG and pulmonary businesses to generate approximately $95 million in revenue. Excluding 2007 revenue from Exubera and the revenue from our Island subsidiary that was spun off, this represents substantial growth of 12% compared to 2007. We will continue to maintain our financial discipline as we invest in the advancement of our proprietary drug pipeline. For 2008 in our proprietary programs we will invest 50 million to $65 million in four Phase II and two new Phase I clinical trials. Even after this significant investment in clinical programs, something Nektar has never invested in before, our non-GAAP operating cash burn will be between 50 million to $75 million.

This clearly demonstrates that we have streamlined our organization and reduced unnecessary spending enabling us to make significant investments in the clinical development of our proprietary pipeline. Additionally in 2008, we expect to pay approximately $32 million in termination payments to Exubera contract manufacturers, $8 million in contract manufacturing accounts payable, $7 million in restructuring costs, and approximately $8 million to maintain our inhaled insulin capacity for a future partner. With the addition of specific items, our GAAP cash used in operation is expected to be between 105 million and $130 million in 2008. It is important to remember that our 50 million to $75 million target for non-GAAP operating cash burn does not include any potential proceeds from new partnerships in pulmonary, PEGylation, or our inhaled insulin program. With that, let me turn the call back to Howard.

Thank you, John. At Nektar, we are the best at what we do. Leveraging our valuable technology platforms to create important new pulmonary and PEGylated therapeutics. We have made critical changes at Nektar transforming our Company into an efficient and focused drug development organization. We have expanded our pipeline with new, high value proprietary programs and entered into new partnerships each with significant economics for Nektar. I told you a year ago that we would build a focused efficient and driven Company with an impressive and growing proprietary pipeline. We have accomplished all of our goals and more in 2007, and I expect a great 2008.

Thank you, Howard. Operator? Please open the call for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of [Elizabeth Bersign] of Banc of America. Please proceed, ma'am.

Good afternoon. I have a few questions. The first one is how much of your revenue and specifically contract revenue was Exubera related? The second one is I'm a little surprised that you didn't update your guidance based on the workforce reduction recently. Was that planned and already embedded in the guidance? And then on the clinical trial side just curious in terms of 102, just where does enrollment stand on that Phase IIa and is Phase IIb still on target for mid year? Thank you.

Okay, thanks, so I'll answer the questions not necessarily in the order that you asked them, but first point is we haven't revised the guidance because yes, the reduction in force and streamlining of Nektar was anticipated when we gave the operating guidance of 50 million to $75 million, so we had anticipated doing that and that was the final step in adjusting the Company to the size that we wanted so that was already baked in. In terms of the Nektar 102 trial, we're in the process of enrolling patients now, patients have been dosed. We're moving forward right on track, and we do expect the Phase IIb component to start as planned so everything is going according to schedule there. I'm going to let John answer the question with regard to Exubera sales.

Yes, on Exubera sales last year, it was approximately $133 million. Out of that $133 million, approximately $42 million of that was contract research.

And in the fourth quarter specifically?

That's for the full year. All of 2007 .

We can get back to you shortly with the answer for the fourth quarter. Let's go to the next question and we'll come back to that.

Your next question comes from the line of [Corey Casmo] of JPMorgan. Please proceed, sir.

Thanks, good afternoon, guys and thanks for taking the questions. Just a really quick follow-up on the fourth quarter revenue number. You submitted that you filed that 8-K back in November after Pfizer paid the $135 million. Guiding for 4Q revenue of 39 million to $43 million, and then reported today $66 million and so can you just enlighten us where the discrepancy comes from?

Yes, just give us one second on that.

Okay, I can go on then.

Yes, go ahead. We'll calculate that for you.

Okay, Howard, can you talk a little bit about the IP that you have around your small molecule PEG programs? And I know there are other companies in the space who are working on this as well and how you may be protected there?

Well, look, we believe we have the dominant IP in small molecule PEGs. We've been working on it longer than anybody else and there are many pieces of IP that surround how one formulates small molecule PEGs, how one prepares linkers and designs linkers, so it's a combination of the actual molecule, the linker technology, as well as the application technology. So, we have intellectual property that covers both the chemistry as well as the use of PEGs in various applications to improve molecules, and I think the different technologies that are used to create small molecule PEGs, which is you know are rather complicated because of the challenge of putting a very very large molecule like PEG on a very small molecule, that work has been pioneered by Nektar and I think we are clearly ahead of everybody else in terms of our inventions there.

Okay. And then finally, on the partnership, on the partnership front a couple of questions here, one on Exubera and one on the rest of your pipeline. In terms of how you're going to notify the Street in the event that you don't reach a partnership, is this something you guided for the three to six timeline, now you're saying second quarter so that implies if we get through the second quarter and we don't hear anything, do we assume nothing happened or will you come out and publicly say something about it? And then as far as your earlier stage proprietary pipeline is concerned, do you have any intention on partnering any of those compounds at some point in 2008?

Well, okay. I think with regard to Exubera, I still am very hopeful that we will have a collaboration and a partner with Exubera inhaled or NGI. Of course, there is as I said today on the call, there is a point in time which we will stop supporting Exubera NGI, and at that point I guess we will make it known publicly. I do believe that if we have a partner it will happen in the first half of this year, and we're working actively towards that goal, but yes, I think it's reasonable to say at some point if we shut down work on Exubera, it will be well known to the public. I think with regard to -- what was the second part of your question again?

Whether you intend to or have any desire to partner any of the earlier stage proprietary programs this year.

Yes, look. I think there's a tremendous value to the Company in terms of taking programs forward through Phase II into Phase III, but in the final analysis, it's always an issue of economics and value, so we're always looking, we're talking partners right now about opportunities. You can imagine that in the two products that we're working on in Phase II, 102 and 118, there's tremendous amount of partnership interest, so obviously, if one can make a PEGylated irinotecan, a drug that already has sales in excess of $1 billion there should be a great market for that and there are a number of companies that are highly interested, same with opioid induced bowel dysfunction, a very very critical medical need/ So would we partner those early? Strictly becomes an issue of economics. I don't think Nektar has to make a decision today as to whether we would partner those based upon early Phase II data, late Phase II data, Phase III data or maybe the decision at some point to take one of them to the market ourselves. In any case it becomes an evaluation of the opportunities in front of us. As of today, we have not made a decision to partner either of those two programs but I think it's perfectly reasonable to think that we could, and I doubt we would partner both of them, but it's entirely possible that we might partner one, let's see how it evolves.

Okay.

And for the financial questions that the were asked by Elizabeth and you Corey, we're calculating that and we will get you an answer shortly. Did you have another question?

No, I was just going to circle back to that. Thanks for taking the questions.

Let me see if John can answer the math questions here.

Yes, Howard. In answer to the questions Corey, to answer your question, total revenue from Pfizer in 2007 was $182 million. That consisted of three pieces. There was $133 million for product, $43 million for contract research, and $6 million for Exubera readiness. And to answer the initial question on fourth quarter revenue out of those numbers, basically the total was $40.3 million, and that consisted of Exubera 15.3, contract research of $25 million, and Exubera readiness of $6 million.

All right, great. Thanks for taking the questions.

Your next question comes from the line of Ian Sanderson of Cowen & Co. Please proceed, sir.

Good afternoon, thanks for taking the questions. Howard, you mentioned for partnering on Exubera that you mentioned either Exubera and/or NGI, would that package necessarily be partnered together because of the IP and the NDA rights? And secondly, can you just refresh us what the litigation settlement charge is here in the quarter, what that is for, and should we assume that the cost of idle Exubera manufacturing capacity is a number that will be incurred in the second quarter as well?

Okay, thanks, Ian. So, in terms of Exubera and NGI, I think we have a we have a number of flavors in front of us after having discussions with various companies. There are companies that clearly want both. There are companies that are only interested in NGI, and I've said that publicly a number of times that it could be an Exubera or an NGI deal, excuse me, it could be an Exubera NGI deal or an NGI deal. I don't imagine there will be any Exubera only deals, so I don't think it's necessarily an issue of IP or capacity or capability that's more an issue of NGI is such a remarkable product. I mean, you've all seen the NGI device. There's no doubt that the NGI device is by far the superior inhaled insulin product being developed. It's the smallest, it's the most elegant and it clearly from the best we can tell works the best so I think the companies that are talking to us are very very interested in NGI, and if inhaled insulin is to be a success and I think it still will be, then the NGI device from Nektar is in my mind, by far the best. So, that has of course the most traction. There are companies that are, sorry, go ahead.

To follow-up on that, my understanding is that at least when this was in Pfizer's hands, one of the attractions to NGI was to the abbreviated regulatory process because they could bridge a lot of the Exubera data. Now, if you were to license NGI independently, would that still be the case?

Yes, that would still be the case, because NGI is Exubera with fewer excipients. Same excipients, but fewer excipients, so it is a very very abbreviated process, and we do expect that NGI would be approved, at the same time frame or contemporary with the other products and developments so I don't think we're behind anybody else. There are companies that are also interested in Exubera along with NGI and there are certain advantages of that and you develop a larger safety database. Remember Exubera already has a significant human safety database. In any case I think you could see either flavor, and that's going to be a function of what the desires of that particular partner are. John, could you answer Ian's question regarding the litigation?

Yes, Ian, on your litigation question, we paid out $1.6 million in fourth quarter of '07, and that related to a number of employee related matters.

Okay. And then the cost of idle Exubera manufacturing capacity again, is that a number that we should expect to be incurred in the second quarter as well?

Yes. Let me answer that question, but before I do, just to add to John's point, that litigation regarding various employee matters dates back two to three years. And that's the resolution of issues that happened years ago.

Okay.

With regard to the cost for maintaining Exubera capability, we are spending some money to enable us to continue to manufacture and supply Exubera because we believe that there is great partner interest. That will probably continue, that will continue to the point where we decide that we are not going to spend any more money on Exubera, as I said in the absence of a partnership, so we're spending that money, I think it's a great investment in the sense that without spending that money to keep NGI in the clinic and to keep our manufacturing capability available to us, it would be very difficult to find a partner. It would sort of be a self-fulfilling prophecy if we shut it all down. So we're going to keep it running while we're in the process of discussions and I think it's a wise investment. At some point and I said in the first half of this year, at some point, if there's no evidence that a partnership is likely we will shut it down.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Jim Reddoch of FBR.

Good afternoon, thank you for the question. Novo I think a couple of months ago said that they were not the going to move forward with meal time inhaled insulin, I guess that was the Eradyme technology and so they were only going to go forward with a basal inhaled, or inhaled basal. Is your technology amenable to basal and has that changed the tenor of your discussions with potential partners at all?

Well, yes. First of all, we all know that the Eradyme technology was not the ideal technology for delivering inhaled insulin, and I think it's pretty obvious to me why Novo didn't want to proceed with that. In any case, the technology that Nektar has is clearly capable of delivering basal insulin as well and we actually have done a significant amount of work over the past years in basal insulin so when we talk about programs that could be useful in diabetes, basal insulin, GLP 1, Nektar has a tremendous capacity to do that work and we are having those discussions with partners as well. So as we have Exubera discussions, we're also having discussions on GLP 1 and we're having discussions on basal insulin and we have to see what the total program looks like.

Great. I muted myself accidentally. What's the expense of keeping Exubera a and NGI partnerable.

Let me just make sure we've stated that publicly. Hang on one second.

Just also wondering that if you -- are you saying that if a partner is not signed by June 30, say end of 2Q, that this expense of keeping it partnerable would also go away?

Yes, we will spend approximately $2 million a month to keep Exubera viable for a partner. That includes manufacturing capacity, packaging capacity, clinical, keeping certain employees in place as well as the clinical studies for NGI. So that costs us roughly $2 million a month and as I said earlier, I think that's a valuable spend, given the discussions we've already had with partners. If we get to the point where our partnership is not likely, we will shut that down and I'm not going to give a hard stop to it but I said, we believe we will find -- if we're finding a partner it will be in the first half of this year so at some point, you could interpret that as a cutoff date and I'm not giving a specific cutoff date but we obviously we will not continue to spend $2 million a month indefinitely.

Okay, got you, thank you.

It appears we have no further questions. I will now turn the call over to Nektar CEO, Howard Robin for closing remarks.

Well, okay, thank you very much for the great questions, and I think overall, I am very pleased with the year Nektar had. I'm very pleased with the employees, the scientists, the staff at Nektar. Everybody has just done an absolutely amazing job to achieve all of our goals and I think this Company has progressed remarkably and is on a very very important path forward and a successful path forward, so I want to thank all of our investors for all of their support and wonderful questions over the year and I expect that 2008 is going to be an absolutely great year for Nektar so thank you very much.

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