Nektar Therapeutics (NKTR) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Nektar Therapeutics financial results conference call. I will be your coordinator for today. At this time, all participants are on a muted line, however we will accept questions at the end of today's session. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Ms. Jennifer Ruddock. Please proceed.

Thank you, Melanie. Good afternoon, and thank you for joining us for Nektar Therapeutics third quarter 2009 financial results conference call. With us today are Howard Robin, our President and CEO, John Nicholson, our Chief Financial Officer, Bharatt Chowrira, our Chief Operating Officer, Dr. Randall Moreadith, our Chief Drug Development Officer, and Dr. Lorianne Masuoka, our Chief Medical Officer.

Before we get started, please note that the following presentation contains forward-looking statements that reflect our current views as to the Company's business strategy, the value and potential of our technology platform, the progress and potential for our proprietary drug candidates, the future economic potential under our partnership agreements, the potential market size and revenue to Nektar for certain of our drug candidates and those of our partners, our financial guidance for 2009, and other future events relating to the Company.

These forward-looking statements involve significant risks and uncertainties that are detailed in Nektar's reports and other filings with the SEC, including our Form 10-K annual report filed with the SEC on March 6, 2009, our most recent Form 10-Q quarterly report filed August 5, 2009, and the report on Form 8-K filed today. Actual events could differ materially from these forward-looking statements, and we assume no obligation to update any 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.

With that, I am pleased to hand the call over to Howard. Howard?

Thank you, Jennifer, and thanks to everyone for joining us today.

We're extremely pleased with our achievements in the third quarter. Our continued success demonstrates how Nektar is generating significant value from our investment in clinical programs, and importantly, it underscores the strength and future potential of Nektar's proprietary polymer conjugate technology to create novel and valuable therapeutics.

Nektar has a number of clear strengths that differentiate us from other biopharma companies. A validated drug development platform, a technology that is broadly applicable to both large and small molecules, and a strategy that focuses on substantially improving well characterized or approved molecules. These strengths have enabled us to create substantial value in the expression of our clinical pipeline of proprietary programs.

Today I want to share with you why I believe Nektar continues to be well positioned as one of the most exciting companies in our industry. Because we have a tremendously powerful technology platform, capable of generating multiple product candidates, partnering opportunities are a key driver for our future growth.

In order to provide Nektar with the financial flexibility to pursue the many product opportunities emanating from our technology, we are committed to working with partners who will accelerate and fund the later stages of clinical development for products in our proprietary pipeline. As the innovator company, we fully expect to retain a significant ownership in these late-stage programs.

Let me tell what you that means to me. It translates into royalty rates that start at approximately 20% and escalate from there. These royalty rates starting at product launch are the equivalent of at least a one-third ownership in our drugs.

In September, we signed a landmark collaboration with AstraZeneca for oral Nektar 118 and 119. The terms and structure of the AstraZeneca deal are consistent with Nektar's partnering strategy. Importantly, this partnership illustrates our ability to retain a significant economic interest in our proprietary programs, and also benefit from significant milestone payment streams. The value of this collaboration for Nektar and our shareholders is compelling.

In addition to significant double-digit royalties on product sales, we have received a $125 million upfront payment, and we have the potential to receive milestone payments for Nektar 118 of $610 million, and $770 million for Nektar 119, for total upfront and milestone payments of $1.5 billion for these two programs.

As the world's leader in launching and marketing new brands, we believe AstraZeneca is the ideal partner to maximize the commercial potential of Nektar 118 and Nektar 119. AstraZeneca shares our strategic vision for these programs, and recognizes that Nektar 118 and Nektar 119 represent highly valuable market opportunities.

Opioid induced constipation is a debilitating and frequent problem for patients who require opioids to control pain. More than 230 million prescriptions are written each year for opioids in the US alone, and up to 90% of these patients have opioid induced constipation.

Dr. Lynn Webster, our lead clinical investigator from the phase II study of Nektar 118 presented final results at the Plenary session of the American College of Gastroenterology meeting last month in San Diego. Let me quickly summarize our clinical results.

Nektar 118 exhibits a wide therapeutic index in the clinic, primarily due to the unique ability of our technology to exclude the drug from the brain. In phase I, Nektar 118 was well tolerated at doses up to 1,000 milligrams a day. In phase II, both the 25 milligram and 50 milligram doses of oral Nektar 118 significantly improved bowel function in patients with severe constipation.

Further, there was no decrement in efficacy at the end of the 28 day treatment period. Importantly, with both of these doses, 25 milligrams and 50 milligrams, there was no reversal of analgesia, no increase in opiate use and no CNS opiate withdrawal.

As an oral once daily tablet to treat OIC, Nektar 118 has the potential to dramatically improve patient quality of life and allow uninterrupted pain relief therapy. With AstraZeneca as our partner, we believe that the market potential for Nektar 118 is well in excess of $1 billion.

Nektar 119 could have even greater commercial potential. In combining Nektar 118 with an opioid, Nektar 119 is designed to provide pain relief without the side effects of constipation found with opioids.

AstraZeneca brings significant resources to Nektar 118 and 119 to rapidly advance these programs through clinical development, regulatory approval and launch. They have a proven track record for creating and establishing market leading brands, and they are the number one pharmaceutical company in launching new chemical entities.

With a commanding presence and focus in the areas of gastroenterology, oncology and neuroscience, they are a perfect fit for Nektar 118 and 119. Importantly, AstraZeneca has expressed a strong commitment to make Nektar 118 and 119 key components of these franchises. We believe that this strength in focus will ensure that the worldwide commercial potential for these much needed products is maximized.

Now let me highlight a very important asset for Nektar that is often overlooked. Our portfolio of late-stage or approved partner programs, such as Amikacin and Cipro with Bayer, Cimzia with UCB, Hematide with AffyMax and Mircera with Roche. Our partnered programs represent enormous value for Nektar that could drive a future revenue run rate of between $200 million and $400 million a year by the end of 2013. And this does not include the revenues we expect to receive from the new AstraZeneca partnership.

While this is not intended as guidance, and is not discounted for development, regulatory and market risks, it illustrates for that you Nektar's partnered revenue potential is significant.

Now I'd like to talk about our next two value drivers for Nektar, Nektar 102 and Nektar 105, our innovative new cancer therapies in clinical development. By using our proprietary polymer conjugate technology to provide continuous exposure of the tumor to high levels of drug, we've created novel cytotoxic agents with the potential for greater anti-cancer properties.

First I would like to discuss Nektar 102, a program that has generated tremendous excitement with clinical investigators and at Nektar. Nektar 102 is active in patients with multiple tumor types, and is currently in phase II clinical studies in ovarian, breast and colorectal cancers. In ovarian cancer, we are excited to announce that we completed enrollment much more rapidly than anticipated in our phase II clinical study.

The study enrolled 70 women with platinum resistant ovarian cancer in a two-stage trial, and is evaluating Nektar 102 in two dose schedules, every two weeks and every three weeks. In mid-September we announced that we completed enrollment in the first stage of this study with 40 patients, 20 in each dose schedule. Because Nektar 102 achieved responses very early in the course of treatment for multiple patients, we opened the second stage of the study earlier than anticipated.

The second stage of the study completed enrollment even more rapidly. This acceleration in enrollment was driven primarily by investigators in the US and Europe who are seeing highly promising activity early in the study. We are actively collecting tumor response data from patients in the ovarian study, and we look forward to sharing top-line results in January.

Nektar 102 offers the possibility of a powerful new treatment option for women with platinum resistant ovarian cancer. Over half of the 22,000 women in the US that are diagnosed annually with ovarian cancer are not cured despite receiving aggressive platinum-based chemotherapy. Women whose cancer is resistant to these platinum regimens have a particularly poor outcome.

Of the many drugs that have been tested in this deadly form of cancer, only two have been approved for use in women with platinum resistant disease, and these drugs have a modest efficacy at best. The response rate for platinum resistant disease for these drugs is only around 12%, and the progression-free survival is also extremely short, roughly two to three months.

The market opportunity in ovarian cancer is significant. Current worldwide sales of branded and generic agents to treat ovarian cancer are approximately $1 billion annually.

We are also evaluating Nektar 102 in a phase II study of single-agent Nektar 102 in metastatic breast cancer. This trial also uses a two-stage design as in the ovarian cancer study, and will enroll 70 patients who have failed a prior taxane regimen. Enrollment in this study is on schedule, and based on preliminary activity observed, we expect to start the second stage of this trial in January.

Our randomized 174-patient study in colorectal cancer is enrolling. The study evaluates Nektar 102 head to head against single-agent irinotecan in second-line colorectal cancer. We anticipate preliminary data from this study to be available in the second half of 2010. Single-agent irinotecan studies in second line colorectal cancer are challenging to enroll, and our goal for Nektar 102 is to replace irinotecan in any setting. So we're currently evaluating the addition of a combination comparison to this study.

Nektar 105, pegylated docetaxel is our second oncology compound in clinical development. We are currently conducting a phase I study with a plan to enroll approximately 30 patients with solid tumors. Enrollment in this study continues to go well, and importantly we have not observed any dose limiting safety or tolerability concerns with Nektar 105. Despite docetaxel's wide use in different tumor settings, and $2 billion in annual sales, the drug is frequently associated with dose limiting neutropenia and hypersensitivity reactions.

Nektar 105 represents a multi-billion-dollar market opportunity, a potentially improved docetaxel therapy without neutropenia or the need for co-administration of steroids, could dramatically expand treatment options for this widely used chemotherapeutic agent. We anticipate reporting data from this phase I study in early 2010.

Now I would like to spend a moment highlighting some exciting new research going on at Nektar. With the continued validation that our platform achieved this year, we are more confident than ever that our research pipeline has the potential to create tremendous long-term value for our shareholders.

An excellent example of this is our clinical success in phase II with oral Nektar 118, which has validated the use of our technology platform to prevent penetration of drugs across the blood-brain barrier. This important pharmacological attribute has the potential to create significant value for Nektar, specifically in the area of pain management.

In peripheral pain, we're evaluating a number of very compelling product opportunities that could redefine how pain is treated. For example, current treatment of neuropathic pain involves a range of drugs that were originally developed for CNS indications and also carry considerable CNS mediated side effects, such as sedation, dizziness, seizures and memory loss. By redesigning these drugs to retain a peripheral analgesic effect, while preventing substantial penetration across the blood-brain barrier, we could create powerful new treatment options for neuropathic pain.

We're also exploring pain programs that use our technology to potentially create abuse deterrent analgesics, opening yet another exciting of research for our Company. Given the early success we've seen in our preclinical studies in these pain programs, we are accelerating our research efforts in this area. We expect to share more with you on exciting research developments in this area early next year.

I would like to turn the call over to John for a review of our financials. John?

Thank you, Howard, and good afternoon, everyone. We have significantly reduced our operating costs and expenses in the third quarter and first nine months of this year as compared to last year. Total operating costs and expenses were down 30% to $39.1 million in the third quarter of 2009, compared to $56 million in the third quarter of 2008. Year to date, through September 30, 2009, total operating costs and expenses were also down 29% to $122.6 million, as compared to $171.6 million in the first nine months of 2008.

Our net loss for the third quarter 2009 was reduced to $31 million versus a loss of $37 million for the same period in 2008. As Howard mentioned, with the signing of the AstraZeneca agreement, we have greatly strengthened our cash position with the $125 million upfront payment for Nektar 118 that we received in October. We now expect to end the year with between $390 million and $400 million in cash.

Since we were asked about this on our last conference call, let me tell you how this $125 million payment will run through our P&L. We plan to amortize this payment between now and the end of 2010. As a reminder, also included in our cash and projected revenue range of guidance for 2009, is a $31 million license option extension from an existing partner, which is expected to occur in the fourth quarter. We may recognize this $31 million payment as revenue completely in Q4, or amortize it over a longer period. So as a result, our revised revenue range for 2009 is now between $65 million and $95 million.

With the AstraZeneca transaction, we now anticipate our GAAP cash flow to be positive for 2009, with GAAP cash provided by operation from approximately $30 million to $40 million. Importantly this year, we made a substantial investment of approximately $63 million into our clinical and preclinical programs. As you can see, we have significantly strengthened our balance sheet, and reduced our operating costs and expenses, while at the same time we have built an advanced stage development pipeline.

With that, I would now like to open the call to questions. Operator?

Yes, sir. (Operator Instructions). And our first question comes from the line of Cory Kasimov with JPMorgan. Go ahead.

Good afternoon, guys. Thank you for taking the questions. First want to focus on 102 and this ovarian study. Can you tell us the number of responses that you needed in the first stage to trigger the move into the second? And then on that same topic, assuming the data continue as they've been and given the excitement in the community it sounds as if they will, what would a potential phase III program look like for this particular agent?

Well, Cory, let me first take the latter part of your question. I think Phase III design can be accomplished in many ways. At this point, as I've said earlier in the presentation, Nektar's strategy is at this point to partner these programs, much as we did Nektar 118 and 119. I think there are many opportunities here for developing this drug in ovarian as well as metastatic breast cancer and colorectal cancer, and I think that would be well served by a partner who has tremendous expertise in the field of oncology and has the breadth and resources to expand this program as appropriate.

For the first portion of the question, I'm going to turn it over to Lorianne.

Thanks, Howard. Just to remind everyone, regarding the two-stage design, the first stage of (inaudible) two stage design is really a futility stage. It's really a stage that is there to determine whether or not you're going to meet minimum activity that you need to see in order to consider the drug valuable for pushing forward into phase III. So the minimum bar there is you need to see at least one response before you can move onto stage two. Now obviously we have announced that we are seeing multiple responses, so we believe we've exceeded that low bar.

So in terms of moving forward into the second stage, that was readily accomplished, as we not only saw these multiple responses but we saw them very, very early in the treatment of the patients.

Okay, that's great, and then with regards to the second line colorectal cancer study, it sounds like that's slipping a little bit. The difficulty in enrollment, you are still having that even with the K-RAS testing for these particular patients?

Right. So in terms of the second line colorectal cancer study, Cory, there are a couple of options that patients have. Of course, single agent irinotecan is approved worldwide in this setting as a single agent. It's not used very often irrespective of whether or not a patient has the wild type or the mutation of their K-RAS gene. Because of course, 5 FU and irinotecan, those drugs are not sensitive to those mutations. So what we are finding challenging is that the randomization to the single agent irinotecan is something that the physicians are not used to using. There's tremendous excitement about Nektar 102. It is really the comparator that is proving challenging.

Okay, and my last question is probably for John, but with regards to this $31 million milestone you're expecting to book in the fourth quarter, when you do indeed receive that, will you disclose who it came from? And I guess along those same lines, can we expect to see other milestone payments from some of these legacy partners in the future?

To answer the first question, Cory, yes, once we receive it, if we receive it we will disclose who the partner is. And the second question to your answer is, at this point in time there is no other deal that is being contemplated at this point in time.

Okay, great, thanks for taking the questions.

Our next question comes from the line of Derek Jellineck with Boenning and Scattergood. Go ahead.

Great, thanks for taking my questions, guys. A couple if I may. First, on 118, any kind of update there with you and AZ on the possible phase III design?

Well, we intentionally held off on our end of phase II meeting with the FDA to wait to bring a partner into that mix, and of course, at this point, AstraZeneca has scheduled an end of phase II meeting with the FDA. They are actively working on a phase III design with us, and I really can't comment in great depth about what that will look like, it certainly is really their prerogative to discuss the specifics of the design, but I know they want to move this program ahead very, very rapidly. I'm sure they're planning to start the phase III study in the earlier part of next year, and I think as we learn, as we and AstraZeneca develop more information we'll share it as best we can.

Okay, thanks. I appreciate that. And on 102, jumping back in the colorectal second line study, you said that the enrollment was going a little slower, and you pointed out the challenges that randomization to a single agent. You mentioned that you may look at a combo in that study. Can you kind of expand on that as well as the design. Is that a superiority trial?

So the study that is currently undergoing enrollment is a study in which we compare Nektar 102 directly against irinotecan. And we're looking for superiority there with regard to an improvement in progression free survival of Nektar 102 as compared to irinotecan. So it's a superiority trial.

With regard to combination therapy, sort of the obvious combination of an irinotecan based product, would be with 5 FU and Leucovorin. And so we're currently examining our options with regard to using a combination approach in this trial as well, and at the time that we make a decision regarding that, of course, we will disclose that.

I just wanted to get your thoughts quickly on who you think the bogey is for the superiority trial, given that (inaudible) trial show modest response?

You cut off for a second. Could you repeat the question?

Sure. I was wondering what the hurdle rate was on that trial, given that the efficacy (inaudible) irinotecan plus or minus (inaudible) didn't really show particularly significant (inaudible).

We just had a little trouble hearing you for a second.

Pardon the interruption. This is the operator. Derek, are you on a speakerphone?

I am.

Can you pick up your handset, sir?

Sure.

Thank you.

Yes, sorry, Derek, every third word was cutting out there, so we're having a little bit of a hard time understanding the question.

Okay, sure. Is this better?

Yes.

I was just wondering about the superior design of that trial. Can you tell me what the hurdle rate is you need to show?

So we're currently powered to show an increase in progression-free survival of 50%. So we believe that this product does have the potential to be significantly better than irinotecan, which is why the study is powered and designed in that way.

Okay, great, and then just lastly, on the cost structure, is the guidance still intact for the $100 million in R&D and $45 million for G&A.

That is correct. At this point in time, we are still staying by our guidance of $100 million for R&D and $45 million for G&A.

Great, thanks so much.

Our next question comes from the line of Ian Sanderson with Cowen. Go ahead.

Good afternoon, thanks for taking the questions. Actually, if I could ask Howard to elaborate a little bit, if you can, on the royalty contributions that you talked about from the big partner products, Amikacin, Cimzia, Hematide, MIRCERA, et cetera, and have you ever given real guidance on these royalty rates on anything besides Amikacin, and maybe if you can provide some color on that.

Secondly, on Nektar 140, I may have missed this. Is this still on track for an IND filing in the current quarter?

Okay. So with regard to the royalty rates, other than Nektar, or inhaled Amikacin, which we did disclose the specific royalty rate, flat royalty rate of 30% in the US and somewhat less in Europe. We're not allowed, per our contracts, to give out specific royalty rates, so what we have on our website and in all of our corporate presentations is a chart which gives you some approximation of what the royalty rates are for all of those products. You could look at the approximate sales value, you could look at the approximate dollars that we expect in royalties and make a judgment as to rates.

They're certainly lower than 30%, and you understand that. Now, if you look at Amikacin, which is a flat 30% royalty from dollar one in the US, remember what I said earlier about the kind of deals that we want to do as the new Nektar. And it is a Nektar focused on polymer conjugate technology, I don't believe we should be doing deals for significantly less than 20%, starting from dollar one, and that's what I've always stated. And I've also said that the AstraZeneca deal for Nektar 118 and 119 is consistent with that approach.

So if you look at a Mircera and you look at Cimzia, you look at Hematide, you'd have to look at the ranges of the sales value, the ranges of the royalty dollars and form your judgement as to what that royalty rate would be. It's pretty clear for me to give you a buyer royalty rate relative to Amikacin, and the royalties for Nektar 118, 119 are more or less as I described.

Okay, and also on the inhaled Amikacin, are we still looking at initiating the phase III trials early next year?

Yes, Bayer has stated in clinical trials.gov, that they plan to start trials of Amikacin in phase III in the first quarter of next year, and we are in the process of manufacturing and delivering devices to them as we speak.

Now, you raised the question on Nektar 140, our pegylated protease inhibitor, at this point we don't have an exact date for NDA filing, excuse me IND filings, we've made some strategic judgements as I've stated in this presentation to perhaps accelerate the pain programs because of what we believe we could accomplish in peripheral pain and in abuse deterrent opioids. So it's always a matter of adjusting your priorities and moving programs more rapidly than others.

We're still actively working with Nektar 140 as a pegylated protease inhibitor. We strongly believe that we can develop it in a way that has a great value for our investors, but at this point, I'm not really prepared to talk about when we would file that IND. We may want to move some of these pain programs ahead of it.

Okay, thank you.

Our next question is a follow-up from the line of Cory Kasimov with JPMorgan. Go ahead.

Hey, guys, thanks for taking the follow-up. Wanted to go back to 102 for a second and the comment, Howard, that you made with regards to partnering the asset prior to pushing it into phase III. So if you are going to have the Phase II data for ovarian early on in 2010, in January, and then you get the, the second line colorectal study in the second half of the year, do you think that the ovarian study alone is enough to get across the finish line from partnership standpoint, or would you suspect that you're going to have to wait until you get that colon data since it is randomized?

Well, look, that will of course be a function of what the final data looks like in the ovarian cancer study. One thing that I think is very, very important is that, while this is a two-stage design and the bar, as Lorianne specifically said, for jumping from the first stage to the second stage is not terribly high. We have seen multiple responses. There is a tremendous investigator enthusiasm for this drug, and the second stage of the design enrolled in the course of about six weeks, all 30 patients. So there's a great desire to work with this drug, and I think that's very, very encouraging.

That said, we will have preliminary top line data in January. And I do believe that if that data is as compelling as one would hope it is, that should be sufficient to drive a partner relationship.

Okay, that's helpful. Thank you.

Our next question comes from the line of Shiv Kapoor with Morgan Joseph. Go ahead. Mr. Kapoor, your line is open.

Can you hear me?

Yes, we can hear you.

The question is regarding R&D expenses, it seems like you would have to -- your expenses would have to marginally go up to meet your guidance, given that you've signed the Nektar 118 and 119 deal, I was hoping you would have lower R& D expenses. What's causing the ramp up in research despite this partnership deal?

Well, I can let John answer this more in a detailed way, I would say this. While there are certainly -- while there are certainly expenses being taken over by our partner, we also now know that we have a validated technology, that we could apply polymer conjugates to small molecules and they show great activity. Now I look at the opportunities we have in our pain programs in peripheral pain, in abuse deterrent opioids, and programs even such as Nektar 140, which we talked about, and I think we want to start accelerating those programs.

So I would not be looking for a decrease in R&D spending. I would say the opposite. Now that we have a platform technology that's been validated, I think the best way to bring value to our shareholders is to move as many programs as we can rapidly, get them to a meaningful stage of development where we answer the question as to whether they have value or not.

That would most likely move them into phase II, and then do partnership arrangements which have tremendous upfront cash as we did with Nektar 118 and 119, and also a significant royalty rate in milestones, which essentially give us a significant ownership percentage of that drug. I think you can build the Company rapidly that way and exploit the platform technology at its maximum.

At some point, there's no doubt that Nektar will want to develop its own drugs. But I think until we look at -- until we exploit the opportunities in front of us, and make a decision where we want to put our stake in the ground, would the actual development through phase III, I think it's premature to make that decision.

So at this point, I would not expect research and development spending to shrink, I would expect the fact that we now have proven technology, we should be able to move more programs, and at some point I'd like to see Nektar at the stage of filing perhaps two INDs a year. And I know that's not ready to happen today, but as we move over the next year or two, we should get to that stage. And I think that's probably the best way to build value for our shareholders.

That makes sense, thanks.

Our next question comes from the line of Bert Hazlett with BMO Capital. Go ahead.

Thank you. I guess a little bit more on that topic, Howard. I guess given the cash position that you've been able to achieve with AstraZeneca, why not consider taking 102 further on? Is it something about, you're seeing about the characteristics of 102 that really want you to partner this? Then if you could remind us, is Paklitaxel the platinum resistant standard of care, if there is such a thing in ovarian?

The standard of care is doxil. Let me answer the first part of your question. I think we're very excited about what we see with Nektar 102 in ovarian cancer. It probably has, although it's probably too soon to tell, great potential in metastatic breast cancer as well as colorectal cancer.

These are extremely expensive and large studies, as you can well imagine. And if I look at the opportunities that we have in opioids, in other forms of peripheral pain drugs, in pegylated protease inhibitors, etc. We have a pretty deep preclinical pipeline that I would like to see move forward pretty rapidly.

Now, if we make a decision to move Nektar 102 into phase III ourselves, and we could do that. We're certainly capable of doing that, and there's nothing unique about Nektar 102 that would make that challenging. What is means is we'd be developing it in phase III, for ovarian, most likely need to move into it phase III at some point for metastatic breast cancer.

And that would really, given limited resources, and although we will hopefully finish this year with approximately $400 million, that is still a limit to our resources. I think that would greatly impact and slow down our ability to develop other billion dollar drugs in the pain area.

So at this point, if we can develop Nektar 102 through phase II and demonstrate that it is an active and important molecule, we should be able to put together another collaboration much like we did with Nektar 118 and 119 with AstraZeneca. And that type of economics, where we have no further spending in phase III where we save $100 million plus in phase III, bring in $100 million plus as an upfront payment. Hundreds and hundreds of millions of dollars of milestones, and then a royalty rate, which translates to a significant ownership potential, and I keep using the percentage of about 20% as a starting royalty rate as the number that always sits in my head.

I think that kind of value for our shareholders, if we used those monies and those resources to move our other programs forward, is probably more valuable for our shareholders in the short term as well as the long term, than if we use half of our resources to take a phase III program forward. And that's my general thinking on it.

Okay, that's fair enough. I have a quick one for John, if I may. The amortization of the upfront for the AZN, is that to year end 2010, and if so to what point are you actually amortizing that to? I mean, what's the logic behind amortizing it to that short a time point?

Basically one of the obligations we have under the contract is to basically give the technology to AstraZeneca, and so in the first 90 days after the HSR approval, we have 90 days to come up with that transfer. And then basically once we agree on that transfer, then you have X amount of time to basically make the transfer. So we're anticipating the transfer to take place no later than 12/31 of next year, so from a guidance standpoint what we're saying to everybody is, once the deal went through in the middle of October, through 12/31 is the time frame we'll be amortizing that over. So approximately for the rest of this year it will be about $23 million, and for 2010 it will be about $102 million.

Great, thank you.

Our next question comes from the line of Tim [Luco] with William Bear. Go ahead.

This is Tim calling in for John. Congratulations on the progress during the quarter. I guess regarding the development program in abuse deterrents, will these be new NMEs not covered by the AZ partnership, and how will you manage what could be considered a conflicting program with 119, or do you suspect it to be viewed as complementary?

The programs that I've talked about in terms of abuse deterrents, opioids, as well as peripheral pain drugs, have nothing to do with the AstraZeneca collaboration, and they are not impacted by that all. They don't conflict with 118, they don't conflict with 119, and AstraZeneca has no rights to those programs, they are entirely proprietary. And I think as we roll out those programs in the early part of next year in January and the early part of next year, I think you will be very excited about the potential for those programs. They are entirely ours.

Fair enough, sounds good. For 140, does your technology change how the backbone molecule will interact with the CNS or cardio muscle, and can you potentially outlicense that compound if you don't take it forward?

I'm going to let Bharatt take a stab at that answer.

Hi. So the Nektar 140 is a program where we are trying to modify the profile of protease inhibitors that are currently approved or (inaudible) molecules. One of the problems in the HIV treatment with using the protease inhibitor is that you require [econovir] boosting because these protease inhibitors rapidly clear through the (inaudible) metabolism.

So using our technology platform, we're trying to modify the profile so that these protease inhibitors would no longer require boosting with econovir, thereby overcoming the pill burden and potential side effects associated with econovir boosting. So that is essentially the approach we are taking with that program.

And will you think about outlicensing it if you don't take it forward?

So we are currently in preclinical development on that, and as we move forward and advance the program, we will have to make that determination.

All right, thank you very much.

Let me address sort of a general issue, that point again. I think at this stage of our development as a Company, and now knowing that we can apply, as I said earlier, our polymer conjugate to small molecules in a very successful way, partnering is strategic for us. I think you will continue to see partnerships for Nektar for our programs.

At some point in time, I think it's comfortable for me to say that we will take a drug through phase III, but I don't believe that is in the near term. And I think the opportunity to work with partners who have great experience in various areas of medicine, and use those resources from high value deals, and let's look at the deal we did with AstraZeneca for Nektar 118 and 119.

That is one of the largest if not the largest biotech deals of 2009. And I think if we can apply those types of resources to the other programs, the resources that those types of deals yield to other programs in our portfolio, I think taking drugs through a meaningful phase II process, and then finding a partner is a very, very comfortable and important strategy for us.

That makes perfect sense. Thanks a lot.

Our next question comes from the line of Ian Sanderson with Cowen. Go ahead.

Thanks for taking the follow-up. I don't know if you can address this at this point, but, Howard, if you can tell us a little bit about the tamper resistant or abuse resistant opioid programs and exactly what your peg does here. Is it just avoid crossing the blood-brain barrier, and is that the primary mechanism?

Well, look, it's a great question, and I would love to answer it is today, but I think it's a bit premature. I will be talking about it actively early next year. We want to do a little more work on it before I start making it clearer.

It is certainly a function of how the opioid gets into the CNS. It is clearly a function of how and how much and rates, etc. So I don't want to go into it in any more detail, but we believe that if we are successful with that program, we will have created a very, very impressive, in essence, tamper resistant product, an abuse deterrent product.

Our next question is a follow-up from Bert Hazlett with BMO Capital. Go ahead.

Thank you. Just a quick follow-up on the R&D expense line. I believe you said for the nine months, $40 million was roughly spent on internal -- internal programs of the $71.5 million. As you expect the R&D line to progress forward, what percentage should you expect of the R&D expense to be focused on internal programs going forward?

I think that kind of granularity, we're not prepared to give out today. As we give further guidance, we can talk about that.

I think the message that I wanted to make sure everybody understood today was that, if you look at our R&D spending in 2009, I would expect similar R&D spending in 2010. And in my mind, the opportunity for those dollars to go into multiple programs and advance our pipeline, in both the preclinical and clinical pipelines, are dollars well spent. So while we haven't given out that kind of specific detail, I would think for next year you should see a research spend and a development spend that is somewhat consistent with 2009.

Okay, thanks.

And I show no further questions. I would like to turn the call back over to Howard Robin for closing remarks. Please proceed.

Well, I just want to take one last moment to thank the employees for Nektar for their commitment and dedication to the Company, and the success of our programs would not be possible without the efforts of our great employees. So I want to thank them personally. Thank you for joining us today, and stay tuned, there's more to come. Thanks, bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.