Nektar Therapeutics
201 Industrial Road
San Carlos, California 94070
USA
+1 650 631-3100 Global Headquarters
+1 650 631-3150 Main FAX
www.nektar.com
NASDAQ: NKTR
2006 ANNUAL REPORT
Nektar Therapeutics is a leader in translating
advanced PEGylation and pulmonary delivery
technologies into therapies that transform patient
care and outcomes. We are the science and
development expertise behind blockbuster
products that make a positive difference in the
lives of patients. We are a public company with a
deep commitment to creating value for our
shareholders and making them proud of the
scientific and medical advances that their support
enables.
To meet our commitments to patients, physicians
and shareholders, we are moving our company in a
new direction. Starting from a position of strength
made possible by our previous achievements, we
are moving toward greater efficiency, productivity
and value creation by reorganizing into specific
business units and focusing on advancing our
proprietary pipeline. Never before have we believed
so strongly in our ability to succeed. Come see
what the excitement at Nektar is all about.
Table of Contents
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6
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23
Platforms, People, Products
Letter to the Shareholders
PEGylation Technology
Pulmonary Technology
Partnered & Proprietary Products
2006 Financial Review
Selected Financial Information
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Report of Independent Registered
Public Accounting Firm
25
26
27
28
30
Management’s Report on Internal Control
Over Financial Reporting
Nektar Therapeutics Consolidated Balance Sheets
Nektar Therapeutics Consolidated Statements
Of Operations
Nektar Therapeutics Consolidated
Statements Of Stockholders’ Equity
Nektar Therapeutics Consolidated
Statements Of Cash Flows
31 Notes To Consolidated Financial Statements
52 Nektar Corporate Information
53 Nektar Management Team & Board of Directors
Nektar Management Team
Howard W. Robin
President and
Chief Executive Officer,
Director
Louis Drapeau
Senior Vice President,
Finance and
Chief Financial Officer
Nevan Elam
Senior Vice President,
Head of the Pulmonary
Business Unit
Elizabeth Frisby
Vice President,
Human Resources
Hoyoung Huh, M.D., Ph.D.
Senior Vice President,
Business Development
and Marketing
David Johnston, Ph.D.
Senior Vice President,
Research and Development
Gil Labrucherie
Senior Vice President,
General Counsel and Secretary
Truc Le
Senior Vice President,
Operations and Corporate Quality
John S. Patton, Ph.D.
Chief Scientific Officer,
Director and Founder
Christopher J. Searcy, Pharm.D.
Senior Vice President,
Corporate Development
David Tolley
Senior Vice President,
Operations and Site Manager,
Nektar Alabama
Tim Warner
Senior Vice President,
Investor Relations
and Corporate Affairs
Nektar Board of Directors
Susan Wang
Former Executive
Vice President,
Corporate Development
and Chief Financial Officer
Solectron
Roy A. Whitfield
Former Chairman and
Chief Executive Officer
Incyte
Robert B. Chess
Chairman of the Board
Nektar Therapeutics
Michael A. Brown
Chairman, Line 6
Director, Former Chairman
and Chief Executive Officer
Quantum Corp
Joseph J. Krivulka
Founder and President
Triax Pharmaceuticals
Christopher A. Kuebler
Former Chairman and
Chief Executive Officer
Covance
Irwin Lerner
Former Chairman and
Chief Executive Officer
F. Hoffmann-LaRoche
John S. Patton, Ph.D.
Co-Founder and
Chief Scientific Officer
Nektar Therapeutics
Howard W. Robin
President and
Chief Executive Officer
Nektar Therapeutics
The preceding discussion contains forward-looking statements that involve risks and uncertainties. Nektar’s actual results could differ
materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those
discussed in Part 1 of the Form 10-K filed with the Securities Exchange Commission for the fiscal year ended December 31, 2006 under
the heading “Risk Factors.”
All Nektar brand and product names are trademarks or registered trademarks of Nektar Therapeutics in the United States and other
countries. The following, which appear in this Annual Report, are registered or other trademarks owned by the following companies:
Exubera (Pfizer Inc.); PEGASYS (Hoffmann-La Roche, Ltd.); Neulasta (Amgen Inc.); Cimzia (UCB Group); Definity (Bristol-Myers Squibb
Medical Imaging, Inc.); Somavert (Pfizer Inc.); PEG-INTRON (Schering-Plough Corporation); SprayGel (Confluent Surgical Inc.); Macugen
(OSI Pharmaceuticals, Inc.); MARINOL (Solvay Pharmaceuticals, Inc.).
.
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| PLATFORMS, PEOPLE, PRODUCTS
WE MAKE MEDICINES better for patients
Nektar’s
Platform Technologies
ADVANCED PEGYLATION When attached to a drug, polyethylene glycol (PEG) polymer chains can sustain
bioavailability by protecting the drug molecules from immune responses and other clearance mechanisms.
In the body, the chain-like PEG attracts water molecules that act like a shield, protecting the active drug molecule
from degradation by antibodies or enzymes. The water molecules also significantly increase the PEG’s
original size, thereby slowing the drug clearance from the kidneys, which allows the drug to stay in the body
longer. The end result: medicine with prolonged and enhanced therapeutic benefits. Most importantly, Nektar
scientists are demonstrating through the use of various structures that “PEGylation” technology can be applied to
small molecules.
ADVANCED PULMONARY DELIVERY Pulmonary delivery offers opportunities for improved and innovative
drug delivery and greater patient compliance. In addition, pulmonary delivery offers rapid onset of action and
more efficient and targeted treatment of lung disorders. Nektar Advanced Pulmonary Delivery combines
innovations in dry powder and liquid pulmonary technology with state-of-the-art devices that deliver both large
and small molecules to the lung for systemic and local drug administration.
11 Marketed or Filed ProdUCtS
PRODUCT
PARTNER
STATUS
Exubera®
for diabetes
Neulasta®
for neutropenia
Pfizer
Marketed
Amgen
Marketed
Macugen®
for macular degeneration
OSI
Pharmaceuticals
Marketed
Somavert®
for acromegaly
PEGASYS®
for hepatitis C
PEG-INTRON®
for hepatitis C
Definity®
for cardiac imaging
SprayGel™
for post-surgical adhesions
DuraSeal™
for cranial dural sealant
Cimzia™
for Crohn’s disease
Mircera™
for renal anemia
Pfizer
Marketed
Roche
Marketed
Schering
Marketed
Bristol-Myers
Squibb
Marketed
Confluent
Marketed
Confluent
Marketed
UCB Pharma
Filed
Roche
Filed
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| LETTER
ANTICIPATED 2007 VALUE DRIVERS
Proprietary Programs
revenue and Product approvals
• NKTR-061 (inhaled amikacin) Phase 2a data by year-end
• Revenue from full launch of Exubera
• NKTR-102 (PEG-irinotecan) Commence Phase 2 by year-end
• Roche’s Mircera approval in US (renal anemia)
• NKTR-118 (oral PEG-naloxol) Commence Phase 2 by year-end
• UCB’s Cimzia™ approval in US and EU (Crohn’s disease)
Partnering
Focus the Business
• One pulmonary and one PEG product deal with significant
economics
• Improve productivity and efficiency
• Significantly reduce cash burn
The anticipated value drivers and certain other statements in this letter are forward-looking statements and actual results could differ materially based on a
number of risks and uncertainties including those contained under the heading “Risk Factors” in Nektar’s most recent annual report on Form 10-K and
quarterly report on Form 10-Q filed with the SEC.
02
TO OUR SHAREHOLDERS
Nektar Therapeutics is widely regarded in the biopharmaceutical
industry as a technology and commercial pioneer in the
pulmonary delivery and PEGylation of medicines. We have
leveraged this expertise to transform approved products—
many of which serve large and lucrative commercial markets—
into significantly safer, more effective, and more convenient
therapeutics for patients. The most recent example of our
pioneering efforts to improve therapeutics is Exubera®, which
has been approved in the U.S. and Europe, the world’s two
most important pharmaceutical markets.
One of the programs we are accelerating is NKTR-102 (PEG-
irinotecan). Irinotecan is a top-selling chemotherapy for colon
cancer and other solid tumors which is a tremendously
important product for oncologists. However, irinotecan has
severe limitations: the drug causes diarrhea and neutropenia.
These are dose-limiting side effects that can seriously
complicate treatment. Our preclinical data indicate that
PEGylation of irinotecan has the potential to significantly
mediate these two side effects and, therefore, greatly improve
the quality of care for cancer patients taking this drug.
Exubera matters
Exubera is the world’s first inhaled insulin product to be
approved for the treatment of adults with type 1 and type 2
diabetes. This drug has the potential to revolutionize the way
diabetes—one of this generation’s greatest health problems—
is treated. The sales and marketing of Exubera, which under
our collaboration agreement is the responsibility of Pfizer, has
been the focus of great concern to investors and analysts.
We believe that Exubera’s regrettably slow start is a poor
indication of its true potential in a multibillion-dollar market
that has gone underserved for more than a generation. We
are, therefore, working closely with the new management team
at Pfizer, and the new Exubera marketing team, in particular,
to ensure that this breakthrough product reaches its potential.
Pfizer is equally committed to Exubera’s success and it is
putting in place a sales and marketing program that is
designed to succeed where the previous program
came up short.
Advancing our proprietary pipeline
Make no mistake, Exubera prescriptions matter. However, there
are a number of proprietary products in development at Nektar
with enormous therapeutic and commercial potential that have
unfortunately been overlooked and overshadowed in recent
years by Exubera and our other pulmonary-based programs.
When the market and medical community gain more clarity
about our proprietary pipeline, particularly our PEGylated small
molecule programs, they will understand why we are so excited
about these prospects.
The vast majority of medicines on the market today are small
molecules. PEGylating these molecules is far from simple, but
we are the PEGylation experts. All of the PEGylated
therapeutics approved over the past 10 years have been
enabled by Nektar. We are producing data and filing patents to
prove that with the right chemistry, the hurdles to PEGylating
small molecules are not insurmountable.
We are also accelerating the development of NKTR-118 (oral
PEG-naloxol) for opioid-induced constipation. In preclinical
studies, NKTR-118 alleviated constipation without diminishing
the analgesic impact of the opioid; it did not enter the central
nervous system as a result of our proprietary PEGylation
chemistry.
In addition to NKTR-102 and NKTR-118, Nektar is developing
a number of other proprietary programs including PEG-Factor
IX for hemophilia, NKTR-203 (basal insulin for diabetes),
NKTR-024 (inhaled amphotericin B) for the prevention of
invasive pulmonary fungal infections and NKTR-061 (inhaled
amikacin) for pneumonia.
What it takes
Elevating the importance of our proprietary pipeline is just one
of many sweeping changes underway at Nektar to better
leverage our pulmonary and PEGylated drug development
platforms. We will continue to partner our products when the
economics add significantly to shareholder value, however, in
general we will focus more upon proprietary drug development.
Nektar has two remarkable platform technologies which can be
broadly applied to make medicines more therapeutically and
commercially valuable, and to develop novel therapeutics. We
have only begun to prove what we are capable of producing for
shareholders and patients alike.
Sincerely,
Howard W. Robin
President and Chief Executive Officer
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| PEGYLATION TECHNOLOGY
OPPORTUNITIES THROUGH INNOVATION
All of the PEGylated medicines approved over the past 10 years were enabled by Nektar. Our
scientific ingenuity is the engine behind our expanding portfolio of robust PEGylated product
opportunities.
04
Our PEGylation technologies improve the performance and
tolerability of drugs used to treat chronic ailments and
life-threatening illnesses.
Nektar’s PEGylation franchise is based on complex technology,
but its impact on therapeutics–and its value to the
biopharmaceutical industry–are quite simple to grasp. All of the
PEGylated therapeutics approved over the past 10 years were
enabled by Nektar. Many of these therapeutics have become
mainstays in cancer care, infectious diseases and other serious
medical conditions.
approaches and structures that allow us to attach a PEG to a
small molecule. This novel approach improves the therapeutic
profile of the small molecule and avoids blood-brain-barrier and
first-pass metabolism effects. The end result is a small
molecule that stays in the body longer, prolonging the drug’s
therapeutic effects, and can avoid central nervous system
uptake.
A Robust Technology
The process of PEGylation adds polymers of polyethylene
glycol (PEG) to a drug. Binding of water molecules to the
chain-like PEG molecules leads to the effective expansion
and motion of the polymer, which reduces the interaction
between the PEGylated drug and other molecules within the
body. By reducing interactions between the drug and the
immune system and clearance mechanisms, the addition of
PEG can reduce a drug’s immunogenicity and may substantially
improve a drug’s half-life. Compared to unmodified drugs,
PEGylated molecules often result in improved clinical benefits
such as: efficacy, safety and less frequent administration.
In the past, Nektar’s R&D efforts have been focused on
PEGylating large molecules for partners. With an eye on the
future, and far larger market opportunities, we are pioneering
efforts to PEGylate small molecules. Small molecule medicines
represent the vast majority of prescription drugs on the market
and in development today. Traditional PEGylation technology is
not conducive to small molecules, so we invented new
Nektar’s Most Advanced
Proprietary PEGylation Programs
NKTR-102 (PEG-irinotecan) is a PEGylated formulation of
irinotecan, a drug with demonstrated efficacy in the treatment
of colorectal cancer and other solid tumors. Irinotecan is a
remarkable drug, but it causes neutropenia and severe
diarrhea, which exacerbates the misery experienced by cancer
patients undergoing irinotecan chemotherapy. Preclinical
studies suggest that NKTR-102 may significantly reduce the
neutropenia and severe diarrhea associated with irinotecan.
NKTR-118 (oral PEG-naloxol) is an oral PEGylated formulation
of an analog of naloxone. This drug is designed to relieve the
constipation that chronic and acute pain sufferers experience
when taking opioids for pain relief. Phase 1 data suggest that
NKTR-118 has the potential to significantly improve the quality
of life for these patients by alleviating their constipation. NKTR-
118 does not enter the central nervous system where it could
interfere with the opioid analgesia.
Preclinical data suggest that NKTR-102 (PEG-irinotecan)
can potentially produce dramatically better results than irinotecan
Total episodes in 8 dogs given 4 weekly doses,
25mg/kg equivalent irinotecan doses
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Dosing
Control
Irinotecan
NKTR-102
Diarrhea
episodes
n = 10 per treatment group
Dose = 90mg/kg
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Observation Days
Early diarrhea
Late diarrhea
Less than 24 hours after dosing
More than 24 hours after dosing
Irinotecan
NKTR-102
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| PULMONARY DELIVERY TECHNOLOGY
APPLYING PROVEN SCIENCE
Nektar’s advanced pulmonary delivery technologies are improving the lives of patients with
diabetes, infectious diseases and other life-threatening conditions by improving the therapeutic
performance of their medicines.
A Breakthrough
In Treatment
Nektar developed and licensed to Pfizer the world’s first inhaled insulin
product—and this breakthrough product is bringing new hope for diabetics.
as Pfizer notes, “the fear of injections has prevented or delayed far, far
too many patients from accepting this appropriate treatment to control
their blood sugar levels. exubera® (insulin human [rdNa origin]) inhalation
Powder is a major advance in insulin delivery to help patients accept
insulin early for better glycemic control … ‘taking exubera is a welcome
alternative. the device is small enough to fit into my coat pocket, and
i can carry it with me everywhere i go. Using exubera helps me to control
my diabetes,’ said a 62-year-old exubera user with type 2 diabetes. …
Pfizer is moving forward to effectively establish exubera and serve the
million of diabetics still uncontrolled on current therapy.”
01
06
Nektar is turning the challenges of pulmonary
delivery into opportunities for success in the
clinic and in the marketplace.
For patients with lung disorders, pulmonary delivery offers
rapid, efficient and targeted treatment of disease that is
superior to what can be achieved with oral or systemic
administration. We are building a diverse pipeline of inhaled
anti-infective agents to treat a variety of life-threatening
pulmonary infections.
Transforming Disease
Management
Our pulmonary delivery technology is transforming the
treatment of diseases that are managed today with injected
therapies. Exubera,® approved for the treatment of type 1 and
type 2 diabetes, is the first example of this approach in action.
Exubera is an effective new approach to managing diabetes,
one of the biggest problems in public health today.
Nektar’s Most Advanced
Pulmonary Delivery Program
NKTR-061 (inhaled amikacin). Patients with hospital-acquired
pneumonia who need mechanical ventilation, as well as
patients on ventilators who contract ventilator-associated
pneumonia have high morbidity and mortality rates, in spite of
available broad spectrum intravenous antibiotics.
It is estimated that 3.5 million patients in U.S. hospitals are
diagnosed with pneumonia each year. Of these cases, up to
250,000 are on mechanical ventilators.
Our Inhaled antibiotics program is designed to treat
pneumonias in this ventilated patient population. Our easy-to-
use micropump technology ensures that NKTR-061 (inhaled
amikacin) has the potential to deliver a target lung
concentration sufficient to treat resistant bacteria without
producing the systemic toxicity commonly found with high
doses of intravenous antibiotics.
NKTR-061 (inhaled amikacin) has the potential to
effectively target the lung without systemic toxicity
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Target lung concentration to
treat resistant bacteria
Blood
Lung
Toxic blood level of amikacin
IV Amikacin,
Dose = 500mg BID
NKTR-061,
Dose = 400mg BID
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| PARTNERED & PROPRIETARY PRODUCTS
A PIPELINE WITH BLOCKBUSTER POTENTIAL
Nektar is committed to developing a portfolio of products that will improve patient care and
create value for our investors.
11 ProdUCt CaNdidateS iN the CliNiC
PRODUCT
PARTNER
STATUS
Tobramycin Inhalation
Powder (TIP™)
for lung infection
PEG-Anti-GFR
antibody fragment
for cancer (CDP 791)
Inhaled-Dronabinol
for migraine
PEG-human growth
hormone for growth
deficiency (hGH)
PEG-Hematide™
for anemia
Ciprofloxacin Inhalation
Powder (CIP)
for lung infection
Ostabolin-C™ Inhalation
Powder (OCIP)
for osteoporosis
Novartis
Phase 3
UCB Pharma
Phase 2
Solvay
Phase 2
Pfizer
Phase 2
Affymax
Phase 2
Bayer
Phase 1
Zelos
Therapeutics
Phase 1
NKTR-061 (inhaled amikacin)
for pneumonia
Phase 2
NKTR-024 (inhaled amphotericin B) for
prevention of invasive pulmonary fungal infections
Phase 1
NKTR-102 (PEG-irinotecan)
for solid tumors
NKTR-118 (oral PEG-naloxol)
for opioid-induced constipation
Phase 1
Phase 1
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4 PRECLINICAL DEVELOPMENT PROGRAMS
PRODUCT
PARTNER
STATUS
Baxter
Pfizer
PEG-Factor VIII
for hemophilia
EG-Factor IX
P
for hemophilia
Next Generation
Inhaled Insulin
for diabetes
NKTR-203
Basal Insulin for diabetes
Pre-
clinical
Pre-
clinical
Pre-
clinical
Pre-
clinical
Nektar proprietary products
2006 Financial Review
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Selected Financial information
The selected consolidated financial data set forth below should be read together with the consolidated financial statements and
related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the other information
contained herein.
(In thousands, except per share information)
Years ended December 31,
StatementS of operationS Data:
Revenue:
Product sales and royalties 1
Contract research
Exubera commercialization readiness
Total revenue
Total operating costs and expenses 2
Loss from operations 2
Gain (loss) on debt extinguishment
Interest and other income (expense), net
(Provision) Benefit for income taxes
Net loss
Basic and diluted net loss per share 3
Shares used in computing basic and
diluted net loss per share 3
2006
2005
2004
2003
2002
$
$
$
153,556
56,303
7,859
217,718
376,948
(159,230)
—
5,297
(828)
$
2,366
81,602
15,311
$ 25,085
8,185
$
27,25
78,62
—
—
$ 18,465
76,380
—
126,27
308,12
114,270
188,212
106,257
171,012
4,845
13,658
(182,633)
(303)
(2,312)
137
(73,42)
(,258)
(18,84)
163
(64,755)
12,018
(12,84)
(16)
(8,813)
—
(8,655)
—
(154,761) $ (185,111) $ (101,886) $
(65,80) $ (107,468)
(1.72) $
(2.15) $
(1.30) $
(1.18) $
(1.4)
89,789
85,15
78,461
55,821
55,282
Years ended December 31,
2006
2005
2004
2003
2002
Balance Sheet Data:
Cash, cash equivalents and investments
Working capital
Total assets
Convertible subordinated notes 4
Other long term liabilities
Accumulated deficit
Total stockholders’ equity
466,977
369,725
768,177
417,653
29,457
$
$ 23,6
$ 418,740
$
$ 136,424
$ 223,880
$
$ 606,638
$ 744,21
$
$ 2,14
$ 173,4
$
37,553
$
$ 36,250
$ (1,056,993) $ (02,232) $ (717,121) $ (615,235) $ (54,345)
$
$ 206,770
$ 467,342
$ 566,423
$ 450,248
$ 858,554
$ 417,653
27,58
$
$ 28,40
$ 223,71
$ 616,788
$ 35,88
46,742
$
$ 326,811
$ 164,11
227,060
1 2006 Product sales and royalties include commercial manufacturing revenue from Exubera Inhalation Powder and Exubera Inhalers.
2 We changed our method of accounting for stock based compensation on January 1, 2006 in connection with the adoption of SFAS No. 123R,
Accounting for Share-Based Payment.
3 Basic and diluted net loss per share is based upon the weighted average number of common shares outstanding.
4 We repaid $36.0 million of the 5% Convertible Subordinated Notes on February 7, 2007.
10
Management’s Discussion and analysis of
Financial condition and Results of Operations
The following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those
discussed in this section as well as in Item 1A of Part I of the
Annual Report on Form 10-K filed with the Securities and Exchange
Commission under the heading “Risk Factors.”
Overview
We are a biopharmaceutical company with a mission to develop
breakthrough products that make a difference in patients’ lives.
We create differentiated, innovative products by applying our
platform technologies to established or novel medicines. Our two
leading technology platforms are Pulmonary Technology and
PEGylation Technology. Nine products using these technology
platforms have received regulatory approval in the U.S. or the
EU. Our two technology platforms are the basis of nearly all of
the partnered and proprietary programs currently in pre clinical
and clinical development or being commercialized.
We create or enable potential products in two ways. First, we
develop products in collaboration with pharmaceutical and
biotechnology companies that seek to improve and differentiate
their products. Second, we apply our technologies to already
approved drugs to create and develop our own differentiated,
proprietary programs. Our proprietary programs are designed to
target serious diseases in novel ways. We believe our proprietary
products and development programs have the potential to raise
the standards of current patient care by improving one or more
performance parameters including efficacy, safety and ease-of-use.
Our technology platforms enable improved performance of a variety
of new and existing molecules. Our Pulmonary Technology makes
drugs inhaleable to deliver them to and through the lungs for both
systemic and local lung applications. Our PEGylation Technology
is a chemical process designed to enhance the performance of
most drug classes with the potential to improve solubility and
stability, increase drug half-life, reduce immune responses to an
active drug, and improve the efficacy or safety of a molecule in
certain instances.
The commercial success of Exubera will be a critical factor in
us achieving our profitability objective and for us to be able to
fund the key elements of our business strategy. We expect our
future revenues to come increasingly from the manufacture and
sale of Exubera Inhalation Powder and Inhalers and royalties
from sales of Exubera by Pfizer. Like any product in the early
stages of commercial launch, there are substantial risks and
uncertainties with respect to the commercial success of
Exubera, including the timing and success of the commercialization
of Exubera by Pfizer in various markets, physician and patient
education and experiences, third party payor reimbursement,
country specific pricing approvals, manufacturing and supply
execution, and other risks and uncertainties identified in this
report. In addition, under our collaboration agreement with
Pfizer, we do not participate in the marketing and sales
activity for Exubera.
Our manufacturing revenues received from Pfizer for Exubera
Inhalation Powder and Inhalers are calculated on a cost-plus basis.
Exubera royalty revenue levels will depend on the level of Exubera
product sales to end users and Pfizer’s cost of goods sold for
Exubera. Pfizer is taking a phased approach to the Exubera
commercial launch. In the second half of 2006, the early phase
of the Exubera launch focused on manufacturing scale-up activities
and the education of diabetes specialists. In 2007, Pfizer initiated
the next phase of the launch expanding the education, marketing
and sales efforts more broadly to primary care physicians. Because
the Exubera commercial roll-out is in its early phases, we cannot
predict the level of Exubera end user product sales or expected
royalty revenues for this or subsequent years.
Currently, we are the exclusive manufacturer of the Exubera
Inhalation Powder. Under our collaboration agreement, Pfizer
can manufacture up to one-half of the Exubera Inhalation Powder
and also has responsibility for the automated filling of all insulin
blister packs for the Exubera Inhaler and packaging of the Exubera
product. Pfizer has an Exubera Inhalation Powder manufacturing
facility and will likely manufacture a portion of the Exubera
Inhalation Powder in the future. In the second half of 2006, Pfizer
experienced scale-up challenges with highly automated, specially
engineered Pfizer equipment, although Pfizer has said they made
significant progress in addressing these challenges. Any failure,
delay or inability to address these challenges and scale-up Pfizer’s
portion of the manufacturing, filling, and packaging processes
could impede Exubera sales and would significantly and adversely
impact our revenues, results of operations, and financial condition.
Although we have been successful at meeting our Exubera
Inhalation Powder and Inhaler manufacturing objectives to
date, it is critical that we continue to meet our manufacturing
commitments in 2007 to support Pfizer’s requirements.
Commercial scale manufacturing execution by both Nektar
and Pfizer remains an important factor in meeting anticipated
Exubera market demand and meeting our financial objectives.
We continue to make significant investments in our proprietary
development programs which comprise a substantial portion of
our research and development spending. Our current strategy is
to develop a portfolio of proprietary programs that is intended to
address critical unmet medical needs by exploiting our know-how
and technology in combination with established medicines. We
intend to continue our strategy of partnering these development
programs with pharmaceutical and biotechnology companies in
various stages of their development in an effort to help fund the
investment of our proprietary development programs. Our decision
as to when to seek partners for our proprietary development
programs will be made on an individual program basis and such
decisions will have an important impact on our future revenues,
research and development spending, and financial position. In this
regard, we are currently seeking collaboration partners for two of
our proprietary development programs and the success and timing
of these partnering efforts will affect our research and development
expense levels and revenues in 2007 and beyond.
We will continue to seek collaborative arrangements with
pharmaceutical and biotechnology companies. We believe our
partnering strategy enables us to develop a large and diversified
pipeline of products and development programs using our
technologies. To date the revenues we have received from the sales
of our partner products have been insufficient to meet our operating
and other expenses. Other than revenues we expect to generate
from Exubera, we do not anticipate receiving sufficient amounts of
revenue from other partner product sales or royalties in the near
future to meet our operating expenses.
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11
Management’s Discussion and analysis of
Financial condition and Results of Operations (continued)
To fund the expense related to our research and development
activities, we have raised significant amounts of capital through
the sale of our equity and convertible debt securities. As of
December 31, 2006, we had approximately $447. million in
long-term debt. Our ability to meet the repayment obligations of
this debt is dependent upon our and our partners’ ability to develop,
obtain regulatory approvals, and successfully commercialize
products. Even if we are successful in this regard, we may
require additional capital to repay our debt obligations.
research and develOpment activities
Our product pipeline includes both partnered and proprietary
development programs. We have ongoing collaborations or
licensing arrangements with more than 30 biotechnology
and pharmaceutical companies to provide our technologies.
Our technologies are currently being used in nine approved
products, in two partner programs that have been filed for with
the FDA and twelve development programs in human clinical trials.
The length of time that a development program is in a given phase
varies substantially according to factors relating to the development
program, such as the type and intended use of the potential
product, the clinical trial design, and the ability to enroll suitable
patients. Generally, for partnered programs, advancement from
one phase to the next and the related costs to do so is dependent
upon factors that are primarily controlled by our partners.
Our portfolio of development programs is focused on our
Pulmonary Technology and PEGylation Technology platforms.
Within each major category, we have both partnered and proprietary
development programs. The estimated completion dates and
costs for our programs are not reasonably certain. See Risk Factors
for discussion of the risks associated with our partnered and
proprietary research and development programs.
In connection with our research and development for partner
products and development programs, we earned $56.3 million,
$81.6 million and $8.2 million in contract research revenue for the
years ending December 31, 2006, 2005 and 2004, respectively.
The costs incurred in connection with these programs, including allocations of facilities, cGMP quality programs and other shared costs,
is as follows (in millions):
molecule
StatuS1
pulmonary
partnered products and Development programs
Exubera® (insulin human [rDNA origin]) Inhalation Powder
Tobramycin inhalation powder (TIP)
Other partner programs
proprietary Development programs
Next generation Exubera inhaler program
Amphotericin B inhalation powder
Inhaled Antibiotics (Aerosolized amikacin)
Other proprietary products
Technology platform
total pulmonary
peGylation
Partnered products and development programs
Proprietary development programs
PEG product (Oncology-related)
PEG product (Pain-related)
Other
total peGylation
other
total research and Development expense
Approved in U.S., EU,
Brazil, and Mexico
Phase 3
Various
Pre-Clinical
Phase 1 (pre-pivotal)
Phase 2
Various
Various
Various
Pre-clinical
Pre-clinical
Various
Various
1 Status definitions are included in the Form 10-K, December 31, 2006, Item 1: Business section
Years ended December 31,
2006
2005
2004
$ 22.1
12.8
14.3
$ 51.4
11.3
.5
$ 68.4
7.4
7.7
17.4
24.3
13.6
9.1
12.2
6.5
16.7
.1
8.4
16.
2.7
8.3
2.5
11.0
11.1
$ 125.8
$ 12.8
$ 11.1
$
1.8
$
0.7
$
1.5
5.5
2.7
10.6
5.3
2.4
4.7
2.7
—
4.0
$ 20.6
$ 13.1
$ 8.2
3.0
8.8
6.2
$ 149.4
$ 151.7 $ 133.5
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stOck-Based cOmpensatiOn
Effective January 1, 2006, we adopted the fair value method
of accounting for stock-based compensation arrangements in
accordance with SFAS No. 123R Share-Based Payment, using
the modified prospective method of adoption. Our results of
operations include $2.1 million of stock-based compensation
expense for the year ended December 31, 2006.
Prior to January 1, 2006, we accounted for stock-based
compensation using the intrinsic value method of accounting
in accordance with Accounting Principles Board Opinion No. 25
“Accounting for Stock Issued to Employees” (“APB 25”). Under the
modified prospective method of transition under SFAS No. 123R,
we were not required to restate prior period financial statements
to reflect expensing of stock-based compensation. Therefore, the
results of operations for the years ended December 31, 2005
and 2004 are not directly comparable to December 31, 2006.
In the discussions of cost of goods sold, research and development
expenses and general and administrative expenses included within
Results of Operations below, we have included the amount of stock-
based compensation expense recognized during the year ended
December 31, 2006 in order to explain the variations from
December 31, 2005 and 2004.
Results of Operations
Years ended December 31, 2006, 2005 and 2004
Revenue (in thousands except percentages)
Years ended December 31
2006
2005
2004
Increase/
(Decrease)
2006 vs 2005
Increase/
(Decrease)
2005 vs 2004
Percentage
Increase/
(Decrease)
2006 vs 2005
Percentage
Increase/
(Decrease)
2005 vs 2004
Product Sales and Royalties
Contract Research
Exubera Commercialization Readiness
$ 153,556
56,303
7,859
$ 2,366 $ 25,085
8,185
81,602
15,311
$ 124,10
(25,2)
(7,452)
$ 4,281
(7,583)
15,311
100%
(31%)
(4%)
—
Total Revenue
$ 217,718
$ 126,27 $ 114,270
$ 1,43
$ 12,00
72%
17%
(%)
N/A
11%
The increase in total revenue for the year ended December 31,
2006 as compared to the year ended December 31, 2005
was primarily due to an increase in Exubera product sales
to Pfizer, partially offset by a decrease in contract research
revenue from Pfizer. The increase in total revenue for the year
ended December 31, 2005 as compared to the year ended
December 31, 2004 was primarily due to Pfizer reimbursement
of commercialization readiness costs.
Pfizer represented 64%, 64% and 61% of our revenue for the
years ended December 31, 2006, 2005 and 2004, respectively.
No other single customer represented 10% or more of our total
revenues for any of the three years ended December 31, 2006,
2005 or 2004.
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12
Management’s Discussion and analysis of
Financial condition and Results of Operations (continued)
Product Sales and Royalties
The increase in product sales and royalties for the year
ended December 31, 2006 as compared to the year ended
December 31, 2005 was primarily due to an increase in
Exubera product sales to Pfizer after the approval of Exubera
in January 2006. Also contributing to the increase was
approximately $18.0 million from our PEGylation products.
The increase in product sales and royalty revenue for the year
ended December 31, 2005 as compared to the year ended
December 31, 2004, was due primarily to $5.0 million of royalty
revenue received from OSI Pharmaceuticals (formerly Eyetech
Pharmaceuticals) product sales of Macugen, $1.5 million of
Exubera product sales, and $1.4 million of product sales for
Aerogen products received in the year ended December 31, 2005.
These product sales and royalty revenue increases were partially
offset by decreases of $3.6 million of product sales from our
PEGylation Technology customers.
We have not experienced any significant returns from our customers.
Royalty revenues were $.0 million, $5.4 million and $0.5 million for
the years ended December 31, 2006, 2005 and 2004, respectively.
Contract Research
Contract research revenue includes reimbursed research and
development expenses as well as the amortization of deferred
up-front signing and milestone payments received from our
collaborative partners. Contract research revenue is expected to
fluctuate from year to year, and future contract research revenue
cannot be predicted accurately. The level of contract research
revenues depends in part upon the continuation of existing
collaborations, signing of new collaborations, and achievement
of milestones under current and future agreements.
Cost of goods sold (in thousands except percentages)
The decrease in contract research revenue in 2006 compared
to 2005 was primarily due to a $34.8 million decrease in Pfizer
contract research revenue after the FDA and EMEA approval of
Exubera in January 2006, and the transition from contract research
revenue and commercialization readiness revenue from Pfizer for
the Exubera development program to Exubera product sales. The
decrease in contract research revenue from Pfizer was partially
offset by a $3.7 million increase in contract research revenues
from Novartis Pharma AG (formerly Chiron Corporation) under our
collaboration agreement to develop a dry powder inhaled formation
of tobramycin using our Pulmonary Technology and a $3.4 million
increase in contract research revenue from Baxter Healthcare,
under our agreement to develop a product to extend the half-life
of Hemophilia A proteins using our PEGylation Technology.
The decrease in contract research revenue for 2005 compared to
2004 was primarily due to approximately $7.4 million decrease in
revenue from Pfizer related to the transition of the Exubera program
from contract research and development to commercialization
readiness. In addition, during the year ended December 31, 2004,
we recognized $2.0 million in revenue from a one-time payment
related to Aventis’ termination of a collaborative program with us.
Other decreases were primarily due to the expected fluctuations in
contract research revenue and the timing of milestone payments.
The estimated completion dates and costs for our programs are
not reasonably certain. See Risk Factors in Form 10-K for the
fiscal year-ended December 31, 2006 for discussion of the risks
associated with our partnered and proprietary research and
development programs.
Years ended December 31
2006
2005
2004
Increase/
(Decrease)
2006 vs 2005
Increase/
(Decrease)
2005 vs 2004
Percentage
Increase/
(Decrease)
2006 vs 2005
Percentage
Increase/
(Decrease)
2005 vs 2004
Cost of Goods Sold
Product gross margin
$ 113,921
39,635
$ 23,728
5,638
$ 1,78
5,287
$ 0,13
33,7
$ 3,30
351
>100%
>100%
20%
7%
Product gross margin %
26%
1%
21%
14
The increase in cost of goods sold during the year ended
December 31, 2006 as compared to the year ended
December 31, 2005 is due to increased Exubera product
sales. This resulted in an increase in gross margin percentage
because the Exubera Inhalation Powder and Inhalers have a
relatively higher margin than our other products. We expect
the gross margin percentage to decline in future periods due
to product mix and our cost-plus manufacturing arrangement.
Cost of sales for the years ended December 31, 2006, 2005
and 2004 includes $1.6 million, nil and nil, respectively, of
stock-based compensation.
The decrease in product gross margin percentage for the year
ended December 31, 2005, as compared to the year ended
December 31, 2004, was primarily due to $1.5 million of
Exubera product sales at zero margin.
Exubera commercialization readiness revenue and costs (in thousands except percentages)
Years ended December 31
2006
2005
2004
Increase/
(Decrease)
2006 vs 2005
Increase/
(Decrease)
2005 vs 2004
Percentage
Increase/
(Decrease)
2006 vs 2005
Percentage
Increase/
(Decrease)
2005 vs 2004
Exubera Commercialization
Readiness revenue
Exubera commercialization
$
7,859
$ 15,311
readiness costs
$
4,168
$ 12,268
$
$
—
$ (7,452)
$ 15,311
(4%)
—
$ (8,100)
$ 12,268
(66%)
N/A
N/A
Exubera commercialization readiness revenue represents
reimbursement by Pfizer of certain agreed upon operating costs,
plus a mark-up, relating to preparation for commercial production
in our Exubera Inhalation Powder manufacturing facilities and
our Exubera Inhaler third party contract manufacturing locations.
The decrease in Exubera commercialization readiness revenue
was primarily due to the transition from readiness preparation to
commercial production in late 2005 and early 2006.
Exubera commercialization readiness costs are start up
manufacturing costs we have incurred in our Exubera Inhalation
Powder manufacturing facility and our Exubera Inhaler device third
party contract manufacturing locations preparing for commercial
scale manufacturing. We do not anticipate incurring any additional
costs related to commercialization readiness. We expect that
remaining commercialization readiness costs previously incurred
will be amortized through October 2007.
Research and development (in thousands except percentages)
Years ended December 31
2006
2005
2004
Increase/
(Decrease)
2006 vs 2005
Increase/
(Decrease)
2005 vs 2004
Percentage
Increase/
(Decrease)
2006 vs 2005
Percentage
Increase/
(Decrease)
2005 vs 2004
Research and development
Purchased in-process
$ 149,381
$ 151,65
$ 133,523
$ (2,278)
$ 18,136
(2%)
research and development
$
—
$
7,85
$
—
$ (7,85)
$ 7,85
N/A
14%
N/A
The decrease in the research and development expense
from the year ended December 31, 2006 compared to the
year ended December 31, 2005, related to decreased spending
in our inhaled insulin programs of $18.4 million and other
programs of $1.1 million. These decreases were partially offset
by $.7 million of non-cash stock-based compensation expense
attributable to the adoption of SFAS 123R and $7.5 million
related to our PEGylation programs.
The increase in research and development expense for the
year ended December 31, 2005 compared to the year ended
December 31, 2004, was primarily attributable to an increase of
$10.7 million for pulmonary programs, $4. million for PEGylation
programs and $2.5 million in other programs.
During the year ended December 31, 2005, we recorded a charge
of $7. million for purchased in-process research and development
costs in connection with our acquisition of Aerogen. The purchased
in-process research and development costs were expensed on
the acquisition date because the acquired technology had not yet
reached technological feasibility and had no future alternative use
outside of these development programs. The in-process research
and development primarily represents two programs in clinical
development, Amikacin and Surfactant. Amikacin is used in our
inhaled antibiotic program in an aerosolized form. We have
completed one Phase 2 trial and are currently planning Phase 2
studies to examine the pharmacokinetics of the program.
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Management’s Discussion and analysis of
Financial condition and Results of Operations (continued)
General and administrative (in thousands except percentages)
Years ended December 31
2006
2005
2004
Increase/
(Decrease)
2006 vs 2005
Increase/
(Decrease)
2005 vs 2004
Percentage
Increase/
(Decrease)
2006 vs 2005
Percentage
Increase/
(Decrease)
2005 vs 2004
General and Administrative
$ 78,319
$ 43,852
$ 30,67
$ 34,467
$ 12,885
7%
42%
General and administrative expenses are associated with
administrative staffing, business development and marketing.
The increase in general and administrative expenses for the year
ended December 31, 2006 as compared to the year ended
December 31, 2005 was primarily due to the following:
• Increased salary and employee-benefit costs of $26.4 million,
including $17.8 million of stock-based compensation expense,
of which $10. million is related to executive severance;
$6. million of cash compensation, of which $3.7 million is
due to executive severance; and $1.7 million of employee
health and welfare benefits.
• Increased professional fees of $4. million primarily due to
legal services related to litigation support, audit and related
services, and other consulting services.
• Increased lease termination costs of $1.0 million associated with
the winding down of operations of Bradford UK. The increase
from lease termination costs was partially offset by lack of
general and administrative costs due to the wind down of our
Bradford operations.
Litigation settlement
The increase in general and administrative expenses for the year
ended December 31, 2005, as compared to the year ended
December 31, 2004 was primarily due to the following:
• Increased accounting fees and expenses of approximately
$2.0 million, primarily due to Sarbanes Oxley
compliance requirements.
• Increased legal fees and expenses of approximately $3.0 million,
primarily due to increased patent fees related to our proprietary
development programs and derivative shareholder claims.
• Incremental head count and related expenses of $5.0 million to
support our product planning and marketing efforts for our
proprietary and partnered programs.
• Addition of approximately $1.0 million from Aerogen operations
from the date of acquisition through December 31, 2005.
We expect general and administrative spending to increase over the
next few years to support increased commercial activities.
Years ended December 31
2006
2005
2004
Increase/
(Decrease)
2006 vs 2005
Increase/
(Decrease)
2005 vs 2004
Percentage
Increase/
(Decrease)
2006 vs 2005
Percentage
Increase/
(Decrease)
2005 vs 2004
Litigation Settlement
$ 17,710
$
—
$
—
$ 17,710
$
—
>100%
N/A
On June 30, 2006, we, our subsidiary Nektar Therapeutics AL
(Nektar AL), and a former officer, Milton Harris, entered into a
Settlement Agreement and General Release (Settlement
Agreement) with the University of Alabama Huntsville (UAH)
related to an intellectual property dispute. Under the terms of the
Settlement Agreement, the Company, Nektar AL, Mr. Harris and
UAH agreed to full and complete satisfaction of all claims asserted
in the litigation in exchange for $25 million in cash payments.
We and Mr. Harris made an initial payment of $15.0 million on
June 30, 2006, of which we paid $11.0 million and Mr. Harris
paid $4.0 million. Beginning July 1, 2007, we will pay UAH 10
annual installment payments of $1.0 million each, representing
an accrued liability of $7.0 million at December 31 2006, or the
present value of the future payments using an 8% annual discount
rate. We recorded a litigation settlement charge of $17.7 million
during the year ended December 31, 2006 which reflects the
net present value of the settlement payments.
16
Amortization of other intangible assets (in thousands except percentages)
Years ended December 31
2006
2005
2004
Increase/
(Decrease)
2006 vs 2005
Increase/
(Decrease)
2005 vs 2004
Percentage
Increase/
(Decrease)
2006 vs 2005
Percentage
Increase/
(Decrease)
2005 vs 2004
Amortization of Other
Intangible Assets
$ 4,039
$ 4,206
$ 3,24
$
(167)
$
282
(4)%
7%
Other intangible assets include proprietary technology, intellectual
property, and supplier and customer relationships acquired from
third parties or in business combinations. The majority of our other
intangible assets were either impaired or fully amortized as of the
year ending December 31, 2006.
As of December 31, 2006, the net book value of our other
intangible assets is $3.6 million representing the unamortized
portion of our supplier and customer relationships intangible asset.
This will be amortized on a straight-line basis of approximately
$0. million per year through October 2010. Accordingly, we
expect our amortization of other intangible assets to decrease
to $0. million per year in the future, absent additional
business combinations.
Impairment of long-lived assets (in thousands except percentages)
Years ended December 31
2006
2005
2004
Increase/
(Decrease)
2006 vs 2005
Increase/
(Decrease)
2005 vs 2004
Percentage
Increase/
(Decrease)
2006 vs 2005
Percentage
Increase/
(Decrease)
2005 vs 2004
Impairment of
Long-Lived Assets
$ 9,410
$ 65,340
$
—
$ (55,30)
$ 65,340
(86%)
N/A
For the year ending December 31, 2006, impairment of long-lived
assets includes $5.5 million relating to the write-off of certain
intangible assets relating to our Ireland operations. Additionally, as
a result of a contract renegotiation with one of our collaboration
partners, we determined that costs incurred relating to a
construction-in-progress asset had no future value because the
asset is no longer probable of being completed. Accordingly, we
recorded an impairment charge of $2.7 million. Also, as a result of
the winding down of our Bradford UK operations, we recorded an
impairment charge of $1.2 million relating to the remaining
laboratory and office equipment.
We performed our annual impairment test for goodwill in
October 2005 and determined at that time that the undiscounted
cash flow from our long-range forecast for each respective
business unit exceeded the carrying amount of the respective
goodwill. In December 2005, we were apprised of unfavorable
results of clinical data related to programs from our Super Critical
Fluids Technology program in Bradford UK, which provided an
indication that the fair value of the respective business unit’s
goodwill was below the carrying value. Therefore, in connection
with our year end close process, we re-performed the impairment
analysis of goodwill and other long-lived assets for Bradford UK.
We determined the fair value of the intangibles and other assets
of Nektar UK based on a discounted cash flow model to be less
than the carrying amount of goodwill and certain long-lived assets.
Based on the above, we recorded an impairment charge to goodwill
and long-lived assets in the year ended December 31, 2005 in the
amount of $5.6 million and $5.7 million, respectively.
This charge is reflected in the Impairment of long-lived assets
line item in our Consolidated Statements of Operations. See
Note 13 for more information regarding the winding-down of
the Bradford facility.
Interest Income (in thousands except percentages)
Years ended December 31
2006
2005
2004
Increase/
(Decrease)
2006 vs 2005
Increase/
(Decrease)
2005 vs 2004
Percentage
Increase/
(Decrease)
2006 vs 2005
Percentage
Increase/
(Decrease)
2005 vs 2004
Interest Income
$ 23,450
$ 13,022
$ 6,602
$ 10,428
$ 6,420
80%
7%
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Management’s Discussion and analysis of
Financial condition and Results of Operations (continued)
The increase in interest income for the year ended December 31,
2006 is primarily due to an increase in our balance of cash, cash
equivalents, and investments in marketable securities resulting from
our $315.0 million subordinated debt offering completed in late
September 2005, and higher prevailing interest rates during 2006
compared to 2005.
The increase in interest income for the year ended December 31,
2005, as compared to the year ended December 31, 2004, was
primarily due to increases in average daily cash balances as a result
of net proceeds of approximately $315.0 million in convertible
subordinated notes in September 2005, and higher prevailing
interest rates during 2005 compared to 2004.
Interest expense (in thousands except percentages)
Years ended December 31
2006
2005
2004
Increase/
(Decrease)
2006 vs 2005
Increase/
(Decrease)
2005 vs 2004
Percentage
Increase/
(Decrease)
2006 vs 2005
Percentage
Increase/
(Decrease)
2005 vs 2004
Interest Expense
$ 20,256
$ 14,085
$ 25,747
$ 6,171
$ (11,662)
44%
(45)%
The increase in interest expense for the year ended December
31, 2006, as compared to the year ended December 31, 2005
was primarily due to a higher average balance of convertible
subordinated debt outstanding resulting from our $315.0 million
subordinated debt offering completed in September 2005.
For the year ended December 31, 2004, interest expense included
a payment of approximately $12.7 million in interest made to certain
holders of our outstanding 3.0% convertible subordinated notes
due June 2010 which completed an exchange of $16.3 million in
aggregate principal amount of the notes held by such holders for
the issuance of approximately 14. million shares of our common
stock. The net increase of $1.0 million was primarily due to the
interest expense related to the issuance of $315.0 million of
3.25% convertible subordinated notes in September 2005
less the decrease in interest expense related to the retirement
of $25.4 million and $45. million aggregate principal amount
of our outstanding 5% and 3.5% convertible subordinated
notes due February, 2007, and October, 2007, respectively, in
September 2005.
Other income (expense), net (in thousands except percentages)
Years ended December 31
2006
2005
2004
Increase/
(Decrease)
2006 vs 2005
Increase/
(Decrease)
2005 vs 2004
Percentage
Increase/
(Decrease)
2006 vs 2005
Percentage
Increase/
(Decrease)
2005 vs 2004
Other Income (Expense), net
$ 2,103
$ (1,24)
$
26
$ 3,352
$
(1,545)
>100%
>(100)%
During the year ended December 31, 2006, we recognized a
$2.2 million gain from the sale of an equity investment in Confluent
Technologies. We do not expect to realize income from such
transactions in the future. Other expense, net of the gain from the
sale of our investment in Confluent Technologies is $0.1 million and
is primarily related to net foreign exchange gains and losses.
During the year ended December 31, 2004, we terminated our
lease obligation related to 45,574 square feet of space located
at our headquarters in San Carlos, California. We recorded other
expense of approximately $1.1 million, representing the write-off
of our capital lease asset partially offset by a reduction in the
present value of our future rent liability. In addition, other income
for the year ended December 31, 2004, included $0.7 million of
income related to our real estate partnership which was dissolved
in September 2004.
Loss on debt extinguishment (in thousands except percentages)
Years ended December 31
2006
2005
2004
Increase/
(Decrease)
2006 vs 2005
Increase/
(Decrease)
2005 vs 2004
Percentage
Increase/
(Decrease)
2006 vs 2005
Percentage
Increase/
(Decrease)
2005 vs 2004
Loss on Debt Extinguishment
$
—
$
303
$ ,258
$
(303)
$
(8,55)
N/A
(7)%
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During the year ended December 31, 2005, we recognized a loss
on debt extinguishment of approximately $0.3 million in connection
with the retirement of $25.4 million and $45. million aggregate
principal amount of our outstanding 5% and 3.5% convertible
subordinated notes due February 2007 and October 2007,
respectively for total cash payments of $71.0 million, in privately
negotiated transactions. As a result these transactions, we wrote
off approximately $0.1 million and $0.5 million of capitalized debt
issuance costs related to the 5% and 3.5% convertible
subordinated notes, respectively.
During the year ended December 31, 2004, we recognized a
loss on debt extinguishment in connection with two privately
negotiated transactions to convert our outstanding convertible
subordinated notes into shares of our common stock. In
January 2004, certain holders of our outstanding 3.5% convertible
subordinated notes due October 2007 completed an exchange
and cancellation of $.0 million in aggregate principal amount of
the notes for the issuance of 0.6 million shares of our common
stock. In February 2004, certain holders of our outstanding
3% convertible subordinated notes due June 2010 converted
approximately $36.0 million in aggregate principal amount of
such notes for approximately 3.2 million shares of our common
stock and a cash payment of approximately $3.1 million. As a result
of these transactions, we recognized losses on debt extinguishment
of approximately $7.8 million and $1.5 million, respectively.
Liquidity and Capital Resources
We had cash, cash equivalents and investments in marketable
securities of $467.0 million and indebtedness of $447. million,
including $417.7 million of convertible subordinated notes,
$20.5 million in capital lease obligations and $.7 million in
other long-term liabilities as of December 31, 2006.
We have financed our operations primarily through revenue from
product sales and research and development contracts, public and
private placements of debt and equity securities and financing of
equipment acquisitions and certain tenant leasehold improvements.
We do not utilize off-balance sheet financing arrangements as a
source of liquidity or financing.
Cashflow Activities
During the year ended December 31, 2006, we used approximately
$2.7 million in operating cash flows. To date, revenue has not been
sufficient to cover our expenses and we are not generating positive
cash flow through our operations. Cash used in operating activities
included an $11.0 million cash payment made in connection with
the University of Alabama Huntsville litigation settlement. In 2006,
we also purchased $22.5 million of property and equipment and
repaid $10.5 million in debt obligations. These uses of cash were
partially offset by $22.3 million in cash collected from employees
for the purchase of common stock.
During the year ended December 31, 2005, we used $78.0 million
in operating cashflows. We purchased $18.0 million of property
and equipment and spent $30.7 million for the purchase of
Aerogen, Inc. Additionally, we repaid $2.5 million in debt obligations.
These uses of cash were offset by $234.7 million in proceeds
from the issuance, net of repurchases, of convertible subordinated
notes, as well as proceeds from the issuance of common stock
to employees and a secondary offering of $10. million and
$31.6 million, respectively.
We expect to use a substantial portion of our cash to fund
our on-going operations over the next few years and to
repay our $447. million of indebtedness outstanding as of
December 31, 2006, including $102.7 million of convertible
subordinated notes due in 2007. In February 2007, we repaid
$36.0 million of our 5% convertible subordinated notes with cash.
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Management’s Discussion and analysis of
Financial condition and Results of Operations (continued)
Contractual Obligations
The following is a summary of our contractual obligations as of December 31, 2006 (in thousands)
obligations 1
Convertible subordinated notes, including interest 2
Capital leases, including interest
Operating leases
Purchase commitments 3
Litigation Settlement and other long-term liabilities,
including interest
Payments due by period
Total
<=1 yr
2007
2–3 yrs
2008–200
3–5yrs
2010–2011
2012+
$ 478,711
41,834
17,55
44,457
$ 115,083
3,2
3,770
44,457
$ 20,475
8,200
6,632
$ 20,475
8,376
5,741
$ 322,678
21,266
1,452
—
—
—
12,12
3,12
2,000
2,000
5,000
$ 54,726
$ 170,431
$ 37,307
$ 36,52
$ 350,36
1 The above table does not include certain commitments and contingencies which are discussed in Note 9 of Notes to Consolidated Financial Statements.
2 We repaid $36.0 million of the 5% convertible subordinated notes on February 7, 2007.
3 Substantially all of this amount had been ordered on open purchase orders as of December 31, 2006 under existing contracts with the Company. This amount does not
represent minimum contract termination liability.
Given our current cash requirements, we forecast that we will have
sufficient cash to meet our net operating expense requirements and
contractual obligations through 2007. We plan to continue to invest
in our growth and our future cash requirements will depend upon
the timing of these investments. Our capital needs will depend on
many factors, including continued progress in our research and
development programs, progress with preclinical and clinical trials
of our proprietary and partnered product candidates, the time and
costs involved in obtaining regulatory approvals, the costs of
developing and scaling our clinical and commercial manufacturing
operations, the costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims, the need to acquire
licenses to new technologies and the status of competitive products.
To date we have been primarily dependent upon equity and
convertible debt financings for capital and have incurred substantial
debt as a result of our issuances of subordinated notes that are
convertible into our common stock. Our substantial debt, the market
price of our securities, and the general economic climate, among
other factors, could have material consequences for our financial
position and could affect our sources of short-term and long-term
funding. There can be no assurance that additional funds, if and
when required, will be available to us on favorable terms, if at all.
Critical Accounting Policies
The preparation of financial statements in conformity with
U.S. Generally Accepted Accounting Principles (GAAP)
requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period.
We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the
circumstances, the results of which form our basis for making
judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources, and evaluate our
estimates on an ongoing basis. Actual results may differ from
those estimates under different assumptions or conditions.
We have determined that for the periods reported in this report,
the following accounting policies and estimates are critical in
understanding our financial condition and results of our operations.
Revenue Recognition
Product revenues from Exubera Inhalation Powder and Inhalers
are primarily derived from the cost-plus manufacturing and supply
agreement with Pfizer, are subject to quarterly manufacturing
variance adjustments, and are recognized at the earlier of
acceptance of products by Pfizer or 60 days from shipment.
Under generally accepted accounting principles, revenue should
be recognized when the related revenue is fixed and determinable.
Under contracts such as the Pfizer contract, where the right of
return exists, management must make a determination whether to
estimate returns based on historical activity or to defer recognition
of revenue until the contractual right of return period has lapsed.
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Because commercial activities began in 2006, we did not have
historical return data to use as a basis for product returns. To date,
Pfizer has not returned any Exubera Inhalation Powder or Inhalers.
Product revenues and the related cost of goods sold for products
that were shipped to Pfizer but have not been recognized within
60 days are recorded as deferred revenue, net of the deferred
costs. As of December 31, 2006, we had net deferred margin
relating to Exubera sales of $5.2 million, comprised of $23.1 million
of deferred revenue and $17. million of deferred cost of sales. In
the future, in lieu of deferring all revenue and related cost of sales,
we expect to recognize revenue upon shipment of goods to Pfizer,
net of a reserve for estimated product returns. We will make this
change when we are able to reasonably estimate returns based on
historical return experience and other factors.
Contract research revenue includes amortization of up-front fees.
Up-front fees should be recognized ratably over the expected
benefit period under the arrangement. Given the uncertainties of
research and development collaborations, significant judgment is
required to determine the duration of the arrangement. We have
$17.7 million of deferred up-front fees related to two research and
collaboration agreements that are being amortized over an average
of 10 years. We considered shorter and longer amortization periods.
The shortest reasonable period is the end of the development
period (estimated to be 4 to 6 years). Given the statistical
probability of drug development success in the bio-pharma industry,
development programs have only a 5%-10% probability of reaching
commercial success. The longest period is either the contractual
life of the agreement, which is generally 10 years from the first
commercial sale, or the end of the patent life, which is frequently
15–17 years. If we had determined a longer or shorter amortization
period was appropriate, our annual up-front fee amortization could
be as low as $1.0 million or as high as $4.4 million.
Milestone payments received are deferred and recorded as
revenue ratably over the next period of continued development.
Management makes its best estimate of the period of time until
the next milestone is reached. This estimate affects the recognition
of revenue for completion of the previous milestone. The original
estimate is periodically evaluated to determine if circumstances
have caused the estimate to change and if so, amortization of
revenue is adjusted prospectively.
Stock-Based Compensation
During 2006, we issued RSU awards totaling 1,088,300 shares
of our common stock to certain employees and directors. The RSU
awards are settled by delivery of shares of our common stock on
or shortly after the date the awards vest. A significant portion of
these awards vest base upon achieving three pre-determined
performance milestones which were initially expected to occur
over a period of 40 months. We are expensing the grant date fair
value of the awards ratably over the expected performance period.
During the period ended September 30, 2006 management
determined that one of the milestones, representing 40% of the
total awards, was no longer probable (as defined in SFAS No. 5:
Accounting for Contingencies) of vesting. As a result, we reversed
all previously recorded compensation expense related to this
performance milestone, or approximately $0.8 million. If we had
determined that this milestone was probable, we would have
expensed an additional $1. million during the year ended
December 31, 2006. The remaining 60% of the performance
based RSUs are expected to vest over a 27 month period
from the award date. We recorded compensation expense of
$5.0 million in the year ended December 31, 2006 related to
the remaining 60% of these performance-based RSU awards.
Impairment of Goodwill and Other Long-Lived Assets
In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill is tested for impairment at least annually or on an
interim basis if an event occurs or circumstances change that would
Indicate the carrying value may not be fully recoverable.
Goodwill is tested for impairment using a two-step approach.
The first step is to compare our fair value to our net asset value,
including goodwill. If the fair value of net assets is greater than our
book value of net assets, goodwill is not considered impaired and
the second step is not required. If the fair value is less than our net
asset value, the second step of the impairment test measures the
amount of the impairment loss, if any. The second step of the
impairment test is to compare the implied fair value of goodwill to
its carrying amount. If the carrying amount of goodwill exceeds its
implied fair value, an impairment loss is recognized equal to that
excess. The implied fair value of goodwill is calculated in the same
manner that goodwill is calculated in a business combination,
whereby the fair value is allocated to all of the assets and liabilities
(including any unrecognized intangible assets) as if they had been
acquired in a business combination and the fair value was the
purchase price. The excess “purchase price” over the amounts
assigned to assets and liabilities would be the implied fair value
of goodwill.
In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we perform a test for recoverability
of our intangible and other long-lived assets whenever events or
changes in circumstances indicate that the carrying value of the
assets may not be recoverable. An impairment loss would be
recognized only if the carrying amount of an intangible or long-lived
asset exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposal of the asset.
In December 2005, we were apprised of unfavorable results at
our Bradford, UK facility and certain clinical data related to those
activities. We re-performed our annual impairment test of the
goodwill assigned to the Super Critical Fluids reporting unit.
We determined the fair value of the Super Critical Fluids reporting
unit, based on a discounted cash flow analysis, was less than the
carrying amount of the reporting units assets, including assigned
goodwill. Consequently, we recorded an impairment charge of
$5.6 million in the year ended December 31, 2005. In connection
with this impairment, we also impaired certain equipment used at
the Bradford location resulting an additional charge of $5.7 million.
These charges are reflected in the Impairment of long-lived assets
line item in our Consolidated Statements of Operations. See Note
13 in Notes to Consolidated Financial Statements for more
information regarding the winding down of the Bradford facility.
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Management’s Discussion and analysis of
Financial condition and Results of Operations (continued)
During the second half of 2006, we began a process of evaluating
business activities outside our focus areas of pulmonary technology
and PEGylation technology. In late December 2006, we entered
into a non-binding letter of intent to sell our nebulizer device
business. We determined that the non-binding letter of intent to
sell the nebulizer device business, coupled with our general efforts
to focus on core technologies, were indicators that our intangible
asset related to these products acquired from the 2005 Aerogen
acquisition does not have future value. After reassessing the
remaining useful life of this intangible asset and evaluating the
historical net losses from the nebulizer device business, we
determined the intangible asset was fully impaired and recorded
a $5.5 million charge for the year ended December 31, 2006.
This charge is reflected in the Impairment of long-lived assets line
item in our Consolidated Statements of Operations.
Recent Accounting Pronouncements
SFAS No. 157
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair
value measurements, but provides guidance on how to measure fair
value by providing a fair value hierarchy used to classify the source
of the information. This statement is effective beginning in October
2008. We are evaluating whether adoption of this statement will
result in a change to its fair value measurements.
SAB No. 108
In September 2006, the SEC issued SAB No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements.
SAB 108 requires analysis of misstatements using both an income
statement (rollover approach) and a balance sheet (iron curtain)
approach in assessing materiality and provides for a one-time
cumulative effect transition adjustment. SAB 108 is effective
for the Company’s fiscal year 2007 annual financial statements.
We do not expect the adoption of the statement to have a material
impact on its consolidated results of operations, financial position
or cash flows.
FIN 48
In July 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes. This interpretation, among other things,
creates a two-step approach for evaluating uncertain tax positions.
Recognition occurs when an enterprise concludes that a tax
position, based on its technical merits, is more likely than not to be
sustained upon examination. Measurement determines the amount
of benefit that more likely than not will be realized. De-recognition
of a tax position that was previously recognized would occur when
a company subsequently determines that a tax position no longer
meets the more-likely-than-not threshold of being sustained.
FIN 48 specifically prohibits the use of a valuation allowance as a
substitute for de-recognition of tax positions, and it has expanded
disclosure requirements. FIN 48 is effective for fiscal years
beginning after December 15, 2006, in which the impact of
adoption should be accounted for as a cumulative-effect adjustment
to the beginning balance of retained earnings. We believe adoption
of this pronouncement will not impact our financial position, results
of operation or cash flows due to our history of net losses and
fully reserved deferred tax assets, however we are still evaluating
FIN 48 and have not yet determined the impact the adoption will
have on the our tax disclosures in the Notes to the Consolidated
Financial Statements.
Quantitative and Qualitative Disclosures about Market Risk
interest rate risk
The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, we invest in
highly liquid and high quality debt securities. Our investments in
debt securities are subject to interest rate risk. To minimize the
exposure due to an adverse shift in interest rates, we invest in short
term securities and maintain a weighted average maturity of one
year or less.
A hypothetical 50 basis point increase in interest rates would result
in an approximate $0.7 million decrease, less than 0.5%, in the fair
value of our available-for-sale securities at December 31, 2006.
This potential change is based on sensitivity analyses performed
on our investment securities at December 31, 2006. Actual results
may differ materially. The same hypothetical 50 basis point increase
in interest rates would have resulted in an approximate $1.1 million
decrease, less than 1%, in the fair value of our available-for-sale
securities at December 31, 2005.
FOreign currency risk
Our operations include research and development, manufacturing,
sales and purchasing activities in the U.S. and Europe. As a result,
our financial results could be affected by factors such as changes
in foreign currency exchange rates or economic conditions in
the foreign markets in which we have exposure. Our results of
operations are exposed to changes in exchange rates between the
U.S. dollar and various foreign currencies, most significantly the
British pound and Euro.
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Report of independent
Registered Public accounting Firm
The Board of Directors and Shareholders of
Nektar Therapeutics
We have audited the accompanying consolidated balance sheets of Nektar Therapeutics as of December 31, 2006 and 2005, and
the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2006. Our audits also included the financial statement schedule listed in the index at 15(a). These financial statements
and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Nektar Therapeutics at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
As discussed in Notes 1 and 15 to the Notes to Consolidated Financial Statements, in fiscal 2006 Nektar Therapeutics changed its
method of accounting for stock-based compensation in accordance with guidance provided in Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of Nektar Therapeutics’ internal control over financial reporting as of December 31, 2006, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 28, 2007 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 28, 2007
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Report of independent
Registered Public accounting Firm
The Board of Directors and Shareholders of
Nektar Therapeutics
We have audited management’s assessment, included in the accompanying “Management’s Report on Internal Control over Financial
Reporting,” that Nektar Therapeutics maintained effective internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Nektar Therapeutics’ management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion
on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Nektar Therapeutics maintained effective internal control over financial reporting as
of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Nektar Therapeutics
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Nektar Therapeutics as of December 31, 2006 and 2005, and the related consolidated statements
of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006, of
Nektar Therapeutics and our report dated February 28, 2007 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 28, 2007
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Management’s Report on
internal control Over Financial Reporting
As Nektar’s Chief Executive Officer and Chief Financial Officer, we are responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-l5(f) under the Securities Exchange Act of 134). Our internal control system is
designed to provide reasonable assurance to management, users of our financial statements and our board of directors regarding the
reliability of financial reporting and preparation of published financial statements in accordance with accounting principles generally
accepted in the United States (“GAAP”).
A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of
performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency,
or combination of control deficiencies, that adversely affects the company’s ability to initiate, authorize, record, process, or report external
financial data reliably in accordance with GAAP such that there is a more than a remote likelihood that a misstatement of the company’s
annual or interim financial statements, which is more than inconsequential will not be prevented or detected. A material weakness is a
control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected.
Our management has assessed our internal control over financial reporting using the criteria issued in the report Internal Control—
Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our
management has concluded that our internal control over financial reporting was effective as of December 31, 2006.
Our independent registered public accounting firm has issued an attestation report on management’s assessment of our internal control
over financial reporting which is included elsewhere herein.
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nektar Therapeutics
consolidated Balance Sheets
(In thousands, except per share information)
December 31,
aSSetS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance of $357 and $70
at December 31, 2006 and 2005, respectively.
Inventory
Other current assets
Total current assets
Long-term investments
Property and equipment, net
Goodwill
Other intangible assets, net
Other assets
Total assets
liaBilitieS anD StocKholDerS’ eQuity
Current liabilities:
Accounts payable
Accrued compensation
Accrued expenses
Interest payable
Capital lease obligations, current portion
Deferred revenue, current portion
Convertible subordinated notes, current portion
Other current liabilities
Total current liabilities
Convertible subordinated notes
Capital lease obligations
Deferred revenue
Other long-term liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock
Common stock, $0.0001 par value; 300,000 authorized; 1,280 shares and
87,707 shares issued and outstanding at December 31, 2006 and 2005, respectively
Capital in excess of par value
Deferred compensation
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
26
26
2006
2005
$
63,760 $ 261,273
394,880
214,28
47,148
14,656
14,595
12,44
18,627
12,521
$
535,039 $ 51,843
8,337
133,812
78,431
3,626
8,932
0,222
142,127
78,431
13,452
14,47
$
768,177 $ 858,554
$
8,160 $
12,994
16,987
3,814
711
16,409
102,653
3,586
16,131
10,385
12,43
3,71
536
15,487
—
10,826
$
165,314 $
6,55
315,000
19,759
23,697
17,347
417,653
20,470
8,374
15,651
$
541,117 $
531,743
—
—
9
1,283,982
—
62
1,233,60
(2,4)
(1,707)
(1,056,993) (02,232)
227,060
326,811
$
768,177 $ 858,554
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27
nektar Therapeutics
consolidated Statements Of Operations
(in thousands, except per share information)
Revenue:
Product sales and royalties
Contract research
Exubera commercialization readiness
Total revenue
Operating costs and expenses:
Cost of goods sold
Exubera commercialization readiness costs
Research and development
General and administrative
Litigation settlement
Amortization of intangible assets
Impairment of long lived assets
Purchased in-process research and development
Total operating costs and expenses
Loss from operations
Interest income
Interest expense
Other income (expense), net
Loss on extinguishment of debt
Loss before (provision) benefit for income taxes
(Provision) benefit for income taxes
Net loss
Basic and diluted net loss per share
Shares used in computing basic and diluted net loss per share
The accompanying notes are an integral part of these consolidated financial statements.
26
26
Years ended December 31,
2006
2005
2004
$ 153,556 $ 2,366 $
56,303
7,859
81,602
15,311
25,085
8,185
—
$ 217,718 $ 126,27 $ 114,270
113,921
4,168
149,381
78,319
17,710
4,039
9,410
—
23,728
12,268
151,65
43,852
—
4,206
65,340
7,85
1,78
—
133,523
30,67
—
3,24
—
—
$ 376,948 $ 308,12 $ 188,212
(159,230)
23,450
(20,256)
2,103
—
(182,633)
13,022
(14,085)
(1,24)
(303)
(73,42)
6,602
(25,747)
26
(,258)
$ (153,933) $ (185,248) $ (102,04)
163
(828)
137
$ (154,761) $ (185,111) $ (101,886)
$
(1.72) $
(2.15) $
(1.30)
89,789
85,15
78,461
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nektar Therapeutics consolidated
Statements Of Stockholders’ equity
(in thousands)
Preferred
Shares
Common
Shares
Amount
Par
Shares Paid In Shares Value
Accumulated
Other
Capital In
Excess of
Par Value Compensation Income/(Loss)
Deferred
Comprehensive Accumulated Stockholders’
Deficit
Equity
Total
40
—
56,17
6
778,500
(38)
58
(615,235)
164,11
—
—
1,817 —
13,665
—
—
,500
1
16,411
—
(20)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15,74
1
11,281
880 —
—
— —
— —
— —
126 —
66 —
12 —
— —
— —
— —
678
247
3,02
1,285
1,158
—
448
—
—
—
—
—
—
—
—
(2,726)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
13,665
—
16,412
—
11,282
—
—
—
—
—
—
—
—
678
247
1,176
1,285
1,158
—
—
—
—
—
(1,314)
—
—
—
(101,886)
448
(1,314)
(101,886)
(103,200)
20
—
84,572
8
1,187,575
(2,764)
(356)
(717,121)
467,342
Balance at December 31, 2003
Common stock issued upon
exercise of stock options
Common stock issued in
secondary offering net of
issuance costs of $3,088
Conversion of convertible
subordinated debentures net
of issuance costs of $2,315
Preferred stock purchased
by Enzon, Inc.
Compensation in connection
with stock options granted
to consultants
Compensation in connection
with severance
Amortization of deferred
compensation
Shares issued for ESPP
Shares issued for retirement plans
Exercise of warrants
Tax benefit related to employee
stock option exercises
Other comprehensive income (loss)
Net loss
Comprehensive loss
Balance at December 31, 2004
Common stock issued upon
exercise of stock options
Common stock issued in secondary
offering net of issuance
costs of $427
Compensation in connection
with stock options granted
—
—
1,015 —
,621
—
—
1,81
1
31,563
—
—
—
—
—
—
to consultants
—
—
— —
208
Amortization of deferred
compensation
Shares issued for ESPP
Shares issued for retirement plans
Other comprehensive income (loss)
Net loss
Comprehensive loss
—
—
—
—
—
—
—
—
—
—
34 —
108 —
87 —
— —
— —
2,03
1,23
1,445
—
—
(185)
—
—
—
—
—
—
—
(1,351)
—
—
,621
—
31,564
—
208
—
—
—
—
(185,111)
1,854
1,23
1,445
(1,351)
(185,111)
(186,462)
Balance at December 31, 2005
20
—
87,707 $
$ 1,233,60
$ (2,4)
$ (1,707)
$
(02,232) $ 326,811
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nektar Therapeutics consolidated
Statements Of Stockholders’ equity (continued)
(in thousands)
Preferred
Shares
Common
Shares
Amount
Par
Shares Paid In Shares Value
Accumulated
Other
Capital In
Excess of
Par Value Compensation Income/(Loss)
Deferred
Comprehensive Accumulated Stockholders’
Total
Common stock issued upon
exercise of stock options
Stock-based compensation
Compensation in connection
with stock options granted
to consultants
Conversion of preferred Stock
Exercise of warrants
Transition adjustment upon
adoption of SFAS No 123R
Shares issued for ESPP
Shares issued for retirement plans
Other comprehensive income (loss)
Net loss
Comprehensive loss
—
—
—
(20)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,326 —
— —
20,642
2,143
— —
1,023 —
12 —
—
10 —
103 —
— —
— —
31
—
—
(2,4)
1,617
1,808
—
—
—
—
—
—
—
2,4
—
—
—
—
—
—
—
—
—
—
—
—
1,76
—
Deficit
Equity
—
—
—
—
—
—
—
—
—
(154,761)
20,642
2,143
31
—
—
—
1,617
1,808
1,76
(154,761)
(152,2)
Balance at December 31, 2006
—
—
91,280 $ 9
$ 1,283,982
$
—
$
62
$ (1,056,993) $ 227,060
The accompanying notes are an integral part of these consolidated financial statements.
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consolidated Statements Of cash Flows
(in thousands)
cash flows used in operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Stock-based compensation
Impairment of long-lived assets
Amortization of gain related to sale of building
Gain on disposal of investment
Loss on termination of capital lease
Loss (gain) on sale or disposal of assets
Loss on extinguishment of debt
In process research and development
Tax benefit related to employee stock option exercises
Changes in assets and liabilities:
Decrease (increase) in trade accounts receivable
Decrease (increase) in inventories
Decrease (increase) in other assets
Increase (decrease) in accounts payable
Increase (decrease) in accrued compensation
Increase (decrease) in accrued expenses
Increase (decrease) in interest payable
Increase (decrease) in deferred revenue
Increase (decrease) in other liabilities
Net cash used in operating activities
cash flows from investing activities:
Purchases of investments
Sales of investments
Maturities of investments
Business acquisition, net of cash acquired
Purchases of property and equipment
Proceeds from sale of partnership interest
Net cash provided by (used in) investing activities
cash flows from financing activities:
Proceeds from debt and capital lease financing
Payments of loan and capital lease obligations
Proceeds from convertible subordinated notes
Repurchase of convertible subordinated notes
Issuance of common stock, net of issuance costs
Net cash provided by financing activities
Effect of exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flows information (in thousands):
Cash paid for interest
Cash paid for income taxes
Supplemental schedule of non-cash investing and financing activities (in thousands):
Conversion of debt into common stock
Deferred compensation related to the issuance of stock options
The accompanying notes are an integral part of these consolidated financial statements.
30
Years ended December 31,
2006
2005
2004
$ (154,761) $ (185,111) $ (101,886)
33,509
30,982
9,410
(874)
(2,252)
—
123
—
—
—
(34,654)
3,971
1,095
(7,971)
3,581
4,548
23
16,245
4,310
25,311
3,507
65,340
(34)
—
1,136
—
303
7,85
—
2,468
(7,420)
(3,542)
,00
1,756
4,823
1,781
(7,174)
2,80
18,011
3,25
—
—
—
—
(462)
,258
—
448
(7,404)
(2,132)
(3,686)
(1,384)
(446)
(1,373)
(426)
11,341
(1,260)
$
(92,715) $
(77,8) $
(78,142)
(502,230)
2,252
405,622
—
(22,524)
(234,1)
88,50
227,113
(30,714)
(17,55)
—
—
(534,717)
177,547
220,260
—
(27,14)
22,450
$ (116,880) $ 32,403 $ (141,654)
—
(10,488)
261
(2,517)
—
—
22,259
305,645
(70,64)
42,424
4,3
(7,71)
—
(376)
211,362
$
11,771 $ 274,84 $ 207,414
311
(45)
—
$ (197,513) $ 22,20 $
261,273
32,064
(12,382)
44,446
$
63,760 $ 261,273 $
32,064
$
$
$
$
14,371 $ 12,468 $
27 $
— $
25,226
238
— $
— $
— $ 186,02
3,02
2,03 $
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31
notes To consolidated Financial Statements
December 31, 2006
nOte 1—OrganizatiOn and summary
OF signiFicant accOunting pOlicies
OrganizatiOn and Basis OF presentatiOn
We are a biopharmaceutical company headquartered in San Carlos,
California and incorporated in Delaware. Our mission is to develop
breakthrough products that make a difference in patients’ lives. We
create differentiated, innovative products by applying our platform
technologies to established or novel medicines. Our two leading
technology platforms are Pulmonary Technology and PEGylation
Technology. Nine products using these technology platforms have
received regulatory approval in the U.S. or the European Union (EU).
Our two technology platforms are the basis of substantially all of the
partnered and proprietary programs. In June 2006, we terminated
the research and development activity related to the Nektar Super
Critical Fluids Technology, which was conducted at our Bradford,
UK facility.
principles OF cOnsOlidatiOn
and use OF estimates
Our consolidated financial statements include the financial position
and results of operations and cash flows of our wholly-owned
subsidiaries: Nektar Therapeutics AL, Corporation (“Nektar AL”);
Nektar Therapeutics UK, Ltd. (“Bradford”), Nektar Therapeutics
(India) Private Limited, and Aerogen Inc. All intercompany accounts
and transactions have been eliminated in consolidation.
Our consolidated financial statements are denominated in U.S.
dollars. Accordingly, changes in exchange rates between the
applicable foreign currency and the U.S. dollar will affect the
translation of each foreign subsidiary’s financial results into U.S.
dollars for purposes of reporting our consolidated financial results.
Translation gains and losses are included in accumulated other
comprehensive loss in the stockholders’ equity section of the
balance sheet. To date, such cumulative translation adjustments
have not been material to our consolidated financial position.
The preparation of financial statements in conformity with U.S.
Generally Accepted Accounting Principles (“GAAP”) requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
reclassiFicatiOns
Certain items previously reported in specific financial statement
captions have been reclassified to conform to the current period
presentation. Such reclassifications have not impacted previously
reported revenues, operating loss or net loss.
Fair value OF Financial instruments
The carrying amounts of certain of the Company’s financial
instruments, including cash and cash equivalents, accounts
receivable, accounts payable, accrued compensation and
other accrued liabilities, approximate fair value because of
their short-term maturities.
signiFicant cOncentratiOns
Our customers are primarily pharmaceutical and biotechnology
companies that are located in the U.S. and EU. Our accounts
receivable balance contains billed and unbilled trade receivables
from product sales and royalties, collaborative research agreements,
and commercialization readiness revenue. We provide for an
allowance for doubtful accounts by reserving for specifically
identified doubtful accounts. We have not experienced significant
credit losses from our accounts receivable or collaborative
research agreements and none are expected. We perform a
regular review of our customers’ payment histories and associated
credit risk. We generally do not require collateral from our
customers. At December 31, 2006, three different customers
represented 56%, 15% and 14%, respectively, of our accounts
receivable. At December 31, 2005, two customers represented
48% and 10%, respectively, of our accounts receivable.
We are dependent on our partners, vendors and contract
manufacturers to provide raw materials, drugs and devices of
appropriate quality and reliability and to meet applicable regulatory
requirements. Consequently, in the event that supplies are delayed
or interrupted for any reason, our ability to develop and produce our
products could be impaired, which could have a material adverse
effect on our business, financial condition and results of operation.
cash, cash equivalents and investments
We consider all investments in marketable securities with an
original maturity of three months or less to be cash equivalents.
Investments are designated as available-for-sale and are carried
at fair value, with unrealized gains and losses reported in
stockholders’ equity as accumulated other comprehensive
income (loss). The disclosed fair value related to our investments
is based primarily on the reported fair values in our period-end
brokerage statements. We independently validate these fair values
using available market quotes and other information. Investments
with maturities greater than one year from the balance sheet date
are classified as long-term.
Interest and dividends on securities classified as available-for-sale,
as well as amortization of premiums and accretion of discounts
to maturity, are included in interest income. Realized gains and
losses and declines in value of available-for-sale securities judged
to be other-than-temporary, if any, are included in other income
(expense). The cost of securities sold is based on the specific
identification method.
inventOries
Inventories are computed on a first-in, first-out basis and stated
net of reserves at the lower of cost or market.
prOperty and equipment
Property and equipment are stated at cost. Major improvements
are capitalized, while maintenance and repairs are expensed
when incurred. Manufacturing, laboratory and other equipment
are depreciated using the straight-line method generally over
estimated useful lives of three to seven years. Leasehold
improvements and buildings are depreciated using the
straight-line method over the shorter of the estimated useful
life or the remaining term of the lease.
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31
30
notes To consolidated Financial Statements
December 31, 2006 (continued)
In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we periodically review our property
and equipment for recoverability whenever events or changes
in circumstances indicate that the carrying value may not be
recoverable. Generally, an impairment loss would be recognized
if the carrying amount of an asset exceeds the sum of the
discounted cash flows expected to result from the use and
eventual disposal of the asset.
gOOdwill
Goodwill represents the excess of the price paid for another
entity over the fair value of the assets acquired and liabilities
assumed in a business combination. We account for our goodwill
asset in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, and test for impairment as of October 1 each
year, as well as at other times when impairment indicators exists
or when events occur or circumstances change that would indicate
the carrying amount may not be fully recoverable. For purposes of
our annual impairment test, we have identified and assigned
goodwill to two reporting units (as defined in SFAS No. 142)
Pulmonary Technology and Advanced PEGylation Technology.
Goodwill is tested for impairment at the reporting unit level
using a two-step approach. The first step is to compare the fair
value of a reporting unit’s net assets, including assigned goodwill,
to the book value of its net assets, including assigned goodwill.
If the fair value of the reporting unit is greater than its net book
value, the assigned goodwill is not considered impaired. If the fair
value is less than the reporting unit’s net book value, we perform
a second step to measure the amount of the impairment, if any.
The second step would be to compare the book value of the
reporting unit’s assigned goodwill to the implied fair value of
the reporting unit’s goodwill. At December 31, 2006, there
were no indications of impairment.
Other intangiBle assets
Other intangible assets include proprietary technology, intellectual
property, and supplier and customer relationships acquired from
third parties or in business combinations. Other intangible assets
with a finite useful life are amortized ratably over their estimated
useful lives, which we currently estimate to be a period of five
years. Once an intangible asset is fully amortized, we remove
the gross costs and accumulated amortization from our
Consolidated Balance Sheets.
In accordance with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, we periodically review our
intangible assets for recoverability whenever events or changes
in circumstances indicate that the carrying value may not be
recoverable. Generally, an impairment loss would be recognized
if the carrying amount of an intangible asset exceeds the sum of
the discounted cash flows expected to result from the use and
eventual disposal of the assets.
revenue recOgnitiOn
We recognize revenue in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 104,
“Revenue Recognition in Financial Statements” (“SAB 104”) and
Emerging Issues Task Force, Issue No. 00-21 (“EITF 00-21”),
“Revenue Arrangements with Multiple Deliverables.”
Revenue is recognized when there is persuasive evidence that an
arrangement exists, delivery has occurred, the price is fixed and
determinable, and collection is reasonably assured. Allowances are
established for estimated sales returns and uncollectible amounts.
Product Sales and Royalty Revenue
Product revenues from Exubera Inhalation Powder and Inhalers are
primarily derived from the cost-plus manufacturing and supply
agreement with Pfizer, are subject to quarterly manufacturing
variance adjustments, and are recognized at the earlier of
acceptance of products by Pfizer or 60 days from shipment.
Product revenues and the related cost of goods sold for products
that were shipped to Pfizer but have not been recognized within
60 days are recorded as deferred revenue, net of the deferred
costs. To date, Pfizer has not returned any Exubera Inhalation
Powder or Inhalers.
Product revenues from our PEGylation Technology platform
are primarily derived from cost-plus manufacturing and supply
agreements with customers in our industry, and are recognized
in accordance with the terms of the related contract. We have
not experienced any significant returns from our customers.
Generally, we are entitled to royalties from our customers based
on their net sales. We recognize royalty revenue when the cash is
received or when the royalty amount to be received is estimable and
collection is reasonably assured. Royalties from the sale of Exubera
Inhalation Powder and Exubera Inhalers were insignificant during
the year ended December 31, 2006.
Contract Research Revenue
We enter into collaborative research and development
arrangements with pharmaceutical and biotechnology partners that
may involve multiple deliverables. Our arrangements may contain
the following elements: upfront fees, collaborative research,
milestone payments, manufacturing and supply, royalties and license
fees. The principles and guidance outlined in EITF No. 00-21
provide a framework to (a) determine whether an arrangement
involving multiple deliverables contains more than one unit of
accounting, and (b) determine how the arrangement consideration
should be measured and allocated to the separate units of
accounting in the arrangement. Significant judgment is required
when determining the separate units of accounting and the fair
value of individual deliverables. For each separate unit of accounting
we have objective and reliable evidence of fair value using available
internal evidence for the undelivered item(s) and our arrangements
generally do not contain a general right of return relative to the
delivered item. We use the residual method to allocate the
arrangement consideration when it does not have fair value of
a delivered item(s). Under the residual method, the amount of
consideration allocated to the delivered item equals the total
arrangement consideration less the aggregate fair value of the
undelivered items.
Contract research revenue from collaborative research and
development agreements is recorded when earned based on the
performance requirements of the contract. Advance payments for
research and development revenue received in excess of amounts
earned are classified as deferred revenue until earned. Amounts
received under these arrangements are generally non-refundable
even if the research effort is unsuccessful.
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notes To consolidated Financial Statements
December 31, 2006 (continued)
32
Payments received for milestones achieved are deferred and
recorded as revenue ratably over the next period of continued
development. Management makes its best estimate of the period of
time until the next milestone is reached. This estimate affects the
recognition of revenue for completion of the previous milestone.
The original estimate is periodically evaluated to determine if
circumstances have caused the estimate to change and if so,
amortization of revenue is adjusted prospectively. Final milestone
payments are recorded and recognized upon achieving the
respective milestone, provided that collection is reasonably assured.
Exubera Commercialization Readiness Revenue
Exubera commercialization readiness revenue represents
reimbursements from Pfizer, of certain agreed upon operating costs
relating to our Exubera Inhalation Powder manufacturing facilities
and our device contract manufacturing locations in preparation for
commercial production, plus a markup on such costs. Exubera
commercialization readiness costs are start up manufacturing costs
we have incurred in our Exubera Inhalation Powder manufacturing
facility and our Exubera Inhaler device contract manufacturing
locations in preparation for commercial production. We do not
anticipate incurring any additional costs related to commercialization
readiness in connection with the ongoing commercial launch of
Exubera, but will continue to recognize revenue and amortize the
remaining commercialization readiness costs previously incurred in
accordance with our reimbursement arrangement with Pfizer
through October, 2007.
shipping and handling cOsts
We record costs related to shipping and handling of product to
customers in cost of goods sold.
stOck-Based cOmpensatiOn
Stock-based compensation arrangements covered by SFAS No.
123R currently include stock option grants and restricted stock unit
(“RSU”) awards under our option plans and purchases of common
stock by our employees at a discount to the market price under our
Employee Stock Purchase Plan (“ESPP”). Stock compensation
expense is recorded ratably over the vesting period of stock option
or performance period of the RSU. Stock-based compensation
expense for purchases under the ESPP are recognized based on
the estimated fair value of the common stock during each offering
period and the percentage of the purchase discount.
Prior to January 1, 2006, we accounted for stock-based employee
compensation plans using the intrinsic value method of accounting
in accordance with APB Opinion No. 25 (“APB No. 25”), Accounting
for Stock Issued to Employees, and related interpretations. Under
the provisions of APB No. 25, no compensation expense was
recognized with respect to employee purchases of our common
stock under the ESPP or when stock options were granted with
exercise prices equal to or greater than market value on the date
of grant. However, for stock-based awards issued below the market
price of our common stock on the grant date, we were required to
record deferred compensation for this intrinsic value and expense
this value ratably over the underlying vesting period.
Effective January 1, 2006, we adopted the fair value method of
accounting for stock-based compensation arrangements in
accordance with SFAS No. 123R: Accounting for Share-Based
Payment (“SFAS No. 123R”) using the modified prospective method
of transition. Under the modified prospective method of
transition, we are not required to restate our prior period financial
statements to reflect expensing of stock-based compensation
under SFAS No. 123R. Therefore, the results for the year ended
December 31, 2006 are not directly comparable to the years
ended December 31, 2005 and 2004.
We use the Black-Scholes option valuation model adjusted for
the estimated historical forfeiture rate for the respective grant
to determine the estimated fair value of our stock-based
compensation arrangements on the date of grant (“grant date fair
value”) and expense this value ratably over the estimated life of the
option or performance period of the RSU award. We have separated
the employee population into two groups for valuation purposes,
including forfeiture rates: (1) executive management and board
members (executives) and (2) all other employees (staff). Expense
amounts are allocated among cost of revenue, research and
development expenses for drug discovery, and general and
administrative expenses based on the function of the applicable
employee. The Black-Scholes option pricing model requires the
input of highly subjective assumptions. Because our employee
stock options have characteristics significantly different from
those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate,
in management’s opinion, the existing models may not provide
a reliable single measure of the fair value of our employee stock
options or common stock purchased under the ESPP. In addition,
management will continue to assess the assumptions and
methodologies used to calculate estimated fair value of stock-based
compensation. Circumstances may change and additional data may
become available over time, which could result in changes to these
assumptions and methodologies, and which could materially impact
our fair value determination.
In November of 2005, the FASB issued FASB Staff Position
FAS 123(R)-3, “Transition Election Related to Accounting for
the Tax Effects of Share Base Payment Awards,” which allowed a
one-time election to adopt one of two acceptable methodologies
for calculating the initial additional paid-in capital pool (“APIC pool”).
We elected the “short-cut” method to establish our APIC pool
required under FAS 123(R) for the year ended December 31, 2006.
In subsequent periods, the APIC pool will be increased by tax
benefits from stock-based compensation and decreased by tax
deficiencies caused when the recorded stock-based compensation
for book purposes exceeds the allowable tax deduction.
research and develOpment expense
Research and development costs are expensed as incurred
and include salaries, benefits and other operating costs such
as outside services, supplies and allocated overhead costs.
We perform research and development for our proprietary
products and technology development and for others pursuant
to collaboration agreements. For our proprietary products and
our internal technology development programs, we invest our
own funds without reimbursement from a third party. Costs
associated with treatment phase of clinical trials are accrued based
on the total estimated cost of the clinical trials and are expensed
ratably based on patient enrollment in the trials. Costs associated
with the start-up and reporting phases of the clinical trials are
expensed as incurred.
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33
notes To consolidated Financial Statements
December 31, 2006 (continued)
Collaboration agreements typically include the development and
licensing of our technology. Under these agreements, we may be
reimbursed for development costs, entitled to milestone payments
when and if certain development or regulatory milestones are
achieved, compensated for the manufacture and supply of clinical
and commercial product and entitled to royalties on sales of
commercial product. All of our collaboration agreements are
generally cancelable by the partner without significant financial
penalty. Certain collaboration agreements may involve feasibility
research which is designed to evaluate the applicability of our
technologies to a particular molecule. Due to the nature of this
research, we are reimbursed for the cost of work performed and
our commitment is generally completed in less than one year.
From time to time we acquire in-process research and development
programs as part of strategic business acquisitions. Generally,
in-process research and development purchased in a business
combination is expensed on the acquisition date primarily because
the acquired technology has not yet reached technological
feasibility and has no future alternative use. In the year ended
December 31, 2005, we recorded a charge of $7. million for
in-process research and development costs in connection with
our acquisition of Aerogen.
net lOss per share
Basic net loss per share is calculated based on the weighted-
average number of common shares outstanding during the periods
presented. For all years presented in the Consolidated Statements
of Operations, the net loss available to common shareholders is
equal to the reported net loss. Basic and diluted net loss per share
are the same due to our historical net losses and the requirement
to exclude potentially dilutive securities which would have an
anti-dilutive effect on net loss per share. These potentially dilutive
securities have been excluded from the diluted net loss per share
calculation and are as follows (in thousands):
Convertible subordinated notes
Stock options and restricted
stock units
Warrants
Convertible preferred stock
Total
December 31,
2006
2005
2004
16,896
16,86
3,831
7,049
16
—
6,481
36
1,023
5,862
36
875
23,961
24,436 10,604
incOme taxes
We account for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax reporting bases of
assets and liabilities and are measured using enacted tax rates and
laws that are expected to be in effect when the differences are
expected to reverse. Realization of deferred tax assets is dependent
upon future earnings, the timing and amount of which are uncertain.
Because of our lack of earnings history, our net deferred tax assets
have been fully reserved.
recent accOunting prOnOuncements
sFas no. 157
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework
for measuring fair value in GAAP, and expands disclosures about
fair value measurements. SFAS No. 157 does not require any new
fair value measurements, but provides guidance on how to measure
fair value by providing a fair value hierarchy used to classify the
source of the information. This statement is effective beginning in
October 2008. The Company is evaluating whether adoption of this
statement will result in a change to its fair value measurements.
saB 108
In September 2006, the SEC issued SAB 108, Considering
the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB 108
requires analysis of misstatements using both an income statement
(rollover approach) and a balance sheet (iron curtain) approach in
assessing materiality and provides for a one-time cumulative effect
transition adjustment. SAB 108 is effective for the Company’s
fiscal year 2007 annual financial statements. We do not expect
the application of the guidance to have a material impact on its
consolidated results of operations, financial position or cash flows.
sFas no. 123r
In the first quarter of fiscal 2006, the Company adopted SFAS
No. 123R, Share-Based Payment, and recognized stock-based
compensation expense in our financial statements. Adoption of
this statement had a material effect on our consolidated results of
operations. However, adoption did not have a material effect on our
financial position or cash flows. See Note 15 for a discussion of the
impact on operating results for the year ended December 31, 2006.
Fin 48
In July 2006, the FASB issued Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes.” This interpretation, among other
things, creates a two-step approach for evaluating uncertain tax
positions. Recognition occurs when an enterprise concludes that
a tax position, based on its technical merits, is more-likely-than-not
to be sustained upon examination. Measurement determines the
amount of benefit that more-likely-than-not will be realized upon
ultimate settlement. De-recognition of a tax position that was
previously recognized would occur when a company subsequently
determines that a tax position no longer meets the more-likely-
than-not threshold of being sustained. FIN 48 specifically prohibits
the use of a valuation allowance as a substitute for de-recognition
of tax positions, and it has expanded disclosure requirements. FIN
48 is effective for fiscal years beginning after December 15, 2006,
in which the impact of adoption should be accounted for as a
cumulative-effect adjustment to the beginning balance of retained
earnings. We believe adoption of this pronouncement will not impact
our financial position, results of operation or cash flows due to our
history of net losses and fully reserved deferred tax assets, however
we are still evaluating FIN 48 and has not yet determined the
impact the adoption will have on the our tax disclosures in the
Notes to the Consolidated Financial Statements.
34
notes To consolidated Financial Statements
December 31, 2006 (continued)
nOte 2—cash and cash equivalents,
shOrt-term investments, and investments
in marketaBle securities
Cash, cash equivalents and investments in marketable securities are as
follows (in thousands):
Estimated Fair Value
at December 31,
nOte 3—inventOry
Inventory consists of the following (in thousands):
Raw material
Work-in-process
Finished goods
2006
2005
Total
$
December 31,
2006
2005
8, 609 $ 8,050
4,736
2,740
1,311
7,837
$
14,656 $ 18,627
Cash and cash equivalents
Short-term investments
$ 63,760 $ 261,273
(less than one year to maturity)
394,880 214,28
Long-term investments
(one to two years to maturity)
8,337
0,222
Total Cash and Available-for-Sale Securities $ 466,977 $ 566,423
Our portfolio of cash and available for sale debt securities includes
(in thousands):
U.S. corporate commercial paper
Obligations of U.S. corporations
Obligations of U.S. government agencies
Repurchase agreements
Obligations of non U.S. corporations
Cash and other debt securities
Estimated Fair Value
at December 31,
2006
2005
$ 234,512 $ 17,57
151,288 17,128
27,372 123,048
33,948
64,1
—
2,75
19,857
17,476
Total Cash and Available-for-Sale Securities $ 466,977 $ 566,423
Raw materials primarily include materials used in the production of
our PEGylation products. Exubera Inhalers are manufactured and
supplied by two of our contract manufacturers, then drop shipped
to our customer. No inventory of Exubera Inhalers is held at Nektar.
Reserves are determined using specific identification plus an
estimated reserve against finished goods for potential defective or
excess inventory based on historical experience or projected usage.
Inventories are reflected net of reserves of $4.7 million and
$3.1 million as of December 31, 2006 and 2005 respectively.
nOte 4—prOperty and equipment
Property and equipment consist of the following (in thousands):
December 31,
2006
2005
Building and leasehold improvements
Laboratory equipment
Manufacturing equipment
Assets at contract manufacturer locations .
Furniture, fixtures and other equipment
Construction-in-progress
$ 118,574 $ 114,02
41,116
23,2
23,750
1,115
6,05
43,066
23,406
25,886
20,970
8,508
At December 31, 2006 and 2005, the average portfolio duration
was approximately four months, and the contractual maturity of any
single investment did not exceed 24 months.
Property and equipment at cost
$ 240,410 $ 228,871
Less: accumulated depreciation
(106,598)
(86,744)
Property and equipment, net
$ 133,812 $ 142,127
Gross unrealized gains on the portfolio were nil as of both
December 31, 2006 and 2005. Gross unrealized losses
on the portfolio were $ 0.5 million and $ 2.0 million as of
December 31, 2006 and 2005, respectively. We have a history
of holding our investments to maturity. Additionally, we have
the ability and intent to hold our debt securities to maturity when
they will be redeemed at full par value. Accordingly, management
considers these unrealized losses to be temporary and has not
recorded a provision for impairment.
At December 31, 2006 and 2005, we had letter of credit
arrangements with certain financial institutions and vendors,
including our landlord, totaling $2.6 million. These letters of
credit are secured by investments in similar amounts.
Building and leasehold improvements include our commercial
manufacturing, clinical manufacturing, research and development
and administrative facilities and the related improvements to
these facilities. Laboratory and manufacturing equipment primarily
includes assets that support both our manufacturing and research
and development efforts. Assets at contract manufacturer locations
are automated assembly line equipment used in the manufacture of
the inhaler device for Exubera.
Construction-in-progress includes assets being built to enhance our
commercial manufacturing operations and with automated assembly
line equipment located at our contract manufacturers’ sites. As a
result of a contract renegotiation with one of our collaboration
partners in the fourth quarter of 2006, we determined that one of
our construction-in-progress assets would no longer be completed
and we recorded an impairment loss for the costs incurred to date
of $2.7 million. Additionally, as a result of our decision to wind down
Bradford, UK operations, we determined that certain laboratory and
office equipment had no remaining useful life. Consequently, we
recorded impairment charges of $1.2 million and $5.7 million for
the years ended December 31, 2006 and 2005, respectively.
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notes To consolidated Financial Statements
December 31, 2006 (continued)
These charges are reflected in the Impairment of Long-lived
Assets line item in our Consolidated Statements of Operations.
See Note 13 for more information regarding the wind down
of the Bradford operations.
Depreciation expense for the years ended December 31, 2006,
2005 and 2004 was $26.8 million, $1.2 million and
$12.6 million, respectively.
nOte 5—gOOdwill and Other
intangiBle assets
goodwill
As of December 31, 2006 and 2005, carrying value of our goodwill
was $78.4 million, which for purposes of our periodic impairment
evaluations, $6.0 million is assigned to our PEGylation Technology
reporting unit and $.4 million is assigned to our Pulmonary
Technology reporting unit.
In the fourth quarter of 2006, we performed our annual
impairment test for goodwill and determined there was no
indication of impairment.
In December 2005, we were apprised of unfavorable results at
our Bradford, UK facility and certain clinical data related to those
activities. We re-performed our annual impairment test of the
goodwill assigned to the super critical fluids reporting unit. We
determined the fair value of the Super Critical Fluids reporting
unit, based on a discounted cash flow analysis, was less than the
carrying amount of the reporting units assets, including assigned
goodwill. Consequently, we recorded an impairment charge of
$5.6 million in the year ended December 31, 2005. This charge
is reflected in the Impairment of Long-lived Assets line item in our
Consolidated Statements of Operations. See Note 13 for more
information regarding the winding down of the Bradford facility.
Other intangible assets
Other intangible assets are comprised of the following (in thousands except useful lives):
December 31, 2006
December 31, 2005
useful
Gross
life in years carrying amount
accumulated
amortization
Net
Gross
Carrying Amount
Accumulated
Amortization
Core technology
Developed product technology
Intellectual property
Supplier and customer relations
Total
5
5
5–7
5
$
—
—
—
4,730
$
—
—
—
(1,104)
$
— $ 15,270 $
—
—
3,626
2,00
7,301
,870
(7,52)
(2,610)
(6,77)
(4,71)
$ 4,730
$ (1,104)
$ 3,626
$ 35,341 $ (21,88)
$ 13,452
Net
$ 7,741
20
522
4,8
Amortization expense related to other intangible assets totaled
$4.3 million, $4. million and $4.5 million for the years ended
December 31, 2006, 2005, and 2004, respectively.
During the second half of 2006, we began a process of evaluating
business activities outside our focus areas of Pulmonary Technology
and PEGylation Technology. In late December 2006, we entered
into a non-binding letter of intent to sell our nebulizer device
business. We determined that the non-binding letter of intent to sell
the nebulizer device business, coupled with our general efforts to
focus on core technologies, were indicators that our intangible
asset related to these products acquired from the 2005 Aerogen
acquisition does not have future value. After reassessing the
remaining useful life of this intangible asset and evaluating the
historical net losses from the nebulizer device business, we
determined the intangible asset was fully impaired and recorded
a $5.5 million charge for the year ended December 31, 2006.
This charge is reflected in the Impairment of Long-lived Assets
line item in our Consolidated Statements of Operations.
Future amortization expense of our existing supplier and customer
relations intangible asset is approximately $0. million per year until
October 2010, when it will be fully amortized.
36
notes To consolidated Financial Statements
December 31, 2006 (continued)
nOte 6—cOnvertiBle suBOrdinated nOtes
The outstanding balance of our convertible subordinated notes is as follows (in thousands):
5% Notes due February 2007
3.5% Notes due October 2007
3.25% Notes due September 2012
Total outstanding convertible subordinated notes
Less: current portion
Convertible subordinated notes
Our convertible subordinated notes are unsecured and
subordinated in right of payment to our future senior debt.
The carrying value approximates fair value for both periods
presented. Costs related to the issuance of these convertible
notes are recorded in Other Assets in our Consolidated Balance
Sheets and are amortized to interest expense on a straight-line
basis over the contractual life of the notes. The unamortized
deferred financing costs were $7.3 million and $.7 million for
the years ended December 31, 2006 and 2005, respectively.
conversion
The notes are convertible at the option of the holder at any time
on or prior to maturity into shares of our common stock. The
3.25% Notes have a conversion rate of 46.4727 shares per
$1,000 principal amount, which is equal to a conversion price of
approximately $21.52. Additionally, at any time prior to maturity,
if a fundamental change as defined in the 3.25% subordinated
debt indenture occurs, we may be required to pay a make-whole
premium on notes converted in connection therewith by increasing
the conversion rate applicable to the notes. The amount of the
make-whole premium will be determined in accordance with a
table showing the make-whole premium that would apply at various
common stock prices and fundamental change effective dates.
The 3.5% Notes have a conversion rate of 1.8177, which is equal
to a conversion price of $ 50.46 per share.
The 5% Notes were repaid in full on February 7, 2007 and are,
therefore, no longer subject to conversion or redemption.
Semi-Annual
Interest
Payment Dates
August 8,
February 8
April 17,
October 17
March 28,
September 28
December 31,
2006
2005
$
36,026
$ 36,026
66,627
66,627
315,000
315,000
$
417,653
$ 417,653
(102,653)
—
$
315,000
$ 417,653
redemption
Beginning on September 28, 2008, we may redeem the 3.25%
Notes in whole or in part for cash at a redemption price equal to
100% of the principal amount of the 3.25% Notes plus any accrued
but unpaid interest if the closing price of the common stock has
exceeded 150% of the conversion price of the 3.25% notes for at
least 20 days in any consecutive 30 day trading period.
The 3.5% Notes are also redeemable in whole or in part at any
time, at certain redemption prices dependent upon the date of
redemption if the closing price of our Common Stock has exceeded
120% of the conversion price then in effect for at least 20 trading
days within a period of 30 consecutive trading days.
loss on early extinguishment
of convertible subordinated notes
In September 2005, we retired $25.4 million and $45. million
aggregate principal amount of our outstanding 5% Notes
and 3.5% Notes, respectively, in cash, in privately negotiated
transactions. As a result of the transactions, we recognized losses
related to the early extinguishment of approximately $0.3 million.
In January 2004, certain holders of our outstanding 3.5%
Notes completed an exchange and cancellation of $.0 million
in aggregate principal amount of the notes for the issuance of
0.6 million shares of our common stock in a privately negotiated
transaction. In February 2004, certain holders of our outstanding
3% Notes, in privately negotiated transactions, converted
approximately $36.0 million in aggregate principal amount of such
notes for approximately $3.2 million shares of our common stock
and a cash payment of approximately $3.1 million. As a result of
these transactions, we recognized losses on debt extinguishment
of approximately $7.8 million and $1.5 million, respectively.
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notes To consolidated Financial Statements
December 31, 2006 (continued)
nOte 7—capital leases
We lease one of the buildings in our San Carlos facility under a
capital lease arrangement that resulted from a sale-leaseback
transaction completed in 2004. In accordance with SFAS No. 13,
Accounting for Leases, we evaluated the lease at inception and
accounted for it as a capital lease by recording a capital lease
asset and capital lease obligation equal to the fair market value
of approximately $25.5 million. It has a current gross carrying
value of $21.2 million. Accumulated amortization of the building
under the lease was approximately $4.1 million and $2.3 million
as of December 31, 2006 and 2005, respectively. The outstanding
capital lease obligation was $20.3 million and $20.8 million as
of December 31, 2006 and 2005, respectively, which represents
the present value of future minimum payments on the lease.
Under the terms of the lease, the rent will escalate 2% in October
of each year until the lease expires in September 2016.
Additionally, we lease certain office equipment under another
capital lease.
Future minimum payments for the two capital leases at
December 31, 2006 are as follows (in thousands):
Years ending December 31,
2007
2008
200
2010
2011
2012 and thereafter
Total minimum payments required
Less: amount representing interest
Present value of future payments
Less: current portion
Non-current portion
$ 3,2
4,071
4,12
4,146
4,230
21,266
$ 41,834
21,364
$ 20,470
711
$ 1,75
The 2004 sale-leaseback transaction qualified for sales treatment
under SFAS No. 8, Accounting for Leases and we recorded a
deferred gain of $12.7 million which is reflected in Other Liabilities.
This amount is being amortized over the term of the lease as a
reduction of depreciation expense. During the years ended
December 31, 2006, 2005 and 2004, we amortized a gain of
$0. million, $0. million and $0.5 million, respectively.
nOte 8—litigatiOn settlement
On June 30, 2006, we, our subsidiary Nektar AL, and a former
officer, Milton Harris, entered into a Settlement Agreement and
General Release with the University of Alabama Huntsville (UAH)
related to an intellectual property dispute. Under the terms of the
Settlement Agreement, the Company, Nektar AL, Mr. Harris and
UAH agreed to full and complete satisfaction of all claims asserted
in the litigation in exchange for $25 million in cash payments.
We and Mr. Harris made an initial payment of $15.0 million on
June 30, 2006, of which we paid $11.0 million and Mr. Harris paid
$4.0 million. Beginning July 1, 2007, we will pay UAH 10 annual
installment payments of $1.0 million each, representing an accrued
liability of $7.0 million at December 31, 2006, or the present value
of the future payments using an 8% annual discount rate. We
recorded a litigation settlement charge of $17.7 million during the
year ended December 31, 2006 which reflects the net present
value of the settlement payments.
nOte 9—cOmmitments and cOntingencies
Operating leases
We lease certain facilities under arrangements expiring through
June 2012. Rent expense for operating leases was approximately
$4.1 million, $3.1 million, and $3.0 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
Future minimum lease payments under non-cancelable operating
leases as of December 31, 2006, are as follows (in thousands):
Years ending December 31,
2007
2008
200
2010
2011
2012 and thereafter
Total minimum payments required
$ 3,770
3,704
2,28
2,836
2,05
1,452
$ 17,55
We have several leases for our facilities in multiple locations.
In the event that we do not exercise our option to extend the
term of the lease of our San Carlos manufacturing facility, we are
required to restore the property to certain conditions in place at the
time of lease. We believe these costs would not be material to our
operations. As a result of terminating our research and development
efforts in the UK, we recorded a $1.0 million expense in the year
ended December 31, 2006, related to the lease restoration of our
Bradford facilities.
38
notes To consolidated Financial Statements
December 31, 2006 (continued)
legal matters
On August 1, 2006, Novo Nordisk filed a lawsuit against Pfizer
in federal court claiming that Pfizer willfully infringes on Novo’s
patents covering inhaled insulin with Exubera. The case is currently
proceeding with discovery and other pre-trial activities. Although
we are not currently a named party in this litigation, we have
incurred litigation costs as a result of such litigation and may
incur substantial future costs and potential indemnity claims from
Pfizer associated with the litigation. These and other disputes may
have a material impact on our business, results of operation and
financial condition.
From time to time, we may be involved in lawsuits, claims,
investigations and proceedings, consisting of intellectual property,
commercial, employment and other matters, which arise in the
ordinary course of business. In accordance with the SFAS No. 5,
Accounting for Contingencies, we make a provision for a liability
when it is both probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. These provisions
are reviewed at least quarterly and adjusted to reflect the impact of
negotiations, settlements, ruling, advice of legal counsel, and other
information and events pertaining to a particular case. Litigation is
inherently unpredictable. If any unfavorable ruling were to occur in
any specific period, there exists the possibility of a material adverse
impact on the results of operations of that period or on our cash
flows and liquidity.
workers’ compensation
Pursuant to the terms of our workers’ compensation insurance
policy, we were subject to self-fund all claims up to $250,000
per occurrence subject to a maximum of $50,000 for the
term of the insurance policy, through October 31, 2006. As of
November 1, 2006, we began a fully funded workers compensation
insurance policy. Historically, we have not been obligated to make
significant payments for these obligations, and no significant
liabilities have been recorded for these obligations on our balance
sheet as of December 31, 2006 or 2005.
royalties
We have certain royalty commitments associated with the shipment
and licensing of certain products. Royalty expense, which is
reflected in Cost of Goods Sold in our Consolidated Statements
of Operations, was approximately $5.5 million, $3.5 million, and
$2.0 million for the years ended December 31, 2006, 2005, and
2004, respectively. The overall maximum amount of the obligations
is based upon sales of the applicable product and cannot be
reasonably estimated.
security agreement with pfizer inc.
In connection with the Collaboration, Development and License
Agreement (“CDLA”) dated January 18, 15, that we entered
into with Pfizer Inc. for the development of the Exubera product,
we entered into a Security Agreement pursuant to which our
obligations under the CDLA and certain Manufacturing and Supply
Agreements related to the manufacture and supply of powdered
insulin and pulmonary inhaler devices for the delivery of powdered
insulin, are secured. Our default under any of these agreements
triggers Pfizer rights with respect to property relating solely to,
or used or which will be used solely in connection with, the
development, manufacture, use and sale of Exubera including
proceeds from the sale or other disposition of the property.
Because the obligated amount of this agreement is not explicitly
stated, the overall maximum amount of the obligations cannot be
reasonably estimated. Historically, we have not been obligated to
make significant payments for these obligations, and no liabilities
have been recorded for these obligations on our balance sheet as
of December 31, 2006, 2005 or 2004.
collaboration agreements for pulmonary products
As part of our collaboration agreements with our partners for the
development, manufacture and supply of products based on our
Pulmonary Technology, we generally agree to defend, indemnify
and hold harmless our partners from and against third party
liabilities arising out of the agreement, including product liability
and infringement of intellectual property. The term of these
indemnification obligations is generally perpetual any time after
execution of the agreement. There is no limitation on the potential
amount of future payments we could be required to make under
these indemnification obligations.
To date we have not incurred costs to defend lawsuits or settle
claims related to these indemnification obligations. If any of our
indemnification obligations is triggered, we may incur substantial
liabilities. Because the obligated amount under these agreements
is not explicitly stated, the overall maximum amount of the
obligations cannot be reasonably estimated. No liabilities have
been recorded for these obligations on our balance sheet as of
December 31, 2006 or 2005.
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notes To consolidated Financial Statements
December 31, 2006 (continued)
license, manufacturing and supply agreements
for products Based on our pegylation technology
As part of our license, manufacturing and supply agreements with
our partners for the development or manufacture and supply of
PEG reagents based on our PEGylation Technology, we generally
agree to defend, indemnify and hold harmless our partners from
and against third party liabilities arising out of the agreement,
including product liability and infringement of intellectual property.
The term of these indemnification obligations is generally perpetual
any time after execution of the agreement. There is no limitation
on the potential amount of future payments we could be required
to make under these indemnification obligations. We have never
incurred costs to defend lawsuits or settle claims related to these
indemnification obligations. If any of our indemnification obligations
is triggered, we may incur substantial liabilities. Because the
obligated amount of this agreement is not explicitly stated, the
overall maximum amount of the obligations cannot be reasonably
estimated. Historically, we have not been obligated to make
significant payments for these obligations, and no liabilities have
been recorded for these obligations in our Consolidated Balance
Sheets as of December 31, 2006, 2005 or 2004.
indemnification of Our contract manufacturers
We have a Manufacturing and Supply Agreement with our contract
manufacturers to provide for the manufacturing of Exubera Inhalers.
We have agreed to defend, indemnify, and hold harmless the
contract manufacturers from and against third party liability arising
out of the agreement, including product liability and infringement
of intellectual property. There is no limitation on the potential
amount of future payments we could be required to make under
these indemnification obligations. We have never incurred costs
to defend lawsuits or settle claims related to these indemnification
obligations. If any of our indemnification obligations is triggered, we
may incur substantial liabilities. Because the obligated amount of
this agreement is not explicitly stated, the overall maximum amount
of the obligations cannot be reasonably estimated.
indemnification of underwriters and
initial purchasers of Our securities
In connection with our sale of equity and convertible debt securities
from, we have agreed to defend, indemnify and hold harmless our
underwriters or initial purchasers, as applicable, as well as certain
related parties from and against certain liabilities, including liabilities
under the Securities Act of 133, as amended. The term of these
indemnification obligations is generally perpetual. There is no
limitation on the potential amount of future payments we could be
required to make under these indemnification obligations. We have
never incurred costs to defend lawsuits or settle claims related to
these indemnification obligations. If any of our indemnification
obligations are triggered, however, we may incur substantial
liabilities. Because the obligated amount of this agreement is not
explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, we have not been
obligated to make significant payments for these obligations, and
no liabilities have been recorded for these obligations in our
Consolidated Balance Sheets as of December 31, 2006,
2005 or 2004.
director and Officer indemnifications
As permitted under Delaware law, and as set forth in our
Certificate of Incorporation and our Bylaws, we indemnify our
directors, executive officers, other officers, employees, and other
agents for certain events or occurrences that arose while in such
capacity. The maximum potential amount of future payments we
could be required to make under this indemnification is unlimited;
however, we have insurance policies that may limit our exposure
and may enable us to recover a portion of any future amounts
paid. Assuming the applicability of coverage, the willingness of the
insurer to assume coverage, and subject to certain retention, loss
limits and other policy provisions, we believe any obligations under
this indemnification are not material, other than an initial $500,000
per incident retention deductible per our insurance policy. However,
no assurances can be given that the covering insurers will not
attempt to dispute the validity, applicability, or amount of coverage
without expensive litigation against these insurers, in which case we
may incur substantial liabilities as a result of these indemnification
obligations. Because the obligated amount of this agreement is
not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, we have not been
obligated to make significant payments for these obligations,
and no liabilities have been recorded for these obligations in
our Consolidated Balance Sheets as of December 31, 2006,
2005 or 2004.
nOte 10—stOckhOlders’ equity
preferred stock
We have authorized 10,000,000 shares of Preferred Stock, each
share having a par value of $0.0001. Three million one hundred
thousand (3,100,000) shares of Preferred Stock are designated
Series A Junior Participating Preferred Stock (the “Series A
Preferred Stock”). We had designated 40,000 shares of
Preferred Stock as Series B Convertible Preferred Stock,
however, on January 7, 2006, the remaining outstanding shares
automatically converted to common stock. We have no preferred
shares issued and outstanding as of December 31, 2006.
series a preferred stock
On June 1, 2001, the Board of Directors approved the adoption
of a Share Purchase Rights Plan. Terms of the Rights Plan provide
for a dividend distribution of one preferred share purchase right
for each outstanding share of our Common Stock. The Rights have
certain anti-takeover effects and will cause substantial dilution to a
person or group that attempts to acquire us on terms not approved
by our Board of Directors. The dividend distribution was payable
on June 22, 2001, to the stockholders of record on that date.
Each Right entitles the registered holder to purchase from us one
one-hundredth of a share of Series A Preferred Stock at a price of
$225.00 per one one-hundredth of a share of Series A Preferred
Stock, subject to adjustment. Each one one-hundredth of a share of
Series A Preferred Stock has designations and powers, preferences
and rights, and the qualifications, limitations and restrictions which
make its value approximately equal to the value of a share of
Common Share.
40
notes To consolidated Financial Statements
December 31, 2006 (continued)
The Rights are not exercisable until the Distribution Date (as
defined in the Certificate of Designation for the Series A Preferred
Stock). The Rights will expire on June 1, 2011, unless the Rights
are earlier redeemed or exchanged by us. Each share of Series A
Preferred Stock will be entitled to a minimum preferential quarterly
dividend payment of $1.00 but will be entitled to an aggregate
dividend of 100 times the dividend declared per share of Common
Stock. In the event of liquidation, the holders of the Series A
Preferred Stock would be entitled to a minimum preferential
liquidation payment of $100 per share, but would be entitled to
receive an aggregate payment equal to 100 times the payment
made per Common Share. Each share of Series A Preferred Stock
will have 100 votes, voting together with the Common Stock. Finally,
in the event of any merger, consolidation or other transaction in
which our Common Stock is exchanged, each share of Series A
Preferred Stock will be entitled to receive 100 times the amount
of consideration received per share of Common Stock. Because of
the nature of the Series A Preferred Stock dividend and liquidation
rights, the value of one one-hundredth of a share of Series A
Preferred Stock should approximate the value of one share of
Common Stock. The Series A Preferred Stock would rank junior to
any other future series of preferred stock. Until a Right is exercised,
the holder thereof, as such, will have no rights as a stockholder,
including, without limitation, the right to vote or to receive dividends.
series B convertible preferred stock
In connection with a strategic alliance with Enzon Pharmaceuticals,
Inc., we entered into a Preferred Stock Purchase Agreement
pursuant to which Enzon purchased 40,000 shares of non-voting
Series B Preferred Stock at a purchase price of one thousand
dollars ($1,000) per share for an aggregate purchase price of
$40.0 million. The Series B Preferred Stock was convertible into
a number of Common Shares equal to the quotient of $1,000
per share divided by the conversion price which was initially
$22.7 per share. In 2004, Enzon converted 20,000 Series B
Preferred Stock into 880,000 Common Shares and on
January 7, 2006, the remaining 20,000 automatically
converted into 1,023,000 Common Shares.
issuance of common stock
On August 15, 2005, we entered into a Common Stock Purchase
Agreement with Mainfield Enterprises Inc. pursuant to which we
sold approximately 1. million shares of our common stock at an
average price of $16.3 per common share for proceeds of
approximately $31.6 million, net of issuance costs.
In March 2004, we entered into an underwriting agreement with
Lehman Brothers Inc. pursuant to which we sold .5 million shares
of our common stock at a price of $20.71 per common share for
proceeds of approximately $16.4 million, net of issuance costs.
During the first half of 2004, certain outstanding convertible
subordinated notes with an aggregate principal amount of
approximately $186.0 million were converted into 16.0 million
shares of common stock. These conversions resulted in a
$11.3 million increase to additional paid in capital.
employee stock purchase plan
In February 14, our Board of Directors adopted the ESPP,
pursuant to section 423(b) of the Internal Revenue Code of 186.
Under the ESPP, 800,000 shares of common stock have been
authorized for issuance. The terms of the ESPP provide eligible
employees with the opportunity to acquire an ownership interest
in Nektar through participation in a program of periodic payroll
deductions for the purchase of our common stock. Employees must
make an election to enroll or re-enroll in the plan on a semi-annual
basis. Stock is purchased at 85% of the lower of the closing price
on the first day of the enrollment period or the last day of the
enrollment period.
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notes To consolidated Financial Statements
December 31, 2006 (continued)
stock Option plans
The following table summarizes information with respect to shares of our common stock that may be issued under our existing equity
compensation plans as of December 31, 2006 (share number in thousands):
Plan Category
Equity compensation plans approved
by security holders 2
Equity compensation plans not approved
by security holders
Total
Number of securities to be
issued upon exercise of
outstanding options
(a)1
Weighted-average
exercise price of
outstanding options
(b)
Number of securities remaining
available for issuance under
equity compensation plans
[excluding securities reflected
In column (a)]
(c)
3,821
7,765
11,586
$ 1.53
$ 18.6
$ 18.7
7,1
1,337
,256
1 Does not include options to purchase 3,200 shares assumed in connection with the acquisition of Bradford Particle Design Ltd (with a weighted-average exercise price of
$7.00 per share) and options to purchase 73,000 shares we assumed in connection with the acquisition of Shearwater Corporation (with a weighted-average exercise
price of $0.03 per share).
2 Includes 316,639 shares of common stock available for future issuance under our ESPP as of December 31, 2006.
2000 equity incentive plan
Our 14 Equity Incentive Plan was adopted by the Board of
Directors on February 10, 14, and was amended and restated
in its entirety and renamed the “2000 Equity Incentive Plan” on
April 1, 2000. The purpose of the 2000 Equity Incentive Plan
is to attract and retain qualified personnel, to provide additional
incentives to our employees, officers, consultants and employee
directors and to promote the success of our business. Pursuant to
the 2000 Equity Incentive Plan, we may grant or issue incentive
stock options to employees and officers and non-qualified stock
options, rights to acquire restricted stock, restricted stock units,
and stock bonuses to consultants, employees, officers and
non-employee directors.
The maximum term of a stock option under the 2000 Equity
Incentive Plan is 10 years, but if the optionee at the time of grant
has voting power of more than 10% of our outstanding capital
stock, the maximum term of an incentive stock option is five years.
The exercise price of incentive stock options granted under the
2000 Equity Incentive Plan must be at least equal to 100% (or
110% with respect to holders of more than 10% of the voting
power of our outstanding capital stock) of the fair market value
of the stock subject to the option on the date of the grant. The
exercise price of non-qualified stock options and the purchase
price of rights to acquire restricted stock and restricted stock units
granted under the 2000 Equity Incentive Plan are determined by
the Board of Directors.
The Board may amend the 2000 Equity Incentive Plan at any time,
although certain amendments would require stockholder approval.
The 2000 Equity Incentive Plan will terminate on February , 2010,
unless earlier terminated by the Board. On June 1, 2006, our
stockholders approved an amendment to the 2000 Equity Incentive
Plan to (i) provide that we will not effect a “repricing” of a
stock award under the 2000 Equity Incentive Plan without prior
stockholder approval (subject to certain exceptions) and (ii) increase
the number of shares of Common Stock authorized for issuance
under the Purchase Plan to a total of 18,250,000 shares.
2000 non-Officer equity incentive plan
Our 18 Non-Officer Equity Incentive Plan was adopted by the
Board of Directors on August 18, 18, and was amended and
restated in its entirety and renamed the “2000 Non-officer Equity
Incentive Plan” on June 6, 2000 (the “2000 Plan”). The purpose of
the 2000 Plan is to attract and retain qualified personnel, to provide
additional incentives to employees and consultants and to promote
the success of our business. Pursuant to the 2000 plan, we may
grant or issue non-qualified stock options, rights to acquire
restricted stock and stock bonuses to employees and consultants
who are neither Officers nor Directors of Nektar. The maximum
term of a stock option under the 2000 Plan is 10 years.
The exercise price of stock options and the purchase price of
restricted stock granted under the 2000 Plan are determined
by the Board of Directors.
non-employee directors’ stock Option plan
On February 10, 14, our Board of Directors adopted the
Non-Employee Directors’ Stock Option Plan under which options to
purchase up to 400,000 shares of our Common Stock at the then
fair market value may be granted to our non-employee directors.
There are no remaining options available for grant under this plan
as of December 31, 2006.
42
notes To consolidated Financial Statements
December 31, 2006 (continued)
restricted stock units
During the years ended December 31, 2006, 2005 and 2004,
we issued RSUs to certain officers, non-employees, directors,
employees and consultants. RSUs are similar to restricted stock
in that they are issued for no consideration; however, the holder
generally is not entitled to the underlying shares of common stock
until the RSU vests. Also, because the RSUs are issued for $0.01,
the grant-date fair value of the award is equal to its intrinsic value
on the date of grant. The RSUs were issued under both the 2000
Equity Incentive Plan and the 2000 Non-Officer Equity Incentive
Plan and are settled by delivery of shares of our common stock on
or shortly after the date the awards vest. A significant portion of the
2006 RSUs vest upon the achievement of certain performance-
based milestones, however, the RSUs issued in 2005 and 2004 are
service based awards and vest based on the passage of time. At
December 31, 2006, certain of these awards are expected to vest
upon achievement of three performance-based milestones which
are expected to occur over a 5 to 33 month period. Beginning with
shares granted in the year ended December 31, 2005, each RSU
depletes the pool of options available for grant by a ratio of 1:1.5.
time accelerated restricted stock award plan
(“tarsap”)
During the year ended December 31, 2004, we issued options
for 111,000 shares of stock under our 2000 Non-Officer Equity
Incentive Plan to certain employees subject to vesting upon FDA
approval of Exubera. The options had an exercise price equal to fair
market value on the date of grant. These options vested upon the
approval of Exubera by the FDA in January 2006.
warrants
In November 16, we issued warrants to purchase a total of
40,000 shares of common stock in connection with a tenant
improvement loan for one of our facilities. The warrants had an
exercise price of $6.56 per share and expired after 10 years.
The warrants allowed for net share settlement at the option of
the warrant holder and were accounted for as equity in accordance
with EITF Issue No. 6-18 (“EITF 6-18”) Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services. The warrants
were valued using a Black-Scholes option valuation model with
the following weighted-average assumptions: risk free interest
rate of 6.4%; dividend yield of 0.0%; volatility factor of 62%; and
a weighted average expected life of ten years. In November 2004,
one of the warrants representing 20,000 shares of common stock
was exercised in the form of a net share settlement for 11,775
shares of common stock. In August 2006, the remaining warrant
representing 20,000 shares of common stock was exercised in the
form of a net share settlement for 12,087 shares of common stock.
Expense related to these warrants was insignificant for the years
ended December 31, 2006, 2005 and 2004.
In September 2000, we issued warrants to purchase 10,000
shares of common stock to the landlord of one of our facilities in
connection with the signing of a capital lease on that facility. In
November 2000, we issued warrants to certain consultants to
purchase an additional 6,000 shares of common stock. These
warrants were accounted for as equity in accordance with EITF
6–18 and were valued using a Black-Scholes option valuation
model with the following weighted-average assumptions: a risk
free interest rate of 6.4%; a dividend yield of 0.0%; a volatility
factor of 68.8%; and a weighted average expected life of
10 years. Both warrants had an exercise price of $45.88 per
share with a six year life, and both expired unexercised in
September and November 2006, respectively. No warrants to
purchase common shares were outstanding at December 31, 2006.
Expense related to these warrants was insignificant for the years
ended December 31, 2006, 2005 and 2004.
401(k) retirement plan
We sponsor a 401(k) retirement plan whereby eligible employees
may elect to contribute up to the lesser of 60% of their annual
compensation or the statutorily prescribed annual limit allowable
under Internal Revenue Service regulations. The 401(k) plan
permits us to make matching contributions on behalf of all
participants. Currently, we match the lesser of 75% of year to
date participant contributions or 3% of eligible wages. The match
vests ratably over the first three years of employment, such that
after three years of employment, all matching is fully vested. The
matching contribution is in the form of shares of our common stock.
We issued approximately 103,000 shares, 87,000 shares, and
66,000 shares of our common stock valued at approximately
$1.8 million, $1.4 million, and $1.2 million in connection with the
match in 2006, 2005 and 2004, respectively. During part of 2004,
shares reserved for issuance related to matching contributions
that had been previously been approved by our Board of Directors
became fully depleted. During this time, we purchased approximately
14,000 shares on the open market on behalf of employees
for a total cost of $0.2 million and recorded this amount as
compensation expense during the period. During the year
ended December 31, 2004, our Board of Directors approved
an additional 300,000 shares to be reserved for issuance related
to matching contributions.
change in control severance plan
On December 6, 2006, the Board of Directors approved a
Change of Control Severance Benefit Plan (the “CIC Plan”) and on
February 14, 2007 the Board of Directors amended and restated
the CIC Plan. The CIC Plan is designed to make certain benefits
available to eligible employees of the Company in the event of
a change of control of the Company and, following such change
of control, an employee’s employment with the Company or
successor company is terminated in certain specified circumstances.
The Company adopted the CIC Plan to support the continuity of the
business in the context of a change of control transaction. The CIC
Plan was not adopted in contemplation of any specific change of
control transaction. A brief description of the material terms and
conditions of the CIC Plan is provided below.
Under the CIC Plan, in the event of a change of control of the
Company and a subsequent termination of employment initiated
by the Company or a successor company other than for Cause
or initiated by the employee for a Good Reason Resignation (as
hereinafter defined) in each case within 12 months following a
change of control transaction, (i) the Chief Executive Officer
would each be entitled to receive cash severance pay equal to
24 months base salary plus annual target incentive pay, the
extension of employee benefits over this severance period and
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nOte 11—cOmprehensive lOss
Comprehensive loss is comprised of net loss and accumulated other
comprehensive income (loss) and includes the following components
(in thousands):
Years ended December 31,
2006
2005
2004
$ (154,761) $ (185,111) $ (101,886)
Net loss, as reported
Change in net unrealized
gains (losses) on
available-for-sale securities
Net unrealized gains
1,458
(101)
(2,12)
reclassified into earnings
Translation adjustment
—
311
—
(1,250)
23
72
Total comprehensive loss $ (152,992) $ (186,462) $ (103,200)
The components of accumulated other comprehensive loss are as follows
(in thousands):
Unrealized loss on
available-for-sale securities
Translation adjustment
Total accumulated other
comprehensive income (loss)
December 31,
2006
2005
$ (499)
561
$ (1,57)
250
$
62
$ (1,707)
notes To consolidated Financial Statements
December 31, 2006 (continued)
the full acceleration of unvested outstanding equity awards, and
(ii) the Chief Scientific Officer, Senior Vice Presidents and Vice
Presidents (including Principal Fellows) would each be entitled to
receive cash severance pay equal to 12 months base salary plus
annual target incentive pay, the extension of employee benefits
over this severance period and the full acceleration of unvested
outstanding equity awards. In the event of a change of control of
the Company and a subsequent termination of employment initiated
by the Company or a successor company other than for Cause (as
hereinafter defined) within 12 months following a change of control
transaction, all other employees would each be entitled to receive
cash severance pay equal to 6 months base salary plus annual
target incentive pay, the extension of employee benefits over this
severance period and the full acceleration of each such employee’s
unvested outstanding equity awards.
On December 6, 2006, the Board of Directors approved an
amendment to all outstanding stock awards held by non-employee
directors to provide for full acceleration of vesting in the event of a
change of control transaction.
reserved shares
At December 31, 2006, we have reserved shares of common stock for
issuance as follows (in thousands):
Convertible subordinated notes
Stock options and restricted stock units
ESPP
401(k) retirement plans
Total
16,86
16,337
317
81
33,631
44
notes To consolidated Financial Statements
December 31, 2006 (continued)
nOte 12—signiFicant cOllaBOrative
research and develOpment agreements
We perform research and development for our biotechnology and
pharmaceutical partners pursuant to collaboration agreements.
Revenues generated from our collaboration efforts are recorded as
Contract Research revenue and our costs of performing these services
are included in Research and Development expense. In accordance
with these agreements, we recorded Contract research revenue as
follows (in thousands):
Partner
Pfizer Inc.
Novartis Pharma AG
Zelos Therapeutics, Inc.
Bayer Healthcare AG
Baxter Healthcare SA
Solvay Pharmaceuticals, Inc.
Other
Contract research revenue
Molecule
2006
2005
2004
Exubera® (insulin human [rDNA origin])
Inhalation Powder, Somavert® (pegvisomant)
Tobramycin inhalation powder (TIP)
Pulmonary Ostabolin-C
Ciprofloxacin Inhalation Powder (CIP)
Poly(ethylene) glycol reagent
Pulmonary dronabinol (Dronabinol metered dose inhaler)
$ 29,315 $ 64,01 $ 6,37
7,307
—
—
—
5,43
6,88
8,516
5,479
4,885
3,690
1,002
3,416
4,831
3,487
4,074
310
2,756
2,053
Under these collaborative research and development agreements,
we are reimbursed for the cost of work performed on a revenue per
annual full-time employee equivalent (FTE) basis, plus out of pocket
third party costs. The initial annual FTE rate is established when the
contract is executed and generally increases each year based on
the consumer price index. Revenue recognized approximates the
costs associated with these billable services.
We also are typically entitled to receive milestone payments when
and if certain development or regulatory milestones are achieved.
All of our research and development agreements are generally
cancelable by our partners without significant financial penalty to
the partner.
pfizer inc.
We are party to a collaboration agreement with Pfizer to develop
Exubera based on our Pulmonary Technology. Under the terms
of the agreement, we receive contract research and development
revenue as well as milestone revenues relating to the Exubera
Inhalation Powder and Exubera Inhalers.
We are party to a license, manufacturing, and supply agreement
with Pfizer whereby we provide one of our PEG reagents used
in the manufacture of Somavert (pegvisomant), a human growth
hormone receptor antagonist that has been approved for use in the
U.S. and EU for the treatment of certain patients with acromegaly.
novartis pharma ag
We are party to a collaboration agreement with Novartis
Pharma AG (formerly Chiron Corporation) to develop a dry
powder inhaled formulation of tobramycin for the treatment of
Pseudomonas aeruginosa in cystic fibrosis patients and to explore
the development of other inhaled antibiotics using our Pulmonary
Technology. We may receive research and development funding,
milestone payments as the program progresses through further
clinical testing, and may receive royalty payments on product sales
and manufacturing revenues if the product is commercialized.
$ 56,303 $ 81,602 $ 8,185
zelos therapeutics, inc.
We are party to a collaboration to develop an inhaleable powder
form of Zelos Therapeutics’ parathyroid hormone (PTH) analogue,
called Ostabolin-CTM. Under the terms of the agreement, Nektar
is responsible for development of the formulated dry powder
drug and inhalation system, as well as clinical and commercial
manufacturing of the drug formulation and device combination.
Zelos is responsible for supply of the active pharmaceutical
ingredient or API, clinical development and commercialization.
We receive research and development funding, milestone payments
as the program progresses through further clinical testing, and
may receive royalty payments on product sales and manufacturing
revenues if the product is commercialized.
Bayer healthcare ag
We are party to a collaboration agreement with Bayer HealthCare
AG to develop an inhaleable powder formulation of a novel form
of Ciprofloxacin (Cipro) to treat chronic lung infections caused by
Pseudomonas aeruginosa in cystic fibrosis patients. Under the terms
of the collaboration, Nektar is responsible for formulation of the
dry powder drug and development of the inhalation system, as well
as clinical and commercial manufacturing of the drug formulation
and device combination. Bayer is responsible for the clinical
development and worldwide commercialization of the system.
We receive research and development funding, milestone payments
as the program progresses through further clinical testing, and
may receive royalty payments on product sales and manufacturing
revenues if the product is commercialized.
Baxter healthcare sa and Baxter healthcare corp.
We are party to a collaboration agreement with Baxter Healthcare
SA and Baxter Healthcare Corp., to develop a product to extend the
half-life of Hemophilia A proteins using our PEGylation Technology.
These products are in pre-clinical development for treatment of
Hemophilia A. We will receive research and development funding,
milestone payments and royalty payments on sales of the products.
Nektar will supply, and will receive manufacturing revenues for, the
poly(ethylene) glycol reagent used in the products for preclinical,
clinical and commercial purposes.
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notes To consolidated Financial Statements
December 31, 2006 (continued)
solvay pharmaceuticals, inc.
We are party to a collaboration agreement with Unimed
Pharmaceuticals, Inc., a wholly owned subsidiary of Solvay
Pharmaceuticals, Inc., to develop a formulation of dronabinol
(synthetic delta--tetrahydrocannabinol) to be delivered using
a metered dose inhaler. The product is under development for
multiple indications. Dronabinol is the active ingredient in Unimed’s
MARINOL® capsules, which are approved in the U.S. for multiple
indications. Solvay initiated Phase II trials for pulmonary dronabinol
in 2005 for the treatment of migraines with and without aura.
We may receive research and development funding, milestone
payments as the program progresses through further clinical
testing, and may receive royalty payments on product sales and
manufacturing revenues if the product is commercialized.
nOte 13—BradFOrd, uk OperatiOns
In December 2005, we determined that the assets of our UK
subsidiary, located in Bradford, England (“Bradford”), were
significantly impaired, and recorded an impairment charge of
$5.6 million related to our goodwill asset and $5.7 million of
accelerated depreciation related to certain fixed assets. These
amounts are reflected in the Impairment of long-lived assets line
item in the Consolidated Statement of Operations. Bradford’s
primary activities related to the Super Critical Fluid Technology
reporting unit as defined under SFAS No. 142: Goodwill and
Other Intangible Assets. These impairment charges represented
a substantial portion of the fair value of Bradford’s net assets as
of December 31, 2005.
In March 2006, the Bradford employees were notified of a
potential shut-down of operations. Retention and severance
incentives were communicated at that time. In June 2006, we
involuntarily terminated the majority of the personnel located in
Bradford and commenced with plans to wind-down the location
and its related operations. The retention and severance incentives
totaling approximately $2. million were paid and expensed to
research and development during the first and second quarters
of 2006. Also in June 2006, we reassessed the useful life of the
remaining laboratory and office equipment and determined these
assets could not be redeployed and had no future use. Due to our
revised estimate of useful life of these assets, we accelerated
approximately $1.2 million of remaining depreciation in June 2006,
which is reflected in the Impairment of long-lived assets line item in
the Consolidated Statement of Operations. In the third quarter of
2006, we met the cease-of-use criteria outlined in SFAS No. 146:
Accounting for Cost Associated with Disposal or Exit Activities
and terminated the majority our facility leases in Bradford. As a
result, we recorded approximately $1.0 million to general and
administrative expense, related primarily to restoration costs
necessary to return the buildings to their original condition.
nOte 14—incOme taxes
For financial reporting purposes, “Loss before provision for income
taxes,” includes the following components (in thousands):
2006
2005
2004
$ (147,059) $ (172,232) $
(6,874)
(13,016)
(5,)
(6,050)
$ (153,933) $ (185,248) $ (102,04)
Domestic
Foreign
Total
46
As of December 31, 2006, we had a net operating loss
carryforward for federal income tax purposes of approximately
$640.0 million, which will expire beginning in the year 2007.
We had a total state net operating loss carryforward of
approximately $323.0 million, which expires beginning in 2010.
We had a foreign net operating loss carryforward of approximately
$52.0 million. A substantial portion of the foreign net operating
losses are UK losses which can be carried forward indefinitely.
Utilization of the federal and state net operating loss and credit
carryforwards may be subject to a substantial annual limitation due
to the “change in ownership” provisions of the Internal Revenue
Code of 186 and similar state provisions. The annual limitation
may result in the expiration of net operating losses and credits
before utilization.
The (provision) benefit for income taxes consists of the following
(in thousands):
2006
2005
2004
Current:
Federal
State
Foreign
Total Current
Deferred:
Federal
State
Foreign
Total Deferred
$
—
(6)
—
(6)
$ —
137
—
137
$
—
(665)
—
(665)
—
(822)
—
(822)
—
—
—
—
—
828
—
828
(Provision) benefit for
income taxes
$ (828)
$ 137
$ 163
Income tax (provision) benefit related to continuing operations differs
from the amounts computed by applying the statutory income tax rate
of 34% to pretax loss as follows (in thousands):
2006
2005
2004
U.S. federal (provision) benefit
At statutory rate
State taxes
Net operating losses
$ 52,337
(6)
$ 62,84
137
$ 34,67
163
not benefited
(50,385)
(58,645)
(33,000)
Non-deductible employee
compensation
Investment impairment and
non-deductible amortization
Non-deductible in process
research charge
Other
Total
(2,138)
—
—
(636)
(1,667)
(1,532)
—
—
(2,672)
—
—
(165)
$
(828) $
137
$
163
Deferred income taxes reflect the net tax effects of loss and credit
carryforwards and temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant
components of our deferred tax assets for federal and state
income taxes are as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Research and other credits
Capitalized research expenses
Deferred revenue
Reserve and accruals
Stock-based compensation
Other
Deferred tax assets
before valuation allowance
Valuation allowance for
deferred tax assets
December 31,
2006
2005
$ 246, 812 $ 16,716
20,301
7,52
7,177
22,332
73
5,186
24,046
5,991
7,762
25,543
11,901
4,563
326,618
260,034
(322,508)
(250,630)
Total deferred tax assets
$
4,110 $
,404
approximately $1. million and $1.2 million, respectively of stock
compensation expense pursuant to APB No. 25 related to RSUs
that were granted at prices below the fair market value at the date
of grant.
Under the modified prospective transition method outlined in
SFAS No. 123R, we are not required to restate prior period financial
statements to reflect expensing of stock-based compensation as
if we had adopted SFAS No. 123R in prior periods. Therefore, the
results for the year ended December 31, 2006 are not directly
comparable to the years ended December 31, 2005 and 2004.
Additionally, these stock-based compensation charges have no
impact on our financial position or reported cash flows.
Stock-based compensation cost is recorded in the following line
items of our Consolidated Financial Statements among the
following categories:
Year ended
December 31,
2006
$
51
1,563
9,692
17,837
$ 29,143
Deferred tax liabilities:
Depreciation
Acquisition related intangibles
Total deferred tax liabilities
Net deferred tax assets
(2,715)
(1,395)
(4,127)
(4,455)
$
$
(4,110) $
(8,582)
Total
— $
822
Inventory
Cost of goods sold
Research and development
General and administrative expenses
Realization of our deferred tax assets is dependent upon
future earnings, if any, the timing and amount of which are
uncertain. Because of our lack of earnings history, the net
deferred tax assets have been fully offset by a valuation
allowance. The valuation allowance increased by $71. million,
and $31.2 million during the years ended December 31, 2006,
and 2005, respectively. The valuation allowance includes
approximately $35.1 million of benefit related to employee
stock option exercises which will be credited to additional paid in
capital when realized. Also, at December 31, 2006, approximately
$14.0 million of the valuation allowance relates to acquisition
related items, if and to the extent realized in future periods, will
first reduce the carrying value of goodwill, then other long-lived
intangible assets of our acquired subsidiary and then income tax
expense. We also have federal research credits of approximately
$14.5 million, which expire beginning in the year 2007 and state
tax research credits of approximately $13.5 million which have no
expiration date.
nOte 15—stOck-Based cOmpensatiOn
We issue stock-based awards from two compensation plans, which
are more fully described in Note 10—Stockholders’ Equity. For the
period ended December 31, 2006 we recorded approximately
$2.1 million of stock-based compensation expense, which includes
approximately $11.8 million of expense related to modifications of
certain stock grants in connection with employment separation
agreements. Generally, the modifications extended the optionee’s
exercise period beyond the 0 day period after termination and
accelerated a portion of the optionee’s unvested grants. In addition,
during the year ended December 31, 2005 and 2004, we recorded
Black-scholes assumptions
Upon adoption of SFAS No. 123R, we applied the guidance in
Staff Accounting Bulletin No. 107 that permits the initial application
of a “simplified” method based on the average of the vesting term
and the term of the option. Previously, we calculated the estimated
life based on the expectation that options would be exercised
within five years on average. We based our estimate of expected
volatility for options granted in fiscal year 2006 on the daily
historical trading data of our common stock over the period
equivalent to the expected term of the respective stock-based
grant. Generally the stock-based grants have expected terms
ranging from 38 months to 64 months. For the period ended
December 31, 2006, the annual forfeiture rate for executives and
staff was estimated to be 4.7% and 7.4%, respectively, based on
our qualitative and quantitative analysis of our historical forfeitures.
The following tables list the Black-Scholes assumptions used to
calculate the fair value of employee stock options and ESPP
purchases. The grant date fair value of RSU awards is always equal
to the intrinsic value of the award on the date of grant since the
awards were issued for no consideration. The weighted average life
of the 2006 RSUs is estimated to be 2.4 years.
Year ended
December 31, 2006
Employee
Stock
Options
4.8%
0.0%
63.1%
ESPP
5.2%
0.0%
33.3%
5.20 years 0.5 years
Average risk-free interest rate
Dividend yield
Volatility factor
Weighted average expected life
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notes To consolidated Financial Statements
December 31, 2006 (continued)
summary of stock Option activity
The table below presents a summary of stock option activity under the 2000 Equity Incentive Plan, the Non-Employee Directors’ Stock Option
Plan and the 2000 Non-Officer Equity Incentive Plan (in thousands, except for per share information):
Balance at December 31, 2003
Options granted
Options exercised
Options expired and canceled
Balance at December 31, 2004
Options granted
Options exercised
Options expired and canceled
Balance at December 31, 2005
Options granted
Options exercised
Options expired and canceled
Balance at December 31, 2006
Exercisable at December 31, 2006
Exercisable at December 31, 2005
Exercisable at December 31, 2004
Options Outstanding
Number of
Shares
Exercise price
Per Share
14,851
1,34
(1,817)
(841)
13,587
1,71
(1,014)
(1,115)
13,24
1,115
(2,160)
(1,501)
$ 0.01-61.63
10.10-22.4
0.01-1.25
0.01-56.38
0.01-61.63
13.46-1.76
0.01-18.47
3.88-56.38
$ 0.01-61.63
14.36-21.51
0.05-20.41
4.62-52.16
Weighted-
Average
Exercise
Price
Per Share
$ 16.4
17.33
7.52
20.86
17.57
17.44
.47
21.34
$ 17.85
17.88
.51
21.86
Weighted-
Average
Remaining
Contractual
Life (in years)
Aggregate
Intrinsic
Value1
6.65
$ 44,103
$ 20,72
6.03
$ 7,055
$ 8,18
5.38
$ 37,678
10,703
$ 0.01-61.63
18.7
8,185
,468
,066
1.88
1.08
18.30
4.78
4.0
4.6
5.25
$ 18,651
$ 15,348
$ 12,22
$ 25,67
$ 4,856
1 Aggregate Intrinsic Value represents the difference between the exercise price of the option and the closing market price of our common stock on the exercise date or
December 31, as applicable.
The weighted-average grant-date fair value of options granted during the years 2006, 2005 and 2004 was $10.54, $10.26 and
$10.45, respectively.
The following table provides information regarding our outstanding stock options as of December 31, 2006 (in thousands except for share
information and contractual life):
Options Outstanding
Options Exerciseable
Weighted-Average
Exercise Price
Per Share
Weighted-Average
Remaining Contractual
Life (in years)
$ 6.25
11.76
14.12
15.31
17.4
18.83
22.02
27.74
36.28
$ 18.7
5.5
4.25
3.83
4.07
6.72
6.56
4.
3.5
3.75
4.78
Number
1,156
1,140
1,187
1,102
1,201
1,134
1,142
1,701
40
10,703
Weighted-Average
Exercise Price
Per Share
$
6.06
11.87
14.0
15.27
17.82
18.87
22.81
27.74
36.27
$ 1.88
Number
871
1,001
80
72
571
535
75
1,701
3
8,185
Range of
Exercise
Prices
$
0.01-8.66
8.67-13.54
13.62-14.50
4.53-16.17
16.1-18.34
18.38-1.55
1.5-23.50
23.4-27.88
27.6-61.63
$ 0.01- 61.63
48
aggregate unrecognized
stock-based compensation expense
As of December 31, 2006, there was approximately $38.4 million of
aggregate unrecognized compensation expense related to unvested
stock-based compensation arrangements under the Option Plans.
This total unrecognized expense is expected to be recognized over
a weighted-average period of approximately 2.6 years as follows:
Fiscal Year
2007
2008
200
2010
2011 and thereafter
Total
(in millions)
$ 17,135
$ 11,011
$ 6,446
$ 2,84
836
$
$ 38,412
summary of rsu award activity
During 2006, we issued RSU awards totaling 1,088,300 shares
of our common stock to certain employees and directors. The RSU
awards are settled by delivery of shares of our common stock on
or shortly after the date the awards vest. A significant portion of
these awards vest base upon achieving three pre-determined
performance milestones which were initially expected to occur over
a period of 40 months. We are expensing the grant date fair value
of the awards ratably over the expected performance period. During
the period ended September 30, 2006 management determined
that one of the milestones, representing 40% of the total awards,
A summary of RSU activity is as follows (in thousands):
was no longer probable (as defined in SFAS No. 5: Accounting
for Contingencies) of vesting. As a result, we reversed all
previously recorded compensation expense related to this
performance milestone, or approximately $0.8 million. If we had
determined that this milestone was probable, we would have
expensed an additional $1. million during the year ended
December 31, 2006. The remaining 60% of the performance
based RSUs are expected to vest over a 27 month period from
the award date. We recorded compensation expense of $5.0 million
in the year ended December 31, 2006 related to the remaining
60% of these performance-based RSU awards.
In February 2004 and March 2005, we issued 206,666 and
112,000 RSU awards, respectively to certain officers and
employees on a time-based vesting schedule. Expense for these
awards is recognized ratably over the underlying time-based vesting
period and will settle by delivery of shares of our common stock on
or shortly after the date the awards vest. The RSU awards become
fully vested over a period of 36 to 48 months. The intrinsic value
of these awards was recorded as deferred compensation in the
Statement of Stockholders’ Equity and totaled approximately
$2.0 million and $3. million for the years ended December 31, 2005
and 2004, respectively. Upon adoption of SFAS No. 123R, we
reversed this unamortized value from stockholders’ equity, but
continue to expense the remaining intrinsic value, which
approximated the awards’ fair value on the original grant date,
ratably over the underlying vesting period. In connection with
these RSU awards, we recorded compensation expense of
$1.3 million, $1. million and $1.2 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
Balance at January 1, 2004
Granted
Balance at December 31, 2004
Granted
Released
Balance at December 31, 2005
Granted
Released
Forfeited & Canceled
Balance at December 31, 2006
Units Issued
—
206
206
112
(34)
284
1,088
(178)
(110)
1,084
Weighted-Average
Remaining
Contractual Life
In Years
Weighted-Average
Grant-Date
Fair Value
$ 18.57
$ 18.30
$ 1.55
1.52
1.14
1.52
Aggregate
Intrinsic
Value
—
$ 4,214
$
518
$ 4,676
$ 3,184
$ 16,479
1 Fair value represents the difference between the exercise price of the award and the closing market price of our common stock on the release date or the year ended
December 31, as applicable.
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nOte 16—segment repOrting
We operate in one business segment which focuses on applying
our technology platforms to improve the performance of established
and novel medicines. We believe we operate in one segment
because our business offerings have similar economic and other
characteristics, including the nature of products and production
processes, types of customers, distribution methods and regulatory
environment. We are comprehensively managed as one business
segment by our Executive Committee, who reports to the Chief
Executive Officer, and is our chief operating decision maker. Within
our one business segment we have two components, Pulmonary
Technology and PEGylation Technology.
Our revenue is derived primarily from clients in the pharmaceutical
and biotechnology industries. Revenue from Pfizer Inc. represented
64%, 64% and 61% of our revenue for the years ended December
31, 2006, 2005 and 2004, respectively.
Revenues from customers in the following geographic areas are as
follows (in thousands):
Years ended December 31,
2006
2005
2004
United States
European countries
All other countries
$ 182,959 $ 10,488 $ 100,855
14,67 11,606
1,80
33,471
1,288
1,824
Total Revenue
$ 217,718 $ 126,27 $ 114,270
At December 31, 2006, the net book value of our property, plant
and equipment was $133.8 million. Approximately 88% of such
assets are located in the United States. At December 31, 2005,
the net book value of property, plant, and equipment was
$142.1 million, and approximately 85% of such assets were
located in the United States.
notes To consolidated Financial Statements
December 31, 2006 (continued)
proforma effects of applying
sFas no. 123 to prior periods
Prior to adoption SFAS No. 123R on January 1, 2006, we
accounted for stock-based compensation under APB No. 25 and
elected the disclosure only method of presenting fair value stock-
based compensation expense. The disclosure only method required
the presentation of net income (loss) as if SFAS No. 123 had been
adopted for all periods presented in the Statements of Operations.
For purposes of the proforma net loss disclosure related to our
employee stock options and ESPP purchases, we computed the
estimated grant date fair values of the stock-based compensation
using the Black-Scholes option valuation model based on the
following assumptions:
Risk-free interest rate
Dividend yield
Volatility factor
Weighted average expected life
December 31,
2005
2004
4.0%
0.0%
0.710
4.5 years
3.3%
0.0%
0.707
5.0 years
In the table below, we have presented proforma disclosures
of our net loss and net loss per share for the prior year periods
assuming the estimated fair value of the options granted
prior to January 1, 2006 is amortized to expense over the
option-vesting period.
Revised
Year ended
December 31, December 31
Year ended
2005
2004*
$ (185,111)
$ (101,886)
Net loss, as reported
Add: Stock-based employee
compensation expense included
in reported net loss
Less: Total stock-based employee
compensation expense determined
under fair value based method for all
options and RSUs granted
1,854
1,423
(21,86)
(25,183)
Proforma net loss
$ (205,243)
$ (125,646)
Net loss per share:
Basic and diluted—as reported
Basic and diluted—proforma
$
$
(2.15)
(2.3)
$
$
(1.30)
(1.60)
* The revised reported proforma net loss for the year ended December 31, 2004
was decreased by approximately $6.0 million for options exchanged under the stock
option exchange programs and adjustments for computational corrections.
50
notes To consolidated Financial Statements
December 31, 2006 (continued)
nOte 17—selected quarterly
Financial data (unaudited)
The following table sets forth certain unaudited quarterly financial
data. In our opinion, the unaudited information set forth below has
been prepared on the same basis as the audited information and
includes all adjustments necessary to present fairly the information
set forth herein. We have experienced fluctuations in our quarterly
results. We expect these fluctuations to continue in the future.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results will not be meaningful, and
you should not rely on our results for one quarter as an indication of
our future performance. Certain items previously reported in specific
financial statement captions have been reclassified to conform to
the current period presentation. Such reclassifications have not
impacted previously reported revenues, operating loss or net loss.
All data is in thousands except per share information.
fiscal year 2006
Fiscal Year 2005
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Product sales and
royalty revenue
Contract research revenue
Exubera commercialization
$ 12,397 $ 44,157 $ 41,451 $ 55,551 $
,054
$ 14,817 $ 14,322 $ 15,111 $ 12,053 $ 1,52 $ 1,552 $ 23,657 $ 18,864
6,32 $
5,470 $
8,450 $
readiness revenue
$
1,745 $
1,744 $
2,070 $
2,300 $
2,573 $
3,528 $
4,247 $
4,63
Gross margin on
product sales
Research and development
expenses
General and administrative
expenses
Litigation Settlement
Impairment of long
lived assets
Operating loss
Interest expense
Net loss
Basic and fully diluted
net loss per share 1
$ 4,897 $
8,426 $ 10,861 $ 15,451 $
1,137 $
37 $
2,325 $
2,13
$ 31,401 $ 40,474 $ 34,985 $ 42,521 $ 34,45 $ 35,785 $ 38,51 $ 42,338
$ 20,373 $ 26,063 $ 14,442 $ 17,441 $
— $
$
— $ 17,710 $
— $
,110 $ 10,135 $ 10,48 $ 13,65
— $
— $
— $
—
— $
1,156 $
$
— $ 65,340
$ (33,174) $ (63,212) $ (22,682) $ (40,162) $ (24,02) $ (26,450) $ (23,367) $ (108,724)
$ 5,142 $
5,177
$ (33,471) $ (62,831) $ (19,604) $ (38,855) $ (26,165) $ (26,12) $ (23,75) $ (108,23)
4,938 $
5,255 $
3,060 $
8,254 $
2,856 $
4,921 $
2,2 $
— $
— $
— $
$
(0.38) $
(0.70) $
(0.22) $
(0.43) $
(0.31) $
(0.32) $
(0.28) $
(1.23)
1 Quarterly loss per share amounts may not total the year-to-date loss per share due to rounding.
nOte 18—suBsequent events (unaudited)
On January 8, 2007, we announced the appointment of
Howard W. Robin as our new President and Chief Executive Officer
(“CEO”), effective January 15, 2007. Mr. Robin replaced Acting
President and CEO Robert Chess who will remain Chairman of the
Board of Directors.
On February 7, 2007, we repaid with cash our $36.0 million
of outstanding 5% convertible subordinated notes plus
accrued interest.
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nektar corporate information
cOrpOrate headquarters
Nektar Therapeutics
150 Industrial Road
San Carlos, CA 4070-6256
Telephone (650) 631-3100
Facsimile (650) 631-3150
annual repOrt On FOrm 10-k
Copies of Nektar’s Annual Report on Form 10-K, exclusive of
exhibits, are available without charge upon written request to:
Investor Relations
Nektar Therapeutics
150 Industrial Road
San Carlos, CA 4070-6256
Or via email to:
investors@nektar.com; Online copies can also be obtained
at www.nektar.com under “Investor Relations.”
annual meeting
The Annual Meeting of Stockholders
will be held on
June 7, 2007
1:00-2:30 p.m. (PST)
Crystal Springs Ballroom
San Mateo Marriott Hotel
1770 S. Amphlett Blvd.
San Mateo, CA 4402
650.653.6034
cOrpOrate cOunsel
Cooley Godward LLP
Palo Alto, CA
independent auditOrs
Ernst & Young LLP
Palo Alto, CA
transFer agent
and stOckhOlder services
Mellon Investor Services, LLC
525 Market Street, Suite 3500
San Francisco, CA 4105
1-800-522-6645
The following graph shows the total stockholder return of an
investment of $100 in cash on December 31, 2001 for: (i) our
common stock; (ii) the RDG Total Return Index for the Nasdaq
Stock Market (U.S. companies); and (iii) the RDG Total Return Index
for the Nasdaq Pharmaceutical Stocks for the period commencing
on December 31, 2001 and ending on December 31, 2006
(2) All values assume reinvestment of the full amount of all
dividends and are calculated as of December 31 of each year.”
Comparison of 5-Year Cumulative Total Return
Among Nektar Therapeutics, The NASDAQ Composite Index
And The NASDAQ Pharmaceutical Index
$160
$140
$120
$100
$80
$60
$40
$20
0
12/01
12/02
12/03
12/04
12/05
12/06
Nektar Therapeutics
NASDAQ Composite NASDAQ Pharmaceutical
*
$100 invested on 12/31/01 in stock or index-including reinvestment of dividends.
Fiscal year ending December 31.
securities
Our Common Stock trades on the NASDAQ Market under the symbol “NKTR.” The table below sets forth the high and low closing sales
prices for our Common Stock (as reported on the NASDAQ Market) during the periods indicated.
Year ended December 31, 2005
High
Low
$ 1.80
$ 1.02
$ 1.5
$ 17.4
$ 13.41
$ 13.72
$ 16.24
$ 14.66
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Year ended December 31, 2006
high
Low
$ 21.76
$ 22.75
$ 18.53
$ 17.20
$ 16.44
$ 16.
$ 13.10
$ 13.6
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
52
Nektar Therapeutics is a leader in translating
advanced PEGylation and pulmonary delivery
technologies into therapies that transform patient
care and outcomes. We are the science and
development expertise behind blockbuster
products that make a positive difference in the
lives of patients. We are a public company with a
deep commitment to creating value for our
shareholders and making them proud of the
scientific and medical advances that their support
enables.
To meet our commitments to patients, physicians
and shareholders, we are moving our company in a
new direction. Starting from a position of strength
made possible by our previous achievements, we
are moving toward greater efficiency, productivity
and value creation by reorganizing into specific
business units and focusing on advancing our
proprietary pipeline. Never before have we believed
so strongly in our ability to succeed. Come see
what the excitement at Nektar is all about.
Table of Contents
1
2
4
6
8
9
10
11
23
Platforms, People, Products
Letter to the Shareholders
PEGylation Technology
Pulmonary Technology
Partnered & Proprietary Products
2006 Financial Review
Selected Financial Information
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Report of Independent Registered
Public Accounting Firm
25
26
27
28
30
Management’s Report on Internal Control
Over Financial Reporting
Nektar Therapeutics Consolidated Balance Sheets
Nektar Therapeutics Consolidated Statements
Of Operations
Nektar Therapeutics Consolidated
Statements Of Stockholders’ Equity
Nektar Therapeutics Consolidated
Statements Of Cash Flows
31 Notes To Consolidated Financial Statements
52 Nektar Corporate Information
53 Nektar Management Team & Board of Directors
Nektar Management Team
Howard W. Robin
President and
Chief Executive Officer,
Director
Louis Drapeau
Senior Vice President,
Finance and
Chief Financial Officer
Nevan Elam
Senior Vice President,
Head of the Pulmonary
Business Unit
Elizabeth Frisby
Vice President,
Human Resources
Hoyoung Huh, M.D., Ph.D.
Senior Vice President,
Business Development
and Marketing
David Johnston, Ph.D.
Senior Vice President,
Research and Development
Gil Labrucherie
Senior Vice President,
General Counsel and Secretary
Truc Le
Senior Vice President,
Operations and Corporate Quality
John S. Patton, Ph.D.
Chief Scientific Officer,
Director and Founder
Christopher J. Searcy, Pharm.D.
Senior Vice President,
Corporate Development
David Tolley
Senior Vice President,
Operations and Site Manager,
Nektar Alabama
Tim Warner
Senior Vice President,
Investor Relations
and Corporate Affairs
Nektar Board of Directors
Susan Wang
Former Executive
Vice President,
Corporate Development
and Chief Financial Officer
Solectron
Roy A. Whitfield
Former Chairman and
Chief Executive Officer
Incyte
Robert B. Chess
Chairman of the Board
Nektar Therapeutics
Michael A. Brown
Chairman, Line 6
Director, Former Chairman
and Chief Executive Officer
Quantum Corp
Joseph J. Krivulka
Founder and President
Triax Pharmaceuticals
Christopher A. Kuebler
Former Chairman and
Chief Executive Officer
Covance
Irwin Lerner
Former Chairman and
Chief Executive Officer
F. Hoffmann-LaRoche
John S. Patton, Ph.D.
Co-Founder and
Chief Scientific Officer
Nektar Therapeutics
Howard W. Robin
President and
Chief Executive Officer
Nektar Therapeutics
The preceding discussion contains forward-looking statements that involve risks and uncertainties. Nektar’s actual results could differ
materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those
discussed in Part 1 of the Form 10-K filed with the Securities Exchange Commission for the fiscal year ended December 31, 2006 under
the heading “Risk Factors.”
All Nektar brand and product names are trademarks or registered trademarks of Nektar Therapeutics in the United States and other
countries. The following, which appear in this Annual Report, are registered or other trademarks owned by the following companies:
Exubera (Pfizer Inc.); PEGASYS (Hoffmann-La Roche, Ltd.); Neulasta (Amgen Inc.); Cimzia (UCB Group); Definity (Bristol-Myers Squibb
Medical Imaging, Inc.); Somavert (Pfizer Inc.); PEG-INTRON (Schering-Plough Corporation); SprayGel (Confluent Surgical Inc.); Macugen
(OSI Pharmaceuticals, Inc.); MARINOL (Solvay Pharmaceuticals, Inc.).
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Nektar Therapeutics
201 Industrial Road
San Carlos, California 94070
USA
+1 650 631-3100 Global Headquarters
+1 650 631-3150 Main FAX
www.nektar.com
NASDAQ: NKTR
2006 ANNUAL REPORT