Nektar Therapeutics Annual Report 2007

FY2007 Annual Report · Nektar Therapeutics

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Annual Report 2007

Nektar is developing a robust pipeline
of high-value therapeutics to address
unmet medical needs by leveraging
and expanding our technology
platforms to improve known
molecules.

To Our Shareholders

This past year, we set out to put Nektar on a new course. I am

treatment of Gram-negative pneumonia, a dangerous infection

pleased to report that we are well on our way to becoming a

with a high rate of morbidity and a mortality rate of 15%-40%.

proprietary drug development company—one that will allow

All told, the successful development and commercialization of

us to better capitalize on our talents, technology platforms,

this product in collaboration with Bayer represent substantial

and resources. We are now more firmly in control of our own

milestone and royalty opportunities for Nektar. Bayer plans to

destiny and more strategically positioned to succeed in our

initiate Phase 3 clinical trials in 2008. NKTR-061 was granted

efforts to build an exciting and valuable company. Clearly,

fast-track status by the FDA and is already generating excite-

Exubera’s departure from the market was a great disappoint-

ment among key infectious disease opinion leaders in the U.S.

ment to us all, but I believe that our core value lies in our

and Europe.

robust pipeline, proprietary drug development programs, and

platform technologies.

By any measure, Nektar is now uniquely positioned in the

biotech industry and has the essential ingredients for success.

In 2007, we expanded our research and development efforts

From a financial standpoint, we closed 2007 with $482 million

and built a pipeline of high-value proprietary therapeutics

in cash and have significantly reduced our historic spending.

together with new, more valuable partnered programs. At the

We have put in place a highly motivated and skilled manage-

same time, we right-sized the company, reduced and refocused

ment team fully capable of executing on our vision. We will

our spending, and significantly increased our efficiency and

continue to invest our resources on proprietary R&D that offers

productivity. We are advancing our lead clinical candidates

the greatest value potential for the company. With respect to

with greater speed and lower risk than competitors by applying

technology, we have two powerful and patent-protected

our proven technology platforms to well-understood molecules.

platforms and the ability to use them as a foundation for

We continue to expand our early research efforts, building a

growing our unique pipeline. Our partnered programs provide

vast patent estate covering novel applications of PEGylation

us with an expanding base of product royalties with the

and polymer chemistry and pulmonary technologies.

potential to produce significant revenues in the coming years.

The perfect case-in-point is the progress we have made devel-

As a proprietary drug development company, we are now

oping proprietary products based on our PEGylation technology

moving forward with a renewed sense of clarity and

platform. We have already advanced two high-value products

confidence about our future. I want to thank you for your

into Phase 2 clinical trials derived from our robust small mole-

continued support and look forward to updating you on

cule PEG platform: NKTR-102 (PEG-irinotecan) for colorectal

our progress.

cancer and NKTR-118 (oral PEG-naloxol) for opioid-induced

bowel dysfunction. Later this year, we plan to expand the

Sincerely,

NKTR-102 Phase 2 trials to include additional solid tumor

indications and we plan to file an Investigational New Drug

application to advance our next important small molecule

oncolytic, NKTR-105 (PEG-docetaxel).

We will continue to work with partners to accelerate the clinical

development of our programs, but rest assured, we will secure

the most favorable economic terms for our shareholders. A

prime example is our new alliance with Bayer HealthCare for

NKTR-061 (inhaled amikacin). NKTR-061 is being developed for the

Howard W. Robin
President and Chief Executive Officer

...leading the industry in PEGylation

and pulmonary
platform
technologies

Nektar has created two technology platforms, one based upon

PEGylation and polymer chemistry, and the other upon pulmonary

formulation and targeted delivery—and Nektar is the driving force and

recognized leader in both.

Each of these platforms is robust and broadly applicable as there are a

vast number of commercially important molecules that can be optimized

by our PEG and pulmonary technologies. Every large molecule PEG product

approved over the last decade has been enabled by Nektar, and we are

at the forefront of small molecule PEG technology. Likewise, our pulmonary

delivery technology is enabling the development of novel and potent

antibiotics.

The innovations that Nektar scientists have created using these platform

technologies are protected by a highly fortified intellectual property estate,

which broadly covers pharmaceutical and biological compositions

and methods.

Dominant Patent Estate in Pulmonary Delivery
Dominant Patent Estate in Pulmonary Delivery
117 U.S. patents issued; 1600 applications filed worldwide

SPRAY DRYING
SPRAY DRYING
Over 20 U.S. Patents
Over 20 U.S. Patents

FORMULATIONS
FORMULATIONS
Over 30 U.S. Patents
Over 30 U.S. Patents

DEVICES/MECHANICAL
DEVICES/MECHANICAL
Over 35 U.S. Patents
Over 35 U.S. Patents

PULMONARY DELIVERY
PULMONARY DELIVERY
Over 30 U.S. Patents
Over 30 U.S. Patents

Powders
Powders
s Spray drying
s Spray drying
modalities
modalities
s Spray drying
s Spray drying
techniques
techniques
techniques
s Spray drying specific
s Spray drying specific
active agents
active agents

Powders
Powders
s Stabilized powders
s Stabilized powders
s Active-agent
s Active-agent
specific powders
specific powders
s Aero-dynamically
ss Aero-dynamically
Aero dynamically
engineered particles
engineered particles

Liquids
Liquids
s Antibiotic-containing
s Antibiotic-containing
liquids
liquids

Powders
Powders
s Inhalers
s Inhalers
s Powder fillers
s Powder fillers

Liquids
Liquids
Liquids
s High efficiency nebulizers
s High efficiency nebulizers

Powders
Powders
s Delivering powders
s Delivering powders
for inhalation
for inhalation
s Treatment methods
s Treatment methods

Liquids
Liquids
s Nebulization
s Nebulization
s Dispensing droplets
s Dispensing droplets

STABILITY-ENHANCED
STABILITY-ENHANCED

PACKAGING
PACKAGING
Over 5 U.S. Patents
Over 5 U.S. Patents

Powders
Powders
s Convenient dosage
s Convenient dosage
forms of pulmonary
forms of pulmonary

formulations
formulations
formulations

Liquids
Liquids
s Antibiotic-containing
s Antibiotic-containing
dosage units
dosage units
s Disposable dosage units
s Disposable dosage units

...drug development is now the
core focus
at Nektar

We have departed from the company’s past focus on providing

drug delivery services and contract research for partners. Today we are

developing our own drugs, advancing them in the clinic with the potential

to create high-value partnerships.

In fact, proprietary drug development is the very foundation of our

corporate mission and serves as the focal point of our R&D and intellectual

property strategy. Going forward, we are confident that our vision will

provide the basis for creating long-term and sustainable value at Nektar.

We are reducing the development risk and the time horizon necessary to

advance our products through the clinic by focusing on the development

of novel therapeutics based on known molecules. We believe that by

improving the performance profile of these therapeutically important

molecules, we can significantly improve the standard of care in a

broad range of disease settings.

Dominant Patent Estate in PEGylation
Dominant Patent Estate in PEGylation
55 U.S. patents issued; 490 applications filed worldwide

POLYMER STRUCTURES
POLYMER STRUCTURES

POLYMER LINKERS
POLYMER LINKERS

CONJUGATES (INCLUDING)
CONJUGATES (INCLUDING)

MANUFACTURING
MANUFACTURING

MECHANISM AND
MECHANISM AND

Large Molecule
Large Molecule
s Linear
s Linear
s Branched
s Branched
(two polymers)
(two polymers)
s Forked
s Forked
(two functional groups)
(two functional groups)
(two functional groups)
s Multi-armed
s Multi-armed
s Segmented
s Segmented
s Sterically hindered
s Sterically hindered
s Bi-functional polymers
s Bi-functional polymers

Small Molecule
Small Molecule
s Linear
s Linear
s Multi-armed
s Multi-armed
s Low molecular weight
s Low molecular weight
polymers
polymers
s Bi-functional polymers
s Bi-functional polymers

Target Attachment Sites
Target Attachment Sites
s Amine
s Amine
s Hydroxyl
s Hydroxyl
s N-terminus
s N-terminus
s C-terminus
s C-terminus
s Thiol
ss Thiol
Thiol

Linkages
Linkages
s Stable
s Stable
s Releasable
s Releasable

s Antibiotics
s Antibiotics
s Anti-Cholinergics
s Anti-Cholinergics
s Anti-HIV agents
s Anti-HIV agents
s Anti-histamines
s Anti-histamines
s Anti-TNF
s Anti-TNF
s Chemo-Therapeutics
ss Chemo-Therapeutics
Chemo Therapeutics
s Neuropeptides
s Neuropeptides
s Opioids
s Opioids
s Factor VIII
s Factor VIII
s Factor IX
s Factor IX
s G-CSF
s G-CSF
s GM-CSF
s GM-CSF
s HgH
s HgH
s Irinotecan
s Irinotecan
s Naloxone
s Naloxone

s Manufacturing
s Manufacturing
efficiency methods
efficiency methods
s Methods of producing
s Methods of producing
reagents
reagents
s Methods of making
s Methods of making
conjugates
conjugates
conjugates
s Purification methods
s Purification methods
s Purified formulations
s Purified formulations

DELIVERY MODALITIES
DELIVERY MODALITIES

s Differential membrane
s Differential membrane
crossing
crossing
s First-pass metabolism/
s First-pass metabolism/
oral bioavailability
oral bioavailability

s Tissue targeting
s Tissue targeting
s Delivery vehicles
s Delivery vehicles
s Gels
s Gels

...our pipeline is growing
with new,
high-value
products

Nektar’s pipeline has evolved—it is no longer dominated by one

product and one partner. In fact, the defining features of our preclinical

and clinical pipeline are its depth, breadth, and diversity. Nektar has an

increasing number of novel, high-value proprietary and partnered

programs.

In 2007 we advanced NKTR-102 (PEG-irinotecan) for colorectal cancer

and NKTR-118 (oral PEG-naloxol) for opioid-induced bowel dysfunction

into Phase 2 clinical trials. We partnered with Bayer and advanced our

lead pulmonary product, NKTR-061 (inhaled amikacin) for Gram-negative

pneumonias.

Bayer plans to commence Phase 3 clinical trials for NKTR-061 in 2008.

Nektar plans to file two Investigational New Drug applications in 2008,

one for our next small molecule PEG oncolytic, NKTR-105 (PEG-docetaxel)

and the other for our next inhaled antibiotic, NKTR-063 (inhaled

vancomycin) for Gram-positive pneumonias.

One of the Most Robust Pipelines in Biotech
One of the Most Robust Pipelines in Biotech

10 MARKETED OR FILED PRODUCTS
10 MARKETED OR FILED PRODUCTS

8 PROGRAMS IN THE CLINIC
8 PROGRAMS IN THE CLINIC

6 PRECLINICAL PROGRAMS
6 PRECLINICAL PROGRAMS

Filed/Recently Approved
Filed/Recently Approved
s Cimzia® (UCB)
s Cimzia® (UCB)
s Mircera™ (Roche)-US
s Mircera™ (Roche)-US

Marketed
Marketed
s Neulasta® (Amgen)
ss Neulasta® (Amgen)
Neulasta® (Amgen)
s PEG-Intron® (Schering)
s PEG-Intron® (Schering)
s Pegasys® (Roche)
s Pegasys® (Roche)
s Mircera™ (Roche)-EU
s Mircera™ (Roche)-EU
s Macugen® (OSI)
s Macugen® (OSI)
s Definity® (BMS)
s Definity® (BMS)
s SprayGel™ (Confluent)
s SprayGel™ (Confluent)
s DuraSeal™ (Confluent)
s DuraSeal™ (Confluent)
s Somavert® (Pfizer)
s Somavert® (Pfizer)

Proprietary
Proprietary
s NKTR-102 (PEG-irinotecan) – Phase 2
s NKTR-102 (PEG-irinotecan) – Phase 2
s NKTR-118 (oral PEG-naloxol) – Phase 2
s NKTR-118 (oral PEG-naloxol) – Phase 2

Partnered
Partnered
s Inhaled Tobramycin (Novartis) – Phase 3
ss Inhaled Tobramycin (Novartis) – Phase 3
Inhaled Tobramycin (Novartis) Phase 3
s Hematide™ (Affymax) – Phase 3
s Hematide™ (Affymax) – Phase 3
s NKTR-061 (inhaled amikacin) (Bayer) – Phase 2b *
s NKTR-061 (inhaled amikacin) (Bayer) – Phase 2b *
s CDP 791 (UCB) – Phase 2
s CDP 791 (UCB) – Phase 2
s Inhaled DHE (MAP) – Phase 2
s Inhaled DHE (MAP) – Phase 2
s Inhaled Ciprofloxacin (Bayer) – Phase 1
s Inhaled Ciprofloxacin (Bayer) – Phase 1

* Expected to enter Phase 3 clinical trials
* Expected to enter Phase 3 clinical trials
in 2008
in 2008

Note: This table contains only a partial listing of Nektar’s pipeline. Please go to www.nektar.com to view our most up-to-date pipeline.

Proprietary
Proprietary
s NKTR-105 (PEG-docetaxel)
s NKTR-105 (PEG-docetaxel)
s NKTR-125 (oral PEG-diphenhydramine)
s NKTR-125 (oral PEG-diphenhydramine)
s NKTR-063 (inhaled vancomycin)
s NKTR-063 (inhaled vancomycin)
s NKTR-067 (inhaled gentamycin)
s NKTR-067 (inhaled gentamycin)

Partnered
Partnered
s PEG-Factor VIII (Baxter)
s PEG-Factor VIII (Baxter)
s PEG-Factor IX (Baxter)
s PEG-Factor IX (Baxter)

* Expected to enter Phase 1 clinical trials
*
Expected to enter Phase 1 clinical trials
in 2008
in 2008

Nektar Value Proposition
Nektar Value Proposition

POSITIONED FOR
POSITIONED FOR

TWO PROVEN
TWO PROVEN

STRONG AND DIVERSE
STRONG AND DIVERSE

GROWING ROYALTY
GROWING ROYALTY

DOMINANT IP
DOMINANT IP

SUCCESS
SUCCESS

DRUG PLATFORMS
DRUG PLATFORMS

PRODUCT PIPELINE
PRODUCT PIPELINE

REVENUE BASE
REVENUE BASE

PORTFOLIO
PORTFOLIO

s Broad, sustainable
s Broad, sustainable
pipeline
pipeline
s High-value proprietary
s High-value proprietary
products
products
s Focus on improving
ss Focus on improving
Focus on improving
known molecules
known molecules
s Robust technology
s Robust technology
platform
platform
s Improved development
s Improved development
times
times
s Reduced risk and cost
s Reduced risk and cost

s PEGylation chemistry
s PEGylation chemistry
s Pulmonary delivery
s Pulmonary delivery

s 10 Partnered products
s 10 Partnered products
approved or filed
approved or filed
s 6 Partnered products
s 6 Partnered products
in the clinic
in the clinic
s 2 Proprietary products
ss 2 Proprietary products
2 Proprietary products
in the clinic
in the clinic
s 6 Preclinical programs *
s 6 Preclinical programs *

*4 out of 6 are proprietary
*4 out of 6 are proprietary

s Partnerships with
s Partnerships with
leading biotech and
leading biotech and

pharma companies
pharma companies

such as Bayer, Baxter,
such as Bayer, Baxter,

Novartis Amgen
Novartis, Amgen,
Novartis, Amgen,

s Pulmonary –
s Pulmonary –
117 U.S. Patents,
117 U.S. Patents,

1,600 applications
1,600 applications
s PEGylation –
s PEGylation –
55 U S Patents
55 U.S. Patents,
55 U.S. Patents,

Roche, Schering-Plough
Roche, Schering-Plough

490 applications
490 applications

and others.
and others.

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 and Exchange Commission for the fiscal year ended
December 31, 2007 under the heading “Risk Factors.”

Financials 2007

Selected Consolidated Financial Information
(In thousands, except per share 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.

2007

2006

2005

2004

2003

Years ended December 31,

Statements of Operations Data:

Revenue:

Product sales and royalties (1)

$ 180,755

$ 153,556

$ 29,366

$ 25,085

$ 27,295

Contract research

85,925

56,303

81,602

89,185

78,962

Exubera commercialization readiness

6,347

7,859

15,311

—

Total revenue

273,027

217, 718

126,279

114,270

106,257

Total operating costs and expenses (2)(3)

309,175

376,948

308,912

188,212

171,012

Loss from operations (2)

(36,148)

(159,230)

(182,633)

(73,942)

(64,755)

Gain (loss) on debt extinguishment

Interest and other income (expense), net

Provision (benefit) for income taxes

—

4,696

1,309

—

(303)

(9,258)

12,018

5,297

(2,312)

(18,849)

(12,984)

828

(137)

(163)

169

Net loss

$ (32,761)

$(154,761)

$(185,111)

$(101,886)

$ (65,890)

Basic and diluted net loss per share (4)

(0.36)

(1.72)

(2.15)

(1.30)

(1.18)

Share used in computing basic and diluted
net loss per share (4)

Balance Sheet Data:
Cash, cash equivalents and investments

Working capital

Total assets

Deferred revenue

Convertible subordinated notes

Other long-term liabilities

Accumulated deficit

91,876

89,789

85,915

78,461

55,821

2007

2006

2005

2004

2003

As of December 31,

482,353

$ 466,977

$ 566,423

$ 418,740

$ 298,409

425,191

$ 369,457

$ 450,248

$ 223,880

$ 223,971

725,103

$ 768,177

$ 858,554

$ 744,921

$ 616,788

80,969

40,106

$ 23,861

$ 31,021

$ 19,680

315,000

$ 417,653

$ 173,949

$ 359,988

27,431

29,189

$ 27,598

$ 36,250

$ 46,742

$ (1,089,754)

$(1,056,993)

$(902,232)

$(717,121)

$(615,235)

Total stockholders’ equity

214,439

$ 227, 060

$ 326,811

$ 467,342

$ 164,191

(1) 2006 and 2007 Product sales and royalties include commercial manufacturing revenue from Exubera bulk dry powder insulin 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) 2007 Operating costs and expenses include the gain on termination of collaborative agreements, net of $79.2 million.
(4) Basic and diluted net loss per share is based upon the weighted average number of common shares outstanding.

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 Part I
(Item 1a) 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 that develops and
enables differentiated therapeutics with our leading
PEGylation and pulmonary drug development technology
platforms. Our mission is to create differentiated, innovative
products by applying our platform technologies to
established or novel medicines. By doing so, we aim to raise
the standards of current patient care by improving one or
more performance parameters, including efficacy, safety or
ease of use. Ten products using these technology platforms
have received regulatory approval in the U.S. or Europe. Our
two technology platforms are the basis of nearly all of our
partnered and proprietary product and product candidates.

We create or enable potential breakthrough products in
two ways. First, we develop products in collaboration with
pharmaceutical and biotechnology companies that seek to
improve and differentiate their products. All of the approved
products today that use our technology platforms are a
result of collaborations with partners. Second, we develop
our own product candidates by applying our technologies
to already approved drugs to create and develop our own
differentiated, proprietary product candidates that are
designed to target serious diseases in novel ways. We
currently have two proprietary product candidates in mid-
stage clinical development and a number of other
candidates in preclinical development.

Our two leading technology platforms enable improved
performance of a variety of new and existing molecules.
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. Our pulmonary technology makes drugs
inhaleable to deliver them to and through the lungs for
both systemic and local lung applications.

There are two key elements to our business strategy.
First, we are developing a portfolio of proprietary product
candidates by applying our PEGylation and pulmonary
technology platforms and know-how to improving already
approved drugs. Our strategy is to identify molecules that
would benefit from the application of our technologies and
potentially improve one or more performance parameters,
including efficacy, safety and ease of use. Our objective is

to create value by advancing these product candidates into
clinical development and then deciding on a product-by-
product basis whether we wish to continue development
and commercialize on our own or seek a partner, or pursue
a combination of these approaches. Our most advanced
proprietary product candidates are NKTR-102 (PEG-
irinotecan) for the treatment of solid tumors, including
colorectal cancer, and NKTR-118 (oral PEG-naloxol) for the
treatment of opioid-induced bowel dysfunction, both of
which entered Phase 2 clinical development in late 2007.

Second, we have collaborations or licensing arrangements
with a number of pharmaceutical and biotechnology
companies. Our partnering strategy enables us to work
towards developing a larger and more diversified pipeline
of drug products and product candidates using our
technologies. As we have shifted our focus away from being
a drug delivery service provider and have advanced research
and development of our proprietary product pipeline, we
expect to engage in selected high value partnerships in
order to optimize revenue potential, probability of success
and overall return on investment. Our partnering options
range from a comprehensive license to a co-promotion and
co-development arrangement with the structure of the
partnership depending on factors such as the cost and
complexity of development, commercialization needs, and
therapeutic area focus.

Historically, we have depended on revenue from Pfizer
related to Exubera contract research and manufacturing.
Our revenue from Pfizer, including Exubera contract research
and manufacturing revenue, was approximately $189.1
million and $139.9 million, representing 69% and 64% of
revenue, for the years ended December 31, 2007 and 2006,
respectively.

On October 18, 2007, Pfizer announced that it was exiting
the Exubera business and gave notice of termination under
the collaborative development and licensing agreement.
On November 9, 2007, we entered into a termination
agreement and mutual release with Pfizer. Under the
termination agreement and mutual release, we received a
one-time payment of $135.0 million in November 2007
from Pfizer in satisfaction of all outstanding contractual
obligations under our then-existing agreements relating to
Exubera and our next-generation inhaled insulin product
development program, also known as NGI. In addition, Pfizer
agreed to continue to perform a number of maintenance
activities for Exubera and NGI for a limited time and to
transfer all of its rights to Exubera and NGI if we find a new
marketing and development partner within a certain time
period as described more fully below. All agreements
between Pfizer and us related to Exubera and NGI, other
than the termination agreement and mutual release,
terminated on November 9, 2007.

We are currently seeking a new marketing and development
partner for Exubera and/or NGI. Under the termination
agreement and mutual release, if we identify a potential
new marketing and development partner for Exubera
and/or NGI within a certain time period, Pfizer will use
commercially reasonable efforts to complete an agreement

with the potential new partner pursuant to which Pfizer will
transfer all of its rights in Exubera and/or NGI to the partner
without additional consideration (including without any
prospective economic value, such as a royalty or profit
sharing), other than reimbursement of certain out-of-pocket
and incremental costs actually incurred by Pfizer in relation
to maintenance and transfer activities performed by Pfizer.
In addition, Pfizer has agreed to undertake a number of
activities designed to transition all of its rights in Exubera
and NGI to a new partner for at least three months
following completion of an agreement with the new
partner, if any, or such longer transition period as regulatory
requirements may require, subject to reimbursement of
certain out-of-pocket and incremental costs actually
incurred by Pfizer.

In addition, in January 2008, we entered into a letter
agreement with Pfizer to maintain a group of key Pfizer
manufacturing personnel in Pfizer’s Exubera manufacturing
facility in Terre Haute, Indiana. The purpose of this
arrangement is to provide potential partners for Exubera
and/or NGI with the opportunity to have manufacturing
performed in Pfizer’s Indiana manufacturing facility in the
event that a new partner reaches a mutually satisfactory
arrangement with Pfizer. We are reimbursing Pfizer for
actual monthly incremental personnel costs incurred to
maintain such personnel during this interim period.

In response to lower expected revenue levels in 2008
resulting from the termination of the Pfizer agreements
related to Exubera and NGI, we have taken steps to reduce
ongoing expense related to Exubera and NGI while
maintaining our Exubera and NGI manufacturing and
development capabilities until such time as a collaboration
agreement with a new partner is concluded or we cease our
partnering efforts. As discussed below under the caption,
“Recent Developments,” we have terminated our
manufacturing and supply agreement with our contract
manufacturers that manufactured and supplied us with the
Exubera inhalers and reduced our workforce. We also have a
2008 continuation agreement with one of the contract
manufacturers, Tech Group North America, Inc., to preserve
manufacturing capacity and expertise to support a new
partner for the Exubera inhaler if we secure a new partner
for Exubera within a certain time period and such partner
desires to enter into a new manufacturing and supply
agreement with Tech Group.

We are currently engaged in discussions with third parties
regarding a potential partnership for Exubera and/or NGI.
If we are able to secure a new partner, utilization of our
Exubera-related assets depends on such partner’s desire to
enter into a manufacture and supply agreement with Tech
Group and to utilize our San Carlos facility to manufacture

Exubera inhalation powder. We currently expect to conclude
whether or not we will have a new partner for Exubera
and/or NGI in the first half of 2008. If we are not successful
in concluding a new partnership for Exubera and/or NGI, we
will eliminate the remaining costs and infrastructure
associated with these programs.

The investment required to advance our proprietary product
development programs, our ability to manage ongoing
expense and the cash generated by new partnerships, if any,
will be the key drivers of our results of operations and
financial position in 2008. To fund 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, 2007, we had
approximately $345.8 million in indebtedness. Our ability to
meet the repayment obligations of this debt is dependent
upon our and our partners’ ability to develop, obtain
regulatory approvals for and successfully commercialize
products. Even if we are successful in this regard, we may
require additional capital to repay our debt obligations as
they become due.

Recent Developments

Workforce Reduction

During the year ended December 31, 2007, we reduced our
workforce by approximately 180 employees, or
approximately 25 percent of our regular full-time
employees, as part of an overall effort to reduce our ongoing
operating costs and improve our organizational structure,
efficiency and productivity. No research and development
programs were curtailed due to the workforce reduction.
The cost of the workforce reduction was approximately
$8.4 million, of which $7.8 million was paid in 2007 and
$0.6 million will be paid in 2008. We estimate that the
reduced salaries and benefits from the workforce reduction
will result in gross annual savings of $20.0 million, a portion
of which we began to realize in the fourth quarter of 2007
within research and development and general and
administrative expenses.

For the year ended December 31, 2007, workforce reduction
charges were recorded in our Consolidated Statements of
Operations as follows (in thousands):

Year ended
December 31,
2007

Cost of goods sold, net of change in inventory

974

Research and development expense

General and administrative expense

5,791

1,617

Total workforce reduction charges

$ 8,382

On February 8, 2008, Executive Management approved a
plan to reduce our workforce by approximately 110
employees, or approximately 20 percent of our regular full-
time employees. The restructuring is designed to streamline
our operations, consolidate corporate functions, and
strengthen decision-making and execution within the
business units. In addition, as part of the plan, we have
preserved the necessary technical and manufacturing
personnel and capabilities to support our ongoing effort to
forge a new partnership for our inhaled insulin programs.

We estimate the 2008 workforce reduction will cost
approximately $5.4 million in 2008, comprised of cash
payments for severance, medical insurance, and
outplacement services. The severance charge associated
with this plan will be recorded as a one-time expense in
February 2008, except for a few employees with transition
dates longer than 60 days. For these employees, the
severance expense will be recorded ratably over the
estimated transition period. In addition to the full-time
employees terminated as part of the 2007 and 2008
workforce reductions, we eliminated open and temporary
positions.

Change in Executive Management and the Board of Directors

On February 8, 2008, Hoyoung Huh, M.D./Ph.D, our Chief
Operating Officer and Head of the PEGylation Business Unit,
resigned from his positions effective as of February 29, 2008.

On February 11, 2008, the Board of Directors met and
appointed Dr. Huh as a new director to fill the vacancy
created by resolution of the Board of Directors at the same
meeting to increase the authorized number of directors
from 10 to 11. Dr. Huh will serve until the 2009 annual
meeting of stockholders or until his successor is duly elected
and qualified.

Termination of Agreement with Contract Manufacturers

We were a party to a Manufacturing and Supply Agreement
(“Exubera Inhaler MSA”) with Tech Group North America, Inc.
and Bespak Europe Ltd. related to the manufacture and
supply of Exubera inhalers.

On February 12, 2008, we entered into a Termination and
2008 Continuation Agreement (“TCA”) with Tech Group.
Under the terms of this agreement, we have agreed to pay

Tech Group up to $13.8 million for costs and expenses that
were due and payable by us under the terms of the Exubera
Inhaler MSA. Additionally, under the terms of the TCA we
agreed to compensate Tech Group to retain a limited
number of core Exubera inhaler manufacturing personnel
and its dedicated Exubera inhaler manufacturing facility for
a limited period in 2008.

Research and Development Activities

Our product pipeline includes both partnered and
proprietary development programs. We have ongoing
collaborations or licensing arrangements with more than
twenty biotechnology and pharmaceutical companies to
provide our pulmonary and PEGylation technologies. Our
technologies are currently being used in ten products
approved in the U.S. or Europe, in three 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.

In connection with our research and development for
partner products and development programs, we earned
$85.9 million, $56.3 million, and $81.6 million in contract
research revenue for the years ending December 31, 2007,
2006, and 2005, respectively. 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 and the timing and risks associated with clinical
development.

The costs incurred in connection with our research and development programs, including allocations of facilities, cGMP quality
programs and other shared costs, is as follows (in millions):

Status as of December 31, 2007 (1)

2007

2006

2005

Years ended December 31,

Pulmonary

Partnered Products and Development Programs

Next-generation inhaled insulin (NGI) (2)

Tobramycin inhalation powder (TIP) (3)

NKTR-061 (inhaled amikacin) (4)

Exubera® inhalation powder (2)

Other partnered product candidates

Proprietary Development Programs

NKTR-024 (amphotericin B inhalation powder) (5)

Other proprietary product candidates

Technology platform

Total Pulmonary

PEGylation

Phase 1

Phase 3

Phase 2

Approved

Various

Phase 1

Various

$ 28.4

$ 17.4

$ 6.5

16.3

15.2

9.2

13.2

4.3

11.1

7.9

12.8

13.6

22.1

14.3

24.3

9.1

12.2

11.3

9.1

51.4

9.5

16.7

8.4

16.9

$105.6

$125.8

$129.8

Partnered Products and Development Programs

Various

5.3

$ 1.8

$ 0.7

Proprietary Development Programs

NKTR-118 (oral PEG-naloxol)

NKTR-102 (PEG-irinotecan)

Other proprietary product candidates

Total PEGylation

Other
Workforce Reduction Charges (6)

Phase 2

Various

Various
n/a

12.9

12.7

11.3

5.5

2.7

10.6

5.3

2.4

4.7

$ 42.2

$ 20.6

$ 13.1

—
5.8

3.0
—

8.8
—

Research and Development Expense

$153.6

$149.4

$151.7

(1) Status definitions are: Approved—regulatory approval to market and sell product obtained in the U.S., EU and other countries.
Phase 3 or Pivotal—product in large-scale clinical trials conducted to obtain regulatory approval to market and sell the drug
(these trials are typically initiated following encouraging Phase 2 trial results).
Phase 2—product in clinical trials to establish dosing and efficacy in patients.
Phase 1— product in clinical trials, typically in healthy subjects, to test safety.

(2) Our Collaborative Development and License Agreement and certain related agreements with Pfizer Inc. for Exubera and NGI terminated on November 9,

2007, following Pfizer’s announcement on October 18, 2007 that it would exit the Exubera business and NGI development.

(3) Novartis Pharma AG is our partner for the TIP program.
(4) On August 1, 2007, we executed an agreement with Bayer AG for the co-development, license and co-promotion of NKTR-061 (inhaled amikacin).
(5) Future expenditures curtailed pending partner deal for the product.
(6) May 2007 workforce reduction charges include severance for personnel that support our research and development activities, including $1.4 million

related to non-commercial operations, manufacturing and quality and $4.4 million related to research and development infrastructure support during
the year ended December 31, 2007.

Results of Operations
Years Ended December 31, 2007, 2006, and 2005

Revenue (in thousands except percentages)

Years ended December 31,

Increase/

(Decrease)

Increase/

(Decrease)

Percentage

Increase/

(Decrease)

Percentage

Increase/

(Decrease)

2007

2006

2005

2007 vs. 2006

2006 vs. 2005

2007 vs. 2006

2006 vs. 2005

Product sales and
royalties

$180,755

$153,556

$ 29,366

$27,199

$ 124,190

Contract research

85,925

56,303

81,602

29,622

(25,299)

18%

53%

Exubera
commercialization
readiness

6,347

7,859

15,311

(1,512)

(7,452)

(19%)

Total Revenue

$273,027

$217,718

$126,279

$55,309

$ 91,439

25%

>100%

(31%)

(49%)

72%

The increase in total revenue for the year ended December
31, 2007 as compared to the year ended December 31, 2006
is primarily a result of increased Exubera product sales to
Pfizer and increased contract research revenue from our
collaboration partners. During the year ended December 31,
2007, total revenue from Pfizer through the November 9,
2007 termination of our collaboration agreements includes
$146.2 million related to Exubera and $36.3 million related
to the next-generation inhaled insulin product development
program (“NGI”). Revenue from Pfizer represented 69% of
our total revenue for the year ended December 31, 2007; no
other single customer represented 10% or more of our total
revenues during this period.

On October 18, 2007, Pfizer announced that it was exiting
the Exubera business and gave notice of termination under
our collaborative development and licensing agreement and
certain other related agreements (the “Pfizer agreements”).
On November 9, 2007, we entered into a termination
agreement and mutual release with Pfizer, in which we
received a one-time payment of $135.0 million in satisfaction
of all outstanding contractual obligations to and from Pfizer
under the Pfizer agreements. We will not receive any
revenue from Pfizer related to Exubera or NGI in 2008.

The increase in total revenue for the year ended December
31, 2006 as compared to the year ended December 31, 2005
is primarily attributable to an increase in Exubera product
sales to Pfizer, partially offset by a decrease in contract
research revenue from Pfizer. Pfizer represented 64% and
64% of our revenue for the years ended December 31, 2006
and 2005, respectively; no other single customer represented
10% or more of our total revenues during these periods.

Product sales and royalties

Product sales and royalties increased 18% to $180.8 million
for the year ended December 31, 2007 as compared to the
year ended December 31, 2006, primarily due to increased
Exubera product sales to Pfizer, as well as certain
modifications to the timing of revenue recognition.

Exubera product sales to Pfizer increased by approximately
$32.0 million during the year ended December 31, 2007 as
compared to the year ended December 31, 2006. Exubera
commercial sales began in January 2006. During 2006, we
deferred recognition of all Exubera product sales until
Pfizer’s contractual 60-day right of return period lapsed. As a
result, as of December 31, 2006 we deferred $22.9 million in
Exubera product sales and we recognized ten months of
product shipments in revenue. In January 2007, we began
estimating product warranty returns and recognizing
Exubera product sales upon shipment. During the year
ended December 31, 2007, we recognized product sales
through November 9, 2007, when our collaboration
agreements with Pfizer terminated, as well as the revenue
deferred at December 31, 2006. We will not have any future
Exubera product sales to Pfizer in 2008.

During the year ended December 31, 2007, royalty revenue
decreased by $5.5 million as compared to the year ended
December 31, 2006. This decrease primarily resulted from a
decrease in royalties related to Macugen sales by OSI.

The increase in product sales and royalties for the year
ended December 31, 2006 as compared to the year ended
December 31, 2005 is 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 in product sales and royalties
from our PEGylation products.

Royalty revenues were $3.7 million, $9.2 million, and $5.4
million for the years ended December 31, 2007, 2006, and
2005, 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 collaboration partners. Contract research revenue
fluctuates from year to year, and therefore 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, the stage of program development, and the
achievement of milestones.

The increase in contract research revenue during the year
ended December 31, 2007 compared to the year ended
December 31, 2006 was attributable to increased revenue
from Pfizer of $17.3 million. The increase in contract
research revenue from Pfizer includes a net decrease in
research revenue of $7.3 million related to Exubera and NGI
in 2007 and recognition of $24.6 million in NGI up-front fees
upon termination of the Pfizer Agreements. Additionally,
contract research revenue from Novartis and Bayer increased
by $8.5 million and $4.5 million, respectively, under our
collaboration agreements to develop a tobramycin
inhalation powder (“TIP”) with Novartis and Ciprofloxacin
and NKTR-061 (inhaled amikacin) with Bayer. These
increases in contract research revenue were partially off-set
by decreased revenue from Zelos of $4.2 million under our
collaboration agreement to develop Ostabolin-C.

Due to the termination of the Pfizer agreements discussed
above, we do not expect to receive any contract research
revenue from Pfizer related to Exubera or NGI in 2008.

for TIP and a $3.4 million increase from Baxter Healthcare,
under our agreement to develop a product to extend the
half-life of Hemophilia A proteins using our PEGylation
technology.

Revenue by geography

Revenue by geographic area is based on the shipping
locations of our customers. The following table sets forth
revenue by geographic area (in thousands):

Years ended December 31,
2006

2005

2007

United States

$ 212,990

$182,959 $109,488

European countries

60,037

33,471

14,967

All other countries

—

1,288

1,824

Total Revenue

$ 273,027

$217,718 $126,279

Cost of goods sold during the year ended December 31,
2007 includes Exubera manufacturing costs through the
November 9, 2007 termination of the Pfizer agreements.
Costs related to our Exubera manufacturing operations after
November 9, 2007 are included in cost of idle Exubera
manufacturing capacity. During the years ended December
31, 2007 and 2006, Exubera contributed $29.3 million and
$19.5 million, respectively, to our product gross margin.

The decrease in contract research revenue during the year
ended December 31, 2006 compared to the year ended
December 31, 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 research and clinical trial support to
manufacturing of commercial product. The decrease in
research revenue from Pfizer was partially offset by a $3.7
million increase in contract research revenues from Novartis

The increase in cost of goods sold and product gross margin
during the year ended December 31, 2007 compared to the
year ended December 31, 2006 is consistent with the
proportionate increase in Exubera product sales. The
decrease in gross margin percentage during the year ended
December 31, 2007 compared to the year ended December
31, 2006 is primarily attributable to product mix, our cost
plus manufacturing arrangement with Pfizer, and the
decline in royalty revenue of $5.5 million during 2007.

Costs of goods sold
(in thousands except percentages)

2007

Years ended December 31,
2006

2005

Increase/
(Decrease)
2007 vs. 2006

Increase/
(Decrease)
2006 vs. 2005

Percentage
Increase/
(Decrease)
2007 vs. 2006

Percentage
Increase/
(Decrease)
2006 vs. 2005

Cost of goods sold

$137,696

$113,921

$ 23,728

$ 23,775

$90,193

Product gross margin

43,059

39,635

5,638

3,424

33,997

21%

>100%

Product gross
margin %

24%

26%

19%

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. The increase in gross margin percentages is due to
increased gross margin in 2006, which is primarily

attributable to increased royalty revenue of $3.8 million and
higher margins on PEGylation products and Exubera
inhalation powder and inhalers compared to the PEGylation
products sold during 2005.

Cost of idle Exubera manufacturing capacity
(in thousands except percentages)

2007

Years ended December 31,
2006

2005

Increase/
(Decrease)
2007 vs. 2006

Increase/
(Decrease)
2006 vs. 2005

Percentage
Increase/
(Decrease)
2007 vs. 2006

Percentage
Increase/
(Decrease)
2006 vs. 2005

Cost of idle Exubera
manufacturing
capacity

$6,314

$ —

$ 6,314

$ —

100%

n/a

Cost of idle Exubera manufacturing capacity includes the
costs of our manufacturing operations after the termination
of the Pfizer agreements on November 9, 2007 through
December 31, 2007. Cost of idle Exubera manufacturing
capacity includes costs payable to our contract
manufacturers under our contractual relationships and
internal salaries, benefits and stock-based compensation
related to Exubera commercial manufacturing employees,
overhead at our San Carlos manufacturing facility, including
rent, utilities and maintenance and depreciation of property
and equipment.

In 2008, we entered into agreements to maintain
manufacturing personnel with Pfizer at their Exubera
manufacturing facility in Terre Haute, Indiana and with Tech
Group at their manufacturing facility in Tempe, Arizona.
Additionally, we will preserve the necessary technical and
manufacturing personnel to support our ongoing effort to
secure a new partner for Exubera and/or NGI. We expect to
continue to incur costs of idle Exubera manufacturing
capacity until we have a new Exubera commercialization
partner or we cease partnering efforts. We expect to
conclude whether or not we will have a new Exubera
commercialization partner in the first half of 2008.

Exubera commercialization readiness revenue and costs
(in thousands except percentages)

2007

Years ended December 31,
2006

2005

Increase/
(Decrease)
2007 vs. 2006

Increase/
(Decrease)
2006 vs. 2005

Percentage
Increase/
(Decrease)
2007 vs. 2006

Percentage
Increase/
(Decrease)
2006 vs. 2005

$ 6,347

$7,859

$ 15,311

$(1,512)

$ (7,452)

(19%)

(49%)

$ 3,507

$4,168

$ 12,268

$ (661)

$ (8,100)

(16%)

(66%)

Exubera
commercialization
readiness revenue

Exubera
commercialization
readiness cost

Exubera commercialization readiness costs are start up
manufacturing costs we incurred in our Exubera Inhalation
Powder manufacturing facility and our Exubera Inhaler
device third party contract manufacturing locations in
preparation for commercial scale manufacturing in early
2006. Exubera commercialization readiness revenue
represents reimbursement by Pfizer of Exubera
commercialization readiness costs plus a contractual mark-
up. During the year ended December 31, 2007, we
amortized the remaining Exubera commercialization costs
through October and did not incur any additional costs.

During the year ended December 31, 2006 compared to the
year ended December 31, 2005, the decrease in Exubera
commercialization readiness revenue and costs was
primarily due to the transition from readiness preparation to
commercial production in late 2005 and early 2006.

We will not incur any additional Exubera commercialization
readiness costs or recognize any additional Exubera
commercialization readiness revenue in 2008 or beyond.

Research and development
(in thousands except percentages)

2007

Years ended December 31,
2006

2005

Increase/
(Decrease)
2007 vs. 2006

Increase/
(Decrease)
2006 vs. 2005

Percentage
Increase/
(Decrease)
2007 vs. 2006

Percentage
Increase/
(Decrease)
2006 vs. 2005

Research &
development

$153,575

$149,381

$151,659

$ 4,194

$ (2,278)

(2%)

Purchased in-process $
research and
development

—

$ 7,859

$ —

$ (7,859)

n/a

During the year ended December 31, 2007, research and
development expense includes workforce reduction charges
totaling $5.8 million recorded in connection with our May
2007 plan to reduce ongoing operating costs. This charge
primarily includes severance of $4.4 million for research and
development infrastructure and support personnel and $1.4
million for non-commercial operations, manufacturing and
quality control personnel.

Research and development expense, excluding workforce
reduction charges, decreased by approximately $1.6 million
during the year ended December 31, 2007, compared to the
year ended December 31, 2006. Research and development
expense related to our PEGylation technology product
candidates increased by approximately $21.6 million as a
result of the completion of the Phase 1 clinical trials for
NKTR-118 and NKTR-102 and the initiation of Phase 2
clinical trials. We expect research and development
expenses for NKTR-118 and NKTR-102 to continue to
increase substantially in 2008 as the Phase 2 trials will
continue throughout 2008. Pulmonary research and
development program expenses decreased by approximately
$20.2 million as a result of a $20.0 million decrease related
to NKTR-024 and a $12.9 million decrease related to
Exubera. These decreases are partially offset by increased
spending on NGI of $11.0 million, increased spending on TIP
of $3.5 million and increased spending on NKTR-061 of
approximately $1.6 million. Additionally, we decreased
spending on non-pulmonary and non-PEGylation programs
by $3.0 million in connection with the winding down of our
Bradford, UK operations in 2006.

The decrease in research and development expense of $2.3
million during the year ended December 31, 2006 compared
to the year ended December 31, 2005, is attributable to
decreased spending on Exubera and NGI of $18.4 million
and in non-pulmonary and non-PEGylation development
programs of $5.8 million in connection with the winding
down of our Bradford, UK operations in 2006. These
decreases were partially offset by increased spending on
NKTR-024 and other pulmonary programs by approximately
$14.4 million and increased spending on PEGylation
programs of approximately $7.5 million.

During the year ended December 31, 2005, we recorded a
charge of $7.9 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 NKTR-061 development program
that we partnered with Bayer AG in 2007. NKTR-061 is being
studied in Phase 2 trials for the adjunctive therapy of
ventilated patients with hospital-acquired, Gram-negative
pneumonias and is currently expected to enter Phase 3
clinical development in 2008.

General and administrative
(in thousands except percentages)

2007

Years ended December 31,
2006

2005

Increase/
(Decrease)
2007 vs. 2006

Increase/
(Decrease)
2006 vs. 2005

Percentage
Increase/
(Decrease)
2007 vs. 2006

Percentage
Increase/
(Decrease)
2006 vs. 2005

General &
administrative

$56,336

$78,319

$ 43,852

$(21,983)

$34,467

(28%)

79%

General and administrative expenses are associated with
administrative staffing, business development and
marketing.

The decrease in general and administrative expenses during
the year ended December 31, 2007 compared to the year
ended December 31, 2006 is primarily attributable to
decreased non-cash stock-based compensation expense of
$11.9 million, decreased headcount resulting in decreased
salaries and benefits of $2.3 million, decreased professional
fees of $5.9 million, and a $1.8 million decrease in
connection with the winding down of our Bradford, UK
operations in 2006.

The increase in general and administrative expenses during
the year ended December 31, 2006 compared to the year

ended December 31, 2005 is primarily attributable to
increased salaries and benefits, stock-based compensation
and professional fees incurred during the year ended
December 31, 2006. In 2006, we adopted SFAS 123R and
recorded a non-cash charge of $17.8 million of stock-based
compensation expense, of which $10.9 million was related
to executive severance agreements. Salaries and employee
benefits increased by approximately $8.6 million, including
$3.7 million related to executive severance agreements.
Professional legal, accounting and consulting fees increased
by $4.9 million during the same period.

In February 2008, Executive Management approved a plan to
reduce our workforce by 110 full-time employees or 20%. In
2008, we expect our direct salaries and benefits will decrease
due to reduced headcount.

Impairment of long lived assets
(in thousands except percentages)

2007

Years ended December 31,
2006

2005

Increase/
(Decrease)
2007 vs. 2006

Increase/
(Decrease)
2006 vs. 2005

Percentage
Increase/
(Decrease)
2007 vs. 2006

Percentage
Increase/
(Decrease)
2006 vs. 2005

Impairment of long
lived assets

$ 28,396

$ 9,410

$ 65,340

$ 18,986

$ (55,930)

>100%

(86%)

On November 9, 2007, we entered into a termination and
mutual release agreement with Pfizer in respect of
terminating all of our Exubera and NGI related agreements.
We are currently engaged in efforts to secure another
collaboration partner to continue the commercialization of
Exubera and/or the development of NGI. As a result, we
performed a SFAS 144 impairment analysis of the property
and equipment that support Exubera commercial operations
and NGI development activities (referred to as “Exubera-
related assets”), including machinery and equipment at our
contract manufacturer locations and machinery, equipment,
and leasehold improvements at our San Carlos, California
headquarters. If we are able to secure a new collaboration
partner for Exubera and/or NGI, utilization of our Exubera-
related assets will depend on any such partner’s desire to
utilize our San Carlos facility to manufacture Exubera bulk
dry powder insulin and whether such partner enters into a
manufacturing and supply agreement with Tech Group to
manufacture and supply Exubera inhalers. Given that we

have not entered into a collaboration agreement and that
uncertainties associated with future supply chain decisions
exist, we concluded that the carrying value of the Exubera-
related assets exceeds the estimated future cash flows. As a
result, we recorded an impairment charge of $28.4 million
during the quarter ended December 31, 2007 for the
Exubera-related assets.

During the year ended December 31, 2006, impairment of
long lived assets includes a write-off of $5.5 million of
certain intangible assets relating to our Ireland operations,
$1.2 million relating to the remaining laboratory and office
equipment at our Bradford, UK location, and $2.7 million
relating to an asset being constructed for use in one of our
partnered pulmonary programs.

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. We
re-performed the impairment analysis of goodwill and other
long lived assets for Bradford UK and 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
value. As a result, we recorded an impairment charge to
goodwill and long lived assets of $59.6 million and $5.7
million, respectively, in December 2005.

Litigation settlement
(in thousands except percentages)

2007

Years ended December 31,
2006

2005

Increase/
(Decrease)
2007 vs. 2006

Increase/
(Decrease)
2006 vs. 2005

Percentage
Increase/
(Decrease)
2007 vs. 2006

Percentage
Increase/
(Decrease)
2006 vs. 2005

Litigation settlement

$1,583

$17,710

$ —

$(16,127)

$ 17,710

(91%)

100%

During the year ended December 31, 2007, we recorded a
litigation settlement charge of $1.6 million related to three
employee-related litigation claims settled in 2007.

On June 30, 2006, we entered into a litigation settlement
related to an intellectual property dispute with the
University of Alabama Huntsville pursuant to which the

Company paid $11.0 million and agreed to pay an additional
$10.0 million in equal $1.0 million installments over ten
years beginning on July 1, 2007. During the year ended
December 31, 2006 we recorded a litigation settlement
charge of $17.7 million which reflects the net present value
of the settlement payments using an 8% annual discount
rate.

Amortization of other intangible assets
(in thousands except percentages)

2007

Years ended December 31,
2006

2005

Increase/
(Decrease)
2007 vs. 2006

Increase/
(Decrease)
2006 vs. 2005

Percentage
Increase/
(Decrease)
2007 vs. 2006

Percentage
Increase/
(Decrease)
2006 vs. 2005

Amortization of other
intangible assets

$946

$4,039

$4,206

$(3,093)

$(167)

(77%)

(4%)

Other intangible assets include proprietary technology,
intellectual property, and supplier and customer
relationships acquired from third parties or in business
combinations.

Amortization of other intangible assets decreased during
the year ending December 31, 2007 compared to the year
ending December 31, 2006 because certain other intangible
assets were fully amortized during the year ended

December 31, 2006. As of December 31, 2007 and 2006, the
net book value of our other intangible assets was $2.7
million and $3.6 million, respectively, representing the
unamortized portion of our customer relationship intangible
asset. This will be amortized on a straight-line basis of
approximately $0.9 million per year through October 2010.
Accordingly, we expect our other intangible assets to
decrease to $0.9 million per year in the future, absent
additional business combinations.

Gain on termination of collaborative agreements, net
(in thousands except percentages)

2007

Years ended December 31,
2006

2005

Increase/
(Decrease)
2007 vs. 2006

Increase/
(Decrease)
2006 vs. 2005

Percentage
Increase/
(Decrease)
2007 vs. 2006

Percentage
Increase/
(Decrease)
2006 vs. 2005

$(79,178)

$ —

$(79,178)

$ —

>(100%)

n/a

Gain on termination
of collaborative
agreements, net

On November 9, 2007, we terminated our collaborative
development and license agreements with Pfizer related to
Exubera and NGI. Under the termination agreement, we
received a one-time payment of $135.0 million from Pfizer in
satisfaction of all mutual outstanding contractual
obligations. The gain on termination of collaborative
agreements, net, includes the Pfizer termination payment
received of $135.0 million less our contractual liability to
Bespak and Tech Group of $32.4 million and less settlement
of outstanding receivables and payables with Pfizer of $23.5
million.

We have also recorded a termination settlement obligation
to our contract manufacturers of $32.4 million as of
December 31, 2007. We were a party to a certain
manufacturing and supply agreement, with Tech Group
North America, Inc. and Bespak Europe Ltd. related to the
manufacture and supply of Exubera inhalers (“Exubera
Inhaler MSA”). As of December 31, 2007, due to Pfizer’s
termination of the Exubera program and our inability to
provide Bespak and Tech Group with future Exubera inhaler
manufacturing commitments, we had a contractual liability
for termination costs and expenses that would be incurred
by Bespak and Tech Group.

Interest income
(in thousands except percentages)

2007

Years ended December 31,
2006

2005

Increase/
(Decrease)
2007 vs. 2006

Increase/
(Decrease)
2006 vs. 2005

Percentage
Increase/
(Decrease)
2007 vs. 2006

Percentage
Increase/
(Decrease)
2006 vs. 2005

Interest income

$22,201

$23,646

$13,022

$ (1,445)

$ 10,624

(6%)

82%

The decrease in interest income during the year ended
December 31, 2007 compared to the year ended December
31, 2006 is due to a decline in the average balance of cash,
cash equivalents, and investments in marketable securities
due to repayment of $102.7 million in convertible
subordinated notes.

The increase in interest income during the year ended
December 31, 2006 as compared to the year ended
December 31, 2005 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.

Interest expense
(in thousands except percentages)

2007

Years ended December 31,
2006

2005

Increase/
(Decrease)
2007 vs. 2006

Increase/
(Decrease)
2006 vs. 2005

Percentage
Increase/
(Decrease)
2007 vs. 2006

Percentage
Increase/
(Decrease)
2006 vs. 2005

Interest expense

$18,638

$ 20,793

$14,085

$ (2,155)

$ 6,708

(10%)

48%

The decrease in interest expense during the year ended
December 31, 2007 compared to the year ended December
31, 2006 was primarily due to a lower average balance of
convertible subordinated notes outstanding during 2007.
We repaid $36.0 million of our 5% notes in February 2007
and we repaid $66.6 million of our 3.5% notes in October
2007.

The increase in interest expense during 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 notes outstanding
resulting from our $315.0 million subordinated debt offering
completed in September 2005.

Other income (expense), net
(in thousands except percentages)

2007

Years ended December 31,
2006

2005

Increase/
(Decrease)
2007 vs. 2006

Increase/
(Decrease)
2006 vs. 2005

Percentage
Increase/
(Decrease)
2007 vs. 2006

Percentage
Increase/
(Decrease)
2006 vs. 2005

Other income
(expense), net

$1,133

$2,444

$(1,249)

$(1,311)

$3,693

(54%)

>100%

During the year ended December 31, 2007, we recognized a
$0.9 million gain from the sale of the management buy-out
of the nebulizer device business in Ireland, which was
completed on November 30, 2007 for a payment of $2.2
million and a net gain of $0.9 million. This management
buy-out included a license and a transfer of certain of our
non-essential general purpose nebulizer technology under
limited terms and conditions designed to prevent future
competition with our pulmonary liquid delivery proprietary
and partnered programs such as NKTR-061. These terms and

conditions included a limited field license to the general
purpose nebulizer devices only and excluded any rights to
directly or indirectly develop, market or distribute general
purpose nebulizers as a component of a drug/device
combination. In addition, any efficiency improvements to
the general purpose nebulizer developed by the newly
formed company are licensed back to us for addition to our
pulmonary technology platform for no additional
consideration.

Loss on debt extinguishment
(in thousands except percentages)

2007

Years ended December 31,
2006

2005

Increase/
(Decrease)
2007 vs. 2006

Increase/
(Decrease)
2006 vs. 2005

Percentage
Increase/
(Decrease)
2007 vs. 2006

Percentage
Increase/
(Decrease)
2006 vs. 2005

Loss on debt
extinguishment

$ —

$ 303

$ —

$(303)

n/a

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.

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 $45.9
million aggregate principle 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.

Liquidity and Capital Resources

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.
Additionally, at December 31, 2007 we had letter of credit
arrangements with certain financial institutions and
vendors, including our landlord, totaling $2.8 million. These
letters of credit are secured by investments in similar
amounts.

As of December 31, 2007, we had cash, cash equivalents and
investments in marketable securities of $482.4 million and
indebtedness of $345.8 million, including $315.0 million of
convertible subordinated notes, $24.0 million in capital lease
obligations and $6.8 million in other liabilities.

Due to the recent adverse developments in the credit
markets, we may experience reduced liquidity with respect
to some of our short-term investments. These investments
are generally held to maturity, which is less than one year.
However, if the need arose to liquidate such securities before
maturity, we may experience losses on liquidation. As of
December 31, 2007, we held $431.9 million of commercial
debt securities, with an average time to maturity of 126
days. To date we have not experienced any liquidity issues
with respect to these securities, but should such issues arise,
we may be required to hold some, or all, of these securities
until maturity. We believe that, even allowing for potential
liquidity issues with respect to these securities, our
remaining cash and cash equivalents and short-term
investments will be sufficient to meet our anticipated cash
needs for at least the next twelve months. We have the
ability and intent to hold our debt securities to maturity
when they will be redeemed at full par value. Accordingly,
we consider unrealized losses to be temporary and have not
recorded a provision for impairment.

Cashflow activities

During the year ended December 31, 2007, net cash
provided by operating activities was $146.3 million. During
the year ended December 31, 2007, net cash provided by
operating activities increased by $239.0 million compared to
the year ended December 31, 2006, in which we used $92.7
million in operating activities. The increase in cash provided
by operations includes the following significant items in

Contractual Obligations

2007: collaboration agreement termination payment
received from Pfizer of $135.0 million and the up-front
payments received from Bayer of $50.0 million and from
Pfizer of $24.6 million.

During the year ended December 31, 2007, we purchased
$32.8 million of property and equipment and repaid $102.7
million of our convertible subordinated notes and other debt
obligations. These uses of cash were partially offset by $3.8
million in cash collected from employees for the purchase of
common stock.

During the year ended December 31, 2006, net cash used in
operating activities was $92.7 million. Cash used in
operating activities included an $11.0 million cash payment
made in connection with the UAH litigation settlement. We
purchased $22.5 million of property and equipment and
repaid $10.5 million in debt obligations. These uses of cash
were offset by $22.3 million in proceeds from the issuance
of common stock to employees.

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 $10.9 million and $31.6 million, respectively.

The following is a summary of our contractual obligations as of December 31, 2007 (in thousands):

Payments due by period

Total

<=1 yr
2008

2-3yrs
2009-2010

4-5yrs
2011-2012

Convertible subordinated notes, including interest

$363,629

$10,238

$ 20,475

$ 332,916

Capital leases, including interest

Operating leases

Purchase commitments (2)

44,832

13,825

19,349

Exubera Inhaler MSA contract termination settlement

32,363

6,010

3,704

19,349

32,363

9,468

5,764

—

9,865

$4,357

—

2013+

$ —

19,489

—

Litigation settlement and other long-term liabilities
including interest

9,000

1,000

2,000

4,000

(1)
(2)

The above table does not include certain commitments and contingencies which are discussed in Note 9 of Notes to Consolidated Financial Statements.
Substantially all of this amount had been ordered pursuant to open purchase orders as of December 31, 2007 under our existing contracts. This amount
does not represent minimum contract termination liability.

$482,998

$72,664

$37,707

$ 349,138

$ 23,489

Given our current cash requirements, we forecast that we
will have sufficient cash to meet our net operating expense
requirements and contractual obligations through
December 31, 2009. We plan to continue to invest in our
growth and our future cash requirements will depend upon
the timing and results 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. Included in our purchase
commitments above is approximately $4.3 million of
capital purchase commitments.

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.

Off Balance Sheet Arrangements

We do not utilize off-balance sheet financing arrangements
as a source of liquidity or financing.

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

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 $63.6 million of deferred up-
front fees related to six 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 $4.0 million
or as high as $16.0 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.

Impairment of Long Lived Assets and Contract Termination
Costs

In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long Lived Assets, we perform a
test for recoverability of our 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 discounted cash flows expected to result from
the use and eventual disposal of the asset.

On November 9, 2007, we terminated our Collaborative
Development and License Agreements with Pfizer related to
Exubera and NGI. We are currently engaged in discussions to
regarding a collaboration for Exubera and/or NGI. If we are
able to secure a new collaboration partner, utilization of our
Exubera-related assets depends on such partner’s desire to
enter into a manufacture and supply agreement with one
of our contract manufacturers and to utilize our San Carlos
facility to manufacture Exubera inhalation powder. We
expect to conclude whether or not we will have a new
partner for Exubera and/or NGI in the first half of 2008.

As a result of the termination of the Pfizer agreements, we
evaluated the realizability of our Exubera-related property
and equipment at our San Carlos, California manufacturing
facility and at our contract manufacturer locations. Given
that we have not entered into a collaboration agreement
and that uncertainties associated with future supply chain
decisions exist, we conclude that the carrying value of the
Exubera-related assets exceeds the estimated future cash
flows. As a result, we recorded an impairment charge of
$28.4 million for the Exubera-related assets during the
three-month period ended December 31, 2007. Our
estimate of the future cash flows from Exubera-related
assets and our assessment of the probability of securing a
commercialization partner for Exubera and/or NGI are highly
judgmental and actual results may differ. However, we
believe it is probable the carrying value of Exubera-related
assets exceeds the estimated future cash flows, which
represents management’s best estimate.

On February 12, 2008, we entered into a Termination and
2008 Continuation Agreement (“TCA”) with Tech Group
pursuant to which our manufacturing and supply
agreement related to the manufacture and supply of
Exubera inhalers (“Exubera Inhaler MSA”) was terminated
in its entirety. We recorded $13.8 million as termination
liabilities under the terms of the TCA. In the event that we
successfully identify a new Exubera collaboration partner
and such partner enters into an Exubera inhaler supply
agreement with Tech Group, we would be relieved of our
obligation to pay Tech Group up to $8.0 million of the
termination liability (subject to downward adjustment
depending on the timing of any such agreement). Due to
the uncertainty regarding the prospects in securing a new
commercialization partner and uncertainty over whether
such partner will enter into an agreement with Tech Group,
we believe that this amount represents a contingent gain to
be recorded when and if the event occurs. This determination
was also based on management’s estimate that securing a
new Exubera and/or NGI collaboration partner is uncertain.

Stock-Based Compensation

compensation. Circumstances may change and additional
data may become available over time, which could result in
changes to the assumptions and methodologies, and which
could materially impact our fair value determination.

Further, we have issued performance-based RSU awards
totaling approximately 1,010,000 shares of our common
stock to certain employees. These awards vest based upon
achieving three pre-determined performance milestones.
We are expensing the grant date fair value of the awards
ratably over the expected performance period for the RSU
awards in which the performance milestones are probable
of achievement under a Statement of Financial Accounting
Standards No. 5, Accounting for Contingencies definition.
The total grant date fair value of the RSU awards was $19.8
million, including $4.0 million for the first milestone, $7.9
million for the second milestone, and $7.9 million for the
third milestone.

The first performance milestone was achieved and
approximately 174,035 shares were fully vested and
released during the year ended December 31, 2007. The
second performance milestone shall vest when upon
achievement of $30.0 million of Exubera royalty revenue
from Pfizer in one quarter. During the year ended December
31, 2007, we determined that it is not probable that future
Exubera product sales will be sufficient to meet the second
performance milestone and we reversed $2.8 million of
previously recognized expense. The third performance
milestone shall vest based on the first filing (whether by us
or a third party licensee or partner of ours) and acceptance
of a New Drug Application (“NDA”) or Biologics License
Application (“BLA”) by the FDA or an equivalent filing and
acceptance with the European Medicines Agency for a
proprietary product. Based on our current product
pipeline development efforts, we determined that the
third performance milestone is currently probable of
achievement by the end of the fourth quarter in 2010.

Evaluating and estimating the probability of achieving the
remaining performance milestone and the appropriate
timing related to the achievement is highly subjective and
requires periodic reassessment. Actual achievement of these
performance milestones or changes in facts and
circumstances may cause significant fluctuations in expense
recognition between reporting periods and would result in
changes in the timing and amount of expense recognition
related to these RSU’s.

Income Taxes

We account for income taxes under the liability method in
accordance with FASB Statement No. 109, Accounting for
Income Taxes, and FASB Interpretation No. 48 (“FIN 48”),
Accounting for Uncertainty in Income Taxes-An Interpretation
of FASB Statement No. 109. 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

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 hierarch 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 our fair value
measurements.

SFAS No. 159

In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities-
Including an Amendment of FASB Statement No. 115. SFAS
No. 159 permits companies to choose to measure certain
financial instruments and other items at fair value. The
standard requires that unrealized gains and losses are
reported in earnings for items measured using the fair value
option. This statement is effective beginning in January
2008. We are evaluating whether adoption of this statement
will result in a change to our fair value measurements.

EITF 07-03

In June 2007, the Emerging Issues Task Force (“EITF”) issued
EITF 07-3, Accounting for Nonrefundable Advance Payments
for Goods or Services for Use in Future Research and
Development Activities, which provides guidance on the
accounting for certain nonrefundable advance payments for
goods or services that will be used or rendered for future
research and development activities. This issue is effective
prospectively for fiscal years beginning after December 15,
2007. We do not expect that the adoption of EITF 07-03 will
have a material impact on our financial position or results
of operations.

differences are expected to reverse. Realization of deferred
tax assets is dependent upon future earnings, the timing
and amount of which are uncertain. FIN 48 contains a
two-step approach to recognizing and measuring uncertain
tax positions. The first step is to evaluate the tax position
for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the
position will be sustained upon tax authority examination,
including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax
benefit as the largest amount that is more than 50%
likely of being realized upon ultimate settlement.

Adoption of FIN 48, which occurred on January 1, 2007, had
no impact on our consolidated financial position, results of
operations, cash flows or our effective tax rate. However,
revisions to the estimated net realizable value of the
deferred tax asset in the future could cause our provision for
income taxes to vary significantly from period to period.
At December 31, 2007, we had significant federal and state
net operating loss and research credit carry forwards which
were offset by a full valuation allowance, due to our inability
to estimate long-term future taxable income with a high
level of certainty. Upon adoption of FIN 48, we did not
recognize an increase or a decrease in the liability for net
unrecognized tax benefits, which would be accounted for
through retained earnings. We historically accrued for
uncertain tax positions in deferred tax assets as we have
been in a net operating loss position since inception and
any adjustments to our tax positions would result in an
adjustment of our net operating loss or tax credit carry
forwards rather than resulting in a cash outlay. If we are
eventually able to recognize these uncertain positions, our
effective tax rate would be reduced. We currently have a
full valuation allowance against our net deferred tax asset
which would impact the timing of the effective tax rate
benefit should any of these uncertain tax positions be
favorably settled in the future.

On a periodic basis, we will continue to evaluate the
realizability of our deferred tax assets and liabilities and
adjust such amounts in light of changing facts and
circumstances, including but not limited to the level of
past and future taxable income, the utilization of the carry
forwards, tax legislation, rulings by relevant tax authorities,
tax planning strategies and if applicable, the progress of
ongoing tax audits. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable
income during the period in which those temporary
differences become deductible or the net operating loss
and research credit carry forwards can be utilized.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate and Market Risk

Foreign Currency Risk

The majority of our revenue, expense, and capital
purchasing activities are transacted in U.S. dollars. However,
since a portion of our operations consist of research and
development activities outside the United States, we have
entered into transactions in other currencies, primarily the
Indian Rupee, and therefore are subject to foreign exchange
risk.

Our international operations are subject to risks typical of
international operations, including, but not limited to,
differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions,
and foreign exchange rate volatility. We do not utilize
derivative financial instruments to manage our exchange
rate risks.

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 liquid, 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 1%, in the fair value of our available-for-sale securities
at December 31, 2007. This potential change is based on
sensitivity analyses performed on our investment securities
at December 31, 2007. Actual results may differ materially.
The same hypothetical 50 basis point increase in interest
rates would have resulted in an approximate $0.7 million
decrease, less than 1%, in the fair value of our available-for-
sale securities at December 31, 2006.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Nektar Therapeutics

We have audited the accompanying consolidated balance sheets of Nektar Therapeutics as of December 31, 2007 and 2006,
and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 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, 2007 and 2006, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2007, 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, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, Nektar Therapeutics changed its method of accounting for
stock-based compensation as of January 1, 2006 and its method of accounting for uncertain tax positions as of January 1,
2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Nektar Therapeutics’ internal control over financial reporting as of December 31, 2007, 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 25, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Palo Alto, California
February 25, 2008

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Nektar Therapeutics

We have audited Nektar Therapeutics’ internal control over financial reporting as of December 31, 2007, 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 included in the
accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on 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, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, 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, Nektar Therapeutics maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2007, 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, 2007 and 2006, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31,
2007 of Nektar Therapeutics and our report dated February 25, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Palo Alto, California
February 25, 2008

Consolidated Balance Sheets
(In thousands, except per share information)

Assets

Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance of $33 and $357 at
December 31, 2007 and 2006, 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 to contract manufacturers
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, 10,000 shares authorized
Series A, $0.0001 par value: 3,100 shares designated; no shares issued or outstanding at
December 31, 2007 and 2006
Series B, $0.0001 par value: 20 shares designated; no shares issued or outstanding at
December 31, 2007 and 2006
Common stock, $0.0001 par value; 300,000 authorized; 92,301 shares and 91,280 shares
issued and outstanding at December 31, 2007 and 2006, respectively
Capital in excess of par value
Accumulated other comprehensive income
Accumulated deficit

Total stockholders’ equity

Total liabilities and stockholders’ equity

The accompanying notes are an integral part of these consolidated financial statements.

Nektar Therapeutics

December 31,

2007

2006

76,293
406,060

63,760
394,880

21,637
12,187
7,106

47,148
14,656
14,595

$ 523,283

$ 535,039

—
114,420
78,431
2,680

6,289

8,337
133,812
78,431
3,626

8,932

$ 725,103

$ 768,177

3,589
14,680
40,444
12,446
2,638
2,335
19,620
—
2,340
98,092

315,000
21,632
61,349
14,591
$ 510,664

7,205
12,994
—
17,942
3,814
711
16,409
102,653
3,854
$ 165,582

315,000
19,759
23,697
17,079
$ 541,117

—

9
1,302,541
1,643
(1,089,754)

9
1,283,982
62
(1,056,993)

214,439

227,060

$ 725,103

$ 768,177

Consolidated Statements of Operations
(in thousands, except per share information)

Nektar Therapeutics

Revenue:
Product sales and royalties
Contract research

Exubera commercialization readiness

Total revenue

Operating costs and expenses:
Cost of goods sold
Cost of idle Exubera manufacturing capacity
Exubera commercialization readiness costs
Research and development
General and administrative
Impairment of long lived assets
Litigation settlement
Amortization of intangible assets
Gain on termination of collaborative agreements, net

Purchased in-process research and development

Years ended December 31,

2007

2006

2005

$ 180,755
85,925

6,347

$ 153,556
56,303

$ 29,366
81,602

7,859

15,311

$ 273,027

$ 217,718

$ 126,279

137,696
6,314
3,507
153,575
56,336
28,396
1,583
946
(79,178)

—

113,921
—
4,168
149,381
78,319
9,410
17,710
4,039
—

—

23,728
—
12,268
151,659
43,852
65,340

—

4,206
—

7,859

Total operating costs and expenses

$ 309,175

$ 376,948

$ 308,912

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

(36,148)
22,201
(18,638)
1,133
—

(159,230)
23,646
(20,793)
2,444
—

(182,633)
13,022
(14,085)
(1,249)
(303)

$ (31,452)

$(153,933)

$(185,248)

1,309

828

(137)

$ (32,761)

$(154,761)

$(185,111)

(0.36)

(1.72)

(2.15)

Shares used in computing basic and diluted net loss per share

91,876

89,789

85,915

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Stockholders’ Equity
(In thousands)

Nektar Therapeutics

Preferred Shares Common Shares

Amount
Shares Paid In Shares

Par Value

Capital In
Excess of
Par Value

Accumulated
Other

Total

Deferred

Comprehensive Accumulated Stockholders’

Compensation Income/(Loss)

Deficit

Equity

Balance at December 31, 2004

20 — 84,572

8 $ 1,187,575 $ (2,764)

$ (356) $ (717,121) $ 467,342

— — 1,015

—

9,621

—

— — 1,891

31,563

—

Common stock issued upon
exercise of stock options

Common stock issued in
secondary offering, net
of insurance costs of $427

Compensation in connection
with stock options granted
to consultants

Amortization of deferred
compensation

— —

—

— —

Shares issued for ESPP

— —

108

Shares issued for retirement plans — —

Other comprehensive loss

Net loss

Comprehensive loss

— —

—

(1,351)

—

9,621

—

31,564

—

208

1,854

1,239

1,445

(1,351)

—

(185,111)

(186,462)

—

208

—

2,039

1,239

1,445

—

(185)

—

Balance at December 31, 2005

20 — 87,707

9 $ 1,233,690 $ (2,949)

$ (1,707) $ (902,232) $ 326,811

Common stock issued upon
exercise of stock options

— — 2,326

Stock based compensation

— —

—

Compensation in connection
with stock options granted to
consultants

— —

—

Conversion of Preferred Stock

(20) — 1,023

Exercise of warrants

— —

Transition adjustment upon
adoption of SFAS No 123R

— — —

Shares issued for ESPP

— —

Shares issued for retirement plans — —

Other comprehensive income

— —

Net loss

— —

109

103

—

Comprehensive loss

—

20,642

29,143

—

(2,949)

2,949

1,617

1,808

—

1,769

—

20,642

—

29,143

—

1,617

1,808

1,769

—

(154,761)

(152,992)

Balance at December 31, 2006 — — 91,280

9 $ 1,283,982 $

— $

62 $(1,056,993) $ 227,060

Common stock issued upon
exercise of stock options

Stock based compensation

Shares issued for ESPP

— —

427 —

— —

—

Shares issued for retirement plans — —

161

Shares issued upon release of
Restricted Share Units

— —

334

Other comprehensive income

— —

Net loss

— —

—

2,913

13,193

867

1,584

–

—

Comprehensive loss

—

1,581

—

2,913

13,193

867

1,584

1,581

—

(32,761)

(31,180)

Balance at December 31, 2007 — — 92,301

9 $ 1,302,541 $

— $ 1,643 $(1,089,754) $ 214,439

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Cash Flows
(in thousands)

Nektar Therapeutics

Cash flows provided by (used in) operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (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 sale or disposal of assets
In process research and development
Loss on termination of capital lease
Loss on extinguishment of debt
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

Years ended December 31,

2007

2006

2005

$ (32,761)

$ (154,761)

$ (185,111)

29,028
14,779
28,396
(874)
(860)
1,843
—
—
—

24,318
1,503
7,443
(3,147)
986
36,151
(1,176)
40,863

(190)

33,509
30,982
9,410
(874)
(2,252)
123
—
—
—

(34,654)
3,971
1,095
(8,926)
3,581
5,503
23
16,245

4,310

25,311
3,507
65,340
(934)
—
—
7,859
1,136
303

2,468
(7,420)
(3,542)
9,009
1,756
4,823
1,781
(7,174)

2,890

Net cash provided by (used in) operating activities

$ 146,302

$ (92,715)

$ (77,998)

Cash flows from investing activities:
Purchases of property and equipment
Purchases of investments
Sales of investments
Maturities of investments

Business acquisition, net of cash acquired

(32,796)
(593,118)
2,057
591,202

—

(22,524)
(502,230)
2,252
405,622

—

(17,955)
(234,991)
88,950
227,113

(30,714)

Net cash provided by (used in) investing activities

$ (32,655)

$ (116,880)

32,403

Cash flows from financing activities:
Issuance of common stock, net of issuance costs
Payments of loan and capital lease obligations
Repayments of convertible subordinated notes
Proceeds from convertible subordinated notes
Proceeds from capital lease financing

3,780
(2,895)
(102,653)
—
—

22,259
(10,488)
—
—
—

42,424
(2,517)
(70,964)
305,645
261

Net cash provided by (used in) financing activities

$ (101,768)

11,771

$ 274,849

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:
Cash paid for interest
Cash paid for income taxes

Supplemental schedule of non-cash investing and financing activities:
Property acquired through capital leases
Deferred compensation related to the issuance of stock options

The accompanying notes are an integral part of these consolidated financial statements.

654

12,533
63,760

76,293

17,389
801

4,445
—

$
$

311

(45)

$ (197,513)
261,273

$ 229,209
32,064

63,760

$ 261,273

$
$

17,751
—

—
—

$
$

15,892
27

—
2,039

Notes to Consolidated Financial Statements
December 31, 2007

Note 1 Organization and Summary of Significant
Accounting Policies

Organization and Basis of Presentation

Fair Value of Financial Instruments

Nektar Therapeutics

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. 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. Transaction gains and losses
arising from activities in other than applicable functional
currency are calculated using the average exchange rate for
the applicable period and reported in net income as a non-
operating item in each period. Aggregate gross foreign
currency transaction gain (loss) recorded in net income for
the years ended December 31, 2007, 2006, and 2005 were
not material.

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.

The carrying amounts of certain of the Company’s financial
instruments, including cash and cash equivalents, short-
term investments, 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
Europe. Our accounts receivable balance contains billed and
unbilled trade receivables from product sales and royalties
and collaborative research agreements. We provide for an
allowance for doubtful accounts by reserving for specifically
identified doubtful accounts. We generally do not require
collateral from our customers. We perform a regular review
of our customers’ payment histories and associated credit
risk. We have not experienced significant credit losses from
our accounts receivable or collaborative research agreements
and none are expected. At December 31, 2007, three
different customers represented 28%, 24%, and 22%,
respectively, of our accounts receivable. At December 31,
2006, three different customers represented 56%, 15% and
14%, respectively, of our accounts receivable.

We are dependent on our partners and vendors 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

Other Intangible Assets

Inventories are computed on a first-in, first-out basis and
stated net of reserves at the lower of cost or market.
Supplies inventory related to research and development
activities are expensed when purchased.

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.

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. During the years ended December 31, 2007 and 2006,
we recorded impairment losses for our Pfizer-related fixed
assets and our Nektar UK fixed assets. Please refer to Note
14 of Notes to Consolidated Financial Statements for
additional information on the impairment analysis
performed.

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 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. There were no indications of
impairment at December 31, 2007 or December 31, 2006.

Other intangible assets include proprietary technology,
intellectual property, and supplier and customer
relationships acquired from third parties or in business
combinations. In accordance with SFAS No. 142, 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, which
terminated on November 9, 2007. Prior to January 1, 2007,
Exubera product revenues were recognized at the earlier of
acceptance of products by Pfizer or sixty days from shipment
and the related cost of goods sold were recorded as deferred
revenue, net of the deferred costs. As of December 31, 2006,
we deferred $5.2 million of Exubera gross margin, comprised
of $23.1 million in deferred product revenue and $17.9
million of deferred costs. On January 1, 2007, we began
recognizing Exubera revenue upon shipment of product and
estimating product warranty returns. During the year ended
December 31, 2007, we recognized the Exubera product
revenue and costs deferred at December 31, 2006, as well as
product revenues through the termination of our agreement
with Pfizer on November 9, 2007.

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.

Notes to Consolidated Financial Statements

Nektar Therapeutics

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 years ended
December 31, 2007 and 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.

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.

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, Share-Based Payment (“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”). Under
SFAS No. 123R, the value of the portion of the option or
award that is ultimately expected to vest is recognized as
expense on a straight line basis over the requisite service
periods in our Consolidated Statements of Operations. 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, Accounting for Stock Issued to Employees (“APB No. 25”),
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 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 years ended December
31, 2007 and 2006 are not directly comparable to the year
ended December 31, 2005.

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 service period 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. Expense amounts
are allocated among inventory, cost of revenue, research and
development expenses, 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.

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.

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. During the year ended December 31,
2005, we recorded a charge of $7.9 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 periods presented in the
Consolidated Statements of Operations, the net loss
available to common stockholders 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. The weighted
average of these potentially dilutive securities has been
excluded from the diluted net loss per share calculation
and is as follows (in thousands):

Years ended December 31,
2007

2006

2005

Convertible subordinated notes

15,781 16,896 5,989

Stock options and restricted
stock units

11,529

9,138 8,351

Warrants

Convertible preferred stock

—

— 1,023

Total

27,310 26,047 15,383

Notes to Consolidated Financial Statements

Nektar Therapeutics

Income Taxes

We account for income taxes under the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes
(“SFAS 109”), and FASB Interpretation No. 48 (“FIN 48”),
Accounting for Uncertainty in Income Taxes – An
Interpretation of FASB Statement No. 109. 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.

FIN 48 contains a two-step approach to recognizing and
measuring uncertain tax positions. The first step is to
evaluate the tax position for recognition by determining if
the weight of available evidence indicates that it is more
likely than not that the position will be sustained upon tax
authority examination, including resolution of related
appeals or litigation processes, if any. The second step is to
measure the tax benefit as the largest amount that is more
than 50% likely of being realized upon ultimate settlement.

We adopted FIN 48 on January 1, 2007. Upon adoption, we
did not recognize an increase or a decrease in the liability for
net unrecognized tax benefits, which would be accounted
for through retained earnings.

We have incurred net operating losses since inception and
we do not have any significant unrecognized tax benefits.
Our policy is to include interest and penalties related to
unrecognized tax benefits, if any, within the provision for
taxes in the consolidated statements of operations. If we
are eventually able to recognize our uncertain positions,
our effective tax rate would be reduced. We currently have a
full valuation allowance against our net deferred tax asset
which would impact the timing of the effective tax rate
benefit should any of these uncertain tax positions be
favorably settled in the future. Any adjustments to our
uncertain tax positions would result in an adjustment of
our net operating loss or tax credit carry forwards rather
than resulting in a cash outlay.

We file income tax returns in the U.S., California and other
states, and various foreign jurisdictions. We are currently not

the subject of any income tax examinations. In general, the
earliest open year subject to examination is 2002, although
depending upon jurisdiction, tax years may remain open,
subject to certain limitations.

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 hierarch 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 our fair value
measurements.

SFAS No. 159

In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities –
Including an Amendment of FASB Statement No. 115. SFAS
No. 159 permits companies to choose to measure certain
financial instruments and other items at fair value. The
standard requires that unrealized gains and losses are
reported in earnings for items measured using the fair value
option. This statement is effective beginning in January
2008. We are evaluating whether adoption of this statement
will result in a change to our fair value measurements.

EITF 07-03

Note 2 Cash, Cash Equivalents, and Available-for-Sale Investments

Cash, cash equivalents, and available-for-sale investments are as follows (in thousands):

Cash and cash equivalents

Short-term investments (less than one year to maturity)

Long-term investments (one to two years to maturity)

Total cash and available-for-sale investments

Estimated Fair Value at December 31,

2007

2006

$ 76,293

$ 63,760

406,060

394,880

—

8,337

$ 482,353

$ 466,977

Our portfolio of cash and available-for-sale investments consists of the following (in thousands):

U.S. corporate commercial paper

Obligations of U.S. corporations

Obligations of U.S. government agencies

Repurchase agreements

Cash and other debt securities

Total cash and available-for-sale investments

Estimated Fair Value at December 31,

2007

2006

$ 293,866

$ 234,512

100,727

151,288

37,333

—

50,427

27,372

33,948

19,857

$ 482,353

$ 466,977

At December 31, 2007, the average portfolio duration was
approximately four months and the contractual maturity of
any single investment did not exceed twelve months. At
December 31, 2006, the average portfolio duration was
approximately four months and the contractual maturity of
any single investment did not exceed twenty-four months.

to changes in interest rates on fixed income securities.
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.

Gross unrealized gains on the portfolio were $0.5 million
and nil as of December 31, 2007 and 2006, respectively.
Gross unrealized losses on the portfolio were $0.1 million
and $0.5 million as of December 31, 2007 and 2006,
respectively. We have a history of holding our investments
to maturity. The gross unrealized losses were primarily due

Note 3 Inventory

Inventory consists of the following (in thousands):

At December 31, 2007 and 2006, we had letter of credit
arrangements with certain financial institutions and
vendors, including our landlord, totaling $2.8 million and
$2.6 million, respectively. These letters of credit are secured
by investments in similar amounts.

Raw materials

Work-in-process

Finished goods

Total

December 31,

2007

2006

$ 9,522

$ 8,609

1,749

916

4,736

1,211

$ 12,187

$ 14,656

Inventory consists of raw materials, work-in-process and
finished goods for our commercial PEGylation business. At
December 31, 2007, we did not hold any Exubera-related
inventory.

Reserves are determined using specific identification plus
an estimated reserve for potential defective or excess
inventory based on historical experience or projected usage.
Inventories are reflected net of reserves of $5.8 million and
$4.2 million as of December 31, 2007 and 2006, respectively.

Notes to Consolidated Financial Statements

Nektar Therapeutics

Note 4 Property and Equipment

Property and equipment consist of the following (in thousands):

Building and leasehold improvements

Laboratory equipment

Manufacturing equipment

Assets at contract manufacturer locations

Furniture, fixtures and other equipment

Construction-in-progress

Property and equipment at cost

Less: accumulated depreciation

Property and equipment, net

December 31,

2007

2006

$ 114,210

$ 118,574

48,425

18,493

—

21,169

18,374

43,066

23,406

25,886

20,970

8,508

$ 220,671

$ 240,410

(106,251)

(106,598)

$ 114,420

$ 133,812

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 includes assets that support
both our manufacturing and research and development
efforts. Assets at contract manufacturer locations included
automated assembly line equipment used in the
manufacture of the Exubera inhaler device at December 31,
2006. Construction-in-progress includes assets being built to
enhance our manufacturing and research and development
programs.

Depreciation expense, including depreciation of assets
acquired through capital leases, for the years ended
December 31, 2007, 2006, and 2005 was $25.9 million,
$26.8 million, and $19.2 million, respectively.

In accordance with SFAS 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. In December 2007, we evaluated
our Exubera-related assets for impairment after the
termination of our collaborative development and license
agreements with Pfizer on November 9, 2007 and recorded
an impairment charge of $28.4 million in December 2007.
During the year ended December 31, 2006, we commenced
with plans to wind-down our Bradford, UK operations and
accelerated $1.2 million of remaining depreciation in June
2006. Additionally, we determined that one of our

construction-in-progress assets would not be completed and
recorded an impairment charge of $2.8 million in December
2006. In December 2005, we determined the fair value of
our Bradford, UK operations’ was below the carrying value
and recorded an impairment charge of $5.7 million related
to the property and equipment at Bradford. Please refer to
Note 14 of Notes to Consolidated Financial Statements for
additional information related to Impairment of Long Lived
Assets.

Note 5 Goodwill and Other Intangible Assets

Goodwill

As of December 31, 2007 and 2006, the carrying value of our
goodwill is $78.4 million, of which $69.0 million is assigned
to our PEGylation technology reporting unit and $9.4 million
is assigned to our pulmonary technology reporting unit.

In the fourth quarters of 2007 and 2006, we performed our
annual impairment tests of goodwill and determined that
goodwill is not impaired because the fair value, based on
the estimated future discounted cash flows, exceeds the
carrying value of the reporting units’ assets, including
assigned goodwill.

In December 2005, we recorded an impairment charge of
$59.6 million related to the goodwill assigned to the super
critical fluids reporting unit in Bradford, UK. Please refer to
Note 14 of Notes to the Consolidated Financial Statements
for additional information.

Other Intangible Assets

The customer relationship intangible asset obtained from the acquisition of Aerogen, Inc. in October 2005 is as follows (in
thousands):

Gross carrying amount

Accumulated amortization

Other intangible asset, net

December 31,

2007

2006

$ 4,730

(2,050)

(1,104)

$ 2,680

$ 3,626

Amortization expense related to other intangible assets
totaled $0.9 million, $4.3 million, and $4.9 million for
the years ended December 31, 2007, 2006, and 2005,
respectively. The estimated useful life is 5 years and future
amortization expense is approximately $0.9 million per year
until October 2010, when it will be fully amortized.

During the year ended December 31, 2006, we recorded an
impairment charge of $5.5 million related to core
technology intangible assets obtained as part of the
Aerogen, Inc. acquisition in October 2005. Please refer to
Note 14 of Notes to the Consolidated Financial Statements
for additional information.

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

Semi-Annual
Interest Payment Dates

August 8, February 8

April 17, October 17

December 31,

2007

2006

—

$ 36,026

66,627

3.25% Notes due September 2012

March 28, September 28

315,000

Total outstanding convertible subordinated notes

Less: current portion

Convertible subordinated notes

$315,000

$ 417,653

—

(102,653)

$315,000

$ 315,000

Our convertible subordinated notes are unsecured and
subordinated in right of payment to any 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 generally amortized to interest
expense on a straight-line basis over the contractual life of
the notes. The unamortized deferred financing costs were
$5.1 million and $7.3 million as of December 31, 2007 and
2006, respectively.

Conversion and Redemption

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.

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 Notes
plus any accrued but unpaid interest if the closing price of
the common stock has exceeded 150% of the conversion
price for at least 20 days in any consecutive 30 day trading
period.

The 3.5% and 5% Notes were repaid in full in 2007 and are,
therefore, no longer subject to conversion or redemption.

Notes to Consolidated Financial Statements

Nektar Therapeutics

Loss on Early Extinguishment of Convertible Subordinated
Notes

In September 2005, we retired $25.4 million and $45.9
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.

agreement to increase our office space by 20,123 square
feet of additional premises. We re-evaluated the lease as
amended and continue to classify it as a capital lease.

Under the terms of the lease, the rent will escalate 2% in
October of each year for the original leased premises and
the rent will escalate 3% in November of each year for the
additional leased premises. The lease termination date for
the original and additional premises is October 5, 2016.

Note 7 Capital Leases

Office Equipment

We lease office space and office equipment under capital
lease arrangements. The gross carrying value by major asset
class and accumulated depreciation as of December 31,
2007 and 2006 are as follows (in thousands):

In November 2007, we entered into a twelve-month lease
with Cisco Systems Capital Corporation related to
communication equipment. The lease agreement includes a
$1 buy-out option at the end of the twelve-month term.

Building Lease

Future Minimum Lease Payments

We lease office space at 201 Industrial Road in San Carlos,
California under capital lease arrangements. During the year
ended December 31, 2007, we modified our existing lease

Future minimum payments for our capital leases at
December 31, 2007 are as follows (in thousands):

December 31,

2007

2006

Years ending December 31,

Building and leasehold improvements

$ 23,962 $21,449

Furniture, fixtures and other equipment

591

Construction in progress

1,602

261

—

Total assets recorded under capital leases $ 26,155 $21,710

Less: accumulated depreciation

(6,124)

(4,173)

Net assets recorded under capital leases $ 20,031 $17,537

2008

2009

2010

2011

2012

2013 and thereafter

Total minimum payments required

Less: amount representing interest

Present value of future payments

Less: current portion

Non-current portion

$ 6,010

4,717

4,752

4,907

4,958

19,489

$ 44,833

(20,866)

$ 23,967

(2,335)

$ 21,632

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, we, Nektar
AL, Mr. Harris and UAH agreed to full and complete
satisfaction of all claims asserted in the litigation in
exchange for $25.0 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. In June 2007, we made the first of ten annual
$1.0 million installment payments. During the year ended
December 31, 2006, we recorded a litigation settlement
charge of $17.7 million, which reflects the net present value
of the settlement payments using an 8% annual discount
rate. As of December 31, 2007 and 2006, our accrued liability
related to the UAH settlement was $6.5 million and $7.0
million, respectively.

Note 9 Commitments and Contingencies

Unconditional Purchase Obligations

As of December 31, 2007, we had approximately $19.3
million of unconditional purchase obligations for purchases
of goods and services in 2008 that have not been recognized
on our Consolidated Balance Sheet. These obligations
include approximately $10.7 million for research and
development activities pertaining to our ongoing Phase 2
clinical trials of NKTR-102 and NKTR-118, $4.3 million for
capital projects to enhance our manufacturing capabilities,
research and development programs, and facilities, $2.2
million for PEGylation inventory purchases, and $2.1 million
for partnered contract research programs.

Future minimum lease payments under non-cancelable
operating leases as of December 31, 2007, are as follows
(in thousands):

Years ending December 31,

2008

2009

2010

2011

2012

$ 3,704

2,928

2,836

2,905

1,452

Total minimum payments required

$ 13,825

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 December 31, 2006, related to the lease
restoration of our Bradford facilities.

In June 2007, we entered in a sub-lease of our Mountain
View, California facility. During the year ending December
31, 2007, we recognized $0.5 million in sub-lease rental
income. The sub-lease expires in February 2009, concurrent
with the expiration of our lease agreement. As of December
31, 2007, future minimum rentals to be received under the
sub-lease are $1.4 million in 2008 and $0.2 million in 2009.

Operating Leases

Legal Matters

We lease certain facilities under arrangements expiring
through June 2012. Certain of these lease arrangements
contain escalation clauses. We recognize rent expense on a
straight-line basis over the lease period. Rent expense for
operating leases was approximately $4.3 million, $4.1
million, and $3.1 million for the years ended December 31,
2007, 2006, and 2005, respectively.

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

Notes to Consolidated Financial Statements

Nektar Therapeutics

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

We renewed our workers compensation insurance policy for
the coverage period beginning November 1, 2006 as a fully
funded policy under which all claims will be paid by the
insurance carrier. In the prior policy period from November 1,
2005 through October 31, 2006 we were covered by a self
funded policy under which the company was liable for all
claims up to $250,000 per occurrence and to a maximum
of $950,000. Historically, we have not incurred significant
obligations under the self funded portion of our workers
compensation policy and no significant liabilities have been
recorded for workers compensation claims filed under the
self funded policy on our Consolidated Balance Sheets as
of December 31, 2007 or 2006.

Indemnification Underwriters and Initial purchasers of our
Securities

In connection with our sale of equity and convertible debt
securities, 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 1933, 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, 2007 or 2006.

Royalties

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 for SEC related
claims and $250,000 per incident for non-SEC related claims
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, 2007 or 2006.

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 $3.9 million,
$5.5 million, and $3.5 million for the years ended December
31, 2007, 2006, and 2005, respectively. The overall maximum
amount of the obligations is based upon sales of the
applicable product and cannot be reasonably estimated.

Collaboration Agreements for Pulmonary and PEGylation
Technology

As part of our collaboration agreements with our partners
for the license, development, manufacture and supply of
products based on our pulmonary or 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 (with
respect to our activities) and infringement of intellectual
property to the extent the intellectual property is developed
by us or licensed to our partners. 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 Consolidated Balance Sheets as of
December 31, 2007 or 2006.

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. 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, 2007 or 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.

Each share of Series A Preferred Stock will be entitled to a
minimum preferential quarterly dividend payment of $1.00,
or if greater than $1.00, 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 $100 per
share or, if greater than $100, an aggregate payment equal
to 100 times the payment made per share of Common
Stock. 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.

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 1,900,000 shares
of our common stock at an average price of $16.93 per
common share for proceeds of approximately $31.6 million,
net of issuance costs.

Stock Option Plans

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.

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,
2007 (share number in thousands):

Stock Option Plans

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)

6,014

6,894

12,908

$ 15.37

$ 15.67

$ 15.63

5,340

1,923

7,263

(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 36,324 shares we assumed in connection with the acquisition of Shearwater Corporation
(with a weighted-average exercise price of $0.03 per share).

(2) Includes 217,838 shares of common stock available for future issuance under our ESPP as of December 31, 2007.

Notes to Consolidated Financial Statements

Nektar Therapeutics

2000 Equity Incentive Plan

Non-Employee Directors’ Stock Option Plan

Our 1994 Equity Incentive Plan was adopted by the Board
of Directors on February 10, 1994, and was amended and
restated in its entirety and renamed the “2000 Equity
Incentive Plan” on April 19, 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 eight 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 9, 2010, unless earlier terminated by
the Board. On June 1, 2006, our stockholders approved an
amendment to the 2000 Equity Incentive Plan to 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 1998 Non-Officer Equity Incentive Plan was adopted
by the Board of Directors on August 18, 1998, 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 eight 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.

On February 10, 1994, 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, 2007.

Restricted Stock Units

During the years ended December 31, 2007, 2006, and 2005,
we issued Restricted Stock Units (“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.

We issued approximately 345,000, 1,089,000, and 112,000
RSUs during the years ended December 31, 2007, 2006, and
2005. Approximately 1,010,000 of the RSUs issued in 2006
vest upon the achievement of three performance-based
milestones. During the year ended December 31, 2007, one
of the performance based milestones was achieved and
174,035 shares vested and were released. The RSUs issued in
2007 and 2005 are service based awards and vest based on
the passage of time. 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.

Warrants

In November 1996, 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 ten 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. 96-18 (“EITF 96-18”) 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, 2007, 2006, and 2005.

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 96-18 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 ten 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, 2007 or
2006. Expense related to these warrants was insignificant
for the years ended December 31, 2007, 2006, and 2005.

Employee Stock Purchase Plan

In February 1994, our Board of Directors adopted the
Employee Stock Purchase Plan (“ESPP”), pursuant to section
423(b) of the Internal Revenue Code of 1986. 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 may elect 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.

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 161,000 shares,
103,000 shares, and 87,000 shares of our common stock
valued at approximately $1.6 million, $1.8 million, and
$1.4 million in connection with the match in 2007, 2006,
and 2005, respectively. During part of 2007, shares reserved
for issuance related to matching contributions that had
been previously been approved by our Board of Directors
became fully depleted. During the year ended December 31,
2007, our Board of Directors approved an additional 300,000
shares to be reserved for issuance related to matching
contributions.

An amendment was made to the current 401(k) plan,
effective January 1, 2008, to provide each eligible participant
with a base matching contribution of $1,000 and up to an
additional $2,000 in matching cash contributions (for a
maximum aggregate of $3,000). The additional matching
contribution accrues to the participant on a $1 for $1 basis
based upon each participant’s annual contribution to the
401(k) plan. If the participant commences employment
during the calendar year, the base matching contribution
will be pro-rated based on the number of calendar quarters
the participant is employed.

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
twelve months following a change of control transaction,
(i) the Chief Executive Officer would 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 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 twelve 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 twelve 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.

Notes to Consolidated Financial Statements

Nektar Therapeutics

Reserved Shares

At December 31, 2007, 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

Note 11 Comprehensive Loss

14,639

15,575

218

220

30,652

Comprehensive loss is comprised of net loss and other comprehensive income (loss) and includes the following components
(in thousands):

Net loss, as reported

Change in net unrealized gains (losses) on available-for-sale investments

Translation adjustment

Total comprehensive loss

Years ended December 31,
2006

2007

2005

$(32,761)

$ (154,761)

$(185,111)

927

654

1,458

311

(101)

(1,250)

$(31,180)

$ (152,992)

$(186,462)

The components of accumulated other comprehensive income are as follows (in thousands):

Unrealized gain (loss) on available-for-sale investments

Translation adjustment

Total accumulated other comprehensive income

December 31,

2007

2006

$ 428

$ (499)

1,215

561

$1,643

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.

Molecule

Exubera®(insulin human [rDNA origin])
Inhalation Powder, next-generation
inhaled insulin

Novartis Pharma AG

Tobramycin inhalation powder (TIP)

Bayer AG

NKTR-061, Ciprofloxacin Inhalation
Powder (CIP)

Baxter Healthcare SA

Poly(ethylene) glycol reagent

Solvay Pharmaceuticals, Inc.

Pulmonary dronabinol (Dronabinol
metered dose inhaler)

Zelos Therapeutics Inc.

Pulmonary Ostabolin-C

Other

Years ended December 31,
2006

2007

2005

$ 43,714

$ 25,815

$ 64,091

17,036

9,422

3,127

2,022

1,748

8,856

8,516

4,885

3,965

1,002

5,962

6,158

4,831

4,074

310

2,756

3,487

2,053

Contract research revenue

$ 85,925

$ 56,303

$ 81,602

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 were a party to collaboration agreements with Pfizer
related to the development of Exubera and the next-
generation inhaled insulin (“NGI”) that terminated on
November 9, 2007. Under the terms of the collaboration
agreements, we received contract research and development
revenue as well as milestone and up-front fees related to the
Exubera Inhalation Powder, Exubera Inhalers and NGI. In the
first half of 2007, we received $24.7 million in non-
refundable payments from Pfizer in connection with NGI,
which was accounted for as deferred up-front fees and
began amortization over 8 years, the expected life of the
agreement. The unamortized balance of the deferred up-
front fees as of September 30, 2007, approximately $23.2
million, was recognized as revenue during the fourth quarter
of 2007 as a result of the termination of the Pfizer

Agreements as no further delivery obligations exist under
the arrangement.

Please refer to Note 13 of Notes to Consolidated Financials
for further information on the termination of our
collaborative agreements with Pfizer Inc.

Novartis Pharma AG

We are party to a collaboration agreement with Novartis
Pharma AG 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 will receive research and development funding and may
receive 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 AG

On August 1, 2007, we entered into a co-development,
license and co-promotion agreement with Bayer AG with
regard to the further development and commercialization
of NKTR-061, a product candidate based on our pulmonary
technology with the potential to deliver a specially-
formulated amikacin, an aminoglycoside antibiotic, for
inhalation deep into the lung for the adjunctive treatment
of Gram-negative pneumonias. Under the collaboration, we
are entitled to receive research and development milestone
payments, royalty payments and/or profit-sharing on

Notes to Consolidated Financial Statements

Nektar Therapeutics

product sales, and sales milestones if the product candidate
is approved and successfully commercialized.

Solvay Pharmaceuticals, Inc.

We are also a party to a collaboration agreement with Bayer
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 will receive research and development funding
and may receive 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
product candidates to extend the half-life of Hemophilia A
and B proteins using our PEGylation technology. On
December 17, 2007, we expanded our agreement with
Baxter to include the license of our PEGylation intellectual
technology and proprietary PEGylation methods with the
potential to improve the half-life of Baxter’s proprietary
treatments for Hemophilia B. These PEGylated hemophilia
product candidates are in pre-clinical development. We are
entitled to receive research and development funding,
milestone payments, as well as royalty payments on product
sales if the product candidate is successfully approved
and commercialized. Nektar will supply, and will receive
manufacturing revenues for, the PEG reagents used in the
products for preclinical, clinical and commercial purposes.

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-9-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 2 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.

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. In
December 2007, Zelos provided notification of termination
of our collaborative development and license agreement.
The agreement will terminate 180 days following the date
of the notification or on June 28, 2008.

Note 13 Gain on Termination of Collaborative Agreements, net

During the year ended December 31, 2007, our gain on termination of collaborative agreements, net line of our Consolidated
Statements of Operations is comprised of the following (in thousands):

Pfizer termination settlement payment received

Exubera Inhaler Manufacturing and Supply Agreement Termination

Tech Group

Bespak

Settlement of assets and liabilities related to Pfizer

Gains on termination of collaborative agreements, net

Year ended
December 31,
2007

$ 135,000

(13,765)

(18,598)

102,637

(23,459)

$ 79,178

Refer to Note 14 of Notes to Consolidated Financial Statements for related impairment of long lived assets associated with manufacturing and development of
Exubera and NGI in 2007.

Pfizer Termination Agreement and Settlement

On October 18, 2007, Pfizer announced that it was exiting
the Exubera business and gave notice of termination under
our collaborative development and license agreements with
Pfizer (the “Pfizer agreements”). On November 9, 2007, we
entered into a termination agreement and mutual release
with Pfizer. Under the termination agreement, we received
a one-time payment of $135.0 million in November 2007
from Pfizer in satisfaction of all outstanding contractual
obligations under our existing agreements relating to
Exubera and NGI. Contractual obligations include unbilled
product sales and contract research revenue through
November 9, 2007, outstanding accounts receivable as of
November 9, 2007, unrecovered capital costs at November 9,
2007, and contract termination costs.

We recognized Exubera and NGI related revenue from Pfizer
for product sales, contract research, and upfront fees
through the contract termination on November 9, 2007
totaling $182.4 million and $41.7 million during the year
and quarter ended December 31, 2007, respectively. We will
not receive any revenue from Pfizer related to Exubera or
NGI in 2008.

We are currently seeking a new marketing and development
partner for Exubera and NGI. Under the termination
agreement, if a new partner for Exubera and/or NGI is
identified subject to certain terms, conditions, and
limitations, Pfizer has agreed to transfer all of its remaining
rights in Exubera and NGI to the new partner without
additional consideration except for reimbursement of
incremental costs actually incurred by Pfizer.

Termination of Exubera Inhaler Manufacturing and Supply
Agreement

We were a party to the manufacturing and supply
agreement (the “Exubera Inhaler MSA”) with Tech Group
North America, Inc. and Bespak Europe Ltd. related to the
manufacture and supply of Exubera inhalers. As a result of
the Pfizer termination described above, management
concluded no further orders for supply of Exubera inhalers
were required from Tech Group or Bespak in the foreseeable
future. Under the Exubera Inhaler MSA, we were required to
provide 2008 production forecasts to Tech Group and Bespak
in November 2007. Due to Pfizer’s termination of the
Exubera program, we were unable to provide Exubera and
Tech Group with future Exubera inhaler manufacturing
commitments. In December 2007, we began discussions
with Tech Group and Bespak to terminate the Exubera
Inhaler MSA. As of December 31, 2007, due to Pfizer’s
termination of the Exubera program and our inability to
provide Bespak and Tech Group with future Exubera inhaler
manufacturing commitments, we had a contractual liability
for termination costs and expenses that would be incurred
by Bespak and Tech Group.

On February 12, 2008, we entered into a Termination and
2008 Continuation Agreement (“TCA”) with Tech Group
pursuant to which the Exubera Inhaler MSA was terminated
in its entirety. We have recorded $13.8 million as termination
liabilities under the terms of the TCA. These expenses were
due and payable under the termination provision of the
Exubera Inhaler MSA, which included reimbursement of
inventory, inventory purchase commitments, unamortized
depreciation on property and equipment, severance costs
and operating lease commitments. In the event that we
successfully identify a new Exubera commercialization
partner and such partner does enter into an Exubera inhaler
supply agreement with Tech Group, we would be relieved of
our obligation to pay Tech Group up to $8.0 million of the
recorded termination liability (subject to downward
adjustment depending on the timing of any such
agreement). Due to the uncertainty regarding the prospects
of securing a new commercialization partner for Exubera
and uncertainty over whether such partner will desire to
enter into an Exubera inhaler manufacturing agreement
with Tech Group, we believe that this amount is a
contingent gain to be recorded when and if those events
occur. Additionally, we agreed to compensate Tech Group
to retain a limited number of core Exubera inhaler
manufacturing personnel and its dedicated Exubera inhaler
manufacturing facility for a limited period in 2008 as part
of the TCA. These contractual fees are not included in the
termination liability recorded during 2007 and will be
expensed as incurred in 2008. This maintenance
arrangement is designed to preserve Tech Group’s capability
to provide future Exubera inhaler manufacturing in the
event that we identify a commercialization partner for
Exubera and such partner elects to enter into a
manufacturing and supply agreement with Tech Group.

On February 14, 2008, we entered into a Termination and
Mutual Release Agreement with Bespak pursuant to which
the Exubera Inhaler MSA was terminated in its entirety and
we agreed to pay Bespak £11.0 million or approximately
$21.6 million, including $3.0 million in satisfaction of
outstanding accounts payable and $18.6 million in
termination costs and expenses that were due and payable
under the termination provisions of the Exubera Inhaler
MSA, which included reimbursement of inventory, inventory
purchase commitments, unamortized depreciation on
property and equipment, severance costs and operating
lease commitments.

Within our Consolidated Balance Sheets, accrued expenses
to contract manufacturers include the aggregate
termination settlement obligation and amounts payable
related to 2007 services provided.

Notes to Consolidated Financial Statements

Nektar Therapeutics

Note 14 Impairment of Long Lived Assets

During the years ended December 31, 2007, 2006, and 2005, we recorded the following charges in the Impairment of long
lived assets line item of our Consolidated Statements of Operations (in thousands):

Years ended December 31,

2007

2006

2005

Exubera-related property and equipment:

Contract manufacturer locations

$ 16,297

$ —

Nektar location

Exubera-related property and equipment

Bradford, UK Operations:

Property and equipment

Goodwill

Bradford, UK Operations

Aerogen core-technology intangible assets

Construction in progress

Impairment of long lived assets

12,099

28,396

—

1,156

—

1,156

5,497

2,757

—

5,703

59,637

65,340

—

$ 28,396

$ 9,410

$ 65,340

Exubera-related property and equipment

On November 9, 2007, we entered into a termination
agreement and mutual release with Pfizer related to
Exubera and NGI. We are currently engaged in discussions
with potential partners regarding a collaboration for
Exubera and/or NGI. However, there is still uncertainty
regarding our ability to successfully conclude a new
commercialization and development partnership for
Exubera and/or NGI. There are challenges to establishing a
new Exubera collaboration including, among others, supply
chain continuity for the portions of the Exubera supply chain
owned and operated by Pfizer, including raw insulin supply,
blister filling, packaging, warehousing and distribution, and
the ability of a potential new partner to obtain regulatory
approval to market and sell Exubera and required regulatory
qualification of certain segments of the Exubera supply
chain. As a result, we performed an impairment analysis
of the property and equipment that support Exubera
commercial operations and NGI (“Exubera-related assets”),
including machinery and equipment at our contract
manufacturer locations and machinery, equipment, and
leasehold improvements in San Carlos and determined the
fair value based on a discounted cash flow model. Given
that we have not finalized a collaboration agreement and
uncertainties associated with future supply chain decisions
exist, we concluded that the carrying value exceeded the
estimated future cash flow. As a result, we recorded an

impairment charge of $28.4 million for the Exubera-related
assets during the three-month period ended December 31,
2007.

Bradford, UK operations

In December 2005, we were apprised of unfavorable results
of clinical data related to programs from our super critical
fluids business unit, located in Bradford, UK (“Bradford”),
which provided an indication that the fair value of the
respective business unit’s goodwill was below the carrying
value. We performed an impairment analysis of goodwill
and other long lived assets for Bradford and determined
the fair value based on a discounted cash flow model was
less than the carrying value. As a result, we recorded an
impairment charge of $65.3 million related to Goodwill and
Property and equipment.

In June 2006, we involuntarily terminated the majority of
the personnel located in Bradford, commenced with plans
to wind-down the location and its related operations, and
reassessed the useful life of the remaining laboratory and
office equipment. We determined that these assets could
not be redeployed and had no future use. Due to our revised
estimate of the useful life of these assets, we accelerated
approximately $1.2 million of remaining depreciation in
June 2006.

Construction in progress

Note 15 Workforce Reduction

In December 2006, we determined that one of our
construction-in-progress assets would no longer be
completed based on the contract renegotiation with one of
our collaboration partners and we recorded an impairment
loss for the costs incurred to date of $2.8 million.

Other Intangible Assets

As part of the October 2005 Aerogen acquisition, we also
acquired $7.2 million in core technology intangible assets. In
late December 2006, we entered into a non-binding letter of
intent to sell our general purpose nebulizer device business.
During the year ended December 31, 2006, we determined
that the non-binding letter of intent to sell the nebulizer
device business, the anticipated proceeds of such potential
sale, and the historical losses of the nebulizer device
business were indicators that this intangible asset did not
have future value and recorded a $5.5 million charge. The
management buy-out of the nebulizer device business was
completed on November 30, 2007 for an upfront payment
of $2.2 million and a net gain of $0.9 million. This
management buy-out included a license and a transfer of
certain of our non-essential general purpose nebulizer
technology under limited terms of use and conditions
designed to prevent future competition with our pulmonary
liquid delivery programs such as NKTR-061 (inhaled
amikacin). These terms and conditions included a limited
field license to the general purpose nebulizer devices only
and excluded any rights to directly or indirectly develop,
market or distribute general purpose nebulizers as a
component of a drug/device combination. In addition, any
efficiency improvements to the general purpose nebulizer
developed by the newly formed company are licensed back
to us for addition to our pulmonary technology platform for
no additional consideration.

As part of an overall effort to reduce ongoing operating
costs and improve the organizational structure, efficiency
and productivity of Nektar, on May 18, 2007, the Board
of Directors approved a plan (the “2007 Plan”) to reduce
our workforce by approximately 180 employees, or
approximately 25 percent of our regular full-time
employees. The total cost of implementing the 2007
Plan was approximately $8.4 million, comprised of
cash payments for severance, medical insurance and
outplacement services.

We notified the affected employees impacted by the 2007
Plan on May 23, 2007. The majority of the affected
employees were terminated in May 2007, but certain
employees were given termination dates longer than two
months from the date of notification. As of December 31,
2007, the Plan has been completed and the remaining
liabilities are related to post-employment medical insurance
for employees impacted by the Plan.

For the year ended December 31, 2007, workforce reduction
charges were recorded in our Consolidated Statements of
Operations as follows (in thousands):

Year ended
December 31,
2007

Cost of goods sold, net of change in inventory

$ 974

Research and development expense (1)

General and administrative expense

Total workforce reduction charges

5,791

1,617

$ 8,382

(1) During the year ended December 31, 2007, workforce reduction charges
recorded to research and development expense included $1.4 million of
non-commercial operations, manufacturing, and quality and $4.4 million
of research and development infrastructure support. No research and
development programs were curtailed due to the workforce reduction.

The following table summarizes the liabilities included in
accrued compensation in our Consolidated Balance Sheet in
connection with the 2007 Plan during the year ended
December 31, 2007(in thousands):

Balance at December 31, 2006

Workforce reduction charges recorded

Workforce reduction payments

Balance at December 31, 2007

$ —

8,382

(7,802)

580

Notes to Consolidated Financial Statements

Nektar Therapeutics

Note 16 Stock-Based Compensation

We issue stock-based awards from three compensation plans, which are more fully described in Note 10-Stockholder’s Equity.
Stock-based compensation costs are recorded in the following lines of our Consolidated Financial Statements (in thousands):

Cost of goods sold, net of change in inventory

Research and development expense

General and administrative expense

Total stock based compensation costs

For the periods ended December 31, 2007 and 2006, we
recorded approximately $0.5 million and $11.8 million,
respectively, of stock-based compensation 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 90 day period after termination and accelerated
a portion of the optionee’s unvested grants. In addition,
during the year ended December 31, 2005, we recorded
approximately $1.9 million 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.
Stock-based compensation charges are non-cash charges
and as such have no impact on our financial position or
reported cash flows.

Year ended December 31,
2007

2006

$ 1,003

$ 1,614

6,275

5,915

9,692

17,837

$13,193

$29,143

Aggregate Unrecognized Stock-based Compensation Expense

As of December 31, 2007, total unrecognized compensation
expense related to unvested stock-based compensation
arrangements under the Options Plans is expected to be
recognized over a weighted-average period of 2.2 years as
follows (in thousands):

Years ending December 31,

2008

2009

2010

2011

2012 and thereafter

$ 10,254

8,980

7,422

3,859

$ 30,566

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 2007 and 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 30
months to 61 months. For the period ended December 31,
2007 and 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.

Average risk-free interest rate

Dividend yield

Volatility factor

Year ended December 31, 2007

Year ended December 31, 2006

Employee Stock
Options

4.2%

0.0%

53.3%

ESPP

4.8%

0.0%

Employee Stock
Options

4.8%

0.0%

ESPP

5.2%

0.0%

38.4%

63.1%

33.3%

Weighted average expected life

5.09 years

0.5 years

5.20 years

0.5 years

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 2007 and 2006 RSUs is estimated to be
1.2 years and 3.0 years, respectively.

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 price per share and
contractual life information):

Options Outstanding

Number of
Shares

Exercise Price
Per Share

Weighted-
Average
Exercise
Price
Per Share

Weighted-
Average
Remaining
Contractual
Life (in years)

Aggregate
Intrinsic
Value (1)

Balance at December 31, 2004
Options granted
Options exercised
Options forfeited & canceled

Balance at December 31, 2005
Options granted
Options exercised
Options forfeited & canceled

Balance at December 31, 2006
Options granted
Options exercised
Options forfeited & canceled

13,590
1,791
(1,014)
(1,114)

$ 0.01-61.63
13.46-19.76
0.01-18.47
3.88-56.38

13,253
1,115
(2,160)
(1,501)

$ 0.01-61.63
14.36-21.51
0.05-20.41
4.62-52.16

10,707
5,257
(429)
(3,323)

$ 0.01-61.63
5.98-15.24
0.01-14.25
4.50-55.19

Balance at December 31, 2007
Exercisable at December 31, 2007
Exercisable at December 31, 2006
Exercisable at December 31, 2005

12,212
7,023
8,185
9,468

17.57
17.44
9.47
21.34

17.85
17.88
9.51
21.86

18.97
9.87
6.80
18.47

15.62
19.15
19.88
19.08

6.03

79,055

8,198

5.38

37,678

18,651

4.78

15,348

1,770

643
584
12,229
25,967

5.20
3.64
4.09
4.69

(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.

Notes to Consolidated Financial Statements

Nektar Therapeutics

The weighted-average grant-date fair value of options
granted during the years ended December 31, 2007, 2006,
and 2005 was $5.11, $10,54, and $10,26, respectively. The
estimated fair value of options that vested during the years

ended December 31, 2007 and 2006 was $8.7 million and
$12.0 million, respectively.

The following table provides information regarding our
outstanding stock options as of December 31, 2007

Options Outstanding

Options Exercisable

Weighted-Average
Exercise Price Per
Share

Weighted-Average
Remaining Contractual
Life (in years)

Range of
Exercise
Prices

$ 0.01-6.42
6.43-6.98
6.99-10.83
10.84-12.37
12.50-14.25
14.28-15.25
15.26-18.29
18.34-23.00
23.05-27.88
27.96-61.63

Number

426,908
1,737,765
1,303,510
1,307,776
1,368,281
1,287,555
1,312,400
1,257,974
1,674,873
534,675

$ 5.21
6.97
8.49
11.44
13.60
14.65
16.83
19.68
27.74
36.75

$ 0.01-61.63

12,211,717

$ 15.62

Summary of RSU Award Activity

During 2007, we issued 344,811 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 12 to 48 months. We are expensing
the grant date fair value of the awards ratably over the
service period.

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 based 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.

One of the three milestones was achieved during the three-
month period ended June 30, 2007 and approximately
174,000 shares were vested and released. During 2007, we
determined that the second milestone would not be met. As
a result, we reversed all previously recorded compensation
expense related to this performance milestone,
approximately $2.8 million, in the third quarter of 2007.

Number

307,952
27,870
593,580
291,346
1,142,468
547,577
996,841
905,339
1,674,873
534,675

7,022,521

Weighted-Average
Exercise Price Per
Share

$ 4.82
6.66
8.13
11.40
13.71
14.73
16.86
19.90
27.74
36.75

$ 19.15

5.58
7.92
6.45
7.04
3.22
5.38
4.47
5.31
2.59
2.80

5.20

Based on our current product pipeline development efforts,
we currently estimate that the achievement of the third
performance milestone is probable by the end of the last
quarter in 2010. If our actual experience in future periods
differs from these current estimates, we may change our
determination of the probability of achieving the
performance milestone or the estimate of the period in
which the milestone will be achieved.

In March 2005, we issued 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. These RSU awards become fully
vested over a period of 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 for the year ended December 31,
2005. 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 nil, $1.3 million, and $1.9 million
for the years ended December 31, 2007, 2006, and 2005
respectively.

The following table presents a summary of RSU activity (in thousands except grant date fair value and contractual life
information):

Balance at December 31, 2004
Granted
Released

Balance at December 31, 2005
Granted
Released
Forfeited & Canceled

Balance at December 31, 2006
Granted
Released
Forfeited & Canceled

Weighted-Average
Remaining
contractual Life
(in years)

Weighted-Average
Grant-Date
Fair value(1)

Units Issued

206
112
(34)

284
1,088
(178)
(110)

1,084
345
(334)
(360)

1.52

1.14

1.52

$ 18.30

$ 19.55

$ 11.01

Balance at December 31, 2007

735

2.03

Aggregate
Intrinsic
Value

$ 4,214

518

$ 4,676

3,184

$ 16,479

3,808

$ 4,925

(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, 2007 as applicable.

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.

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, 2007 and 2006 are not directly comparable to the year
ended December 31, 2005.

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

4.0%

0.0%

0.710

4.5 years

Notes to Consolidated Financial Statements

Nektar Therapeutics

In the table below, we have presented proforma disclosures of our net loss and net loss per share for 2005 assuming the
estimated fair value of the options granted prior to January 1, 2006 is amortized to expense over the option-vesting period.

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

Pro forma net loss

Net loss per share:

Basic and diluted—as reported

Basic and diluted—proforma

Note 17 Income Taxes

Year ended
December 31,
2005

$ (185,111)

1,854

(21,986)

$ (205,243)

(2.15)

(2.39)

For financial reporting purposes, “Loss before provision for income taxes,” includes the following components (in thousands):

Domestic

Foreign

Total

Years ended December 31,
2006

2007

2005

$ (30,143)

$(147,059)

$(172,232)

(1,309)

(6,874)

(13,016)

$ (31,452)

$(153,933)

$(185,248)

As of December 31, 2007, we had a net operating loss
carryforward for federal income tax purposes of
approximately $617.1 million, portions of which began to
expire in 2007. We had a total state net operating loss
carryforward of approximately $306.7 million, which will
begin to expire in 2010. We had a foreign net operating loss
carryforward of approximately $37.6 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 1986 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):

Current:

Federal

State

Foreign

Total Current

Deferred:

Federal

State

Foreign

Total Deferred

Provision (Benefit) for income taxes

Years ended December 31,

2007

2006

2005

194

$ —

782

333

—

(137)

—

$ 1,309

$ (137)

$ —

—

$ —

$ 1,309

—

822

—

$ 822

$ 828

—

$ —

$ (137)

Income tax provision (benefit) related to continuing operations differs from the amounts computed by applying the statutory
income tax rate of 35% to pretax loss as follows (in thousands):

U.S. federal provision (benefit)

At statutory rate

State taxes

Net operating losses not benefited

Previously unrecognized tax credits

Non-deductable employee compensation

Investment impairment and non-deductable amortization

Non-deductable in process research charge

Sale of Irish subsidiary

Other

Total

2007

Years ended December 31,
2006

2005

$ (10,998)

$ (52,337)

$ (62,984)

782

(137)

27,829

50,385

58,645

(13,109)

210

—

(3,604)

199

—

2,138

636

—

1,667

2,672

—

1,309

828

(137)

Notes to Consolidated Financial Statements

Nektar Therapeutics

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

Depreciation

Reserve and accruals

Stock based compensation

Capital loss carryforward

Other

Deferred tax assets before valuation allowance

Valuation allowance for deferred tax assets

Total deferred tax assets

Deferred tax liabilities:

Depreciation

Acquisition related intangibles

Total deferred tax liabilities

Net deferred tax assets

December 31,

2007

2006

$ 254,419

$ 246,812

47,274

24,046

6,670

11,050

7,423

24,495

16,375

3,918

6,170

5,991

7,762

—

25,543

11,901

—

4,563

377,794

326,618

(375,318)

(322,508)

2,476

4,110

—

(2,476)

(2,715)

(1,395)

(4,110)

— $

—

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 $52.8
million and $71.9 million during the years ended December
31, 2007 and 2006, respectively. The valuation allowance
includes approximately $38.0 million and $35.1 million of
benefit as of December 31, 2007 and 2006, respectively,
related to employee stock option exercises that will be
credited to additional paid in capital when realized. We have
federal research credits of approximately $19.3 million,
which will begin to expire in 2008 and state research credits
of approximately $14.9 million which have no expiration
date. We have federal orphan drug credits of $12.8 million
which will expire in 2024.

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.

As of December 31, 2007, we have $9.2 million of
unrecognized tax benefits. We historically accrued for
uncertain tax positions in deferred tax assets as we have
been in a net operating loss position since inception and
any adjustments to our tax positions would result in an
adjustment of our net operating loss or tax credit carry
forwards rather than resulting in a cash outlay. If we are
eventually able to recognize these uncertain positions, our
effective tax rate would be reduced. We currently have a full

valuation allowance against our net deferred tax asset
which would impact the timing of the effective tax rate
benefit should any of these uncertain tax positions be
favorably settled in the future.

It is reasonably possible that certain unrecognized tax
benefits may increase or decrease within the next twelve
months due to tax examination changes, settlement
activities, expirations of statute of limitations, or the impact
on recognition and measurement considerations related to
the results of published tax cases or other similar activities.
We do not anticipate any significant changes to
unrecognized tax benefits over the next 12 months.

Our policy is to include interest and penalties related to
unrecognized tax benefits, if any, within the provision for
taxes in the consolidated condensed statements of
operations under the provisions of FIN 48. We have not
accrued any amounts for the payment of interest and
penalties relating to unrecognized tax benefits.

We file income tax returns in the U.S., as well as California,
Alabama and various other foreign jurisdictions. We are
currently not the subject of any income tax examinations. In
general, the earliest open year subject to examination is
2004 for U.S. and Alabama and 2003 for California, although
depending upon jurisdiction, tax years may remain open
subject to limitations. We have evaluated the need for
additional tax reserves for any audits as part of our FIN 48
adoption process.

We have the following activity relating to unrecognized
tax benefits during the year-ended December 31, 2007:
(in thousands)

Note 18 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
operate in one segment because our business offerings have
similar economics 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 Chief Executive Officer and his
management team. 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 69%, 64%, and 64% of our
revenue for the years ended December 31, 2007, 2006,
and 2005, respectively. Due to the termination of our
collaborative agreements with Pfizer, we do not expect to
receive any revenue from Pfizer in 2008 related to Exubera or
NGI. Please refer to Note 13 of Notes to Consolidated
Financial Statements for additional information on the
termination of our collaborative agreements.

Revenue by geographic area is based on the shipping
locations of the customers. The following table sets forth
revenue by geographic area (in thousands):

Years ended December 31,

2007

2006

2005

United States

$ 212,990 $182,959 $109,488

2007

European countries

60,037

33,471

14,967

Balance at January 1, 2007

$ 7,176

All other countries

—

1,288

1,824

Tax positions related to current year

Total revenue

$ 273,027 $217,718 $126,279

Additions

Reductions

Settlements

Lapses in statute of limitations

2,046

—

Balance at December 31, 2007

$ 9,222

Notes to Consolidated Financial Statements

Nektar Therapeutics

At December 31, 2007, the net book value of property and
equipment was $114.4 million. Approximately 98% of such
assets were located in the United States. At December 31,
2006, the net book value of our property, plant and
equipment was $133.8 million, and approximately 88% of
such assets were located in the United States.

Note 19 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 2007

Fiscal Year 2006

Product sales and royalty
revenue

$ 71,355 $ 47,001 $ 35,697 $ 26,702 $ 11,151 $ 45,403 $ 41,451 $ 55,551

Contract research revenue

$ 11,997 $ 16,615 $ 18,824 $ 38,489 $ 16,063 $ 13,076 $ 15,111 $ 12,053

Exubera commercialization
readiness revenue

1,664 $

2,301 $

1,800 $

582 $

1,745 $

1,744 $

2,070 $

2,300

Gross margin on product sales

$ 15,727 $

8,626 $

9,391 $

9,315 $

3,651 $

9,219 $ 11,314 $ 15,451

Research and development
expenses

General and administrative
expenses

$ 37,492 $ 41,000 $ 35,773 $ 39,310 $ 31,401 $ 39,454 $ 36,005 $ 42,521

$ 16,735 $ 13,178 $ 12,426 $ 13,997 $ 20,373 $ 27,083 $ 13,422 $ 17,441

Litigation settlement

Impairment of long lived assets $

Gain on termination of
collaborative agreements, net

— $

1,583 $

— $ 17,710 $

— $

—

— $ 28,396 $

— $

1,156 $

— $

8,254

— $ (79,178) $

— $

—

Operating income (loss)

$ (25,969) $ (27,988) $ (19,572) $ 37,381 $ (33,174) $ (63,212) $ (22,682) $ (40,162)

Interest expense

Net income (loss)

Basic and diluted net income
(loss) per share (1)(2)

4,933 $

4,702 $

4,773 $

4,230 $

5,142 $

4,938 $

5,255 $

5,458

$ (25,673) $ (27,510) $ (18,620) $ 39,042 $ (33,471) $ (62,831) $ (19,604) $ (38,855)

(0.28) $

(0.30) $

(0.20) $

0.42 $

(0.38) $

(0.70) $

(0.22) $

(0.43)

(1) Quarterly loss per share amounts may not total the year-to-date loss per share due to rounding.
(2) During the fourth quarter of 2007, there were approximately 578 dilutive shares outstanding which did not change earnings per share.

Note 20 Subsequent Events (Unaudited)

Terre Haute, Indiana Manufacturing Facility

On January 30, 2008, we entered into a letter agreement
with Pfizer to maintain a group of key Pfizer manufacturing
personnel in Pfizer’s Terre Haute, Indiana Exubera
manufacturing facility. We are reimbursing Pfizer for actual
monthly incremental personnel costs incurred to maintain
such personnel during this interim period.

Workforce Reduction

operations, consolidate corporate functions, and strengthen
decision-making and execution within the business units. In
addition, as part of the plan, we have preserved the
necessary technical and manufacturing personnel and
capabilities to support our ongoing effort to forge a new
partnership for our inhaled insulin programs.

We expect the total cost of the workforce reduction will
total approximately $5.4 million, comprised of cash
payments for severance, medical insurance, and
outplacement services. The severance charge associated
with this plan will be recorded as a one-time benefit
arrangement in February 2008, except for certain employees
with transition dates longer than 60 days. For these
employees, the severance expense will be recorded ratably
over the estimated transition period.

Corporate Information

Corporate Headquarters
Nektar Therapeutics
201 Industrial Road
San Carlos, CA 94070-6256
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
201 Industrial Road
San Carlos, CA 94070-6256

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 6, 2008
2:00 — 3:30 p.m. (PDT)
The Sandpebble Room
Hyatt Regency San Francisco Airport
1333 Bayshore Highway
Burlingame, CA 94010
Telephone (650) 347-1234

Corporate Counsel
O’Melveny & Myers LLP
Menlo Park, CA

Nektar Therapeutics

Independent Autitors
Ernst & Young LLP
Palo Alto, CA

Transfer Agent and Stockholder Services
Mellon Investor Services, LLC
525 Market Street, Suite 3500
San Francisco, CA 94105
Telephone (800) 522-6645

The following graph compares, for the five-year period
ended December 31, 2007, the cumulative total stockholder
return (change in stock price plus reinvested dividends) of
our common stock with (i) the NASDAQ Composite Index
and (ii) the NASDAQ Pharmaceutical Index. Measurement
points are the last trading day of each of our fiscal years
ended December 31, 2002, December 31, 2003, December
31, 2004, December 31, 2005, December 31, 2006 and
December 31, 2007. The graph assumes that $100 was
invested on December 31, 2002 in the common stock of
the Company, the NASDAQ Composite Index and the
NASDAQ Pharmaceutical Index and assumes reinvestment
of any dividends. The stock price performance in the graph
is not intended to forecast or indicate future stock price
performance.

Comparison of 5-Year Cumulative Total Return

Among Nektar Threapeutics, the NASDAQ Composite Index and the NASDAQ Pharmaceutical Index

$250

$200

$150

$100

Securities

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

$50

12/02

12/03

12/04

12/05

12/06

12/07

Nektar Therapeutics

NASDAQ Composite

NASDAQ Pharmaceutical

Year Ended
December 31, 2006

High

Low

Year Ended
December 31, 2007

High

Low

$ 21.76

$ 16.44

1st Quarter

$ 15.24

$ 11.20

22.75

16.99

2nd Quarter

18.53

13.10

3rd Quarter

17.20

13.96

4th Quarter

13.58

9.75

8.98

9.32

7.63

5.22

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 trademarks owned by the following companies: Exubera (Pfizer, Inc.); PEGASYS (Hoffman-LaRoche, Ltd.); Neulasta (Amgen
Inc.); Cimzia (UCB Group); Somavert (Pfizer, Inc.); PEG-INTRON (Schering-Plough Corporation); Macugen (OSI Pharmaceutiocals, Inc,); and MARINOL (Solvay Pharmaceuticals, Inc.).

NEKTAR MANAGEMENT TEAM

Howard W. Robin
President and Chief Executive Officer

Nevan Elam
Senior Vice President, Head of the Pulmonary Business Unit

Gil M. Labrucherie
Senior Vice President, General Counsel and Secretary

John Nicholson
Senior Vice President and Chief Financial Officer

John S. Patton, Ph.D.
Co-Founder and Chief Research Fellow

Dorian Rinella
Senior Vice President, Human Resources and Facilities

Tim Warner
Senior Vice President, Investor Relations and Corporate Affairs

NEKTAR BOARD OF DIRECTORS

Robert B. Chess
Chairman of the Board, Nektar Therapeutics and
Chairman and CEO, OPX Biotechnologies, Inc.

Michael A. Brown
Chairman, Quantum Corporation

Hoyoung Huh, M.D., Ph.D.
President and CEO, BiPar Sciences

Joseph J. Krivulka
Founder and President, Triax Pharmaceuticals

Christopher A. Kuebler
Chairman, Covance Inc.

Irwin Lerner
Former Chairman, F. Hoffman-LaRoche, Inc.

Lutz Lingnau
Former Executive Board Member, Schering AG

John S. Patton, Ph.D.
Co-Founder and Chief Research Fellow, Nektar Therapeutics

Howard W. Robin
President and Chief Executive Officer, Nektar Therapeutics

Susan Wang
Former CFO, Solectron

Roy A. Whitfield
Former Chairman, Incyte Genomics, Inc.

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Nektar Therapeutics
201 Industrial Road
San Carlos, CA 94070
USA
+1 650.631.3100 Global Headquarters
www.nektar.com
NASDAQ: NKTR