UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

or

o		TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 0-24006

201 Industrial Road
San Carlos, California 94070
(Address of principal executive offices)

650-631-3100
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 
12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, was 92,401,904 on April 30, 2008.

 

 

NEKTAR THERAPEUTICS
INDEX

PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements — Unaudited:			4
Condensed Consolidated Balance Sheets — March 31, 2008 and December 31, 2007			4
Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2008 and 2007			5
Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2008 and 2007			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			21
Item 4. Controls and Procedures			21
PART II: OTHER INFORMATION
Item 1. Legal Proceedings			22
Item 1A. Risk Factors			22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3. Defaults Upon Senior Securities			33
Item 4. Submission of Matters to a Vote of Security Holders			33
Item 5. Other Information			33
Item 6. Exhibits			34
Signatures			35
Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

Forward-Looking Statements

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of this Quarterly Report on Form 10-Q, including any projections of earnings, revenue or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance and any statements of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including, but not limited to, the risk factors set forth in “Part II, Item 1A — Risk Factors” below and for the reasons described elsewhere in this Quarterly Report on Form 10-Q. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof and we do not intend to update any forward-looking statements except as required by law or applicable regulations. Except where the context otherwise requires, in this Quarterly Report on Form 10-Q, the “Company,” “Nektar,” “we,” “us” and “our” refer to Nektar Therapeutics, a Delaware corporation, and, where appropriate, its subsidiaries.

Trademarks

All Nektar brand and product names, including, but not limited to, Nektar ^® , contained in this document are trademarks, registered trademarks or service marks of Nektar Therapeutics in the United States (U.S.) and certain other countries. This document also contains references to trademarks, registered trademarks and service marks of other companies that are the property of their respective owners.

PART I: FINANCIAL INFORMATION

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

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

NEKTAR THERAPEUTICS

We are dependent on our partners, vendors and third party manufacturers to provide raw certain materials, active pharmaceutical ingredients and pulmonary delivery devices of the appropriate quality and reliability to meet applicable regulatory requirements. Consequently, in the event that supplies are delayed or interrupted for any reason, our ability to develop and meet our supply commitments could be impaired, which could have a material adverse effect on our business, financial condition and results of operation.

Income Taxes

We account for income taxes under the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS 109”), and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”). 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. At March 31, 2008 and December 31, 2007, we have provided a full valuation allowance against our net deferred tax assets generated by our domestic net operating loss and we have recorded a provision for foreign income taxes payable in India at an effective rate in India of approximately 34% for the three months ended March 31, 2008.

Recent Accounting Pronouncements

SFAS 157

On January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), for financial assets and financial liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. FASB Statement of Position No. 157-2 defers adoption of SFAS 157 for non-financial assets and non-financial liabilities. Refer to Note 4 for fair value disclosures of cash equivalents and available-for-sale investments.

SFAS 159

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS No. 159 permits companies to choose to measure certain financial instruments and other items at fair value. This standard is currently effective, but we have not elected to utilize the fair value option for any of our financial assets or liabilities. We continue to account for our available-for-sale investments utilizing Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities , which requires us to mark our available-for-sale investments to fair value with unrealized gains and losses recorded as other comprehensive income within stockholders’ equity.

EITF 07-3

On January 1, 2008, we adopted the provisions of 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 focuses on these nonrefundable costs and whether to account for them as: (a) a period expense when paid or (b) a capitalized cost until the goods have been delivered or the related services performed. The adoption of EITF 07-3 did not have a material impact on our financial position or results of operations.

EITF 07-1

In December 2007, the FASB ratified EITF Issue No. 07-1, Accounting for Collaborative Arrangements , which defines collaborative arrangements and establishes reporting and disclosure requirements for transactions between participants in a collaborative arrangement and between participants in the arrangements and third parties. This issue is effective retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date for fiscal years beginning after December 15, 2008. We do not expect EITF 07-1 will have a material impact on our financial position or results of operations.

Note 2—Termination of Inhaled Insulin Programs

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. 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 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. On April 9, 2008, we announced that we had ceased all negotiations with potential partners for Exubera and NGI as a result of new data analysis from ongoing clinical trials conducted by Pfizer.

Termination of Exubera Inhaler Manufacturing and Supply Agreement

We were a party to a manufacturing and supply agreement (the “Exubera Inhaler MSA”) with Tech Group North America, Inc. (“Tech Group”) and Bespak Europe Ltd. (“Bespak”) related to the manufacture and supply of Exubera inhalers. As a result of the November 2007 Pfizer termination described above, we concluded no further orders for supply of Exubera inhalers were required from Tech Group and Bespak in the foreseeable future. In December 2007, we began discussions with Tech Group and Bespak to terminate the Exubera Inhaler MSA. As of December 31, 2007, we recorded $40.4 million of accrued expenses to Bespak and Tech Group for outstanding accounts payable and termination costs and expenses that were due and payable under the termination provisions of the Exubera Inhaler MSA. We paid Bespak $21.8 million and Tech Group $10.6 million related to these liabilities during the first quarter of 2008. We had a remaining termination liability of $7.5 million payable to Tech Group as of March 31, 2008, which was paid on April 23, 2008.

Exubera Manufacturing Continuation Agreements

In connection with the termination of the Exubera Inhaler MSA, we entered into a 2008 continuation agreement with Tech Group, pursuant to which Tech Group agreed to preserve key personnel and manufacturing facilities to support potential future Exubera inhaler manufacturing from January through April 2008. We also entered into a letter agreement with Pfizer to retain a limited number of Exubera manufacturing personnel at Pfizer’s Terre Haute, Indiana manufacturing facility during March and April 2008. Following the termination of our inhaled insulin programs on April 9, 2008, we have terminated these continuation agreements with Tech Group and Pfizer. For the three months ended March 31, 2008, we incurred $3.4 million in expense related to these continuation agreements. We will record an expense of $1.6 million in April 2008 for the final monthly maintenance provided under these continuation agreements.

Cost of Idle Exubera Manufacturing Capacity

Cost of idle Exubera manufacturing capacity primarily includes costs payable to Tech Group and Pfizer under our manufacturing continuation agreements discussed above and severance and outplacement costs for our Exubera and NGI employees terminated as part of the February 2008 workforce reduction plan. Cost of idle Exubera manufacturing capacity also includes an allocation of manufacturing costs shared between commercial operations and research and development including employee compensation and benefits, rent, and utilities. Following the termination of our Exubera and NGI partnering efforts on April 9, 2008, we have taken all necessary steps to cease spending associated with maintaining Exubera manufacturing capacity and any further NGI development.

Our portfolio of cash, cash equivalents, and available-for-sale investments includes (in thousands):

Gross unrealized gains on the portfolio were $1.0 million and $0.5 million as of March 31, 2008 and December 31, 2007, respectively. Gross unrealized losses on the portfolio were $0.1 million as of March 31, 2008 and as of December 31, 2007. The gross unrealized losses were primarily due to changes in interest rates on fixed income securities. We have a history of holding our investments to maturity and 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 these unrealized losses to be temporary and have not recorded a provision for impairment.

Note 4—Fair Value

The following table represents the fair value hierarchy for our financial assets (cash equivalents and available-for-sale investments) measured at fair value on a recurring basis as of March 31, 2008 (in thousands):

Inventory consists of raw materials, work-in-process and finished goods for our commercial PEGylation business. 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 $5.4 million and $5.8 million as of March 31, 2008 and December 31, 2007, respectively.

Note 6—Commitments and Contingencies

Legal Matters

From time to time, we may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. In accordance with the SFAS No. 5, Accounting for Contingencies , we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, ruling, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. If any unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period or on our cash flows and liquidity.

Collaboration Agreements for Pulmonary Products

As part of our collaboration agreements with our partners for the development, manufacture and supply of products based on our pulmonary technology, we generally agree to defend, indemnify and hold harmless our partners from and against third party liabilities arising out of the agreements, including product liability and infringement of intellectual property. The term of these indemnification obligations is generally perpetual any time after execution of the agreement. There is no limitation on the potential amount of future payments we could be required to make under these indemnification obligations.

To date we have not incurred costs to defend lawsuits or settle claims related to these indemnification obligations. If any of our indemnification obligations is triggered, we may incur substantial liabilities. Because the obligated amount under these agreements is not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. No liabilities have been recorded for these obligations on our Condensed Consolidated Balance Sheets as of March 31, 2008 or December 31, 2007.

License, Manufacturing and Supply Agreements for Products Based on our PEGylation Technology

As part of our license, manufacturing and supply agreements with our partners for the development or manufacture and supply of PEG reagents or intellectual property licenses based on our PEGylation technology, we generally agree to defend, indemnify and hold harmless our partners from and against third party liabilities arising out of the agreements, including product liability and infringement of intellectual property. The term of these indemnification obligations is generally perpetual any time after execution of the agreements. There is no limitation on the potential amount of future payments we could be required to make under these indemnification obligations. We have never incurred costs to defend lawsuits or settle claims related to these indemnification obligations. If any of our indemnification obligations is triggered, we may incur substantial liabilities. Because the obligated amount in these agreements 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 Condensed Consolidated Balance Sheets as of March 31, 2008 or December 31, 2007.

Note 7—Workforce Reduction Plans

In an effort to reduce ongoing operating costs and improve our organizational structure, efficiency and productivity, we executed a workforce reduction plan in May 2007 (the “2007 Plan”). In February 2008, we executed another workforce reduction plan (the “2008 Plan”) designed to streamline the company, consolidate corporate functions, and strengthen decision-making and execution within our business units.

The 2007 Plan reduced our workforce by approximately 180 full-time employees, or approximately 25 percent of our regular full-time employees, and was substantially complete as of December 31, 2007. During the three months ended March 31, 2008, we made payments for severance and medical insurance related to the 2007 Plan.

The 2008 Plan was finalized by executive management on February 8, 2008. The 2008 Plan reduced our workforce by approximately 110 employees, or approximately 20 percent of our regular full-time employees. We notified the employees affected by the 2008 Plan on February 11, 2008. We estimate the 2008 Plan will cost approximately $5.7 million, comprised of cash payments for severance, medical insurance, and outplacement services. We expect execution of the 2008 Plan will be complete by December 31, 2008. We have recognized $5.3 million of workforce reduction charges related to the 2008 Plan during the three months ended March 31, 2008 and we expect to record an additional $0.4 million during the remainder of 2008 for employees with termination dates longer than two months from the date of notification.

Since May 2007, we have incurred $13.7 million related to our two workforce reduction plans, $8.4 million related to the 2007 plan and $5.3 million related to the 2008 plan. For the three months ended March 31, 2008, workforce reduction charges were recorded in our Condensed Consolidated Financial Statements as follows (in thousands):