UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No.___)

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Nektar Therapeutics

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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NEKTAR THERAPEUTICS
201 Industrial Road
San Carlos, California 94070

 

 

 

CONTENTS

 

NEKTAR THERAPEUTICS
201 Industrial Road
San Carlos, California 94070

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 6, 2008

 

 

 

QUESTIONS AND ANSWERS ABOUT THESE PROXY MATERIALS AND VOTING PROCEDURES

 

Why am I receiving these materials?

 

We sent you this proxy statement and the enclosed proxy card because the board of directors of Nektar Therapeutics (“Nektar,” the “Company,” “we” or “us”) is soliciting your proxy to vote at our 2008 annual meeting of stockholders (the “Annual Meeting”) to be held on June 6, 2008 at 2:00 p.m. local time at the Hyatt Regency San Francisco Airport, The Sandpebble Room, located at 1333 Bayshore Highway, Burlingame, California 94010. We invite you to attend the Annual Meeting to vote on the proposals described in this proxy statement. However, you do not need to attend the meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card, or follow the instructions below to submit your proxy over the telephone or on the Internet.

 

We intend to mail this proxy statement and accompanying proxy card on or about April 29, 2008 to all stockholders of record entitled to vote at the annual meeting.

 

Who can vote at the annual meeting?

 

Only stockholders of record at the close of business on April 11, 2008 will be entitled to vote at the Annual Meeting. On this record date, there were 92,361,799 shares of common stock outstanding and entitled to vote.

 

Stockholder of Record: Shares Registered in Your Name

 

If, on April 11, 2008, your shares were registered directly in your name with our transfer agent, BNY Mellon Shareowner Services LLC, then you are a stockholder of record. The printed version of these proxy materials will be sent to you by mail directly by us. As a stockholder of record, you may vote in person at the Annual Meeting or vote by proxy. Whether or not you plan to attend the Annual Meeting, we urge you to vote by proxy by mail, over the telephone or on the Internet as instructed below to ensure your vote is counted.

 

Beneficial Owner: Shares Registered in the Name of a Broker, Bank or Other Agent

 

If, on April 11, 2008, your shares were held in an account at a brokerage firm, bank or other agent, then you are the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered the stockholder of record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to direct your broker, bank or other agent on how to vote the shares in your account. You are also invited to attend the Annual Meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the Annual Meeting unless you request and obtain a valid proxy from your broker, bank or other agent.

 

What am I voting on?

 

There are three matters scheduled for a vote:

 

 

 

How do I vote?

 

You may either vote “For” all the nominees to the board of directors or you may abstain from voting for any nominee you specify. For each of the other matters to be voted on, you may vote “For” or “Against” or abstain from voting. The procedures for voting are:

 

Stockholder of Record: Shares Registered in Your Name

 

If you are a stockholder of record, you may vote in person at the Annual Meeting, vote by proxy using the enclosed proxy card, vote by proxy over the telephone or vote by proxy on the Internet. Whether or not you plan to attend the meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the Annual Meeting and vote in person if you have already voted by proxy.

 

 

Beneficial Owner: Shares Registered in the Name of Broker, Bank or Other Agent

 

If you are a beneficial owner of shares registered in the name of your broker, bank or other agent, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from us. Simply complete and mail the proxy card to ensure that your vote is counted. Alternatively, you may vote by telephone or over the Internet as instructed by your broker or bank. To vote in person at the Annual Meeting, you must obtain a valid proxy from your broker, bank or other agent. Follow the instructions from your broker, bank or other agent included with these proxy materials, or contact your broker or bank to request a proxy form.

 

 

 

How many votes do I have?

 

On each matter to be voted upon, you have one vote for each share of common stock you owned as of April 11, 2008.

 

What is the quorum requirement?

 

A quorum of stockholders is necessary to hold a valid meeting. The presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote will constitute a quorum. On the record date, there were 92,361,799 shares outstanding and entitled to vote.

 

Your shares will be counted towards the quorum only if you submit a valid proxy or vote in person at the Annual Meeting. Abstentions and broker non-votes will be counted towards the quorum requirement. If there is no quorum, the chairman of the Annual Meeting or a majority of the votes present at the Annual Meeting may adjourn the Annual Meeting to another date.

What if I return a proxy card but do not make specific choices?

 

If you are a stockholder of record and you return a signed and dated proxy card without marking any voting selections, your shares will be voted:

 

 

If any other matter is properly presented at the meeting, your proxy (one of the individuals named on your proxy card) will vote your shares using his best judgment.

 

If you are a beneficial owner of shares registered in the name of your broker, bank or other agent, your shares are held by your broker, bank or other agent as your nominee (that is, in “street name”) and you will need to obtain a proxy form from the organization that holds your shares and follow the instructions included on that form regarding how to instruct the organization to vote your shares. If you do not give instructions to your broker, bank or other agent, it can vote your shares with respect to “discretionary” items but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under the rules of the New York Stock Exchange, and, in the absence of your voting instructions, your broker, bank or other agent may vote your shares held in street name on such proposals. Non-discretionary items are proposals considered non-routine under the rules of the New York Stock Exchange, and, in the absence of your voting instructions, your broker, bank or other agent may not vote your shares held in street name on such proposals and the shares will be treated as broker non-votes. Proposal 1 and Proposal 3 involve matters we believe to be routine. Accordingly, no broker non-votes are expected to exist in connection with Proposal 1 and Proposal 3. Broker non-votes are expected in connection with Proposal 2.

 

How are votes counted?

 

Votes will be counted by the inspector of election appointed for the Annual Meeting, who will count “For” votes, abstentions and broker non-votes and, with respect to Proposals 2 and 3, “Against” votes.

 

How many votes are needed to approve each proposal?

 

 

Who is paying for this proxy solicitation?

 

We will pay for the entire cost of soliciting proxies. In addition to these mailed proxy materials, our directors and employees may also solicit proxies in person, by telephone or by other means of communication. We will not pay our directors and employees any additional compensation for soliciting proxies. We may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

 

What does it mean if I receive more than one proxy card?

 

If you receive more than one proxy card, your shares are registered in more than one name or are registered in different accounts. Please complete, sign and return each proxy card to ensure that all of your shares are voted.

Can I change my vote after submitting my proxy?

 

Yes, you can revoke your proxy at any time before the final vote at the Annual Meeting. You may revoke your proxy in any one of three ways:

 

 

When are stockholder proposals due for next year’s Annual Meeting?

 

Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), some stockholder proposals may be eligible for inclusion in our 2009 proxy statement. Any such proposal must be submitted in writing by December 26, 2008, to our Secretary, care of Nektar Therapeutics, 201 Industrial Road, San Carlos, California 94070. If we change the date of our 2009 annual meeting by more than 30 days from the date of the previous year’s annual meeting, the deadline is a reasonable time before we begin to print and send our proxy materials. Stockholders interested in submitting such a proposal are advised to contact knowledgeable counsel with regard to the detailed requirements of the applicable securities laws. The submission of a stockholder proposal does not guarantee that it will be included in our proxy statement.

 

Alternatively, under our bylaws, if you wish to submit a proposal that is not to be included in next year’s proxy statement or nominate a director, you must provide specific information to us no earlier than March 8, 2009 and no later than the close of business on April 7, 2009. If we change the date of our 2009 annual meeting by more than 30 days from the date of the previous year’s annual meeting, the deadline is changed to not earlier than the sixtieth day prior to such annual meeting and no later than the close of business on the ninetieth day prior to such annual meeting. In the event we provide less than 70 days’ notice or prior public disclosure of the date of the annual meeting, the stockholder proposal or nomination must be received not later than the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. You are advised to review our bylaws, which contain additional requirements with respect to advance notice of stockholder proposals and director nominees.

 

A stockholder’s submission must include certain specific information concerning the proposal or nominee, as the case may be, and information as to the stockholder’s ownership of our common stock. Proposals or nominations not meeting these requirements will not be entertained at any annual meeting.

 

In relation to stockholder proposals and nominations, in certain instances we may exercise discretionary voting authority under proxies held by the board of directors. For instance, if we do not receive a stockholder proposal by March 11, 2009, we may exercise discretionary voting authority under proxies held by the board of directors on such stockholder proposal. If we change the date of our 2009 annual meeting by more than 30 days from the date of the previous year’s annual meeting, the deadline will change to a reasonable time before we begin to print and send our proxy materials. In addition, even if we are notified of a stockholder proposal within the time requirements discussed above, if the stockholder does not comply with certain requirements of the Exchange Act, we may exercise discretionary voting authority under proxies held by the board of directors on such stockholder proposal if we include advice in our proxy statement on the nature of the matter and how we intend to exercise our discretion to vote on the matter.

 

What is “householding” and how does it affect me?

 

We have adopted a procedure approved by the Securities and Exchange Commission (the “SEC”) called “householding.” Under this procedure, stockholders who have the same address may receive only one copy of the printed version of these proxy materials, unless one or more of these stockholders notifies us that they wish to receive individual copies. This process potentially means extra convenience for stockholders and cost savings for companies.

If you are a beneficial owner of our common stock, once you receive notice from your broker, bank or other agent that they will be householding communications to your address, householding will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in householding and would prefer to receive separate proxy materials, please notify your broker, bank or other agent, direct your written request to Nektar Therapeutics, Secretary, 201 Industrial Road, San Carlos, California 94070 or contact our Secretary at (650) 631-3100. Stockholders who currently receive multiple copies of our proxy materials at their address and would like to request householding of their communications should contact their broker, bank or other agent.

 

How can I find out the results of the voting at the annual meeting?

 

Preliminary voting results will be announced at the Annual Meeting. Final voting results will be published in our quarterly report on Form 10-Q for the quarter ending June 30, 2008.

 

Our board of directors is presently comprised of eleven (11) directors and is divided into three (3) classes. Each class consists, as nearly as possible, of one third of the total number of directors, and each class has a three (3) year term. There are three (3) current directors in Class I, whose term of office expires in 2008: Michael A. Brown, Joseph J. Krivulka and Howard W. Robin. Each of the current directors in Class I has been nominated for reelection at the Annual Meeting. Messrs. Brown and Krivulka were previously elected by the stockholders and Mr. Robin was appointed to a newly created vacancy by the board of directors on February 14, 2007. Vacancies on the board, including vacancies created by an increase in the number of directors, are filled only by persons elected by a majority of the remaining directors. A director elected by the board to fill a vacancy in a class serves for the earlier of the remainder of the full term of that class, that director’s successor is elected and qualified or their death, resignation or removal.

 

Directors are elected by a plurality of the votes of the shares present in person or represented by proxy at the Annual Meeting and entitled to vote on the election of directors. The three nominees receiving the highest number of affirmative votes will be elected. Shares represented by executed proxies will be voted for the election of the three nominees named below, unless the “abstain” voting selection has been marked on the proxy card. If any nominee becomes unavailable for election as a result of an unexpected occurrence, shares that would otherwise be voted for such nominee will be voted for the election of a substitute nominee proposed by the nominating and corporate governance committee. Each person nominated for election has agreed to serve if elected. Our management has no reason to believe that any nominee will be unable to serve. If elected at the Annual Meeting, each of the nominees will serve until the earlier of the 2011 annual meeting, their successors are elected and qualified or their death, resignation or removal.

 

The following is a brief biography of each nominee.

 

Michael A. Brown

 

Michael A. Brown , age 49, has served as our director since September 2002 and serves on the organization and compensation committee. Mr. Brown serves as Chairman of Line 6, a private company supplying musical instruments, amplifiers and audio gear. Mr. Brown was Chairman of the Board of Quantum Corporation, a computer storage device company, from 1998 through 2003 and continues to serve as a director of Quantum. He served as Quantum’s Chief Executive Officer from September 1995, until his retirement in September 2002. Mr. Brown was President of Quantum’s Desktop Storage Division from 1993 to 1995 and Executive Vice President and Chief Operating Officer from 1992 to 1993. Previously, Mr. Brown held senior positions in product and marketing management after he joined Quantum’s marketing organization in August 1984. Before joining Quantum, Mr. Brown served in the marketing organization at Hewlett-Packard, Inc., a computer products company. Mr. Brown holds a B.A. in economics from Harvard University and an M.B.A. from Stanford University. Mr. Brown is also a director of Symantec Corp., a security and storage management software company.

 

Joseph J. Krivulka

 

Joseph J. Krivulka , age 56, has served as our director since March 2005. Mr. Krivulka is founder and President of Triax Pharmaceuticals, a dermatology products company, a position he has held since November 2004. Mr. Krivulka is also the founder and Chairman of Akrimax Pharmaceuticals, LLC, an emerging branded and contract manufacturing pharmaceutical company. Mr. Krivulka was a co-founder and President of Reliant Pharmaceuticals, LLC, a company that markets pharmaceutical products, from 1999 until 2004. Mr. Krivulka was formerly Chief Executive Officer of Bertek, Inc., a generic pharmaceutical products company that is a subsidiary of Mylan Laboratories Inc., and Corporate Vice President of Mylan Laboratories, a generic pharmaceutical products company. Mr. Krivulka is also a director of Aeolus Pharmaceuticals Inc., a drug development services company. He holds a B.S. from West Virginia Wesleyan College.

 

Howard W. Robin

 

Howard W. Robin , age 55, has served as our President and Chief Executive Officer since January 2007 and was appointed as a member of our board of directors in February 2007. Mr. Robin served as Chief Executive Officer,

President and a director of Sirna Therapeutics, Inc., a biotechnology company, from July 2001 to November 2006 and served as their Chief Operating Officer, President and a director from January 2001 to June 2001. From 1991 to 2001, Mr. Robin was Corporate Vice President and General Manager at Berlex Laboratories, Inc., a pharmaceutical products company that is a subsidiary of Schering, AG, and served as their Vice President of Finance and Business Development and Chief Financial Officer from 1987 to 1991. From 1984 to 1987, Mr. Robin was Director of Business Planning and Development at Berlex. He was a Senior Associate with Arthur Andersen & Co. prior to joining Berlex. Mr. Robin is also a director of Acologix, a biopharmaceutical company. He received his B.S. in Accounting and Finance from Fairleigh Dickinson University in 1974.

 

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.

PROPOSAL 2

APPROVAL OF THE 2008 EQUITY INCENTIVE PLAN

 

At the Annual Meeting, stockholders will be asked to approve the Company’s 2008 Equity Incentive Plan (the “2008 Plan”), which was approved by our board of directors on March 20, 2008.

 

We believe that incentives and stock-based awards focus employees on the objective of creating stockholder value and promoting our success and that incentive compensation plans like the proposed 2008 Plan are an important attraction, retention and motivation tool for participants in the plan.

 

We currently maintain the 2000 Equity Incentive Plan (the “2000 Plan”), which is scheduled to expire on February 9, 2010. As of April 1, 2008, a total of 7,220,526 shares of our common stock were then subject to outstanding awards granted under the 2000 Plan, and an additional 3,820,054 shares of our common stock were then available for new award grants under the 2000 Plan. We also maintain a 2000 Non-Officer Equity Incentive Plan (the “Non-Officer Plan”). As of April 1, 2008, a total of 8,335,287 shares of our common stock were then subject to outstanding awards granted under the Non-Officer Plan, and an additional 390,554 shares of our common stock were then available for new award grants under the Non-Officer Plan. Our outstanding options generally may not be transferred to third parties for value and do not include dividend equivalent rights.

 

Our board of directors approved the 2008 Plan based, in part, on a belief that the number of shares currently available under the 2000 Plan and Non-Officer Plan does not give us sufficient authority and flexibility to adequately provide for future incentives. If stockholders approve the 2008 Plan, a maximum of 9,000,000 shares will be available for award grants under the 2008 Plan. Whether the stockholders approve or do not approve the 2008 Plan, the 2000 Plan and Non-Officer Plan will remain in full force and effect and we will continue to have authority to grant new awards under these plans.

 

The principal terms of the 2008 Plan are summarized below. The following summary is qualified in its entirety by the full text of the 2008 Plan, which appears as Exhibit A to this proxy statement.

 

Purpose

 

The purpose of the 2008 Plan is to attract and retain qualified personnel, to provide additional incentives to our employees, officers, consultants and directors and to promote the success of our business.

 

Administration

 

Our board of directors or one or more committees appointed by the board of directors will administer the 2008 Plan. Our board of directors has delegated general administrative authority for the 2008 Plan to the organization and compensation committee of our board of directors. A committee may delegate some or all of its authority with respect to the 2008 Plan to another committee of directors. (The appropriate acting body, be it our board of directors or a committee within its delegated authority, is referred to in this proposal as the “Committee.”)

 

The Committee has broad authority under the 2008 Plan with respect to award grants, including, without limitation, the authority:

 

 

 

Authorized Shares; Limits on Awards

 

The maximum number of shares of our common stock that may be issued or transferred pursuant to awards under the 2008 Plan is 9,000,000 shares. Shares issued in respect of any stock bonus award or restricted stock purchase award granted under the 2008 Plan will be counted against the share limit as 1.5 shares for every one share actually issued in connection with the award. For example, if we granted 100 shares of our common stock as a stock bonus award under the 2008 Plan, 150 shares would be charged against the share limit with respect to that award.

 

The following other limits are also contained in the 2008 Plan:

 

 

To the extent that shares are delivered pursuant to the exercise of an option, the number of underlying shares as to which the exercise related shall be counted against the applicable share limits, as opposed to only counting the shares actually issued. (For purposes of clarity, if an option relates to 100,000 shares and is exercised at a time when the payment due to the participant is 15,000 shares, 100,000 shares shall be charged against the applicable share limits with respect to such exercise.) Shares that are subject to or underlie awards which expire, for any reason are cancelled or terminated, are forfeited, fail to vest or for any other reason are not paid or delivered under the 2008 Plan will again be available for subsequent awards under the 2008 Plan. However, any shares subject to a stock award that is forfeited or reacquired or repurchased by us will be available for subsequent awards other than incentive stock options.

 

Eligibility

 

Persons eligible to receive awards under the 2008 Plan include officers or employees of us or any of our subsidiaries, members of our board of directors and certain consultants and advisors to us or any of our subsidiaries. Currently, approximately 500 officers and employees of us and our subsidiaries (including all of our Named Executive Officers), each of our 9 non-employee directors and approximately 50 consultants (with the number of consultants fluctuating from time to time) are considered eligible under the 2008 Plan.

 

Types of Awards

 

The 2008 Plan authorizes stock options (incentive and nonqualified), stock bonuses and restricted stock awards.

 

A stock option is the right to purchase shares of our common stock at a future date at a specified price per share (the “exercise price”). The per share exercise price of an option generally may not be less than the fair market value of a share of our common stock on the date of grant. The maximum term of an option is eight years from the date of grant. An option may either be an incentive stock option or a nonqualified stock option. Incentive stock option benefits are taxed differently from nonqualified stock options, as described under “Federal Income Tax Consequences of Awards Under the 2008 Plan” below. Incentive stock options are also subject to more restrictive terms and are limited in amount by the U.S. Internal Revenue Code and the 2008 Plan. Incentive stock options may only be granted to employees of us or a subsidiary. Options generally vest in monthly installments from the date of grant (one year from date of grant in the case of new hire options), with the effect that such options are fully vested after four years from the date of grant although the actual vesting schedule for stock options is determined at the discretion of the Committee. In addition, options granted under the 2008 Plan may permit exercise prior to vesting, but in such event the participant may be required to enter into an early exercise

stock purchase agreement that allows us to repurchase shares not yet vested at their exercise price should the participant’s service to us or our affiliates end before vesting.

 

A stock bonus typically represents a bonus in shares of common stock for services rendered. The Committee may grant stock bonuses to reward continued services, contributions or achievements, in such manner and on such terms and conditions (including any restrictions on the shares) as the Committee may determine from time to time.

 

A restricted stock award is an award typically for a fixed number of shares of common stock, which is subject to vesting or other restrictions. The Committee must specify the price, if any, or services the recipient must provide for the shares of restricted stock, the conditions on vesting (which may include, among others, the passage of time or specified performance objectives or both) and any other restrictions (for example, restrictions on transfer) imposed on the shares. Unless the Committee otherwise provides in an award agreement, a restricted stock award usually confers voting and dividend rights prior to vesting.

 

Adjustments

 

If there is any change in the stock subject to the 2008 Plan or subject to any award granted under the 2008 Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the 2008 Plan and awards outstanding there under will be appropriately adjusted as to the type of security and the maximum number of shares subject to the 2008 Plan, the type of security and the maximum number of shares which may be granted to an employee during a calendar year and the type of security, number of shares and price per share of stock subject to such outstanding awards.

 

No Repricing

 

In no case (except due to an adjustment to reflect a stock split or similar event or any repricing that may be approved by stockholders) will any adjustment be made to a stock option award under the 2008 Plan (by amendment, cancellation and regrant, exchange or other means) that would constitute a repricing of the per share exercise price of the award.

 

Effect of Certain Corporate Events

 

If we dissolve or liquidate, outstanding awards will terminate if not exercised prior to such event. Generally, and subject to limited exceptions set forth in the 2008 Plan, if we undergo certain corporate transactions such as a merger, business combination or other reorganization, or a sale of substantially all of our assets, all awards then-outstanding under the 2008 Plan will become fully vested or paid, as applicable, and will terminate or be terminated in such circumstances, unless the awards are assumed, substituted or otherwise continued. If there is an acquisition of a majority of our voting power and such event does not constitute a corporate transaction described above, then all awards then-outstanding under the 2008 Plan by participants who are then in service to us or our subsidiaries will become fully vested. The Committee also has the discretion to establish other change of control provisions with respect to awards granted under the 2008 Plan. For example, the Committee could provide for the acceleration of vesting or payment of an award in connection with a corporate event that is not described above and provide that any such acceleration shall be automatic upon the occurrence of any such event.

 

Duration, Amendment and Termination

 

The board may amend or terminate the 2008 Plan at any time and in any manner. Stockholder approval for an amendment will be required only to the extent then required by applicable law or any applicable listing agency or required under Sections 162, 422 or 424 of the U.S. Internal Revenue Code to preserve the intended tax consequences of the plan. For example, stockholder approval will be required for any amendment that proposes to increase the maximum number of shares that may be delivered with respect to awards granted under the 2008 Plan. (Adjustments as a result of stock splits or similar events will not, however, be considered an amendment requiring stockholder approval.) Unless terminated earlier by the board of directors, the authority to grant new awards under the 2008 Plan will terminate on March 20, 2018. Outstanding awards, as well as the Committee’s authority with respect thereto, generally will continue following the expiration or termination of the

plan. Generally speaking, outstanding awards may be amended by the Committee (except for a repricing), but the consent of the award holder is required if the amendment (or any plan amendment) impairs the holder.

 

Restrictions on Transfer

 

Under the 2008 Plan, an incentive stock option may not be transferred by the optionholder other than by will or by the laws of descent and distribution. A nonstatutory stock option may be transferred to the extent permitted in the individual optionholder’s agreement. During the lifetime of an optionholder, only the optionholder may exercise an option. No rights under a stock bonus or restricted stock purchase agreement are transferable except as expressly authorized by the terms of the applicable stock bonus or restricted stock purchase agreement. In addition, shares subject to our repurchase under an early exercise stock purchase agreement may be subject to restrictions on transfer that the Committee deems appropriate.

 

Federal Income Tax Consequences of Awards under the 2008 Plan

 

The U.S. federal income tax consequences of the 2008 Plan under current federal law, which is subject to change, are summarized in the following discussion of the general tax principles applicable to the 2008 Plan. This summary is not intended to be exhaustive and, among other considerations, does not describe the deferred compensation provisions of Section 409A of the U.S. Internal Revenue Code to the extent an award is subject to and does not satisfy those rules, nor does it describe state, local or international tax consequences. THIS SUMMARY IS NOT INTENDED AS TAX ADVICE TO ANY PERSON AND RECIPIENTS OF INCENTIVE STOCK OPTIONS, NONQUALIFIED OPTIONS AND/OR RESTRICTED STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS FOR ANY FEDERAL, STATE, LOCAL AND FOREIGN TAX EFFECTS ON THEIR INDIVIDUAL CIRCUMSTANCES.

 

With respect to nonqualified stock options, we are generally entitled to deduct, and the participant recognizes taxable income in an amount equal to, the difference between the option exercise price and the fair market value of the shares at the time of exercise. With respect to incentive stock options, we are generally not entitled to a deduction nor does the participant recognize income at the time of exercise, although the participant may be subject to the U.S. federal alternative minimum tax.

 

With respect to nontransferable restricted stock subject to a substantial risk of forfeiture, the award results in income recognition equal to the excess of the fair market value over the price paid, if any, only at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant) and stock bonuses are generally subject to tax at the time of payment. In each of the foregoing cases, we will generally have a corresponding deduction at the time the participant recognizes income.

 

If an award is accelerated under the 2008 Plan in connection with a “change in control” (as this term is used under the U.S. Internal Revenue Code), we may not be permitted to deduct the portion of the compensation attributable to the acceleration (“parachute payments”) if it exceeds certain threshold limits under the U.S. Internal Revenue Code (and certain related excise taxes may be triggered). Furthermore, the aggregate compensation in excess of $1,000,000 attributable to awards that are not “performance-based” within the meaning of Section 162(m) of the U.S. Internal Revenue Code may not be permitted to be deducted by us in certain circumstances.

 

Specific Benefits under the 2008 Equity Incentive Plan

 

We have not approved any awards that are conditioned upon stockholder approval of the 2008 Plan. We are not currently considering any other specific award grants under the 2008 Plan. If the 2008 Plan had been in existence in 2007, we expect that our award grants for 2007 would not have been substantially different from those actually made in that year under the 2000 Plan. For information regarding stock-based awards granted to our Named Executive Officers during 2007, see the material under the heading “Information About the Executive Officers” below.

 

The closing market price for a share of our common stock as of April 1, 2008 was $6.89 per share.

Vote Required for Approval of the 2008 Equity Incentive Plan

 

The board of directors believes that the adoption of the 2008 Plan will promote the interests of us and our stockholders and will help us and our subsidiaries continue to be able to attract, retain and reward persons important to our success.

 

All members of our board of directors are eligible for awards under the 2008 Plan and thus have a personal interest in the approval of the 2008 Plan.

 

Approval of the 2008 Plan requires the affirmative vote of a majority of the common stock present, or represented, and entitled to vote at the Annual Meeting.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF THE 2008 EQUITY INCENTIVE PLAN AS DESCRIBED ABOVE AND SET FORTH IN EXHIBIT A HERETO.

INFORMATION ABOUT OUR EQUITY COMPENSATION PLANS

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

We currently maintain 4 equity compensation plans: the 2000 Plan, the Non-Officer Plan, the Employee Stock Purchase Plan (the “ESPP”) and the Non-Employee Directors’ Stock Option Plan (the “Directors Plan”). With the exception of the Non-Officer Plan, these plans have each been approved by our stockholders. Stockholders are also being asked to approve a new equity compensation plan, the 2008 Plan, as described above in this proxy statement.

 

The following table sets forth, for each of our equity compensation plans, the number of shares of common stock subject to outstanding options and restricted stock units, the weighted-average exercise price of outstanding options and the number of shares remaining available for future award grants as of December 31, 2007 (share number in thousands).

 

 

 

 

Equity Compensation Plans Not Approved by Stockholders

 

The Non-Officer Plan did not require approval of, and has not been approved by, our stockholders. The 2008 Plan is substantially similar to the Non-Officer Plan, except that only employees and consultants who are neither our officers nor directors may be granted awards under the Non-Officer Plan and incentive stock options cannot be granted under the Non-Officer Plan. The Committee administers the Non-Officer Plan and determines the exercise or purchase price for any shares of common stock subject to an award, the vesting schedule, if any, applicable to each award, the term of each award and the other terms and conditions of each award, in each case subject to the limitations of the Non-Officer Plan. Awards granted under the Non-Officer Plan generally will expire not more than 8 years after the date of grant.

 

RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The audit committee of the board of directors has selected Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008, and has further directed that management submit the selection of our independent registered public accounting firm for ratification by the stockholders at the Annual Meeting. Ernst & Young LLP has audited our financial statements since our inception in 1990. Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting. They will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

 

Neither our bylaws nor other governing documents or law require stockholder ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm. However, the audit committee is submitting the selection of Ernst & Young LLP to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the audit committee will reconsider whether or not to retain Ernst & Young LLP. Even if the selection is ratified, the audit committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if the committee determines that such a change would be in our best interests and our stockholders’ best interest.

 

The affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the Annual Meeting and cast on this proposal will be required to ratify the selection of Ernst & Young LLP.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 3.

 

The following table sets forth certain information regarding the ownership of our common stock as of January 31, 2008 by: (i) each director and nominee for director; (ii) each of our Named Executive Officers; (iii) all of our executive officers and directors as a group; and (iv) all those known by us to be beneficial owners of more than five percent of our common stock.

 

 

 

 

 

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who beneficially own more than ten percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than ten percent beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

 

To our knowledge, based solely on our review of Forms 3, 4 and 5, and any amendments thereto, furnished to us or written representations that no Form 5 was required, we believe that during the fiscal year ended December 31, 2007, all filing requirements applicable to our executive officers and directors under the Exchange Act were met in a timely manner, other than a Form 4 that was filed on January 9, 2007 for stock awards made to Mr. Chess on January 3, 2007 and a Form 3 that was filed for Mr. Lingnau on September 11, 2007 following Mr. Lingnau’s appointment to the board of directors on August 27, 2007.

 

We review all relationships and transactions between us and (i) any of our directors or executive officers, (ii) any nominee for election as a director, (iii) any security holder who is known to us to own beneficially or of record more than five percent of our common stock or (iv) any member of the immediate family of any of the foregoing. Our legal staff is primarily responsible for the development and implementation of processes and controls to obtain information with respect to related person transactions and for then determining, based on the facts and circumstances, whether the Company or a related person has a direct or indirect material interest in the transaction. In addition, the audit committee reviews and approves or ratifies any related person transaction that is required to be disclosed. In the course of its review and approval or ratification of a disclosable related party transaction, the committee considers:

 

 

Any member of the audit committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction, provided, however, that such director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction.

 

As required under SEC rules, related party transactions that are determined to be directly or indirectly material to us or the related party are disclosed in our proxy statement. Historically, we have not entered into transactions with related parties. During the 2007 fiscal year, there were no relationships or transactions between us and any related party for which disclosure is required under the rules of the SEC.

 

The following is a brief biography of each current director, including each nominee for reelection at the Annual Meeting to a new term of office and each director whose current term of office continues through the Annual Meeting.

 

Current Directors Nominated for Reelecton to Serve Until the 2011 Annual Meeting

 

Michael A. Brown

 

Michael A. Brown , age 49, has served as our director since September 2002. Mr. Brown serves as Chairman of Line 6, a private company supplying musical instruments, amplifiers and audio gear. Mr. Brown was Chairman of the Board of Quantum Corporation, a computer storage device company, from 1998 through 2003 and continues to serve as a director of Quantum. He served as Quantum’s Chief Executive Officer from September 1995, until his retirement in September 2002. Mr. Brown was President of Quantum’s Desktop Storage Division from 1993 to 1995 and Executive Vice President and Chief Operating Officer from 1992 to 1993. Previously, Mr. Brown held senior positions in product and marketing management after he joined Quantum’s marketing organization in August 1984. Before joining Quantum, Mr. Brown served in the marketing organization at Hewlett-Packard, Inc., a computer products company. Mr. Brown holds a B.A. in economics from Harvard University and an M.B.A. from Stanford University. Mr. Brown is also a director of Symantec Corp., a security and storage management software company.

 

Joseph J. Krivulka

 

Joseph J. Krivulka , age 56, has served as our director since March 2005. Mr. Krivulka is founder and President of Triax Pharmaceuticals, a dermatology products company, a position he has held since November 2004. Mr. Krivulka is also the founder and Chairman of Akrimax Pharmaceuticals, LLC, an emerging branded and contract manufacturing pharmaceutical company. Mr. Krivulka was a co-founder and President of Reliant Pharmaceuticals, LLC, a company that markets pharmaceutical products, from 1999 until 2004. Mr. Krivulka was formerly Chief Executive Officer of Bertek, Inc., a generic pharmaceutical products company that is a subsidiary of Mylan Laboratories Inc., and Corporate Vice President of Mylan Laboratories, a generic pharmaceutical products company. Mr. Krivulka is also a director of Aeolus Pharmaceuticals Inc., a drug development services company. He holds a B.S. from West Virginia Wesleyan College.

 

Howard W. Robin

 

Howard W. Robin , age 55, has served as our President and Chief Executive Officer since January 2007 and was appointed as a member of our board of directors in February 2007. Mr. Robin served as Chief Executive Officer, President and a director of Sirna Therapeutics, Inc., a biotechnology company, from July 2001 to November 2006 and from January 2001 to June 2001, served as their Chief Operating Officer, President and as director. From 1991 to 2001, Mr. Robin was Corporate Vice President and General Manager at Berlex Laboratories, Inc., a pharmaceutical products company that is a subsidiary of Schering, AG, and from 1987 to 1991 he served as Vice President of Finance and Business Development and Chief Financial Officer. From 1984 to 1987, Mr. Robin was Director of Business Planning and Development at Berlex. He was a Senior Associate with Arthur Andersen & Co. prior to joining Berlex. Mr. Robin is also a director of Acologix, a biopharmaceutical company. He received his BS in Accounting and Finance from Fairleigh Dickinson University in 1974.

 

Directors Continuing in Office Until the 2009 Annual Meeting

 

Robert B. Chess

 

Robert B. Chess , age 50, is Chairman of our board of directors and has served as a director since May 1992. Mr. Chess is currently the Chairman and CEO of OpX Biotechnologies, a start-up platform technology company in the biofuels and biorefined chemicals field. From March 2006 until January 2007, Mr. Chess served as Acting President and Chief Executive Officer, and from April 1999 to January 2007, served as Executive Chairman. He also served as our Co-Chief Executive Officer from August 1998 to April 2000, as President from December 1991 to August 1998, and as Chief Executive Officer from May 1992 to August 1998. Mr. Chess was previously the

co-Founder and President of Penederm, Inc., a publicly-traded dermatological pharmaceutical company that was sold to Mylan Laboratories. He has held management positions at Intel Corporation and Metaphor Computer Systems (now part of IBM), and was a member of the first President Bush’s White House staff. Mr. Chess serves on the board of directors of the Biotechnology Industry Organization (BIO), is Co-Chairman of BIO’s Intellectual Property Committee, and has served as Chairman of BIO’s Emerging Company Section. Mr. Chess is Chairman of Bio Ventures for Global Health, a member of the board of directors of Metabolex, and is on the Board of Trustees of the California Institute of Technology and the Committee for Economic Development. He is a member of the faculty of the Stanford Graduate School of Business, where he teaches courses in Entrepreneurship and Management of Health Care Innovation, and is an Adjunct Fellow at Stanford’s Center for Health Policy. Mr. Chess received his B.S. degree in Engineering from the California Institute of Technology and an M.B.A. from Harvard.

 

Dr. Hoyoung Huh

 

Dr. Hoyoung Huh , age 38, has served as our director since February 2008. Since March 2008, Dr. Huh has served as President and Chief Executive Officer of BiPar Sciences, a privately held biopharmaceutical company focused on oncology therapeutics. From May 2007 through February 2008, Dr. Huh served as our Chief Operating Officer and Head of the PEGylation Business Unit, responsible for the Company’s worldwide business development, marketing, manufacturing and leading Nektar’s PEGylation business. From March 2005 through April 2007, he served as the Company’s Senior Vice President of Business Development and Marketing. From September 1997 to February 2005, Dr. Huh was a leader in the healthcare and biotechnology practice at McKinsey and Company, a management consulting firm, where he was elected partner in 2003. He currently serves on the Board of BayBio, a biotechnology industry association. Dr. Huh holds an M.D. from Cornell University Medical College, a Ph.D. in Genetics and Cell Biology from the Cornell University/Sloan Kettering Institute, and an A.B. in Biochemistry from Dartmouth College.

 

Susan Wang

 

Susan Wang , age 57, has served as our director since December 2003. Ms. Wang, who retired from Solectron in May 2002, served in various management positions there from 1984 to June 2002. Her final position at Solectron, an electronics manufacturing services and supply chain solutions company, was Executive Vice President for Corporate Development and Chief Financial Officer, a position she held from September 2001 to June 2002. Prior to joining Solectron, Ms. Wang held financial and managerial positions with Xerox Corporation and Westvaco Corporation. She began her career with Price Waterhouse & Co. in New York and is a certified public accountant. Ms. Wang earned an M.B.A. from the University of Connecticut and a B.S. in accounting from the University of Texas. Ms. Wang is also a director of Altera Corporation, a programmable semiconductor company, and Avanex Corporation, an optical switching company.

 

Roy A. Whitfield

 

Roy A. Whitfield , age 54, has served as our director since August 2000. He currently serves as a director of Incyte Corporation, Illumina, Inc., Sciona, Inc. and Bioseek, Inc. Since February 2008, he has also served as Executive Chairman of the board of directors of Bioseek. Mr. Whitfield is the former Chairman of the Board and Chief Executive Officer of Incyte Corporation, a company he co-founded in 1991. From January 1993 to November 2001, Mr. Whitfield served as its Chief Executive Officer and from November 2001 until June 2003 as its Chairman. From 1984 to 1989, Mr. Whitfield held senior operating and business development positions with Technicon Instruments Corporation, a medical instrumentation company, and its predecessor company, Cooper Biomedical, Inc., a biotechnology and medical diagnostics company. Prior to his work at Technicon, Mr. Whitfield spent seven years with the Boston Consulting Group’s international consulting practice. Mr. Whitfield was awarded a B.S. in mathematics from Oxford University and an M.B.A. from Stanford University.

 

Directors Continuing in Office Until the 2010 Annual Meeting

 

Christopher A. Kuebler

 

Christopher A. Kuebler , age 54, has served as our director since December 2001. Mr. Kuebler also currently serves on the board of directors of Waters Corporation, an analytical technologies services company. From January

1997 to December 2005, Mr. Kuebler served as Chairman of the Board of Covance Inc., a drug development services company, and from November 1994 to December 2004, served as its Chief Executive Officer. From March 1993 through November 1994, he was the Corporate Vice President, European Operations for Abbott Laboratories Inc., a diversified health care company. From January 1986 until March 1993, Mr. Kuebler served in various commercial positions for Abbott Laboratories’ Pharmaceutical Division and was that Division’s Vice President, Sales and Marketing prior to taking the position of Corporate Vice President, European Operations. Before that, he held positions at Squibb Inc. and Monsanto Health Care. Mr. Kuebler holds a B.S. in Biological Science from Florida State University.

 

Irwin Lerner

 

Irwin Lerner , age 77, has served as our director since April 1999. From November 2006 to June 2007, Mr. Lerner served as the Interim President and Chief Executive Officer of Medarex Inc., a monoclonal antibody products company, for which Mr. Lerner has served as a director since 1995 and Chairman of the Board since 1997. Mr. Lerner served as Chairman of the Board and on the Executive Committee of Hoffmann-La Roche Inc., a pharmaceutical and health care company, from January 1993 until his retirement in September 1993, and from 1980 through December 1992, also served as its President and Chief Executive Officer. He served for 12 years on the board of the Pharmaceutical Manufacturers’ Association where he chaired the Association’s FDA Issues Committee. Mr. Lerner received a B.S. and an M.B.A. from Rutgers University. He is currently a Distinguished Executive-in-Residence at Rutgers University Business School. Mr. Lerner is also a director of Covance Inc., a drug development services company, and Panacos Pharmaceuticals Inc., an anti-viral products company.

 

Lutz Lingnau

 

Lutz Lingnau , age 65, retired from Schering AG Group, Germany, in 2005 as a member of Schering AG’s Executive Board and as Vice Chairman, President and Chief Executive Officer of Schering Berlin, Inc., a United States subsidiary. Prior to his retirement, Mr. Lingnau was responsible for Schering AG’s worldwide specialized therapeutics and dermatology businesses. He joined Schering AG’s business trainee program in 1966. Throughout his career at Schering AG, he served in various capacities and in a number of subsidiaries in South America and the United States, including his roles as President of Berlex Laboratories, Inc., from 1983 to 1985, as the Head of Worldwide Sales and Marketing in the Pharmaceutical Division of Schering AG, from 1985 to 1989, and as Chairman of Berlex Laboratories, Inc. from 1985 to 2005. Mr. Lingnau is currently a member of the Supervisory Board of LANXESS AG, Chairman of the board of directors of Micropharma Limited, a biotechnology company, and was a member of the board of directors of Sirna Therapeutics, Inc., a biotechnology company, from February 2006 through the closing of the acquisition of Sirna by Merck & Co., Inc. in December 2006.

 

John S. Patton, Ph.D.

 

John S. Patton, Ph.D. , age 61, our co-founder, has served as our Chief Research Fellow since April 2008, and has served as a director since July 1990. Dr. Patton served as Chief Scientific Officer from December 2001 to March 2008 and Vice President, Research from December 1991 to November 2001. He served as our President from the Company’s incorporation in July 1990 to December 1991. From 1985 to 1990, Dr. Patton was a Project Team Leader with Genentech, Inc., a biotechnology company, where he headed their non-invasive drug delivery activities. Dr. Patton was on the faculty of the Marine Science and Microbiology Departments at the University of Georgia from 1979 through 1985, where he was granted tenure in 1984. Dr. Patton received a B.S. in Zoology and Biochemistry from Pennsylvania State University, an M.S. from the University of Rhode Island, a Ph.D. in Biology from the University of California, San Diego and received post doctorate fellowships from Harvard Medical School and the University of Lund, Sweden, both in biomedicine. Dr. Patton is also a director of Halozyme Therapeutics, Inc., a biopharmaceutical company.

 

The board of directors met eleven (11) times during the 2007 fiscal year. Each board member attended 75% or more of the aggregate of the meetings of the board and of the committees on which he or she served held during the period of the 2007 fiscal year for which he or she was a director or committee member, as applicable.

 

The board of directors has documented our governance practices in our Corporate Governance Policy Statement to assure that the board will have the necessary authority and practices in place to review and evaluate our business operations as needed and to make decisions that are independent of our management. The guidelines are also intended to align the interests of directors and management with those of our stockholders. The Corporate Governance Policy Statement sets forth certain practices the board will follow with respect to board composition, board committees, board nomination, director qualifications and evaluation of the board and committees. The Corporate Governance Policy Statement, as well as the charters for each committee of the board, may be viewed at www.nektar.com .

 

As required under the NASDAQ Global Select Market listing standards, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the board of directors. Our board consults with counsel to ensure that its determinations are consistent with all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in pertinent NASDAQ listing standards, as in effect from time to time.

 

Consistent with these standards, after review of all relevant transactions or relationships between each director, or any of his or her family members, and us, our senior management and our independent registered public accounting firm, the board has affirmatively determined that all of our directors are independent directors within the meaning of the applicable NASDAQ listing standards, except for Mr. Robin, our President and Chief Executive Officer, Dr. Patton, our co-founder and Chief Research Fellow, Dr. Huh, our former Chief Operating Officer and Head of the PEGylation Business Unit through February 28, 2008, and Mr. Chess, who acted as our Interim Chief Executive Officer from March 2006 through Mr. Robin’s appointment in January 2007.

 

As required under applicable NASDAQ listing standards, in the 2007 fiscal year, our independent directors met four times in regularly scheduled executive sessions at which only independent directors were present. Messrs. Brown, Lerner, Krivulka and Whitfield each presided over one or more of the executive sessions held in 2007.

Information Regarding the Committees of the Board of Directors

 

The board has three committees: an audit committee, an organization and compensation committee and a nominating and corporate governance committee. The following table provides membership and meeting information for the 2007 fiscal year for each of the board committees:

 

 

 

 

Below is a description of each committee of the board of directors. The board of directors has determined that each member of each committee meets the applicable rules and regulations regarding “independence” and that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment with regard to us.

 

Audit Committee

 

The audit committee of the board of directors oversees our corporate accounting and financial reporting process. For this purpose, the audit committee performs several functions. The audit committee:

 

 

The audit committee has the authority to retain special legal, accounting or other professional advisors to advise the committee as it deems necessary, at our expense, to carry out its duties and to determine the compensation of any such advisors.

 

Three directors comprised the audit committee in fiscal 2007: Ms. Wang, who chairs the committee, and Messrs. Krivulka and Whitfield. On February 25, 2008, the board of directors made a change of assignment to the audit committee appointing Mr. Lerner in place of Mr. Krivulka. The board of directors annually reviews the NASDAQ listing standards definition of independence for audit committee members and has determined that all members of our audit committee are independent. The board of directors has determined that Ms. Wang qualifies as an “audit committee financial expert,” as defined in applicable SEC rules. The board made a qualitative assessment of Ms. Wang’s level of knowledge and experience based on a number of factors, including her formal education and

experience as a chief financial officer of a public reporting company. In addition to our audit committee, Ms. Wang also serves on the audit committees of Avanex Corporation and Altera Corporation. The board of directors does not believe that such simultaneous service impairs Ms. Wang’s ability to effectively serve on our audit committee and as the chairwoman of such committee. The audit committee has adopted a written audit committee charter that is available on our corporate website at www.nektar.com .

 

Organization and Compensation Committee

 

The organization and compensation committee of the board of directors administers the variable compensation programs and reviews management’s recommendations for organization structure and development of the Company. Additionally, the organization and compensation committee also reviews management’s recommendations for both the type and level of cash and equity-based compensation for officers, employees and consultants of the Company, and recommends certain compensation actions to the board of directors. The organization and compensation committee:

 

 

The organization and compensation committee’s charter permits it to rely on members of management when appropriate in performing its duties. The organization and compensation committee takes into account our President and Chief Executive Officer’s recommendations regarding the compensatory arrangements for our executive officers, although our President and Chief Executive Officer does not participate in the deliberations or determinations of his own compensation. In particular, the organization and compensation committee considered our President and Chief Executive Officer’s recommendations regarding the appropriate equity awards to grant to our executive officers. The organization and compensation committee’s charter gives the committee the sole authority to retain independent counsel, compensation and benefits consultants or other outside experts or advisors that it believes to be necessary or appropriate. During 2007, the organization and compensation committee retained Towers Perrin and Frederic W. Cook & Co., each a national executive compensation consulting firm that performs compensation benchmarking, analysis and design services. Towers Perrin was engaged to provide benchmarking and analysis in the first quarter of 2007. Frederic W. Cook & Co. was engaged to provide compensation benchmarking studies, to assist in the development of our 2007 peer group of companies for compensation

comparison purposes and to provide recommendations and advice on the structure and amounts of the compensation provided to our President and Chief Executive Officer and other executive officers during 2007. Each of Towers Perrin and Frederic W. Cook & Co. do not provide any other services to us other than the services it performs at the request of the organization and compensation committee.

 

Three directors comprised the organization and compensation committee in fiscal 2007: Mr. Brown, who chairs the committee, and Messrs. Kuebler and Krivulka. On February 25, 2008, the board of directors made a change of assignment to the committee appointing Mr. Lingnau in place of Mr. Krivulka. The board of directors annually reviews the NASDAQ listing standards definition of independence for organization and compensation committee members and has determined that all members of our organization and compensation committee are independent. The organization and compensation committee charter can be found on our corporate website at www.nektar.com .

 

Nominating and Corporate Governance Committee

 

The nominating and corporate governance committee:

 

 

The nominating and corporate governance committee believes that candidates for director should possess the highest personal and professional ethics, integrity and values, be committed to represent our long-term interests and those of our stockholders, possess diverse experience at policy-making levels in business, science and technology, possess key personal characteristics such as strategic thinking, objectivity, independent judgment, intellect and the courage to speak out and actively participate in meetings, as well as have sufficient time to carry out the duties and responsibilities of a board member effectively.

 

Candidates for director nominees are reviewed in the context of the current composition of the board, our operating requirements and the long-term interests of stockholders. In conducting this assessment, the committee considers diversity, age, skills and such other factors as it deems appropriate given our current needs and those of our board to maintain a balance of knowledge, experience and capability. The nominating and corporate governance committee also periodically reviews the overall effectiveness of the board including board attendance, level of participation, quality of performance, self-assessment reviews and any relationships or transactions that might impair director independence. In the case of new director candidates, the nominating and corporate governance committee also determines whether the nominee must be independent for NASDAQ purposes, which determination is based upon applicable NASDAQ listing standards, applicable SEC rules and regulations and the advice of counsel, if necessary. The committee then uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems appropriate, a professional search firm. The committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the function and needs of the board. The nominating and corporate governance committee meets to discuss and consider such candidates’ qualifications and then selects a nominee for recommendation to the board by majority vote. We have paid fees to third party search firms in the past to assist in our process of identifying or evaluating director candidates.

 

The nominating and corporate governance committee of our board of directors will consider for nomination any qualified director candidates recommended by our stockholders. Any stockholder who wishes to recommend a director candidate is directed to submit in writing the candidate’s name, biographical information and relevant qualifications to our Secretary. All written submissions received from our stockholders will be reviewed by the nominating and corporate governance committee at the next appropriate meeting. The nominating and corporate

governance committee will evaluate any suggested director candidates received from our stockholders in the same manner as recommendations received from management, committee members or members of our board.

 

Three directors comprise the nominating and corporate governance committee: Mr. Whitfield, who chairs the committee, and Messrs. Kuebler and Lerner. The board of directors annually reviews the NASDAQ listing standards definition of independence for nominating and corporate governance committee members and has determined that all members of our nominating and corporate governance committee are independent. Our nominating and corporate governance committee charter can be found on our corporate website at www.nektar.com .

 

The board of directors will consider any written or electronic communication from our stockholders to the board, a committee of the board or any individual director. Any stockholder who wishes to communicate to the board of directors, a committee of the board or individual director, should submit written or electronic communications to our Secretary, which shall include contact information for such stockholder. All communications from stockholders received shall be forwarded by our Secretary to the board of directors, a committee of the board or an individual director, as appropriate, by our Secretary on a periodic basis, but in any event no later than the board of director’s next scheduled meeting. The board of directors, a committee of the board, or individual directors, as appropriate, will consider and review carefully any communications from stockholders forwarded by our Secretary.

 

We have adopted a code of business conduct and ethics that applies to all employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The code of business conduct and ethics is available on our website at www.nektar.com . Amendments to, and waivers from, the code of business conduct and ethics that apply to any director, executive officer or persons performing similar functions, will be disclosed at the website address provided above and, to the extent required by applicable regulations, on a Current Report on Form 8-K.

Organization and Compensation Committee Interlocks and Insider Participation

 

The organization and compensation committee consisted of three non-employee members during 2007: Messrs. Brown, Kuebler and Krivulka. No director who served on the organization and compensation committee in 2007 was, or has been, an officer or employee of us, nor has any director had any relationships requiring disclosure under the SEC rules regarding certain relationships and related-party transactions. None of our executive officers served on the board of directors or the compensation committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served on our board of directors or organization and compensation committee.

 

Each of our non-employee directors participates in our Compensation Plan for Non-Employee Directors (the “Director Plan”). Only our non-employee directors are eligible to participate in the Director Plan. The following table shows, for the fiscal year ended December 31, 2007, compensation awarded or paid to our non-employee directors at December 31, 2007.

 

 

 

 

 

Under the Director Plan in effect for 2007, each non-employee director was eligible to receive an annual retainer of $25,000 for serving on the board of directors, an annual retainer of $25,000 for serving as the chair or lead director of the board of directors, an annual retainer of $7,500 for serving on the audit committee, an additional annual retainer of $7,500 for serving as chair of the audit committee, an annual retainer of $5,000 for serving on any other committee established by the board of directors and an additional annual retainer of $5,000 for serving as chair of any other such committee. In addition, if a non-employee director attended more than four (4) regularly scheduled board meetings then such non-employee director received an additional $2,000 per in person meeting and if the non-employee director attended more than four (4) telephonic board meetings then such non-employee director received an additional $1,000 per telephonic meeting. Similarly, if a non-employee director attended more than four (4) regularly scheduled committee meetings then such non-employee director received an additional $1,000 per in person meeting and if the non-employee director attended more than four (4) telephonic committee meetings then such non-employee director received an additional $500 per telephonic meeting.

 

In addition, under the Director Plan in effect for 2007, in September each non-employee director received equity awards under the 2000 Equity Incentive Plan with an aggregate value composed of fifty percent (50%) stock options at an exercise price equal to the closing price of our common stock on the grant date and fifty percent (50%) restricted stock unit awards. This annual equity compensation award was based on the approximate aggregate value of the median equity compensation for non-employee directors of comparable companies as determined annually by the board of directors. The value of stock options was determined based on the application of the Black-Scholes valuation method. Stock options and restricted stock unit awards granted to non-employee directors under the Director Plan vest over a period of one year following the date of grant and stock options have a term of eight (8) years. In the event of a change of control, the vesting of each option or restricted stock unit award will accelerate in full as of the closing of such transaction. Each option or restricted stock unit award will also accelerate in full upon the director’s death.

 

In March 2008, the organization and compensation committee recommended, and the board of directors approved, an Amended and Restated Compensation Plan for Non-Employee Directors, effective as of January 1, 2008 (the “2008 Director Plan”). The modifications were made to the Director Plan to adjust compensation to more closely approximate the median of non-employee director compensation of our peer group companies. The structure of the 2008 Director Plan is substantially similar to the Director Plan in effect for 2007, however, the following key changes were made. The annual retainers previously payable to directors for their service on committees of the board of directors were eliminated, and the meeting fees payable for attendance at committee meetings in person or telephonically were increased. Under the 2008 Director Plan, directors are entitled to receive

their board and committee meeting fees for all meetings attended, and not just for attending more than four (4) meetings. Changes were also made to the mix of equity awards, as we can elect to grant 100% of the annual equity award in the form of stock options (rather than 50% in stock options and 50% in restricted stock unit awards). While the 2008 Director Plan retains the flexibility to grant a mix of stock options and restricted stock unit awards, the board of directors determined that non-employee director equity compensation in 2008 would be in the form of stock options to be consistent with the type of recent equity incentives granted to the Named Executive Officers. In addition, the 2008 Director Plan now provides for an initial equity award that will be granted to new directors upon their appointment to the board of directors. The value of the initial equity award is equal to 150% of the annual equity award and will vest monthly over a period of three years or upon the occurrence of a change of control. New directors will also be entitled to a pro rata portion of the annual equity award if they are appointed following the grant date. The board of directors also decided to make a one-time equity award to Messrs. Lingnau and Huh in connection with their recent appointment to the board of directors which was consistent with the initial equity awards made to the other members of the board of directors in connection with their appointments to the board of directors. This appointment equity award for Messrs. Lingnau and Huh was made in March 2008 and therefore will be reported in our 2008 Director Compensation Table.

 

Introduction

 

The Compensation Discussion and Analysis is designed to provide stockholders with an understanding of our executive compensation philosophy and decision making process. It discusses the principles underlying the structure of the compensation arrangements for our Chief Executive Officer, our former Acting Chief Executive Officer, our Chief Financial Officer, two other persons that served as Chief Financial Officer during 2007, our other three most highly compensated executive officers who were serving as executive officers on December 31, 2007 and our former Senior Vice President Research and Development who would have been one of our other three most highly compensated executive officers had his employment not terminated prior to December 31, 2007 (the “Named Executive Officers”).

 

Our current compensation programs for the Named Executive Officers are determined and approved by the organization and compensation committee, although the full board of directors approves the compensation programs for our Chief Executive Officer based on the recommendations of the organization and compensation committee. None of the Named Executive Officers are members of the organization and compensation committee. As described in more detail above under the caption “Information About the Board of Directors—Organization and Compensation Committee,” the organization and compensation committee takes into account our President and Chief Executive Officer’s recommendations regarding the compensatory arrangements for our executive officers, although our President and Chief Executive Officer does not participate in the deliberations or determinations of his own compensation. For example, during 2007, the organization and compensation committee considered the President and Chief Executive Officer’s recommendations regarding the appropriate equity awards to grant to our executive officers. The other Named Executive Officers do not currently have any role in determining or recommending the form or amount of compensation paid to our Named Executive Officers.

 

Compensation Program Objectives and Philosophy

 

In 2007, the Company began a significant transformation from a drug delivery service provider to a therapeutic drug development company. As a result, in 2007 the Company was in a turn-around position as it began execution of its strategy to develop and expand early research activities and its proprietary clinical development pipeline as well as continuing to execute on significant collaboration partnerships. During this critical transition year, we concluded that it was vital that we provide our experienced and skilled senior leadership with significant incentives and retention compensation. Our goal was to structure a substantial portion of this compensation such that it would only have value if the senior leadership was successful in building significant incremental value for the Company and its stockholders.

 

As such, our current executive compensation programs are intended to achieve the following four fundamental goals and objectives: (1) to attract and retain an experienced, highly qualified and motivated executive management team to lead our business, (2) to emphasize sustained performance by aligning significant elements of executive compensation with our stockholders’ interests, (3) to provide appropriate economic rewards for achieving high levels of Company performance and individual contribution and (4) to ensure we are paying competitively, taking into account the experience, skills and performance of the executive officers required to build our business in our turn-around position.

 

When structuring our current executive compensation programs to achieve our goals and objectives, we are guided by the following basic philosophies:

 

 

 

We believe that each element of our executive compensation program helps us to achieve one or more of our compensation goals and objectives. For example, we believe that performance-based short-term cash incentive opportunities in combination with equity incentive awards that are earned over time and increase in value as the Company becomes more valuable is the best way to align our executives’ interests with those of our stockholders. Providing base salaries, occasional discretionary bonus opportunities and severance protections for certain terminations of employment helps us ensure that we are providing a competitive compensation package that will permit us to attract and retain qualified executives. We believe that we have created a total compensation program that combines short- and long-term components, cash and equity, and fixed and contingent payments, in proportions that are appropriate to achieve each of our four fundamental goals and objectives. We also believe that the structure of our compensation program provides appropriate incentives to reward our executive officers for achieving our long-term goals and objectives, some of the most important of which are building a successful product pipeline, encouraging collaboration with partners to build long-term business relationships, increasing the efficiency of our organization capabilities and infrastructure and continuously improving our financial performance.

 

Design and Elements of Our Compensation Program

 

As we describe in more detail below, the material elements of our current executive compensation programs for Named Executive Officers consist primarily of the following:

 

 

While we review peer group company data regarding the mix of current and long-term incentive compensation and between cash and non-cash compensation, we have not adopted any formal policies or guidelines for allocations among these various compensation elements. However, consistent with our philosophy of paying for performance, we believe that a greater component of overall cash compensation for the Named Executive Officers relative to other employees should be performance-based.

Benchmarking of Compensation: Peer Companies

 

One important factor in our compensation decisions is information regarding compensation practices of similar public companies. When making compensation decisions during 2006 that affected compensation levels for 2007, and when making compensation decisions during the first portion of 2007, we reviewed compensation studies prepared by Towers Perrin as part of our decision process. The compensation studies provided by Towers Perrin provided data on base salary, total cash compensation (base salary plus actual annual incentives), target total cash compensation (base salary plus target annual incentives) and actual total direct compensation (actual total cash compensation plus expected value of long-term equity incentives). The compensation studies provided by Towers Perrin were based on a review of the following 28 publicly-held companies:

 

 

In July 2007, we undertook a review of our peer group companies and selected a smaller, more focused group that better fits our transition from a drug delivery company to a multi-product drug development company. In determining the appropriate peer companies, we considered the following factors: business model, business stage and complexity, product similarity and company size (both number of employees and market capitalization). We approved a new peer group in December 2007. Frederic W. Cook & Co. developed compensation studies that provided data on base salary, total cash compensation (base salary plus actual annual incentives), target total cash compensation (base salary plus target annual incentives) and actual total direct compensation (actual total cash compensation plus expected value of long-term equity incentives). This information was used in the deliberations when determining the structure and amounts of retention equity awards made to the Named Executive Officers in December 2007, and in determining total compensation for the Named Executive Officers as part of our annual compensation review in February 2008. The new peer companies included:

 

 

The above selection of peer group companies was reviewed by the board of directors prior to approval. We recognize that given the fluctuation of our market capitalization in 2007 as a result of the business transition discussed above, it was important to consider a wide range of factors in selecting an appropriate peer group. We concluded that we will again review the appropriateness of this selection of peer group companies in 2008.

 

We realize that benchmarking our executive compensation programs against compensation earned at peer group companies may not always be appropriate as a standalone tool for setting compensation due to the unique aspects of our business and the need to attract and retrain particular expert managers with unique experience, skills

and other individual circumstances. However, we generally believe that gathering this information is an important component of our executive compensation decision-making process.

 

bonus amount between attainment of the Company performance objectives and individual performance (e.g., a Named Executive Officer could earn his full target bonus if his individual performance percentage is 100%, even if we fail to achieve the Company performance objectives at the 100% level). The appropriate allocation for each Named Executive Officer is determined by us in our sole discretion. The maximum payout for each Named Executive Officer was determined to be 200% of his target annual incentive (with the actual award determined based on the corporate performance modifier and the individual performance modifier), although the maximum payout under Mr. Robin’s variable compensation arrangement for 2007 was set at 150% of his target annual performance-based incentive compensation based on his offer letter agreement entered into in January 2007. The design of the Incentive Compensation Policy can be summarized as follows:

 

 

Target Annual Incentives for 2007.  Except for Mr. Chess, who did not participate in the Incentive Compensation Policy, the Named Executive Officers who were employed by us during 2006 were each assigned a target annual incentive award for 2007 at the beginning of the year. Mr. Robin and the other Named Executive Officers who began employment during 2007 were also assigned a target incentive award that they were eligible to earn for the portion of 2007 following their start date although Mr. Robin who began employment in January 2007 was eligible for 100% of his incentive compensation target. Each Named Executive Officer’s target annual incentive award was set as a specific percentage of base salary. For the participating Named Executive Officers other than Mr. Robin, the dollar amount of the annual incentive target was initially split between two semi-annual performance periods by dividing it equally into two parts (Mr. Robin’s incentive target applied for the entire portion of 2007). For example, an executive with an initial target annual incentive equal of 50% of base salary would have had a target incentive equal to 50% of the base salary earned for the performance period from January 1, 2007 through June 30, 2007, and a target incentive equal to 50% of the base salary earned for the performance period from July 1, 2007 through December 31, 2007. Following the initial determination of target incentive awards, we decided to retroactively increase the target awards for Messrs. Elam, Huh and Patton. We increased Dr. Huh’s target award in connection with his promotion to Chief Operating Officer and Head of the PEGylation Business Unit in June 2007. We increased Messrs. Elam’s and Patton’s target awards because, after reviewing peer group compensation information, we determined that their initial awards were not competitive with similar short-term incentive opportunities offered to comparable executives at our peer companies. The following table shows the target annual incentive award assigned to each Named Executive Officer for 2007 both as a dollar amount for the entire 2007 year and as a percentage of base salary for each semi-annual performance period. The amounts shown in the table reflect the retroactive adjustments described above, and the dollar amounts presented take into account the value of any pro-rata bonuses newly hired Named Executive Officers were entitled to receive for 2007.

 

Company Performance Objectives.  For the first semi-annual performance period from January 1, 2007 through June 30, 2007, the Company performance objectives and relative weightings assigned to each objective were as follows:

 

 

 

7.   Operating loss/income objective (20%).

 

For the second semi-annual performance period from July 1, 2007 through December 31, 2007, the Company performance objectives and relative weightings assigned to each objective were as follows:

 

1.   An objective related to supporting the commercial success of Exubera (10%).

 

2.   Development objective related to a next-generation pulmonary insulin development program (15%).

 

3.   Clinical development objective related to NKTR-061 (inhaled amakacin) (10%).

 

4.   Clinical development objective related to NKTR-118 (pegylated oral nalaxol) (10%).

 

5.   Clinical development objective related to NKTR-102 (pegylated irinotecan) (20%).

 

6.   Regulatory objective related to NKTR-203 (basal insulin) (5%).

 

7.   A business development objective related to Nektar’s PEGylation Technology platform (5%).

 

8.   A business development objective related to Nektar’s Pulmonary Technology platform (20%).

 

9.   Financial objective related to reduction of ongoing annual cash expenditures (20%).

 

10.   An organizational development objective (10%).

 

11.   An objective related to corporate communications (5%).

 

These second half performance objectives also served as the performance objectives applicable to Mr. Robin’s short-term incentive compensation opportunity for the 2007 calendar year. The aggregate weighting of the second half performance objectives was set at 130%, as they were designed to represent significant stretch goals. Our intent in establishing the weightings was that if we met our base-level plan for the performance period, we would achieve approximately 100% of the 130% aggregate weightings. Achievement of all of the performance objectives would represent significant out-performance, and mean that we exceeded our base-level plan during the performance period. Similarly, out-performance with respect to any of the individual Company performance objectives would also mean that the Company exceeded the base-level plan with respect to that objective and contribute to a corporate performance rating greater than 130%. However, the maximum corporate performance modifier was 150% in any case in 2007.

 

Actual Annual Incentives Earned for 2007.  Following the end of the first-half 2007 performance period, after review of the Company’s achievement of the Company performance objectives we established for such semi-annual period, we concluded that the corporate performance rating would be set at 100%. This 100% corporate performance achievement rating was determined in our discretion based on a preliminary assessment that the actual achievement level based on a numerical scoring of the Company performance objectives would not have been less than 100%. In connection with this determination, we opted not to make any upward or downward adjustments for individual performance. We made the foregoing determinations for a number of reasons, including the following: (i) the transition of senior leadership of the Company with our appointment of Mr. Robin as President and Chief Executive Officer in January 2007, (ii) our desire to establish a different range of

performance objectives for the second-half 2007 performance period that reflected the comprehensive organization, strategic, operational and financial review conducted by Mr. Robin and his senior management team that, among other things, resulted in the approval of a new operational efficiency plan that included a work force reduction carried out on May 23, 2007, (iii) the fact that employees participating in the Incentive Compensation Policy who were terminated as part of the workforce reduction were awarded 100% of their target incentive compensation and (iv) the focus of our management team during a substantial majority of the first half 2007 performance period was on the significant effort that was necessary to plan and implement the operational efficiency program, work force reduction and establishment of the second half 2007 goals.

 

At the end of the first performance period, those Named Executive Officers who were eligible to receive a payment with respect to the first performance period were offered the opportunity to either receive their payment earned for the first performance period or to elect to have their entire 2007 incentive compensation payment based on our attainment of the performance objectives established for the second performance period and the executive’s individual performance. We offered these Named Executive Officers this election option because although it has been our past practice to have short-term incentive compensation become earned based on performance during two semi-annual performance periods, we decided during 2007 to transition to one annual performance period, and wanted to give the Named Executive Officers the option of also having an annual performance period for 2007.

 

Following the end of the second performance period, the Company’s attainment of quantitative performance objectives was reviewed by the Company’s internal audit department and qualitative performance objectives were reviewed by the organization and compensation committee and the board of directors. As a result of these reviews, the board of directors determined that the Company performance objectives for the second period had been achieved at a 145% level. Following this determination, each Named Executive Officer’s individual performance was reviewed and each Named Executive Officer’s individual performance rating was determined by us (Mr. Robin’s performance was assessed by, and incentive bonus determined by, the board of directors). Each Named Executive Officer’s incentive bonus earned was then determined based on the attainment of the Company performance objectives and his individual performance. The following table lists the actual bonus earned by each Named Executive Officer as a percentage of his target bonus established for the entire 2007 fiscal year and for each semi-annual performance period, where applicable.

 

 

 

 

Changes to Incentive Compensation Policy for 2008.  In February 2008, we approved an amendment to the Incentive Compensation Policy to increase the maximum amount of the corporate performance modifier to 200% from 150%. However, the maximum payout of 200% for any individual Named Executive Officer, including Mr. Robin, remains intact. We determined to increase Mr. Robin’s maximum payout from 150% of his target annual incentive to 200% of his target annual incentive in order to make Mr. Robin’s target short-term incentive compensation opportunity consistent with the opportunities provided to the other Named Executive Officers. We also approved an amendment to the Incentive Compensation Policy where the plan will be based upon annual performance, with the performance period running from January 1 to December 31 of each year. This amendment eliminates the semi-annual incentive compensation payments and was approved to continue to promote a pay-for-performance culture at the Company.

 

Discretionary Bonuses Paid in 2007.  Each of Messrs. Huh, Chess, Patton and Johnston were awarded and paid discretionary bonuses during 2007 that were not paid pursuant to the Incentive Compensation Policy. We determined to pay Mr. Chess his bonus for the following reasons: (i) to recognize his willingness to put aside other personal priorities and opportunities to serve as our acting President and Chief Executive Officer during the search for a new President and Chief Executive Officer for a much longer period of time than originally anticipated (until Mr. Robin’s appointment in January 2007), (ii) his outstanding leadership during a year in which Exubera manufacturing ramped to commercial scale and we made advances in our proprietary and partner research and development programs and (iii) for his key role in the critical transition period from the retirement of our former President and Chief Executive Officer, Ajit S. Gill, to the successful recruitment and appointment of Mr. Robin. We determined to pay Dr. Huh his bonus to recognize his outstanding performance in 2006. We determined to pay Messrs. Patton and Johnston their bonuses in order to compensate them for losses they incurred as a result of an administrative delay in the delivery of shares of common stock by the Company in respect of outstanding restricted stock units that vested during 2007.

 

The amount of the actual incentive bonus, if any, earned by each Named Executive Officer under the Incentive Compensation Policy for the 2007 fiscal year, and the amounts of the discretionary bonuses paid to Messrs. Huh, Chess, Patton and Johnston, are reported in the Summary Compensation Table below.

 

Equity Awards

 

In accordance with our objective of aligning executive compensation with our stockholders’ interests, our current long-term incentive program for the Named Executive Officers consists solely of the award of equity compensation subject to a vesting schedule. We believe that equity compensation is an effective tool to align the interests of Named Executive Officers—who have significant responsibility for driving our success—with the interests of our stockholders and also provides the executives with an opportunity to increase their share ownership. We have historically awarded equity compensation in the form of stock options and restricted stock unit awards (“RSUs”). During 2007, we determined that Named Executive Officers would be granted primarily stock options, and each Named Executive Officer received at least one grant of stock options during 2007. Stock options were and continue to be our preferred equity award because the options will only have value if the shares of our common stock appreciate following the grant date and further align the interests of the Named Executive Officers with those of our stockholders. While we granted RSU awards to Messrs. Chess, Nicholson and Harkness during 2007, these awards were either made in connection with the executive’s commencement of employment (Mr. Harkness), in connection with a promotion (Mr. Nicholson) or to reward outstanding performance under special circumstances (Mr. Chess).

 

Stock Options.  As in past years, the Named Executive Officers who were employed by us during the prior year received an annual equity award during the first portion of the calendar year in connection with the annual performance review process. We considered a number of factors when determining the size of each Named Executive Officer’s annual performance grant of stock options, with some of the most important factors being individual performance, peer group company comparisons for long-term compensation for similar executive

positions, overall contribution to the Company, internal pay equity, executive officer retention, carried-interest ownership, the Black-Scholes valuation of the stock options, potential wealth creation analysis, the number of unvested stock options held by the executive officer and their exercise price(s), the total number of stock options and RSUs to be awarded and the effects on stockholder dilution. These annual performance grants become vested in substantially equal monthly installments over a four-year period, subject to the Named Executive Officer’s continued employment or service through each vesting date. In 2007, we changed our standard vesting period for stock options to a four-year vesting period instead of the five-year vesting period that was used previously to be consistent with companies in our industry.

 

We also granted stock option awards to Messrs. Robin, Nicholson, Huh and Harkness in connection with either their commencement of employment or promotion. The primary factors that we considered when determining the size of these grants were the need to offer a competitive and above median equity compensation package that would attract or retain these executives in our turn-around position, peer group company comparisons for long-term compensation for similar executive positions, the Black-Scholes valuation of the stock options, each executive’s experience and past performance, and the carried-interest ownership and potential for future gain for each executive. With the exception of Mr. Robin’s grant, these grants vest over a four-year period like annual performance grants. However there is no monthly vesting during the first year because an annual “cliff vesting” hurdle is used instead. Mr. Robin’s initial stock option grant vests over a five-year period because his stock options were granted before we determined it was appropriate to utilize a four-year vesting period for stock option awards.

 

As discussed above, the Company’s strategy significantly changed during the course of 2007 under Mr. Robin’s leadership as the Company began its transformation into a drug development company. During this critical transition period, we believed it was vital that we retain and motivate our senior leaders responsible for the execution of the Company’s therapeutic drug development business plan and closely align their financial success with the interests of our stockholders. As a result, we determined that it was appropriate to award a special retention grant of stock options to each of the Named Executive Officers who remained employed by us at the time of grant. We did not believe that stockholder interests would be served by granting “full value” RSU awards for retention purposes and elected instead to grant stock options that would only have value if the price of the Company’s stock increased after the grant date. We determined that a special grant of stock options was necessary for several reasons, the most important of which are the following:

 

 

In order to determine the size of each Named Executive Officer’s special retention grant, we considered each executive’s current stock award holdings, the average exercise price of stock options held by each executive, competitive benchmark data for similar executive roles at peer group companies, individual executive skills, experience and performance, and a carried-interest ownership analysis. Like the new hire and promotion grants, these retention grants vest over a four-year period with no portion of the option vesting unless the Named Executive Officer continues to provide service to the Company for at least one year following the stock option grant (i.e., one year “cliff vesting” for the first 25% of the shares subject to the stock option).

Restricted Stock Units.  RSU awards granted to Messrs. Nicholson and Harkness vest over a period of four years, with an annual “cliff vesting” hurdle used for these awards as well.

 

The stock option and RSU awards granted to Mr. Chess have a different vesting schedule because they were granted in recognition of Mr. Chess’ services as our Acting President and Chief Executive Officer on a temporary basis.

 

The grant date for equity awards is typically the date of approval by the organization and compensation committee or the board of directors, as the case may be, or the date an executive officer commences employment for new hire grants. To streamline the administration of our equity plans, the organization and compensation committee or board of directors, as applicable, will generally approve equity awards to newly hired executives at the time their other compensation arrangements are approved, but provide that the grant date will be the later date that they actually begin employment with us. This approach also permits us to match the grant date with the service period of the option recipient. We do not have any programs, plans or practices with respect to the timing of stock option grants in coordination with the release of material nonpublic information with the intent to provide value to option recipients. Accordingly, we do not time the release of material nonpublic information for the purpose of affecting the value of equity or other compensation granted to our executive officers. We believe that the grant of equity awards should be made in the normal course of business aligning the interests of the stock option recipients with those of the stockholders rather than seeking to provide an immediate benefit to option recipients through the timing of stock option grants.

 

The number of shares of common stock subject to stock options and RSUs granted to each Named Executive Officer during 2007, and the grant-date fair value of these awards as determined under FAS 123R for purposes of our financial statements, is presented in the Grants of Plan Based Awards table below. A description of the material terms of the 2007 stock option and RSU awards is presented in the narrative section following that table.

 

Severance and Change of Control Benefits

 

Named Executive Officers who are Current Employees.  If the employment of each of Messrs. Robin, Nicholson, Patton and Elam is terminated by us without cause or by the executive for a designated good reason outside of a change of control context, he will be entitled to severance benefits. Messrs. Robin and Nicholson entered into offer letter agreements providing for severance protections in connection with their commencement of employment and Messrs. Patton and Elam entered into letter agreements providing for severance protections during 2007. Severance benefits are based on a “1x” multiple, and include a cash severance payment based on the executive’s base salary and the amount of his target annual incentive bonus, payment of COBRA premiums for one year, an additional twelve or eighteen month period to exercise vested options (including any options granted prior to the agreements being entered into) and pro-rata option vesting for Messrs. Robin and Nicholson if their employment terminates within their first year of employment. In order to attract and retain these Named Executive Officers in a competitive environment for highly skilled senior executive talent in the biotechnology and pharmaceutical industry, we determined it was necessary to offer each of them severance benefits for terminations resulting from a termination without cause or constructive termination of employment outside of a change of control situation. Many of our peer companies provide severance benefits for similar types of terminations of employment, and we believe that it is important for us to offer these severance benefits in order to continue to provide a competitive total compensation program. These Named Executive Officers would also be entitled to certain termination benefits upon a termination of employment because of death or disability outside of a change of control context.

 

We also have a Change of Control Severance Benefit Plan (the “CIC Plan”) that would provide Messrs. Robin, Nicholson, Patton and Elam with certain severance benefits if their employment is terminated in connection with a change of control. Severance benefits under the CIC Plan are structured on a “double-trigger” basis, meaning that the executive must experience a termination without cause or resign for a designated and specifically defined good reason in connection with the change of control in order for severance benefits to become due under the CIC Plan. Like the severance benefits under the letter agreements, we believe that these change of control severance benefits are an important element of a competitive total compensation program. Additionally, we believe that providing change of control benefits should eliminate, or at least reduce, the reluctance of our Named Executive Officers and

other key employees covered by the CIC Plan to diligently consider and pursue potential change of control opportunities that may be in the best interests of our stockholders. At the same time, by providing change of control benefits only upon the occurrence of an additional triggering event occurring in connection with the change of control transaction resulting in a job loss, we believe that this CIC Plan helps preserve the value of our key personnel for any potential acquiring company.

 

Severance benefits under the CIC Plan are generally similar to the severance benefits under the letter agreements, however Mr. Robin’s cash payments and COBRA period would be increased and all executives would be entitled to full equity vesting, and a “gross up” payment for any excise taxes imposed under Section 4999 of the Internal Revenue Code once a 10% cutback threshold is exceeded and outplacement benefits. We determined that the Chief Executive Officer’s cash severance payments should be increased to an amount equivalent to annual base salary and target bonus compensation for two years in connection with a change of control because of his role in the Company and the likelihood that a change of control would result in his termination of employment. The excise tax gross-up is intended to make the Named Executive Officers whole for any adverse tax consequences to which they may become subject under Section 4999 of the Internal Revenue Code and to preserve the level of change of control severance protections that we have determined to be appropriate.

 

Named Executive Officers who are Former Employees.  Each of Messrs. Chess, Huh, Drapeau, Harkness and Johnston are no longer employees of us. Messrs. Chess and Huh did not receive any severance or other termination benefits in connection with their resignations, and each is currently a non-employee member of our board of directors. We entered into separation agreements with each of Messrs. Drapeau, Harkness and Johnston in connection with their terminations of employment whereby each executive received severance benefits in exchange for agreeing to release all potential claims they may have against us. The severance benefits for Messrs. Drapeau and Johnston were determined based on similar benefit arrangements provided to senior executives of the Company during the past few years. The severance benefits for Mr. Harkness were determined substantially in accordance with his offer letter agreement.

 

The Potential Payments Upon Termination or Change of Control section below describes and quantifies the severance and other benefits paid or payable to the Named Executive Officers.

 

Other Benefits

 

We believe that establishing competitive benefit packages for employees is an important factor in attracting and retaining highly-qualified personnel, including the Named Executive Officers. The Named Executive Officers are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life, disability insurance and the 401(k) plan, in each case generally on the same basis as other employees. We do not offer a tax-qualified defined-benefit pension plan or any non-qualified defined benefit retirement plans.

 

Perquisites

 

We do not believe that perquisites constitute a material element of our total compensation program for the Named Executive Officers. A substantial portion of the perquisites provided to Named Executive Officers during 2007 included life insurance premiums paid by us. The perquisites and other personal benefits provided to the Named Executive Officers during 2007 are reported in footnote 5 to the Summary Compensation Table below.

 

Section 162(m) Policy

 

Section 162(m) of the U.S. Internal Revenue Code limits our deduction for federal income tax purposes to $1 million of compensation paid to certain Named Executive Officers in a taxable year. Compensation above $1 million may be deducted if it is “performance-based compensation” within the meaning of Section 162(m). While we consider the compensation limits of Section 162(m) when designing our executive compensation programs, we have from time to time granted compensation that may not be deductible under the Section 162(m) limits in situations where we have determined the compensation to be appropriate to satisfy our compensation and other objectives. We intend to continue to evaluate the effects of the compensation limits of Section 162(m) and to grant compensation awards in the future in a manner consistent with the best interests of our stockholders.

 

The material in this report is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall the material in this section be deemed to be incorporated by reference in any registration statement or other document filed with the SEC under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, except as otherwise expressly stated in such filing.

 

The organization and compensation committee has reviewed the Compensation Discussion and Analysis and discussed it with management. Based on its review and discussions with management, the committee recommended to our board of directors that the Compensation Discussion and Analysis be included in our annual report on Form 10-K for the fiscal year ended December 31, 2007 and in our 2008 proxy statement. This report is provided by the following independent directors, who comprise the committee:

 

Michael A. Brown − Chairman

Christopher A. Kuebler

Lutz Lingnau

 

The following table shows, for the fiscal year ended December 31, 2007, compensation awarded to or earned by our Chief Executive Officer, our former Acting Chief Executive Officer, our Chief Financial Officer, two other persons that served as Chief Financial Officer during 2007, our other three most highly compensated executive officers who were serving as executive officers on December 31, 2007 and our former Senior Vice President Research and Development who would have been one of our other three most highly compensated executive officers had his employment not terminated prior to December 31, 2007 (the “Named Executive Officers”). To the extent any Named Executive Officers were also named executive officers for the fiscal year ended December 31, 2006, compensation information for our 2006 fiscal year is also presented for such executives.