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NEKTAR THERAPEUTICS - Quarter Report: 2010 March (Form 10-Q)

Unassociated Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________

FORM 10-Q
______________________

ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2010
 
or

¨
 
TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________
 
Commission File Number: 0-24006
______________________
 
NEKTAR THERAPEUTICS
(Exact name of registrant as specified in its charter)
______________________

Delaware
 
94-3134940
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
201 Industrial Road
San Carlos, California 94070
(Address of principal executive offices)
 
650-631-3100
(Registrant’s telephone number, including area code)
 
___________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
______________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨
 
Accelerated filer þ
 
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, was 94,058,037 on April 30, 2010.
 


 

NEKTAR THERAPEUTICS
 
INDEX

PART I: FINANCIAL INFORMATION
  1
   
Item 1. Condensed Consolidated Financial Statements — Unaudited:
  1
   
 Condensed Consolidated Balance Sheets — March 31, 2010 and December 31, 2009
  1
   
 Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009
  2
   
 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009
  3
   
 Notes to Condensed Consolidated Financial Statements
  4
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
  11
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
  15
   
Item 4. Controls and Procedures
  15
   
PART II: OTHER INFORMATION
  17
   
Item 1. Legal Proceedings
  17
   
Item 1A. Risk Factors
  17
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  27
   
Item 3. Defaults Upon Senior Securities
  27
   
Item 4. Submission of Matters to a Vote of Security Holders
  28
   
Item 5. Other Information
  28
   
Item 6. Exhibits
  28
   
 Signatures
  29
 
i

Forward-Looking Statements
 
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of this quarterly report on Form 10-Q, including any projections of earnings, revenue or other financial items, any statements regarding the plans and objectives of management for future operations (including, but not limited to, pre-clinical development, clinical trials and manufacturing), any statements concerning proposed drug candidates or other new products or services, any statements regarding future economic conditions or performance, any statements regarding expected benefits from the closing of the sale of pulmonary assets to Novartis on December 31, 2008, any statements regarded the timing of the move of our corporate headquarters to, and the estimated costs of, the facility subject to the sublease with Pfizer, Inc. dated September 30, 2009, any statements regarding the success of our collaborations, including in relation to the license agreement with AstraZeneca AB dated September 20, 2009, any statement regarding our plans and objectives for our collaboration with Bayer Healthcare LLC entered into in August 2007 for BAY41-6551 (NKTR-061 or Amikacin Inhale), including plans and objectives to initiate Phase 3 clinical trials, any statements regarding the plans and timing of any transaction regarding NKTR-102, and any statements of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, such expectations or any of the forward-looking statements may prove to be incorrect and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including, but not limited to, the risk factors set forth in Part II, Item 1A “Risk Factors” below and for the reasons described elsewhere in this quarterly report on Form 10-Q. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof and we do not intend to update any forward-looking statements except as required by law or applicable regulations. Except where the context otherwise requires, in this quarterly report on Form 10-Q, the “Company,” “Nektar,” “we,” “us,” and “our” refer to Nektar Therapeutics, a Delaware corporation, and, where appropriate, its subsidiaries.
 
Trademarks
 
All Nektar brand and product names, including, but not limited to, Nektar®, contained in this document are trademarks, registered trademarks or service marks of Nektar Therapeutics in the United States (U.S.) and certain other countries. This document also contains references to trademarks, registered trademarks and service marks of other companies that are the property of their respective owners.

ii

PART I: FINANCIAL INFORMATION
 
Item 1. Condensed Consolidated Financial Statements — Unaudited:
 
NEKTAR THERAPEUTICS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share information)
(Unaudited)

   
March 31,
 2010
   
December 31,
 2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 20,572     $ 49,597  
Short-term investments
    341,386       346,614  
Accounts receivable, net of allowance of $306 at March 31, 2010
    and nil at December 31, 2009, respectively
    7,709       4,801  
Inventory
    8,703       6,471  
Other current assets
    7,101       6,183  
Total current assets
  $ 385,471     $ 413,666  
Property and equipment, net
    82,650       78,263  
Goodwill
    76,501       76,501  
Other assets
    3,887       7,088  
Total assets
  $ 548,509     $ 575,518  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 5,664     $ 3,066  
Accrued compensation
    5,704       10,052  
Accrued clinical trial expenses
    13,615       14,167  
Accrued expenses
    5,708       4,354  
Deferred revenue, current portion
    90,465       115,563  
Other current liabilities
    4,489       5,814  
Total current liabilities
  $ 125,645     $ 153,016  
Convertible subordinated notes
    214,955       214,955  
Capital lease obligations
    18,352       18,800  
Deferred revenue
    75,339       76,809  
Deferred gain
    4,808       5,027  
Other long-term liabilities
    4,656       4,544  
Total liabilities
  $ 443,755     $ 473,151  
Commitments and contingencies
               
Stockholders’ equity:
               
Preferred stock, $0.0001 par value; 10,000 shares authorized Series A; 3,100 shares designated; no shares issued or outstanding at March  31, 2010 and December 31, 2009
           
Common stock, $0.0001 par value; 300,000 shares authorized; 93,918 shares and 93,281 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively
    9       9  
Capital in excess of par value
    1,336,462       1,327,942  
Accumulated other comprehensive income
    1,022       1,025  
Accumulated deficit
    (1,232,739 )     (1,226,609 )
Total stockholders’ equity
    104,754       102,367  
Total liabilities and stockholders’ equity
  $ 548,509     $ 575,518  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
1

NEKTAR THERAPEUTICS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
(Unaudited)

   
Three months ended
March 31,
 
   
2010
   
2009
 
Revenue:
           
Product sales and royalties
  $ 3,584     $ 6,470  
License, collaboration, and other
    29,653       3,241  
Total revenue
    33,237       9,711  
Operating costs and expenses:
               
Cost of goods sold
    4,296       5,626  
Research and development
    23,286       23,363  
General and administrative
    9,013       11,020  
Total operating costs and expenses
    36,595       40,009  
Loss from operations
    (3,358 )     (30,298 )
Non-operating income (expense):
               
Interest income
    463       1,650  
Interest expense
    (2,951 )     (3,337 )
Other income (expense), net
    24       45  
Total non-operating expense
    (2,464 )     (1,642 )
Loss before provision for income taxes
    (5,822 )     (31,940 )
Provision for (benefit from) income taxes
    308       (133 )
Net loss
  $ (6,130 )   $ (31,807 )
Basic and diluted net loss per share
  $ (0.07 )   $ (0.34 )
Shares used in computing basic and diluted net loss per share
    93,631       92,516  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
2

NEKTAR THERAPEUTICS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Three months ended
March 31,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net loss
  $ (6,130 )   $ (31,807 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    4,149       3,615  
Stock-based compensation
    3,744       2,325  
Other non-cash transactions
    (235 )     115  
Changes in operating assets and liabilities:
               
Accounts receivable
    (2,908 )     5,365  
Inventory
    (2,232 )     (4,073 )
Other assets
    (883 )     496  
Accounts payable
    1,748       (8,095 )
Accrued compensation
    (4,348 )     (6,133 )
Accrued clinical trial expenses
    (552 )     (2,640 )
Accrued expenses
    1,354       3,364  
Deferred revenue
    (26,568 )     (3,029 )
Other liabilities
    (1,302 )     (1,897 )
Net cash used in operating activities
  $ (34,163 )   $ (42,394 )
Cash flows from investing activities:
               
Purchases of investments
    (115,277 )     (85,298 )
Maturities of investments
    112,074       104,458  
Sales of investments
    8,197       -  
Purchases of property and equipment
    (3,973 )     (5,104 )
Transaction costs from Novartis pulmonary asset sale
    -       (4,766 )
Net cash provided by investing activities
  $ 1,021     $ 9,290  
Cash flows from financing activities:
               
Payments of loan and capital lease obligations
    (359 )     (302 )
Proceeds from issuances of common stock
    4,776       61  
Net cash provided by (used in) financing activities
  $ 4,417     $ (241 )
Effect of exchange rates on cash and cash equivalents
    (300 )     61  
Net decrease in cash and cash equivalents
  $ (29,025 )   $ (33,284 )
Cash and cash equivalents at beginning of period
    49,597       155,584  
Cash and cash equivalents at end of period
  $ 20,572     $ 122,300  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
3

NEKTAR THERAPEUTICS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
 
 
Note 1—Organization and Summary of Significant Accounting Policies
 
Organization
 
We are a clinical-stage biopharmaceutical company headquartered in San Carlos, California and incorporated in Delaware. We are developing a pipeline of drug candidates that utilize our PEGylation and advanced polymer conjugate technology platforms designed to improve the therapeutic benefits of drugs.
 
Basis of Presentation and Principles of Consolidation
 
Our consolidated financial statements include the financial position, results of operations and cash flows of our wholly-owned subsidiaries: Nektar Therapeutics AL, Corporation (Nektar AL), Nektar Therapeutics (India) Private Limited, Nektar Therapeutics UK, Ltd. (Nektar UK) and Aerogen, Inc. All intercompany accounts and transactions have been eliminated in consolidation. The merger of Nektar AL, an Alabama corporation, with and into its parent corporation, Nektar Therapeutics, was made effective July 31, 2009. As of the effective date, the separate existence of the Alabama corporation ceased, and all rights, privileges, powers and franchises of the Alabama corporation are vested in Nektar Therapeutics, the surviving corporation.
 
We prepared our Condensed Consolidated Financial Statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) can be condensed or omitted. In the opinion of management, these financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and operating results.
 
Our Condensed Consolidated Financial Statements are denominated in U.S. dollars. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. dollar will affect the translation of each foreign subsidiary’s financial results into U.S. dollars for purposes of reporting our consolidated financial results. Translation gains and losses are included in accumulated other comprehensive income in the stockholders’ equity section of the Condensed Consolidated Balance Sheets. To date, such cumulative translation adjustments have not been material to our consolidated financial position.
 
Revenue, expenses, assets, and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim Condensed Consolidated Financial Statements may not be the same as those for the full year.
 
The accompanying Condensed Consolidated Balance Sheet as of March 31, 2010, the Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009, and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 are unaudited. The Condensed Consolidated Balance Sheet data as of December 31, 2009 was derived from the audited consolidated financial statements which are included in our Annual Report on Form 10-K filed with the SEC on March 2, 2010. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and the accompanying notes to those financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
 
Reclassifications
 
Certain items previously reported in specific financial statement captions have been reclassified to conform to the current period presentation. Such reclassifications do not impact previously reported revenue, operating loss or net loss or total assets, liabilities or stockholders’ equity.
 
4

Segment Information
 
We operate in one business segment which focuses on applying our technology platforms to improve the performance of established and novel medicines. We operate in one segment because our business offerings have similar economics and other characteristics, including the nature of products and production processes, types of customers, distribution methods and regulatory environment. We are comprehensively managed as one business segment by our Chief Executive Officer and his management team.

Significant Concentrations
 
Our customers are primarily pharmaceutical and biotechnology companies that are located in the U.S. and Europe. Our accounts receivable balance contains billed and unbilled trade receivables from product sales, royalties, and collaborative research agreements. We provide for an allowance for doubtful accounts by reserving for specifically identified doubtful accounts. We generally do not require collateral from our customers. We regularly review our customers’ payment histories and associated credit risk. We have not experienced significant credit losses from our accounts receivable.
 
We are dependent on our partners and vendors to provide raw materials, drugs and devices of appropriate quality and reliability and to meet applicable regulatory requirements. Consequently, in the event that supplies are delayed or interrupted for any reason, our ability to develop and produce our products could be impaired, which could have a material adverse effect on our business, financial condition and results of operations.
 
Revenue
 
Product sales and royalties
 
Product sales are primarily derived from cost-plus manufacturing and supply agreements with our collaboration partners and revenue is recognized in accordance with the terms of the related agreement. We have not experienced any significant returns from our customers.

Generally, we are entitled to royalties from our partners based on their net sales once their products are approved for commercial sale. We recognize royalty revenue when the cash is received or when the royalty amount to be received is estimable and collection is reasonably assured.

License, collaboration and other
 
We enter into technology license agreements and collaborative research and development arrangements with pharmaceutical and biotechnology partners that may involve multiple deliverables. Our arrangements may contain one or more of the following elements: upfront fees, contract research, milestone payments, manufacturing and supply, royalties, and license fees. Each deliverable in the arrangement is evaluated to determine whether it meets the criteria to be accounted for as a separate unit of accounting or whether it should be combined with other deliverables.  Revenue is recognized for each element when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured.
 
Upfront fees received for license and collaborative agreements are recognized ratably over our expected performance period under the arrangement.  Management makes its best estimate of the period over which we expect to fulfill our performance obligations, which may include technology transfer assistance, clinical development activities, and manufacturing activities from development through the commercialization of the product.  Given the uncertainties of research and development collaborations, significant judgment is required to determine the duration of the performance period.
 
Performance milestones payments received are deferred and recorded as revenue ratably over the period of time from the achievement of the milestone and our estimated date on which the next milestone will be achieved.  Management makes its best estimate of the period of time until the next milestone is reached.  Final milestone payments are recorded and recognized upon achieving the respective milestone, provided that collection is reasonably assured.
 
The original estimated amortization periods for upfront fees and milestone payments are periodically evaluated to determine if circumstances have caused the estimate to change and if so, amortization of revenue is adjusted prospectively.
 
5

Income Taxes
 
We recorded a net income tax provision for our operations in India at an effective tax rate of 34%.  The U.S. Federal deferred tax asset generated from our net operating loss has been fully reserved.
 
We account for income taxes under the liability method, in which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.
 
Recent Accounting Pronouncements
 
FASB Accounting Standards Update 2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements
 
In October 2009, the FASB published FASB Accounting Standards Update (ASU) 2009-13, which amends the criteria to identify separate units of accounting within Subtopic 605-25, “Revenue Recognition-Multiple-Element Arrangements”. The revised guidance also expands the disclosure required for multiple-element revenue arrangements. FASB ASU No. 2009-13 is effective for fiscal years beginning on or after June 15, 2010, and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date. Early adoption is permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. We are currently evaluating the impact of adoption on our financial position and results of operations.
 
FASB ASU 2010-17, Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition
 
In April 2010, the FASB codified the consensus reached in Emerging Issues Task Force Issue No. 08-09, “Milestone Method of Revenue Recognition.”  FASB ASU No. 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions.  FASB ASU No. 2010 – 17 is effective for fiscal years beginning on or after June 15, 2010, and is effective on a prospective basis for milestones achieved after the adoption date.  Early adoption is permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption.  We are currently evaluating the impact of adoption on our financial position and results of operations.
 
Note 2—Cash, Cash Equivalents, and Available-For-Sale Investments
 
Cash, cash equivalents, and available-for-sale investments are as follows (in thousands):
   
Estimated Fair Value at
 
   
March 31,
2010
   
December 31,
2009
 
Cash and cash equivalents
 
$
20,572
   
$
49,597
 
Short-term investments (less than one year to maturity)
   
341,386
     
346,614
 
Total cash, cash equivalents, and available-for-sale investments
 
$
361,958
   
$
396,211
 
 
Our portfolio of cash, cash equivalents, and available-for-sale investments includes (in thousands):

  
 
Estimated Fair Value at
 
   
March 31,
2010
   
December 31,
2009
 
Cash and money market funds
 
$
20,572
   
$
33,104
 
Obligations of U.S. corporations
   
175,022
     
160,458
 
Obligations of U.S. government agencies
   
99,451
     
125,731
 
U.S. corporate commercial paper
   
61,912
     
71,923
 
Obligations of U.S. states and municipalities
   
5,001
     
4,995
 
Total cash, cash equivalents, and available-for-sale investments
 
$
361,958
   
$
396,211
 

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in liquid, high quality debt securities.   We use a market approach to value our Level 2 investments.  The disclosed fair value related to our investments is based primarily on the reported fair values in our period-end brokerage statements.  We independently validate these fair values using available market quotes and other information.
 
6

Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in short-term securities and maintain a weighted average maturity of one year or less. At March 31, 2010 and December 31, 2009, the average portfolio duration was approximately five months and the contractual maturity of any single investment did not exceed twelve months.
 
Gross unrealized gains and losses were insignificant at March 31, 2010 and at December 31, 2009.  The gross unrealized losses were primarily due to changes in interest rates on fixed income securities. Based on our available cash and our expected operating cash requirements we do not intend to sell these securities and it is more likely than not that we will not be required to sell these securities before we recover the amortized cost basis. Accordingly, we believe there are no other-than-temporary impairments on these securities and have not recorded a provision for impairment.
 
The following table represents the fair value hierarchy for our financial assets measured at fair value on a recurring basis as of March 31, 2010 (in thousands):

   
Level 1
   
Level 2
   
Level 3
   
Total
 
Money market funds
 
$
16,315
   
$
   
$
   
$
16,315
 
Obligations of U.S. corporations
   
     
175,022
     
     
175,022
 
Obligations of U.S. government agencies
   
     
99,451
     
     
99,451
 
U.S. corporate commercial paper
   
     
61,912
     
     
61,912
 
Obligations of U.S. states and municipalities
   
     
5,001
     
     
5,001
 
Cash equivalents and available-for-sale investments
 
$
16,315
   
$
341,386
   
$
   
$
357,701
 
Cash
                           
4,257
 
Cash, cash equivalents, and available-for-sale investments
                         
$
361,958
 

Level 1 —
Quoted prices in active markets for identical assets or liabilities.
Level 2 —
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 —
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Note 3 —Inventory
 
Inventory consists of the following (in thousands):

   
March 31,
 2010
   
December 31,
2009
 
Raw materials
 
$
6,195
   
$
5,937
 
Work-in-process
   
2,110
     
 
Finished goods
   
398
     
534
 
Total
 
$
8,703
   
$
6,471
 
 
Inventory is manufactured upon receipt of firm purchase orders from our licensing partners. Inventory includes direct materials, direct labor, and manufacturing overhead and is computed on a first-in, first-out basis. Inventory is stated at the lower of cost or market and is net of reserves of $4.8 million and $3.3 million as of March 31, 2010 and December 31, 2009, respectively. Reserves are determined using specific identification plus an estimated reserve for potential defective or excess inventory based on historical experience or projected usage.
 
Note 4 - Commitments and Contingencies
 
Legal Matters
 
From time to time, we may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. In accordance with the Contingencies Topic of the FASB ASC, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. If any unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period or on our cash flows and liquidity.
 
7

Indemnifications in Connection with Commercial Agreements
 
As part of our collaboration agreements with our partners related to the license, development, manufacture and supply of drugs based on our proprietary technologies, we generally agree to defend, indemnify and hold harmless our partners from and against third party liabilities arising out of the applicable agreements, including product liability (with respect to our activities) and infringement of intellectual property to the extent the intellectual property is developed by us and licensed to our partners. The term of these indemnification obligations is generally perpetual any time after execution of the agreement. There is generally no limitation on the potential amount of future payments we could be required to make under these indemnification obligations.
 
As part of our pulmonary asset sale to Novartis that closed on December 31, 2008, we and Novartis made representations and warranties and entered into certain covenants and ancillary agreements which are supported by an indemnity obligation. In the event it was determined that we breached any of the representations and warranties or covenants and agreements made by us in the transaction documents, we could incur an indemnification liability depending on the timing, nature, and amount of any such claims.
 
To date we have not incurred costs to defend lawsuits or settle claims related to these indemnification obligations. If any of our indemnification obligations is triggered, we may incur substantial liabilities. Because the obligated amount under these agreements is not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. No liabilities have been recorded for these obligations on our Consolidated Balance Sheets as of March 31, 2010 or December 31, 2009.

Note 5 —License and Collaboration Agreements

We have entered into various license agreements and collaborative research and development agreements with pharmaceutical and biotechnology companies. Under these arrangements, we are entitled to receive license fees, upfront payments, milestone payments when and if certain development or regulatory milestones are achieved, and/or reimbursement for research and development activities. All of our research and development agreements are generally cancelable by our partners without significant financial penalty to the partner. Our costs of performing these services are included in Research and development expense.

In accordance with these agreements, we recorded License, collaboration and other revenue as follows (in thousands):

       
Three months ended
March 31,
 
Partner                                                            
 
Agreement                                   
 
2010
   
2009
 
AstraZeneca AB
 
NKTR-118 and NKTR-119
  $ 25,726     $  
Bayer Healthcare LLC
 
BAY41-6651 (NKTR-061, Amikacin Inhale)
    887       1,396  
F. Hoffmann La-Roche
 
Pegasys
    1,283       20  
Other
        1,757       1,825  
  License, collaboration, and other revenue
      $ 29,653     $ 3,241  

In addition, we have recorded deferred revenue relating to these agreements in our Condensed Consolidated Balance Sheets as follows (in thousands):
       
March 31,
   
December 31,
 
Partner                                                            
 
Agreement                                   
 
2010
   
2009
 
AstraZeneca AB
 
NKTR-118 and NKTR-119
  $ 76,042     $ 101,389  
Bayer Healthcare LLC
 
BAY41-6651 (NKTR-061, Amikacin Inhale)
    32,900       33,786  
F. Hoffmann La-Roche
 
Pegasys
    29,503       30,785  
Other
        27,359       26,412  
   Total Deferred Revenue
        165,804       192,372  
Less: current portion
        (90,465 )     (115,563 )
   Deferred Revenue, non-current
      $ 75,339     $ 76,809  

AstraZeneca AB

NKTR-118 and NKTR-119

On September 20, 2009, we entered into a License Agreement with AstraZeneca AB, a Swedish corporation (AstraZeneca), under which we granted AstraZeneca a worldwide, exclusive, perpetual, royalty-bearing, and sublicensable license under our patents and other intellectual property to develop, sell and otherwise commercially exploit Oral NKTR-118 and NKTR-119.  AstraZeneca will bear all costs associated with research, development and commercialization and will control product development and commercialization decisions for Oral NKTR-118 and NKTR-119.  

8

Under the terms of the agreement, AstraZeneca paid us an upfront payment of $125.0 million.  We expect to amortize the remaining deferred revenue over the performance obligation period which is expected to conclude with the completion of the technology transfer at the end of 2010.

Bayer Healthcare LLC

BAY41-6651 (NKTR-061, Amikacin Inhale)

On August 1, 2007, we entered into a co-development, license and co-promotion agreement with Bayer Healthcare LLC to develop a specially-formulated inhaled Amikacin (BAY41-6651). We are responsible for any future development of the nebulizer device included in the Amikacin product through the completion of Phase 3 clinical trial, scale-up for commercialization, and commercial manufacturing and supply. Bayer Healthcare LLC is responsible for most future clinical development and commercialization costs, all activities to support worldwide regulatory filings, approvals and related activities, further development of BAY41-6651 and final product packaging.

We received an upfront payment of $40.0 million in 2007 and performance milestone payments of $20.0 million.   We expect to amortize the remaining deferred revenue related to the upfront payment through July 2021, the estimated end of the life of the agreement.  We expect to amortize the remaining deferred revenue related to the milestone payments through December 2010.

F. Hoffmann La-Roche Ltd and Hoffmann-LaRoche Inc.

PEGASYS

In February 1997, we entered into a license, manufacturing and supply agreement with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (Roche), under which we granted Roche a worldwide, exclusive license to use certain PEGylation materials in the manufacture of PEGASYS.  As a result of Roche exercising a license extension option in December 2009, beginning in 2010 Roche has the right to manufacture all of its requirements for our proprietary PEGylation materials for PEGASYS and we would perform additional manufacturing, if any, only on an as requested basis.

In connection with Roche’s exercise of the license option extension in December 2009, we received a payment of $31.0 million.   We expect to amortize the remaining deferred revenue through December 2015, which is the period through which we are required to provide back-up manufacturing and supply services on an as-requested basis.
 
Note 6 – Stock-Based Compensation

Total stock-based compensation expense was recorded in our Condensed Consolidated Financial Statements as follows (in thousands):
   
Three months ended
March 31,
 
   
2010
   
2009
 
Cost of goods sold, net of inventory change
  $ 38     $ 75  
Research and development expense
    1,461       662  
General and administrative expense
    2,245       1,588  
Total stock-based compensation costs
  $ 3,744     $ 2,325  
                 

Aggregate Unrecognized Stock-Based Compensation Expense

Aggregate total unrecognized stock-based compensation expense is expected to be recognized as follows (in thousands):
 
Fiscal Year
 
As of
March 31, 2010
 
2010 (remaining 9 months)
  $ 11,858  
2011
    13,999  
2012
    9,503  
2013
    6,671  
2014 and thereafter
    617  
    $ 42,648  

9

Summary of Stock Option Activity

During the three months ended March 31, 2010 and 2009, we granted 3,756,925 and 3,202,200 stock options, respectively. The weighted average grant-date fair value of options granted during the three-months ended March 31, 2010 and 2009 was $5.97 per share and $2.41 per share, respectively.

Black-Scholes Assumptions

The fair values of stock-based awards are based on estimates as of the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:
 
 
Three months ended March 31,
 
2010
 
2009
Average risk-free interest rate
1.9%
 
1.5%
Volatility factor
63.0%
 
59.7%
Dividend yield
0.0%
 
0.0%
Weighted average expected life
4.8 years
 
5.0 years

The average risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of grants for periods commensurate with the expected term of the stock-based award.  Our estimate of expected volatility is based on the daily historical trading data of our common stock over a historical period commensurate with the expected term of the stock-based award.  We have never paid dividends, nor do we expect to pay dividends in the foreseeable future; therefore, we used a dividend yield of 0.0%.

For the three months ended March 31, 2010, we estimated the weighted-average expected life based on the contractual and vesting terms of the stock options, as well as historic cancellation and historic exercise data.  Previously, the weighted-average expected life was determined using the “simplified” method, in which the expected life was based on the average of the vesting term and the contractual term of the option, as permitted under Staff Accounting Bulletin Topic 14.D.2.  The change did not result in a material difference in weighted average expected life.

For the three months ended March 31, 2010, the estimated annual forfeiture rate for director options and restricted stock units awards (RSU), employee options and RSU awards, and performance-based RSU awards utilized was 0%, 11%, and 25% respectively.  For the three months ended March 31, 2009, the estimated annual forfeiture rate for director options and RSU awards, employee options, and employee RSU awards was estimated to be 15%, 11%, and 25%, respectively.
 
Note 7—Net Loss Per Share
 
Basic net loss per share is calculated based on the weighted-average number of common shares outstanding during the periods presented. For all periods presented in the Condensed Consolidated Statements of Operations, the net loss available to common stockholders is equal to the reported net loss. Basic and diluted net loss per share are the same due to our historical net losses and the requirement to exclude potentially dilutive securities which would have an anti-dilutive effect on net loss per share. The weighted average of these potentially dilutive securities has been excluded from the diluted net loss per share calculation and is as follows (in thousands):
 

   
Three months ended March 31,
 
   
2010
   
2009
 
Convertible subordinated notes
    9,989       9,989  
Stock options
    8,544       14,585  
Total
    18,533       24,574  
 
10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section as well as factors described in “Part II, Item 1A—Risk Factors.”
 
Overview
 
Strategic Direction of Our Business

We are a clinical-stage biopharmaceutical company developing a pipeline of drug candidates that utilize our PEGylation and advanced polymer conjugate technology platforms to improve the therapeutic benefits of drugs. Our proprietary product pipeline is comprised of drug candidates targeted at a number of therapeutic areas including oncology, pain, anti-infectives and immunology. We create our innovative product candidates by using our proprietary chemistry platform to modify the chemical structure of drugs using unique polymer conjugates. Additionally, we may utilize established pharmacologic targets to engineer a new drug candidate relying on a combination of the known properties of these targets and the attributes of our customized polymer chemistry. Our drug candidates are designed to substantially improve the pharmacokinetics, half-life, oral bioavailability, metabolism or distribution of drugs to improve their therapeutic efficacy.

We continue to make substantial investments to advance our pipeline of drug candidates from early stage discovery research through clinical development. We have several Phase 2 clinical trials for NKTR-102 (PEGylated irinotecan) directed at a number of different oncology indications including ovarian, breast, and colorectal cancers.  In addition, we have an ongoing Phase 1 clinical trial for NKTR-105 (PEGylated docetaxel) for patients with refractory solid tumors.  We also have other products in early discovery research or preclinical development.

Our focus on research and clinical development requires substantial investments that continue to increase as we advance each drug candidate through the development cycle. While we believe that our strategy has the potential to create significant value if one or more of our drug candidates demonstrates positive clinical results and receives regulatory approval in one or more major markets, drug development is an inherently uncertain process and there is a high risk of failure at every stage prior to approval and the timing and outcome of clinical trial results are very difficult to predict. Clinical development success and failures can have an unpredictable and disproportionate positive or negative impact on our scientific and medical prospects, financial prospects, financial condition, and market value.

We decide on a program-by-program basis whether we wish to continue development into Phase 3 pivotal clinical trials and commercialize products on our own, or seek a partner, or pursue a combination of these approaches. Following completion of Phase 2 development, or earlier in the development cycle in certain circumstances, we will generally be seeking collaborations with one or more biotechnology or pharmaceutical companies to conduct Phase 3 clinical development, to be responsible for the regulatory approval process and, if such drug candidate is approved, to market and sell the drug in one or more global markets.  To date, we have partnered our proprietary drug development programs prior to Phase 3 clinical development.  We intend to explore a variety of structures for a collaboration partnership for NKTR-102 in order to seek to maximize the value of this drug candidate.  Whether we ultimately enter into a collaboration agreement for NKTR-102 will depend on the partnership and other opportunities that may be available to us.  The financial terms of such future collaborations, if any, including, without limitation, upfront payments, development and sales milestone payments, and royalty rates, will be critical to the future prospects of our business and financial condition. There can be no assurance that any future collaborations will be available to us for NKTR-102 or other of our development programs, on commercially favorable terms or at all.

We also have a number of existing license and collaboration agreements with third parties who have licensed our proprietary technologies for drugs that have either received regulatory approval in one or more markets or drug candidates that are still in the clinical development stage.  For example, the future clinical and commercial success of Bayer’s Amikacin Inhale (BAY41-6551 or NKTR-061), UCB’s CIMZIA, Roche’s MIRCERA and Affymax’s Hematide, among others, will together have a material impact on our long-term financial results and financial condition, as will the success of Bayer’s Cipro Inhale program, in relation to which we have certain royalty rights. Because drug development and commercialization is subject to numerous risks and uncertainties, there is a risk that our future revenue from one or more of these agreements will be less than we anticipate.
 
Historically, we entered into a number of license and supply contracts under which we manufactured and supplied proprietary PEGylation reagents on a cost-plus or fixed price basis.  Our current strategy is to manufacture and supply PEGylation reagents to support our proprietary drug candidates or for third party collaborators where we have a strategic development and commercialization relationship.   As a result, whenever possible, we are renegotiating or not seeking renewal of legacy manufacturing supply arrangements that do not include a strategic development or commercialization component.  While this will result in some revenue loss in the short-term, product sales from these legacy agreements are generally low-margin.  Our strategy allows us to focus our proprietary manufacturing expertise and capacity on drugs and drug candidates where we have significant future economic opportunity.

11

Key Developments and Trends in Liquidity and Capital Resources

At March 31, 2010, we had approximately $362.0 million in cash, cash equivalents, and short-term investments and $240.5 million in indebtedness. We may from time to time purchase or retire convertible subordinated notes through cash purchase or exchanges for our other securities in open market or privately negotiated transactions, depending on, among other factors, our levels of available cash and the price at which such convertible notes are available for purchase. For instance, in the fourth quarter of 2008, we repurchased approximately $100.0 million in par value of our 3.25% convertible subordinated notes for an aggregate purchase price of $47.8 million. We will evaluate similar future transactions, if any, in light of then-existing market conditions. These transactions, individually or in the aggregate, may be material to our business.

In 2010, we plan to relocate all of our functions currently located in San Carlos, California, including our corporate headquarters, to a facility in the Mission Bay area of San Francisco, California, which we have subleased from Pfizer Inc.  In 2010, in connection with the move, we expect to spend approximately $25.0 million for tenant improvements to complete the Mission Bay Facility and office and laboratory equipment.

We have financed our operations primarily through revenue from product sales and royalties, development and commercialization collaboration contracts and debt and equity financings. In October 2009, we received a payment of $125.0 million from AstraZeneca under the license agreement we entered with AstraZeneca AB dated September 20, 2009 (AstraZeneca License) as an upfront payment for the worldwide rights to further develop and commercialize Oral NKTR-118 and NKTR-119.  In December 2009, we also received a payment of $31.0 million from the exercise of a license option extension by one of our existing collaboration partners.  Similar to 2009, the results of our collaboration partnering efforts will also have a material impact on our cash position at the end of 2010.  To date we have incurred substantial debt as a result of our issuances of subordinated notes that are convertible into our common stock. Our substantial debt, the market price of our securities, and the general economic climate, among other factors, could have material consequences for our financial condition and could affect our sources of short-term and long-term funding. Our ability to meet our ongoing operating expenses and repay our outstanding indebtedness is dependent upon our and our partners’ ability to successfully complete clinical development of, obtain regulatory approvals for and successfully commercialize new drugs. Even if we or our partners are successful, we may require additional capital to continue to fund our operations and repay our debt obligations as they become due. There can be no assurance that additional funds, if and when required, will be available to us on favorable terms, if at all.
 
Results of Operations
 
Three Months Ended March 31, 2010 and 2009
 
Revenue (in thousands, except percentages)
   
Three months
ended
March 31, 2010
   
Three months
ended
March 31, 2009
   
Increase /
(Decrease)
2010 vs. 2009
   
Percentage
Increase /
(Decrease)
2010 vs. 2009
 
Product sales and royalties
  $ 3,584     $ 6,470     $ (2,886 )     (45 %)
License, collaboration and other
    29,653       3,241       26,412    
>100
%
Total revenue
  $ 33,237     $ 9,711     $ 23,526    
>100
%
 
Our revenue is derived from our collaboration agreements, under which we may receive license fees, milestone payments based on clinical progress, regulatory progress or net sales achievements, contract research payments, royalties or product sales revenue. Significant variations in the timing of receipt of cash payments and our recognition of revenue can result from the nature of significant milestone payments based on the execution of new collaboration agreements, the timing of clinical, regulatory or sales events which often result in single milestone payments and the timing and success of the commercial launch of new drugs by our collaboration partners.
 
Product Sales and Royalties
 
Product sales include cost-plus and fixed price manufacturing and supply agreements with our collaboration partners.  We also receive royalty revenue from certain of our collaboration partners based on their net sales once their products are approved for commercial sale.  
 
The decrease in product sales and royalties for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 is primarily attributable to lower product sales volumes to our collaboration partners.  The timing of shipments is based on the demand and requirements of our collaboration partners and is not ratable through the year.  We expect quarterly product sales volumes to increase in the remainder of 2010.
 
12

License, Collaboration and Other
 
License, collaboration and other revenue includes amortization of upfront payments and performance milestone payments received in connection with our license and collaboration agreements and reimbursed research and development expenses.  The level of license, collaboration and other revenue depends in part upon the estimated amortization period of the upfront and milestone payments, the achievement of future milestones, the continuation of existing collaborations, the amount of reimbursed research and development work, and the signing of new collaborations.
 
For the three months ended March 31, 2010, the increase in license, collaboration and other revenue compared to the three months ended March 31, 2009 is primarily attributable to the $25.3 million recognized of the $125.0 million upfront payment received from AstraZeneca in October 2009 for NKTR-118 and NKTR-119.
 
Cost of Goods Sold and Product Gross Margin (in thousands, except percentages)

   
Three months
ended
March 31, 2010
   
Three months
ended
March 31, 2009
   
Increase /
(Decrease)
2010 vs. 2009
   
Percentage
Increase /
(Decrease)
2010 vs. 2009
 
Cost of goods sold
  $ 4,296     $ 5,626     $ (1,330 )     (24 %)
Product gross profit
  $ (712 )   $ 844     $ (1,556 )  
>(100
%)
Product gross margin
    (20 %)     13 %                
 
For the three months ended March 31, 2010 compared to the three months ended March 31, 2009, the decrease in product gross margin is primarily attributable to the decrease in product sale shipments and increase in reserves recognized during the three months ended March 31, 2010.  As a result of the fixed cost base associated with our manufacturing activities, we expect product gross margin to fluctuate in future periods depending on the level of manufacturing orders from our customers.
 
Research and Development Expense (in thousands, except percentages)

   
Three months
ended
March 31, 2010
   
Three months
ended
March 31, 2009
   
Increase /
(Decrease)
2010 vs. 2009
   
Percentage
Increase /
(Decrease)
2010 vs. 2009
 
Research and development expense
  $ 23,286     $ 23,363     $ (77 )     0 %

 
Research and development expense consists primarily of personnel costs, including salaries, benefits, and stock-based compensation, clinical studies performed by contract research organizations, materials and supplies, licenses and fees, and overhead allocations consisting of various support and facilities related costs.  While research and development expense remained at a consistent level for the three months ended March 31, 2010 compared to the three months ended March 31, 2009, the components of research and development expense changed after we entered into the AstraZeneca License for NKTR-118 and NKTR-119 and the completion of our research and development facility in India.
 
Research and development expense related to NKTR-118 and NKTR-119 for the three months ended March 31, 2009 totaled approximately $4.4 million compared to $0.5 million in the same period of 2010.  In addition, outside spending with contract manufacturing and contract research organizations decreased by approximately $0.6 million for the three months ended March 31, 2010 compared to the three months ended March 31, 2009.  These decreases were off-set by the following increases: $1.0 million increase for the NKTR-102 program as we continue the Phase 2 clinical trials for our breast, ovarian and colorectal cancer programs; $0.8 million increase for our India operations after the completion of the India research facility; $1.7 million increase in U.S. employee costs as a result of headcount additions and salary and benefit cost increases; and $0.8 million increase in non-cash stock-based compensation expense.
 

General and Administrative Expense (in thousands, except percentages)
 
   
Three months
ended
March 31, 2010
   
Three months
ended
March 31, 2009
   
Increase /
(Decrease)
2010 vs. 2009
   
Percentage
Increase /
(Decrease)
2010 vs. 2009
 
General and administrative expense
  $ 9,013     $ 11,020     $ (2,007 )     (18 %)

13

General and administrative expense is associated with administrative staffing, business development, marketing, and legal. For the three months ended March 31, 2010 compared to the three months ended March 31, 2009, the decrease is attributable to reductions in headcount and outside professional services.  Allocation of corporate-wide overhead costs, including facilities, human resources, information systems, and procurement, to general and administrative expense decreased as a result of the decreased headcount in general and administrative departments, while total company headcount remained at a consistent level.  Outside professional services related to legal, accounting, market research, recruiting, and other consulting decreased by $1.3 million for the three months ended March 31, 2010 compared to the three months ended March 31, 2009.   Partially off-setting these decreases, non-cash stock-based compensation expense increased by $0.7 million due to additional stock option and RSU grants and higher stock price.
 

Interest Income and Interest Expense (in thousands, except percentages)
 
   
Three months
ended
March 31, 2010
   
Three months
ended
March 31, 2009
   
Increase /
(Decrease)
2010 vs. 2009
   
Percentage
Increase /
(Decease)
2010 vs. 2009
 
Interest income
  $ 463     $ 1,650     $ (1,187 )     (72 %)
Interest expense
  $ (2,951 )   $ (3,337 )   $ (386 )     (12 %)

    The decrease in interest income for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 is a result of decreased market interest rates received for our cash and short-term investments.
 
Liquidity and Capital Resources
 
We have financed our operations primarily through revenue from partner licensing, collaboration and manufacturing agreements, public and private placements of debt and equity securities, and financing of equipment acquisitions and certain tenant leasehold improvements.
 
We had cash, cash equivalents and short-term investments in marketable securities of $362.0 million and indebtedness of $240.5 million, including $215.0 million of 3.25% convertible subordinated notes due September 2012, $20.0 million in capital lease obligations, and $5.5 million in other liabilities as of March 31, 2010.
 
Due to the continuing adverse environment in the credit markets, we may experience reduced liquidity with respect to some of our short-term investments. These investments are generally held to maturity, which is less than one year. However, if the need arose to liquidate such securities before maturity, we may experience losses on liquidation. At March 31, 2010, the average time to maturity of the investments held in our portfolio was approximately five months and the contractual maturity of any single investment did not exceed twelve months. To date we have not experienced any liquidity issues with respect to these securities, but should such issues arise, we may be required to hold some, or all, of these securities until maturity. We believe that, even allowing for potential liquidity issues with respect to these securities, our remaining cash, cash equivalents, and short-term investments will be sufficient to meet our anticipated cash needs for at least the next twelve months. Based on our available cash and our expected operating cash requirements, we do not intend to sell these securities and it is more likely than not that we will not be required to sell these securities before we recover the amortized cost basis. Accordingly, we believe there are no other-than-temporary impairments on these securities and have not recorded a provision for impairment.
 
Cash flows from operating activities
 
Cash flows used in operating activities for the three months ended March 31, 2010 totaled $34.2 million, which includes $7.2 million for employee bonus payments related to services performed in 2009, $3.5 million for interest payments on our convertible subordinated notes, and $23.5 million of other net operating cash uses. Because of the nature and timing of certain cash receipts and payments, net cash utilization is not expected to be ratable over the four quarters of the year.
 
For the three months ended March 31, 2009, cash used in operations included $4.7 million for employee bonus payments related to services performed in 2008, $3.5 million for interest payments on our convertible subordinated notes, $2.7 million for severance payments, and $31.5 million of other net operating cash uses.
 
Cash flows from investing activities
 
We purchased $4.0 million and $5.1 million of property and equipment in the three months ended March 31, 2010 and 2009, respectively. During the three months ended March 31, 2009, we paid $4.8 million of previously expensed transaction costs related to the sale of certain assets related to our pulmonary business, associated technology and intellectual property to Novartis, which was completed on December 31, 2008.
 
14

Cash flows from financing activities
 
We received $4.8 million from issuances of common stock to employees during the three months ended March 31, 2010, resulting in net cash provided by financing activities. Cash used in financing activities was not significant for the three months ended March 31, 2009.
 
Contractual Obligations
 
There were no material changes during the three months ended March 31, 2010 to the summary of contractual obligations included in our Annual Report on Form 10-K for the year ended December 31, 2009.
 
Off-Balance Sheet Arrangements
 
We do not utilize off-balance sheet financing arrangements as a source of liquidity or financing.
 
Recent Accounting Pronouncements
 
FASB Accounting Standards Update 2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements
 
In October 2009, the FASB published FASB Accounting Standards Update (ASU) 2009-13, which amends the criteria to identify separate units of accounting within Subtopic 605-25, “Revenue Recognition-Multiple-Element Arrangements”. The revised guidance also expands the disclosure required for multiple-element revenue arrangements. FASB ASU No. 2009-13 is effective for fiscal years beginning on or after June 15, 2010, and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date. Early adoption is permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. We are currently evaluating the impact of adoption on our financial position and results of operations.

FASB ASU 2010-17, Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition
 
In April 2010, the FASB codified the consensus reached in Emerging Issues Task Force Issue No. 08-09, “Milestone Method of Revenue Recognition.”  FASB ASU No. 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions.  FASB ASU No. 2010 – 17 is effective for fiscal years beginning on or after June 15, 2010, and is effective on a prospective basis for milestones achieved after the adoption date.  Early adoption is permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption.  We are currently evaluating the impact of adoption on our financial position and results of operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
Our market risks at March 31, 2010 have not changed significantly from those discussed in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2009 on file with the Securities and Exchange Commission.
 
Item 4. Controls and Procedures
 
Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.
 
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon, and as of the date of, this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
 
Changes in Internal Control Over Financial Reporting
 
We continuously seek to improve the efficiency and effectiveness of our internal controls. This results in refinements to processes throughout the Company. However, there was no change in our internal control over financial reporting that occurred in the three months ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
15

Limitations on the Effectiveness of Controls
 
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
Approval of Non-Audit Services
 
In the three months ended March 31, 2010, the Audit Committee of the Board of Directors approved approximately $12,300 in non-audit related services related to tax compliance and advisory services to be provided by Ernst & Young LLP, our independent registered public accounting firm.

16

PART II: OTHER INFORMATION
 
Item 1. Legal Proceedings
 
Reference is hereby made to our disclosures in “Legal Matters” under Note 4 of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q and the information under the heading “Legal Matters” is incorporated by reference herein.
 
Item 1A. Risk Factors
 
Investors in Nektar Therapeutics should carefully consider the risks described below before making an investment decision. The risks described below may not be the only ones relating to our company. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Item 1A of our Annual Report on Form 10-K for the twelve months ended December 31, 2009. Additional risks that we currently believe are immaterial may also impair our business operations. Our business, results of operation, financial condition, cash flow and future prospects and the trading price of our common stock and our abilities to repay our convertible notes could be harmed as a result of any of these risks, and investors may lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2009, including our consolidated financial statements and related notes, and our other filings made from time to time with the Securities and Exchange Commission (SEC).

Risks Related to Our Business

Drug development is an inherently uncertain process and there is a high risk of failure at every stage of development and development failures can significantly harm our business.

We have a number of proprietary product candidates and partnered product candidates in research and development ranging from the early discovery research phase through preclinical testing and clinical trials. Preclinical testing and clinical trials are long, expensive and highly uncertain processes. It will take us, or our collaborative partners, several years to complete clinical trials. Drug development is an uncertain scientific and medical endeavor and failure can unexpectedly occur at any stage of clinical development even after early preclinical or mid-stage clinical results suggest that the drug candidate has potential as a new therapy that may benefit patients and health authority approval would be anticipated. Typically, there is a high rate of attrition for product candidates in preclinical and clinical trials due to scientific feasibility, safety, efficacy, changing standards of medical care and other variables.  We or our partners have a number of important product candidates in mid- to late-stage development such as Bayer’s Amikacin Inhale, Oral NKTR-118 (oral PEGylated naloxol) and NKTR-119 which we partnered with AstraZeneca, Affymax’s Hematide, and NKTR-102 (PEGylated irinotecan) in a number of oncology indications including breast, colorectal and ovarian cancers.  We also have an ongoing Phase 1 clinical trial for NKTR-105 (PEGylated docetaxel) for patients with refractory solid tumors.  Any one of these trials could fail at any time as clinical development of drug candidates presents numerous unpredictable risks and is very uncertain at all times prior to regulatory approval by one or more health authorities in major markets.

Even with success in preclinical testing and clinical trials, the risk of clinical failure remains high prior to regulatory approval.

A number of companies in the pharmaceutical and biotechnology industries have suffered significant unforeseen setbacks in later stage clinical trials (i.e., Phase 2 or Phase 3 trials) due to factors such as inconclusive efficacy results and adverse medical events, even after achieving positive results in earlier trials that were satisfactory both to them and to reviewing regulatory agencies. Although we announced positive Phase 2 clinical results for Oral NKTR-118 (oral PEGylated naloxol) in 2009, there are still substantial risks and uncertainties associated with the future commencement and outcome of a Phase 3 clinical trial and the regulatory review process even following the AstraZeneca transaction.  While NKTR-102 (PEGylated irinotecan) continues in Phase 2 clinical development for multiple cancer indications, it is possible this product candidate could fail in one or all of the cancer indications in which it is currently being studied due to efficacy, safety or other commercial or regulatory factors.  In the quarter ended March 31, 2010, we announced preliminary positive results from stage one of our Phase 2 trial for ovarian cancer patients.  These results were based on preliminary data only and such results could change based on final data gathering and analysis review procedures.  In addition, the preliminary results from stage 1 of the NKTR-102 clinical study for ovarian cancer is not necessarily indicative or predictive of the future results from stage 2 of this clinical study or the other cancer indication where we are studying NKTR-102.  As a result, there remains a significant uncertainty as to the success or failure of NKTR-102 and whether this drug candidate will eventually receive regulatory approval or be a commercial success even if approved by one or more health authorities in any of the cancer indications for which it is being studied.  The risk of failure is increased for our product candidates that are based on new technologies, such as the application of our advanced polymer conjugate technology to small molecules, including without limitation Oral NKTR-118, Oral NKTR-119, NKTR-102, NKTR-105 and other drug candidates currently in the discovery research or preclinical development phases.  If our PEGylation and advanced polymer conjugate technologies fail to generate new drug candidates with positive clinical trial results and approved drugs, our business, results of operations, and financial condition would be materially harmed. 

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If we are unable to establish and maintain collaboration partnerships on attractive commercial terms, our business, results of operations and financial condition could suffer.

We intend to continue to seek partnerships with pharmaceutical and biotechnology partners to fund a portion of our research and development expenses and develop and commercialize our product candidates, including NKTR-102. In September 2009, we entered into a license agreement with AstraZeneca for NKTR-118 and NKTR-119 which included an upfront payment of $125.0 million.  The completion of the AstraZeneca transaction was critical to our financial results and financial condition for the year ended December 31, 2009.  We intend to explore a variety of transaction structures for a collaboration partner for NKTR-102.  Whether we ultimately enter into a collaboration agreement for NKTR-102 will depend on the partnership and other opportunities that may be available to us.  Our ability to successfully conclude a collaboration partnership for NKTR-102 on commercially favorable terms, or at all, will have a significant impact on our business and financial position in 2010. The timing of any future partnership, as well as the terms and conditions of the partnership, will affect our ability to benefit from the relationship. If we are unable to find suitable partners or to negotiate collaborative arrangements with favorable commercial terms with respect to our existing and future product candidates or the licensing of our technology, or if any arrangements we negotiate, or have negotiated, are terminated, our business, results of operations and financial condition could suffer.

We may not be able to obtain intellectual property licenses related to the development of our technology on a commercially reasonable basis, if at all.

Numerous pending and issued U.S. and foreign patent rights and other proprietary rights owned by third parties relate to pharmaceutical compositions, medical devices and equipment and methods for preparation, packaging and delivery of pharmaceutical compositions. We cannot predict with any certainty which, if any, patent references will be considered relevant to our or our collaborative partners’ technology by authorities in the various jurisdictions where such rights exist, nor can we predict with certainty which, if any, of these rights will or may be asserted against us by third parties.   In certain cases, we have existing licenses or cross-licenses with third parties however the scope and adequacy of these licenses is very uncertain and can change substantially during long development and commercialization cycles for biotechnology and pharmaceutical products.  There can be no assurance that we can obtain a license to any technology that we determine we need on reasonable terms, if at all, or that we could develop or otherwise obtain alternate technology. If we are required to enter into a license with a third party, our potential economic benefit for the products subject to the license will be diminished. The failure to obtain licenses on commercially reasonable terms, or at all, if needed, would have a material adverse effect on us.

If any of our pending patent applications do not issue, or are deemed invalid following issuance, we may lose valuable intellectual property protection.

The patent positions of pharmaceutical, medical device and biotechnology companies, such as ours, are uncertain and involve complex legal and factual issues. We own approximately 100 U.S. and approximately 380 foreign patents and a number of pending patent applications that cover various aspects of our technologies. We have filed patent applications, and plan to file additional patent applications, covering various aspects of our PEGylation and advanced polymer conjugate technologies and our proprietary product candidates. There can be no assurance that patents that have issued will be valid and enforceable or that patents for which we apply will issue with broad coverage, if at all. The coverage claimed in a patent application can be significantly reduced before the patent is issued and, as a consequence, our patent applications may result in patents with narrow coverage. Since publication of discoveries in scientific or patent literature often lags behind the date of such discoveries, we cannot be certain that we were the first inventor of inventions covered by our patents or patent applications. As part of the patent application process, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office, which could result in substantial cost to us, even if the eventual outcome is favorable. Further, an issued patent may undergo further proceedings to limit its scope so as not to provide meaningful protection and any claims that have issued, or that eventually issue, may be circumvented or otherwise invalidated. Any attempt to enforce our patents or patent application rights could be time consuming and costly. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from or to third parties or require us to cease using the technology in dispute. Even if a patent is issued and enforceable, because development and commercialization of pharmaceutical products can be subject to substantial delays, patents may expire early and provide only a short period of protection, if any, following commercialization of related products.

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There are many laws, regulations and judicial decisions that dictate and otherwise influence the manner in which patent applications are filed and prosecuted and in which patents are granted and enforced. Changes to these laws, regulations and judicial decisions are subject to influences outside of our control and may negatively affect our business, including our ability to obtain meaningful patent coverage or enforcement rights to any of our issued patents. New laws, regulations and judicial decisions may be retroactive in effect, potentially reducing or eliminating our ability to implement our patent-related strategies to these changes. Changes to laws, regulations and judicial decisions that affect our business are often difficult or impossible to foresee, which limits our ability to adequately adapt our patent strategies to these changes.

The commercial potential of a drug candidate in development is difficult to predict and if the market size for a new drug is significantly smaller than we anticipated, it could significantly and negatively impact our revenue, results of operations and financial condition.

It is very difficult to estimate the commercial potential of product candidates due to factors such as safety and efficacy compared to other available treatments, including potential generic drug alternatives with similar efficacy profiles, changing standards of care, third party payer reimbursement, patient and physician preferences, the availability of competitive alternatives that may emerge either during the long drug development process or after commercial introduction, and the availability of generic versions of our successful product candidates following approval by health authorities based on the expiration of regulatory exclusivity or our inability to prevent generic versions from coming to market in one or more geographies by the assertion of one or more patents covering such approved drug.  If due to one or more of these risks the market potential for a product candidate is lower than we anticipated, it could significantly and negatively impact the commercial terms of any collaboration partnership potential for such product candidate or, if we have already entered into a collaboration for such drug candidate, the revenue potential from royalty and milestone payments could be significantly diminished and would negatively impact our revenue, results of operations and financial condition.

Our revenue is exclusively derived from our collaboration agreements, which can result in significant fluctuation in our revenue from period to period, and our past revenue is therefore not necessarily indicative of our future revenue.

Our revenue is derived from our collaboration agreements with partners, under which we may receive contract research payments, milestone payments based on clinical progress, regulatory progress or net sales achievements, royalties or manufacturing revenue. Significant variations in the timing of receipt of cash payments and our recognition of revenue can result from the nature of significant milestone payments based on the execution of new collaboration agreements, the timing of clinical, regulatory or sales events which result in single milestone payments and the timing and success of the commercial launch of new drugs by our collaboration partners. The amount of our revenue derived from collaboration agreements in any given period will depend on a number of unpredictable factors, including our ability to find and maintain suitable collaboration partners, the timing of the negotiation and conclusion of collaboration agreements with such partners, whether and when we or our partner achieve clinical and sales milestones, whether the partnership is exclusive or whether we can seek other partners, the timing of regulatory approvals in one or more major markets and the market introduction of new drugs or generic versions of the approved drug, as well as other factors.

If our partners, on which we depend to obtain regulatory approvals for and to commercialize our partnered products, are not successful, or if such collaborations fail, the development or commercialization of our partnered products may be delayed or unsuccessful.

When we sign a collaborative development agreement or license agreement to develop a product candidate with a pharmaceutical or biotechnology company, the pharmaceutical or biotechnology company is generally expected to: 

 
design and conduct large scale clinical studies;

 
prepare and file documents necessary to obtain government approvals to sell a given product candidate; and/or

 
market and sell our products when and if they are approved.
 
Our reliance on collaboration partners poses a number of risks to our business, including risks that:

 
we may be unable to control whether, and the extent to which, our partners devote sufficient resources to the development programs or commercial marketing and sales efforts;

 
disputes may arise in the future with respect to the ownership of rights to technology or intellectual property developed with partners;

 
disagreements with partners could lead to delays in, or termination of, the research, development or commercialization of product candidates or to litigation or arbitration proceedings;

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contracts with our partners may fail to provide us with significant protection, or to be effectively enforced, in the event one of our partners fails to perform;

 
partners have considerable discretion in electing whether to pursue the development of any additional product candidates and may pursue alternative technologies or products either on their own or in collaboration with our competitors;

 
partners with marketing rights may choose to devote fewer resources to the marketing of our partnered products than they do to products of their own development or products in-licensed from other third parties;

 
the timing and level of resources that our partners dedicate to the development program will affect the timing and amount of revenue we receive;

 
we do not have the ability to unilaterally terminate agreements (or partners may have extension or renewal rights) that we believe are not on commercially reasonable terms or consistent with our current business strategy;

 
partners may be unable to pay us as expected; and

 
partners may terminate their agreements with us unilaterally for any or no reason, in some cases with the payment of a termination fee penalty and in other cases with no termination fee penalty.

Given these risks, the success of our current and future partnerships is highly unpredictable and can have a substantial negative or positive impact on our business. We have entered into collaborations in the past that have been subsequently terminated, such as our collaboration with Pfizer for the development and commercialization of inhaled insulin that was terminated by Pfizer in November 2007. If other collaborations are suspended or terminated, our ability to commercialize certain other proposed product candidates could also be negatively impacted. If our collaborations fail, our product development or commercialization of product candidates could be delayed or cancelled, which would negatively impact our business, results of operations and financial condition.

If we or our partners do not obtain regulatory approval for our product candidates on a timely basis, if at all, or if the terms of any approval impose significant restrictions or limitations on use, our business, results of operations and financial condition will be negatively affected.

We or our partners may not obtain regulatory approval for product candidates on a timely basis, if at all, or the terms of any approval (which in some countries includes pricing approval) may impose significant restrictions or limitations on use. Product candidates must undergo rigorous animal and human testing and an extensive FDA mandated or equivalent foreign authorities’ review process for safety and efficacy. This process generally takes a number of years and requires the expenditure of substantial resources. The time required for completing testing and obtaining approvals is uncertain, and the FDA and other U.S. and foreign regulatory agencies have substantial discretion to terminate clinical trials, require additional clinical development or other testing at any phase of development, delay or withhold registration and marketing approval and mandate product withdrawals, including recalls. In addition, undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restricted label or the delay or denial of regulatory approval by regulatory authorities. 

Even if we or our partners receive regulatory approval of a product, the approval may limit the indicated uses for which the product may be marketed. Our partnered products that have obtained regulatory approval, and the manufacturing processes for these products, are subject to continued review and periodic inspections by the FDA and other regulatory authorities. Discovery from such review and inspection of previously unknown problems may result in restrictions on marketed products or on us, including withdrawal or recall of such products from the market, suspension of related manufacturing operations or a more restricted label. The failure to obtain timely regulatory approval of product candidates, any product marketing limitations or a product withdrawal would negatively impact our business, results of operations and financial condition.

We are a party to numerous collaboration agreements and other significant agreements which contain complex commercial terms that could result in disputes, litigation or indemnification liability that could adversely affect our business, results of operations and financial condition.

We currently derive, and expect to derive in the foreseeable future, all of our revenue from collaboration agreements with biotechnology and pharmaceutical companies. These collaboration agreements contain complex commercial terms, including:

 
clinical development and commercialization obligations that are based on certain commercial reasonableness performance standards that can often be difficult to enforce if disputes arise as to adequacy of performance;

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research and development performance and reimbursement obligations for our personnel and other resources allocated to partnered product development programs;

 
clinical and commercial manufacturing agreements, some of which are priced on an actual cost basis for products supplied by us to our partners with complicated cost allocation formulas and methodologies;

 
intellectual property ownership allocation between us and our partners for improvements and new inventions developed during the course of the partnership;

 
royalties on end product sales based on a number of complex variables, including net sales calculations, geography, patent life, generic competitors, and other factors; and

 
indemnity obligations for third-party intellectual property infringement, product liability and certain other claims.

On September 20, 2009, we entered into a worldwide exclusive license agreement with AstraZeneca for the further development and commercialization of NKTR-118 and NKTR-119.  In addition, we have also entered into complex commercial agreements with Novartis in connection with the sale of certain assets related to our pulmonary business, associated technology and intellectual property to Novartis (the Novartis Pulmonary Asset Sale), which was completed on December 31, 2008. Our agreements with AstraZeneca and Novartis contain complex representations and warranties, covenants and indemnification obligations that could result in substantial future liability and harm our financial condition if we breach any of our agreements with AstraZeneca or Novartis or any third party agreements impacted by this complex transaction. As part of the Novartis Pulmonary Asset Sale, we entered an exclusive license agreement with Novartis Pharma pursuant to which Novartis Pharma grants back to us an exclusive, irrevocable, perpetual, royalty-free and worldwide license under certain specific patent rights and other related intellectual property rights necessary for us to satisfy certain continuing contractual obligations to third parties, including in connection with development, manufacture, sale and commercialization activities related to our partnered program for BAY41-6551 with Bayer Healthcare LLC . We also entered into a service agreement pursuant to which we have subcontracted to Novartis certain services to be performed related to our partnered program for BAY41-6551 and a transition services agreement pursuant to which Novartis and we provided each other with specified services for limited time periods following the closing of the Novartis Pulmonary Asset Sale to facilitate the transition of the acquired assets and business from us to Novartis.

From time to time, we have informal dispute resolution discussions with third parties regarding the appropriate interpretation of the complex commercial terms contained in our agreements. One or more disputes may arise in the future regarding our collaboration agreements, transaction documents, or third party license agreements that may ultimately result in costly litigation and unfavorable interpretation of contract terms, which would have a material adverse impact on our business, results of operations or financial condition.

If we or our partners are not able to manufacture drugs or drug substances in quantities and at costs that are commercially feasible, we may fail to meet our contractual obligations or our proprietary and partnered product candidates may experience clinical delays or constrained commercial supply which could significantly harm our business.

If we are not able to scale-up manufacturing to meet the drug quantities required to support large clinical trials or commercial manufacturing in a timely manner or at a commercially reasonable cost, we risk delaying our clinical trials or those of our partners and may breach contractual obligations and incur associated damages and costs, and reduce or even eliminate associated revenues.  In some cases, we may subcontract manufacturing or other services.  Pharmaceutical manufacturing involves significant risks and uncertainties related to the demonstration of adequate stability, sufficient purification of the drug substance and drug product, the identification and elimination of impurities, optimal formulations, process validation, and challenges to controlling for all of these factors during manufacturing scale-up for large clinical trials and commercial manufacturing and supply.  In addition, we have faced and may in the future face significant difficulties, delays and unexpected expenses as we validate third party contract manufacturers required for scale-up to clinical or commercial quantities.  Failure to manufacture products in quantities or at costs that are commercially feasible could cause us not to meet our supply requirements, contractual obligations or other requirements for our proprietary product candidates and, as a result, would significantly harm our business, results of operations and financial condition.

For instance, we entered a service agreement with Novartis pursuant to which we subcontract to Novartis certain important services to be performed in relation to our partnered program for BAY41-6551 with Bayer Healthcare LLC. If our subcontractors do not dedicate adequate resources to our programs, we risk breach of our obligations to our partners. Building and validating large scale clinical or commercial-scale manufacturing facilities and processes, recruiting and training qualified personnel and obtaining necessary regulatory approvals is complex, expensive and time consuming. In the past we have encountered challenges in scaling up manufacturing to meet the requirements of large scale clinical trials without making modifications to the drug formulation, which may cause significant delays in clinical development. Further, our drug and device combination products, such as BAY41-6551 and the Cipro Inhale program, require significant device design, formulation development work and manufacturing scale-up activities.  Further, we have experienced delays in starting the Phase 3 clinical development program for BAY41-6551 as we work to finalize the device design with a demonstrated capability to be manufactured at commercial scale.  This work is ongoing. Drug/device combination products are particularly complex, expensive, time-consuming and uncertain due to the number of variables involved in the final product design, including ease of patient/doctor use, maintenance of clinical efficacy, reliability and cost of manufacturing, regulatory approval requirements and standards and other important factors.  There continues to be substantial and unpredictable risk and uncertainty related to manufacturing and supply until such time as the commercial supply chain is validated and proven.
 
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We purchase some of the starting material for drugs and drug candidates from a single source or a limited number of suppliers, and the partial or complete loss of one of these suppliers could cause production delays, clinical trial delays, substantial loss of revenue and contract liability to third parties.

We often face very limited supply of a critical raw material that can only be obtained from a single, or a limited number of, suppliers, which could cause production delays, clinical trial delays, substantial lost revenue opportunity or contract liability to third parties. For example, there are only a limited number of qualified suppliers, and in some cases single source suppliers, for the raw materials included in our PEGylation and advanced polymer conjugate drug formulations, and any interruption in supply or failure to procure such raw materials on commercially feasible terms could harm our business by delaying our clinical trials, impeding commercialization of approved drugs or increasing operating loss to the extent we cannot pass on increased costs to a manufacturing customer.
 
We rely on trade secret protection and other unpatented proprietary rights for important proprietary technologies, and any loss of such rights could harm our business, results of operations and financial condition.

We rely on trade secret protection for our confidential and proprietary information. No assurance can be given that others will not independently develop substantially equivalent confidential and proprietary information or otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully protect our trade secrets. In addition, unpatented proprietary rights, including trade secrets and know-how, can be difficult to protect and may lose their value if they are independently developed by a third party or if their secrecy is lost. Any loss of trade secret protection or other unpatented proprietary rights could harm our business, results of operations and financial condition.

We expect to continue to incur substantial losses and negative cash flow from operations and may not achieve or sustain profitability in the future.

For the three months ended March 31, 2010, we reported a net loss of $6.1 million.  If and when we achieve profitability depends upon a number of factors, including the timing and recognition of milestone payments and royalties received, the timing of revenue under our collaboration agreements, the amount of investments we make in our proprietary product candidates and the regulatory approval and market success of our product candidates. We may not be able to achieve and sustain profitability.

Other factors that will affect whether we achieve and sustain profitability include our ability, alone or together with our partners, to:

 
develop products utilizing our technologies, either independently or in collaboration with other pharmaceutical or biotech companies;

 
receive necessary regulatory and marketing approvals;

 
maintain or expand manufacturing at necessary levels;

 
achieve market acceptance of our partnered products;

 
receive royalties on products that have been approved, marketed or submitted for marketing approval with regulatory authorities; and

 
maintain sufficient funds to finance our activities.

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If we do not generate sufficient cash flow through increased revenue or raising additional capital, we may not be able to meet our substantial debt obligations.

As of March 31, 2010, we had cash, cash equivalents, and short-term investments in marketable securities valued at approximately $362.0 million and approximately $240.5 million of indebtedness, including approximately $215.0 million in convertible subordinated notes due September 2012, $20.0 million in capital lease obligations, and $5.5 million of other liabilities.

Our substantial indebtedness has and will continue to impact us by:

 
making it more difficult to obtain additional financing;

 
constraining our ability to react quickly in an unfavorable economic climate;

 
constraining our stock price; and

 
constraining our ability to invest in our proprietary product development programs.

Currently, we are not generating positive cash flow. If we are unable to satisfy our debt service requirements, substantial liquidity problems could result. In relation to our convertible subordinated notes, since the market price of our common stock is significantly below the conversion price, the holders of our outstanding convertible subordinated notes are unlikely to convert the notes to common stock in accordance with the existing terms of the notes. If we do not generate sufficient cash from operations to repay principal or interest on our remaining convertible subordinated notes, or satisfy any of our other debt obligations, when due, we may have to raise additional funds from the issuance of equity or debt securities or otherwise restructure our obligations. Any such financing or restructuring may not be available to us on commercially acceptable terms, if at all.

If we cannot raise additional capital, our financial condition will suffer.

We have no material credit facility or other material committed sources of capital. To the extent operating and capital resources are insufficient to meet our future capital needs, we will have to raise additional funds from new collaboration partnerships or the capital markets to continue the marketing and development of our technologies and proprietary products. Such funds may not be available on favorable terms, if at all. We may be unable to obtain suitable new collaboration partners on attractive terms and our substantial indebtedness may limit our ability to obtain additional capital markets financing. If adequate funds are not available on reasonable terms, we may be required to curtail operations significantly or obtain funds by entering into financing, supply or collaboration agreements on unattractive terms. Our inability to raise capital could harm our business and our stock price. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in dilution to our stockholders.

If government and private insurance programs do not provide reimbursement for our partnered products or proprietary products, those products will not be widely accepted, which would have a negative impact on our business, results of operations and financial condition.

In both domestic and foreign markets, sales of our partnered and proprietary products that have received regulatory approval will depend in part on market acceptance among physicians and patients, pricing approvals by government authorities and the availability of reimbursement from third-party payers, such as government health administration authorities, managed care providers, private health insurers and other organizations. Such third-party payers are increasingly challenging the price and cost effectiveness of medical products and services. Therefore, significant uncertainty exists as to the pricing approvals for, and the reimbursement status of, newly approved healthcare products. Moreover, legislation and regulations affecting the pricing of pharmaceuticals may change before regulatory agencies approve our proposed products for marketing and could further limit pricing approvals for, and reimbursement of, our products from government authorities and third-party payers. A government or third-party payer decision not to approve pricing for, or provide adequate coverage and reimbursements of, our products would limit market acceptance of such products.
 
We depend on third parties to conduct the clinical trials for our proprietary product candidates and any failure of those parties to fulfill their obligations could harm our development and commercialization plans.

We depend on independent clinical investigators, contract research organizations and other third-party service providers to conduct clinical trials for our proprietary product candidates. Though we rely heavily on these parties for successful execution of our clinical trials and are ultimately responsible for the results of their activities, many aspects of their activities are beyond our control. For example, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial, but the independent clinical investigators may prioritize other projects over ours or communicate issues regarding our products to us in an untimely manner. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The early termination of any of our clinical trial arrangements, the failure of third parties to comply with the regulations and requirements governing clinical trials or our reliance on results of trials that we have not directly conducted or monitored could hinder or delay the development, approval and commercialization of our product candidates and would adversely affect our business, results of operations and financial condition.

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Our manufacturing operations and those of our contract manufacturers are subject to governmental regulatory requirements, which, if not met, would have a material adverse effect on our business, results of operations and financial condition.

We and our contract manufacturers are required in certain cases to maintain compliance with current good manufacturing practices (cGMP), including cGMP guidelines applicable to active pharmaceutical ingredients, and are subject to inspections by the FDA or comparable agencies in other jurisdictions to confirm such compliance. We anticipate periodic regulatory inspections of our drug manufacturing facilities and the manufacturing facilities of our contract manufacturers for compliance with applicable regulatory requirements. Any failure to follow and document our or our contract manufacturers’ adherence to such cGMP regulations or satisfy other manufacturing and product release regulatory requirements may disrupt our ability to meet our manufacturing obligations to our customers, lead to significant delays in the availability of products for commercial use or clinical study, result in the termination or hold on a clinical study or delay or prevent filing or approval of marketing applications for our products. Failure to comply with applicable regulations may also result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could harm our business. The results of these inspections could result in costly manufacturing changes or facility or capital equipment upgrades to satisfy the FDA that our manufacturing and quality control procedures are in substantial compliance with cGMP. Manufacturing delays, for us or our contract manufacturers, pending resolution of regulatory deficiencies or suspensions would have a material adverse effect on our business, results of operations and financial condition.

Significant competition for our polymer conjugate chemistry technology platforms and our partnered and proprietary products and product candidates could make our technologies, products or product candidates obsolete or uncompetitive, which would negatively impact our business, results of operations and financial condition.

Our PEGylation and advanced polymer conjugate chemistry platforms and our partnered and proprietary products and product candidates compete with various pharmaceutical and biotechnology companies. Competitors of our PEGylation and polymer conjugate chemistry technologies include The Dow Chemical Company, Enzon Pharmaceuticals, Inc., SunBio Corporation, Mountain View Pharmaceuticals, Inc., Novo Nordisk A/S (formerly assets held by Neose Technologies, Inc.), and NOF Corporation. Several other chemical, biotechnology and pharmaceutical companies may also be developing PEGylation technologies or technologies that have similar impact on target drug molecules. Some of these companies license or provide the technology to other companies, while others are developing the technology for internal use.

There are several competitors for our proprietary product candidates currently in development. For BAY41-6551 (Amikacin inhale), the current standard of care includes several approved intravenous antibiotics for the treatment of either hospital-acquired pneumonia or ventilator-associated pneumonia in patients on mechanical ventilators. For Oral NKTR-118 (PEGylated naloxol), there are currently several alternative therapies used to address opioid-induced constipation (OIC) and opioid-induced bowel dysfunction (OBD), including over-the-counter laxatives and stool softeners such as docusate sodium, senna and milk of magnesia. In addition, there are a number of companies developing potential products which are in various stages of clinical development and are being evaluated for the treatment of OIC and OBD in different patient populations, including Adolor Corporation, GlaxoSmithKline plc, Progenics Pharmaceuticals, Inc., Pfizer (via Wyeth acquisition completed in 2009), Mundipharma Int. Limited, Sucampo Pharmaceuticals and Takeda Pharmaceutical Company Limited. For NKTR-102 (PEG-irinotecan), there are a number of approved therapies for the treatment of colorectal cancer, including Eloxatin, Camptosar, Avastin, Erbitux, Vectibux, Xeloda, Adrucil and Wellcovorin. In addition, there are a number of drugs in various stages of preclinical and clinical development from companies exploring cancer therapies or improved chemotherapeutic agents to potentially treat colorectal cancer, including, but not limited to, products in development from Bristol-Myers Squibb Company, Pfizer, Inc., GlaxoSmithKline plc, Antigenics, Inc., F. Hoffmann-La Roche Ltd, Novartis AG, Cell Therapeutics, Inc., Neopharm Inc., Meditech Research Ltd, Alchemia Limited, Enzon Pharmaceuticals, Inc. and others. There are also a number of chemotherapies and cancer therapies approved today and in various stages of clinical development for ovarian and breast cancers including but not limited to: Avastin® (bevacizumab), Camptosar® (irinotecan), Doxil® (doxorubicin HCl ), Ellence® (epirubicin), Gemzar® (gemcitabine), Herceptin® (trastuzumab),  Hycamtin® (topotecan),  Paraplatin® (carboplatin), and Taxol® (paclitaxel). These therapies are only partially effective in treating ovarian or breast cancers.  Major pharmaceutical or biotechnology companies with approved drugs or drugs in development for these cancers include Bristol-Meyers Squibb, Genentech, Inc., GlaxoSmithKline plc, Johnson and Johnson, Pfizer, Inc., Eli Lilly & Co., and many others.
 
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There can be no assurance that we or our partners will successfully develop, obtain regulatory approvals and commercialize next-generation or new products that will successfully compete with those of our competitors. Many of our competitors have greater financial, research and development, marketing and sales, manufacturing and managerial capabilities. We face competition from these companies not just in product development but also in areas such as recruiting employees, acquiring technologies that might enhance our ability to commercialize products, establishing relationships with certain research and academic institutions, enrolling patients in clinical trials and seeking program partnerships and collaborations with larger pharmaceutical companies. As a result, our competitors may succeed in developing competing technologies, obtaining regulatory approval or gaining market acceptance for products before we do. These developments could make our products or technologies uncompetitive or obsolete.

We could be involved in legal proceedings and may incur substantial litigation costs and liabilities that will adversely affect our business, results of operations and financial condition.

From time to time, third parties have asserted, and may in the future assert, that we or our partners infringe their proprietary rights. The third party often bases its assertions on a claim that its patents cover our technology. Similar assertions of infringement could be based on future patents that may issue to third parties. In certain of our agreements with our partners, we are obligated to indemnify and hold harmless our partners from intellectual property infringement, product liability and certain other claims, which could cause us to incur substantial costs if we are called upon to defend ourselves and our partners against any claims. If a third party obtains injunctive or other equitable relief against us or our partners, they could effectively prevent us, or our partners, from developing or commercializing, or deriving revenue from, certain products or product candidates in the U.S. and abroad. For instance, F. Hoffmann-La Roche Ltd, to which we license our proprietary PEGylation reagent for use in the MIRCERA product, was a party to a significant patent infringement lawsuit brought by Amgen Inc. related to Roche’s proposed marketing and sale of MIRCERA to treat chemotherapy anemia in the U.S.  In October 2008, a federal court ruled in favor of Amgen, issuing a permanent injunction preventing Roche from marketing or selling MIRCERA in the U.S.  In December 2009, the U.S. District court for the District of Massachusetts entered a final judgment and permanent injunction, and Roche and Amgen entered into a settlement and limited license agreement which allows Roche to begin selling MIRCERA in the U.S. in July 2014.

Third-party claims could also result in the award of substantial damages to be paid by us or a settlement resulting in significant payments to be made by us. For instance, a settlement might require us to enter a license agreement under which we pay substantial royalties to a third party, diminishing our future economic returns from the related product. In 2006, we entered into a litigation settlement related to an intellectual property dispute with the University of Alabama in Huntsville pursuant to which we paid $11.0 million and agreed to pay an additional $10.0 million in equal $1.0 million installments over ten years ending with the last payment due on July 1, 2016. We cannot predict with certainty the eventual outcome of any pending or future litigation. Costs associated with such litigation, substantial damage claims, indemnification claims or royalties paid for licenses from third parties could have a material adverse effect on our business, results of operations and financial condition.

If product liability lawsuits are brought against us, we may incur substantial liabilities.

The manufacture, clinical testing, marketing and sale of medical products involve inherent product liability risks. If product liability costs exceed our product liability insurance coverage, we may incur substantial liabilities that could have a severe negative impact on our financial position. Whether or not we are ultimately successful in any product liability litigation, such litigation would consume substantial amounts of our financial and managerial resources and might result in adverse publicity, all of which would impair our business. Additionally, we may not be able to maintain our clinical trial insurance or product liability insurance at an acceptable cost, if at all, and this insurance may not provide adequate coverage against potential claims or losses.

Our future depends on the proper management of our current and future business operations and their associated expenses.

Our business strategy requires us to manage our business to provide for the continued development and potential commercialization of our proprietary and partnered product candidates. Our strategy also calls for us to undertake increased research and development activities and to manage an increasing number of relationships with partners and other third parties, while simultaneously managing the expenses generated by these activities. If we are unable to manage effectively our current operations and any growth we may experience, our business, financial condition and results of operations may be adversely affected. If we are unable to effectively manage our expenses, we may find it necessary to reduce our personnel-related costs through further reductions in our workforce, which could harm our operations, employee morale and impair our ability to retain and recruit talent. Furthermore, if adequate funds are not available, we may be required to obtain funds through arrangements with partners or other sources that may require us to relinquish rights to certain of our technologies or products that we would not otherwise relinquish.

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We are dependent on our management team and key technical personnel, and the loss of any key manager or employee may impair our ability to develop our products effectively and may harm our business, operating results and financial condition.

Our success largely depends on the continued services of our executive officers and other key personnel. The loss of one or more members of our management team or other key employees could seriously harm our business, operating results and financial condition. The relationships that our key managers have cultivated within our industry make us particularly dependent upon their continued employment with us. We are also dependent on the continued services of our technical personnel because of the highly technical nature of our products and the regulatory approval process. Because our executive officers and key employees are not obligated to provide us with continued services, they could terminate their employment with us at any time without penalty. We do not have any post-employment noncompetition agreements with any of our employees and do not maintain key person life insurance policies on any of our executive officers or key employees.

Because competition for highly qualified technical personnel is intense, we may not be able to attract and retain the personnel we need to support our operations and growth.

We must attract and retain experts in the areas of clinical testing, manufacturing, regulatory, finance, marketing and distribution and develop additional expertise in our existing personnel. We face intense competition from other biopharmaceutical companies, research and academic institutions and other organizations for qualified personnel. Many of the organizations with which we compete for qualified personnel have greater resources than we have. Because competition for skilled personnel in our industry is intense, companies such as ours sometimes experience high attrition rates with regard to their skilled employees. Further, in making employment decisions, job candidates often consider the value of the stock options they are to receive in connection with their employment. Our equity incentive plan and employee benefit plans may not be effective in motivating or retaining our employees or attracting new employees, and significant volatility in the price of our stock may adversely affect our ability to attract or retain qualified personnel. If we fail to attract new personnel or to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

If earthquakes and other catastrophic events strike, our business may be harmed.

Our corporate headquarters, including a substantial portion of our research and development operations, are located in the San Francisco Bay Area, a region known for seismic activity and a potential terrorist target. In addition, we own facilities for the manufacture of products using our PEGylation and advanced polymer conjugate technologies in Huntsville, Alabama and own and lease offices in Hyderabad, India. There are no backup facilities for our manufacturing operations located in Huntsville, Alabama. In the event of an earthquake or other natural disaster, political instability, or terrorist event in any of these locations, our ability to manufacture and supply materials for drug candidates in development and our ability to meet our manufacturing obligations to our customers would be significantly disrupted and our business, results of operations and financial condition would be harmed. Our collaborative partners may also be subject to catastrophic events, such as hurricanes and tornadoes, any of which could harm our business, results of operations and financial condition. We have not undertaken a systematic analysis of the potential consequences to our business, results of operations and financial condition from a major earthquake or other catastrophic event, such as a fire, sustained loss of power, terrorist activity or other disaster, and do not have a recovery plan for such disasters. In addition, our insurance coverage may not be sufficient to compensate us for actual losses from any interruption of our business that may occur.

We have implemented certain anti-takeover measures, which make it more difficult to acquire us, even though such acquisitions may be beneficial to our stockholders.

Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even though such acquisitions may be beneficial to our stockholders. These anti-takeover provisions include:

 
establishment of a classified board of directors such that not all members of the board may be elected at one time;

 
lack of a provision for cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

 
the ability of our board to authorize the issuance of “blank check” preferred stock to increase the number of outstanding shares and thwart a takeover attempt;

 
prohibition on stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of stockholders;

 
establishment of advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

 
limitations on who may call a special meeting of stockholders.

Further, we have in place a preferred share purchase rights plan, commonly known as a “poison pill.” The provisions described above, our “poison pill” and provisions of Delaware law relating to business combinations with interested stockholders may discourage, delay or prevent a third party from acquiring us. These provisions may also discourage, delay or prevent a third party from acquiring a large portion of our securities or initiating a tender offer or proxy contest, even if our stockholders might receive a premium for their shares in the acquisition over the then current market prices. We also have a change of control severance benefits plan which provides for certain cash severance, stock award acceleration and other benefits in the event our employees are terminated (or, in some cases, resign for specified reasons) following an acquisition. This severance plan could discourage a third party from acquiring us.
 
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Risks Related to Our Securities

The price of our common stock and senior convertible debt are expected to remain volatile.

Our stock price is volatile. During the quarter ended March 31, 2010, based on closing bid prices on the NASDAQ Global Select Market, our stock price ranged from $9.39 to $15.52 per share. We expect our stock price to remain volatile. In addition, as our convertible senior notes are convertible into shares of our common stock, volatility or depressed prices of our common stock could have a similar effect on the trading price of our notes. Also, interest rate fluctuations can affect the price of our convertible senior notes. A variety of factors may have a significant effect on the market price of our common stock or notes, including:

 
announcements of data from, or material developments in, our clinical trials or those of our competitors, including delays in clinical development, approval or launch;

 
announcements by collaboration partners as to their plans or expectations related to products using our technologies;

 
announcements or terminations of collaboration agreements by us or our competitors;

 
fluctuations in our results of operations;

 
developments in patent or other proprietary rights, including intellectual property litigation or entering into intellectual property license agreements and the costs associated with those arrangements;

 
announcements of technological innovations or new therapeutic products that may compete with our approved products or products under development;

 
announcements of changes in governmental regulation affecting us or our competitors;

 
hedging activities by purchasers of our convertible senior notes;

 
litigation brought against us or third parties to whom we have indemnification obligations;

 
public concern as to the safety of drug formulations developed by us or others; and

 
general market conditions.

Our stockholders may be diluted, and the price of our common stock may decrease, as a result of the exercise of outstanding stock options and warrants or the future issuances of securities.

We may issue additional common stock, preferred stock, restricted stock units or securities convertible into or exchangeable for our common stock. Furthermore, substantially all shares of common stock for which our outstanding stock options or warrants are exercisable are, once they have been purchased, eligible for immediate sale in the public market. The issuance of additional common stock, preferred stock, restricted stock units or securities convertible into or exchangeable for our common stock or the exercise of stock options or warrants would dilute existing investors and could adversely affect the price of our securities.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None, including no purchases of any class of our equity securities by us or any affiliate pursuant to any publicly announced repurchase plan in the three months ended March 31, 2010.
 
Item 3. Defaults Upon Senior Securities
 
None.
 
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Item 5. Other Information
 
None.
 
Item 6. Exhibits
 
Except as so indicated in Exhibit 32.1, the following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

Exhibit
Number
 
Description of Documents
     
31.1(1)
 
Certification of Nektar Therapeutics’ principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a).
     
31.2(1)
 
Certification of Nektar Therapeutics’ principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a).
     
  32.1(1)*
 
Section 1350 Certifications.
 

(1)
Filed herewith.
 
*
Exhibit 32.1 is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall such exhibit be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act, except as otherwise stated in such filing.
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
By:
/s/ John Nicholson  
    John Nicholson  
   
Senior Vice President and Chief Financial Officer
 
       
 
Date: May 5, 2010
 
       
 
By:
/s/ Jillian B. Thomsen  
   
Jillian B. Thomsen 
 
   
Senior Vice President and Chief Accounting Officer
 
       
 
Date: May  5, 2010
 
 
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EXHIBIT INDEX
 
 
Except as so indicated in Exhibit 32.1, the following exhibits are filed as part of, or incorporated by reference in, this Quarterly Report on Form 10-Q.
 
Exhibit
Number
 
Description of Documents
     
31.1(1)
 
Certification of Nektar Therapeutics’ principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a).
     
31.2(1)
 
Certification of Nektar Therapeutics’ principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a).
     
  32.1(1)*
 
Section 1350 Certifications.
 

(1)
Filed herewith.
 
*
Exhibit 32.1 is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall such exhibit be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act, except as otherwise stated in such filing.
 
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