We have audited the accompanying consolidated balance sheets of Nektar Therapeutics as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2).  These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nektar Therapeutics at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Nektar Therapeutics’ internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2010, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Palo Alto, CA

March 2, 2010

 

 

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Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders of Nektar Therapeutics

 

We have audited Nektar Therapeutics’ internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Nektar Therapeutics’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Nektar Therapeutics maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Nektar Therapeutics as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2009 of Nektar Therapeutics and our report dated March 2, 2010 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

Palo Alto, CA

March 2, 2010

 

 

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NEKTAR THERAPEUTICS

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share information)

		December 31,
		2009				2008
ASSETS
Current assets:
Cash and cash equivalents		$	49,597			$	155,584
Short-term investments			346,614				223,410
Accounts receivable, net of allowance of nil and $92 at December 31, 2009 and 2008, respectively			4,801				11,161
Inventory			6,471				9,319
Other current assets			6,183				6,746
Total current assets		$	413,666			$	406,220
Property and equipment, net			78,263				73,578
Goodwill			76,501				76,501
Other assets			7,088				4,237
Total assets		$	575,518			$	560,536
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,066			$	13,832
Accrued compensation			10,052				11,570
Accrued clinical trial expenses			14,167				17,622
Accrued expenses			4,354				9,923
Deferred revenue, current portion			115,563				10,010
Other current liabilities			5,814				5,417
Total current liabilities		$	153,016			$	68,374
Convertible subordinated notes			214,955				214,955
Capital lease obligations, less current portion			18,800				20,347
Deferred revenue, less current portion			76,809				55,567
Deferred gain			5,027				5,901
Other long-term liabilities			4,544				5,238
Total liabilities		$	473,151			$	370,382
Commitments and contingencies
Stockholders’ equity:
Preferred stock, 10,000 shares authorized Series A, $0.0001 par value; 3,100 shares designated; no shares issued or outstanding at either December 31, 2009 or 2008			—				—
Common stock, $0.0001 par value; 300,000 authorized; 93,281 shares and 92,503 shares issued and outstanding at December 31, 2009 and 2008, respectively			9				9
Capital in excess of par value			1,327,942				1,312,796
Accumulated other comprehensive income			1,025				1,439
Accumulated deficit			(1,226,609	)			(1,124,090	)
Total stockholders’ equity			102,367				190,154
Total liabilities and stockholders’ equity		$	575,518			$	560,536

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

 

 

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NEKTAR THERAPEUTICS

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share information)

		Years ended December 31,
		2009				2008				2007
Revenue:
Product sales and royalties		$	35,288			$	41,255			$	180,755
License, collaboration and other revenue			36,643				48,930				92,272
Total revenue		$	71,931			$	90,185			$	273,027
Operating costs and expenses:
Cost of goods sold			30,948				28,216				137,696
Other cost of revenue			—				6,821				9,821
Research and development			95,109				154,417				153,575
General and administrative			41,006				51,497				58,865
Impairment of long-lived assets			—				1,458				28,396
Gain on sale of pulmonary assets			—				(69,572	)			—
Gain on termination of collaborative agreements, net			—				—				(79,178	)
Total operating costs and expenses		$	167,063			$	172,837			$	309,175
Loss from operations			(95,132	)			(82,652	)			(36,148	)
Non-operating income (expense):
Interest income			3,688				12,495				22,201
Interest expense			(12,176	)			(15,192	)			(18,638	)
Other income (expense), net			848				58				1,133
Gain on extinguishment of debt			—				50,149				—
Total non-operating income (expense), net			(7,640	)			47,510				4,696
Loss before (benefit) provision for income taxes		$	(102,772	)		$	(35,142	)		$	(31,452	)
(Benefit) provision for income taxes			(253	)			(806	)			1,309
Net loss		$	(102,519	)		$	(34,336	)		$	(32,761	)
Basic and diluted net loss per share		$	(1.11	)		$	(0.37	)		$	(0.36	)
Shares used in computing basic and diluted net loss per share			92,772				92,407				91,876

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

 

 

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NEKTAR THERAPEUTICS

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

		Common Shares				Par Value				Capital In Excess of Par Value				Accumulated Other Comprehensive Income/(Loss)				Accumulated Deficit				Total Stockholders’ Equity
Balance at December 31, 2006			91,280			$	9			$	1,283,982			$	62			$	(1,056,993	)		$	227,060
Stock option exercises and RSU release			761				—				2,915				—				—				2,915
Stock-based compensation			—				—				13,193				—				—				13,193
Shares issued for employee plans(1)			260				—				2,451				—				—				2,451
Other comprehensive income			—				—				—				1,581				—				1,581
Net loss			—				—				—				—				(32,761	)			(32,761	)
Comprehensive loss																							(31,180	)
Balance at December 31, 2007			92,301			$	9			$	1,302,541			$	1,643			$	(1,089,754	)		$	214,439
Stock option exercises and RSU release			146				—				122				—				—				122
Stock-based compensation			—				—				9,871				—				—				9,871
Shares issued for Employee Stock Purchase Plan			56				—				262				—				—				262
Other comprehensive loss			—				—				—				(204	)			—				(204	)
Net loss			—				—				—				—				(34,336	)			(34,336	)
Comprehensive loss																							(34,540	)
Balance at December 31, 2008			92,503			$	9			$	1,312,796			$	1,439			$	(1,124,090	)		$	190,154
Stock option exercises and RSU release			742				—				4,696				—				—				4,696
Stock-based compensation			—				—				10,326				—				—				10,326
Shares issued for Employee Stock Purchase Plan			36				—				124				—				—				124
Other comprehensive loss			—				—				—				(414	)			—				(414	)
Net loss			—				—				—				—				(102,519	)			(102,519	)
Comprehensive loss																							(102,933	)
Balance at December 31, 2009			93,281			$	9			$	1,327,942			$	1,025			$	(1,226,609	)		$	102,367

(1)	Employee plans include our Employee Stock Purchase and 401K Plans

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

 

 

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NEKTAR THERAPEUTICS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

		Years ended December 31,
		2009				2008				2007
Cash flows from operating activities:
Net loss		$	(102,519	)		$	(34,336	)		$	(32,761	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			14,881				22,489				29,028
Stock-based compensation			10,326				9,871				14,779
Other non-cash transactions			(657	)			1,251				109
Gain on sale of pulmonary assets			—				(69,572	)			—
Gain on extinguishment of debt			—				(50,149	)			—
Impairment of long-lived assets			—				1,458				28,396
Changes in assets and liabilities:
Decrease (increase) in trade accounts receivable			6,034				10,476				24,318
Decrease (increase) in inventory			2,848				2,868				1,503
Decrease (increase) in other assets			(200	)			1,166				7,443
Increase (decrease) in accounts payable			(8,046	)			6,181				(3,147	)
Increase (decrease) in accrued compensation			(1,518	)			(3,382	)			986
Increase (decrease) in accrued clinical trial expenses			(3,455	)			14,727				907
Increase (decrease) in accrued expenses to contract manufacturers			—				(40,444	)			40,444
Increase (decrease) in accrued expenses			(4,191	)			(1,332	)			(5,200	)
Increase (decrease) in deferred revenue			126,795				(15,392	)			40,863
Increase (decrease) in other liabilities			(559	)			(1,662	)			(1,366	)
Net cash provided by (used in) operating activities		$	39,739			$	(145,782	)		$	146,302
Cash flows from investing activities:
Purchases of property and equipment			(16,390	)			(18,855	)			(32,796	)
Advance payments for property and equipment			(4,312	)			—				—
Maturities of investments			310,707				588,168				591,202
Sales of investments			17,318				70,060				2,057
Purchases of investments			(451,918	)			(475,316	)			(593,118	)
Proceeds from sale of pulmonary assets			(4,440	)			114,831				—
Investment in Pearl Therapeutics			—				(4,236	)			—
Net cash provided by (used in) investing activities		$	(149,035	)		$	274,652			$	(32,655	)
Cash flows from financing activities:
Issuance of common stock, net of issuance costs			4,820				384				3,780
Payments of loan and capital lease obligations			(1,285	)			(2,368	)			(2,895	)
Repayments of convertible subordinated notes			—				(47,757	)			(102,653	)
Net cash provided by (used in) financing activities		$	3,535			$	(49,741	)		$	(101,768	)
Effect of exchange rates on cash and cash equivalents			(226	)			162				654
Net (decrease) increase in cash and cash equivalents		$	(105,987	)		$	79,291			$	12,533
Cash and cash equivalents at beginning of year			155,584				76,293				63,760
Cash and cash equivalents at end of year		$	49,597			$	155,584			$	76,293
Supplemental disclosure of cash flows information:
Cash paid for interest		$	11,225			$	14,702			$	17,389
Cash paid for income taxes		$	743			$	812			$	801
Supplemental schedule of non-cash investing and financing activities:
Property acquired through capital leases		$	—			$	—			$	4,445

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

 

 

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NEKTAR THERAPEUTICS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009

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, Principles of Consolidation and Use of Estimates

 

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.

Our consolidated financial statements are denominated in U.S. dollars. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. dollar will affect the translation of each foreign subsidiary’s financial results into U.S. dollars for purposes of reporting our consolidated financial results. Translation gains and losses are included in accumulated other comprehensive loss in the stockholders’ equity section of the balance sheet. To date, such cumulative translation adjustments have not been material to our consolidated financial position.  Aggregate gross foreign currency transaction gains (losses) recorded in operations for the years ended December 31, 2009, 2008, and 2007 were not material.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including those related to deferred revenue amortization periods, inventories and related impairment of investments and long-lived assets, restructuring and contingencies, stock-based compensation, and litigation, amongst others. We base our estimates on historical experience and on other assumptions that management believes are reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities when these values are not readily apparent from other sources. Certain items previously reported in specific financial statement captions have been reclassified to conform to the current period presentation. Such reclassifications have not impacted previously reported revenues, operating loss or net loss.

Cash, Cash Equivalents, and Investments and Fair Value of Financial Instruments

We consider all investments in marketable securities with an original maturity of three months or less to be cash equivalents. Investments are designated as available-for-sale and are carried at fair value, with unrealized gains and losses reported in stockholders’ equity as accumulated other comprehensive income (loss). The disclosed fair value related to our investments is based primarily on the reported fair values in our period-end brokerage statements. We independently validate these fair values using available market quotes and other information. Investments with maturities greater than one year from the balance sheet date, if any, are classified as long-term.

Interest and dividends on securities classified as available-for-sale, as well as amortization of premiums and accretion of discounts to maturity, are included in interest income. Realized gains and losses and declines in value of available-for-sale securities judged to be other-than-temporary, if any, are included in other income (expense). The cost of securities sold is based on the specific identification method.

 

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The carrying value of cash, cash equivalents, and investments approximates fair value and is based on quoted market prices.

Accounts Receivable and Significant Customer Concentrations

Our customers are primarily pharmaceutical and biotechnology companies that are located in the U.S. and Europe. Our accounts receivable balance contains billed and unbilled trade receivables from product sales and royalties and collaborative research agreements. We provide for an allowance for doubtful accounts by reserving for specifically identified doubtful accounts. We generally do not require collateral from our customers. We perform a regular review of our customers’ payment histories and associated credit risk. We have not experienced significant credit losses from our accounts receivable. At December 31, 2009, four different customers represented 30%, 29%, 13%, and 13%, respectively, of our accounts receivable.  At December 31, 2008, three different customers represented 29%, 19%, and 15%, respectively, of our accounts receivable.

Inventories and Significant Supplier Concentrations

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

We are dependent on our partners and vendors to provide raw materials, drugs and devices of appropriate quality and reliability and to meet applicable regulatory requirements. Consequently, in the event that supplies are delayed or interrupted for any reason, our ability to develop and produce our products could be impaired, which could have a material adverse effect on our business, financial condition and results of operation.

Property and Equipment

Property and equipment are stated at cost. Major improvements are capitalized, while maintenance and repairs are expensed when incurred. Manufacturing, laboratory and other equipment are depreciated using the straight-line method generally over estimated useful lives of three to seven years. Leasehold improvements and buildings are depreciated using the straight-line method over the shorter of the estimated useful life or the remaining term of the lease.

We periodically review our property and equipment for recoverability whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Generally, an impairment loss would be recognized if the carrying amount of an asset exceeds the sum of the discounted cash flows expected to result from the use and eventual disposal of the asset (See Note 12).

Goodwill

Goodwill represents the excess of the price paid for another entity over the fair value of the assets acquired and liabilities assumed in a business combination. We test for impairment in the fourth quarter of each year using an October 1 measurement date, as well as at other times when impairment indicators exist or when events occur or circumstances change that would indicate the carrying amount may not be fully recoverable.

We are organized in one reporting unit and have evaluated the goodwill for the Company as a whole.  Goodwill is tested for impairment using a two-step approach. The first step is to compare the fair value of our net assets, including assigned goodwill, to the book value of our net assets, including assigned goodwill. If the fair value is greater than our net book value, the assigned goodwill is not considered impaired. If the fair value is less than our net book value, we perform a second step to measure the amount of the impairment, if any. The second step would be to compare the book value of our assigned goodwill to the implied fair value of our goodwill. As of December 31, 2009 and 2008, the carrying value of our goodwill was $76.5 million. We did not recognize any goodwill-related impairment charges during 2009, 2008 or 2007.

Revenue Recognition

 

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.

 

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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.

 

Shipping and Handling Costs

We record costs related to shipping and handling of product to customers in cost of goods sold.

Stock-Based Compensation

Stock-based compensation arrangements include stock option grants and restricted stock unit (RSU) awards under our equity incentive plans and our Employee Stock Purchase Plan (ESPP), in which employees may purchase our common stock at a discount to the market price.

We use the Black-Scholes option valuation model, adjusted for the estimated historical forfeiture rate, for the respective grant to determine the estimated fair value of the option or RSU award on the date of grant (grant date fair value) and the estimated fair value of common stock purchased under the ESPP.  The Black-Scholes option pricing model requires the input of highly subjective assumptions. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models may not provide a reliable single measure of the fair value of our employee stock options or common stock purchased under the ESPP. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of stock-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and which could materially impact our fair value determination.

We expense the value of the portion of the option or award that is ultimately expected to vest on a straight line basis over the requisite service periods in our Consolidated Statements of Operations. Stock-based compensation expense for purchases under the ESPP are recognized based on the estimated fair value of the common stock during each offering period and the percentage of the purchase discount.  Expense amounts are allocated among inventory, cost of goods sold, research and development expenses, and general and administrative expenses based on the function of the applicable employee.

Research and Development Expense

Research and development costs are expensed as incurred and include salaries, benefits and other operating costs such as outside services, supplies and allocated overhead costs. We perform research and development for our proprietary drug candidates and technology development and for certain third parties under collaboration agreements. For our proprietary drug candidates and our internal technology development programs, we invest our own funds without reimbursement from a third party. Costs associated with treatment phase of clinical trials are accrued based on the total estimated cost of the clinical trials and are expensed ratably based on patient enrollment in the trials. Costs associated with the start-up and reporting phases of the clinical trials are expensed ratably over the duration of the reporting and start-up phases.

 

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Net Loss Per Share

Basic net loss per share is calculated based on the weighted-average number of common shares outstanding during the periods presented. For all periods presented in the Consolidated Statements of Operations, the net loss available to common stockholders is equal to the reported net loss. Basic and diluted net loss per share are the same due to our historical net losses and the requirement to exclude potentially dilutive securities which would have an anti-dilutive effect on net loss per share. The weighted average of these potentially dilutive securities has been excluded from the diluted net loss per share calculation and is as follows (in thousands):

		Years ended December 31,
		2009				2008				2007
Convertible subordinated notes			9,989				13,804				15,781
Stock options			10,653				14,147				11,108
Total			20,642				27,951				26,889

Income Taxes

We account for income taxes under the liability method; under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.

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

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

We file income tax returns in the U.S., California, Alabama, India and the U.K. We are currently not the subject of any income tax examinations. In general, the earliest open year subject to examination is 2006 for U.S. and Alabama and 2005 for California, although depending upon the jurisdiction tax years may remain open, subject to certain limitations.

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.

 

 

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FASB ASU No. 2010-6, Improving Disclosures About Fair Value Measurements

In January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair Value Measurements, that adds required disclosures about items transferring into and out of Levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchase, sales, issuances, and settlements relative to Level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation.  FASB ASU No. 2010-6 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the requirement to provide level 3 purchases, sales, issuances, and settlements on a gross basis, which is effective for fiscal years beginning after December 15, 2010. Since this standard impacts disclosure requirements only, we do not expect its adoption will have a material impact on our financial statements.

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
		December 31, 2009				December 31, 2008
Cash and cash equivalents		$	49,597			$	155,584
Short-term investments (less than one year to maturity)			346,614				223,410
Total cash, cash equivalents, and available-for-sale investments		$	396,211			$	378,994

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

		Estimated Fair Value at
		December 31, 2009				December 31, 2008
Obligations of U.S. corporations		$	160,458			$	26,275
Obligations of U.S. government agencies			125,731				91,667
U.S. corporate commercial paper			71,923				115,658
Obligations of U.S. states and municipalities			4,995				—
Cash and money market funds			33,104				145,394
Total cash, cash equivalents, and available-for-sale investments		$	396,211			$	378,994

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in liquid, high quality debt securities. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in short-term securities and maintain a weighted average maturity of one year or less. At December 31, 2009, the average portfolio duration was approximately five months and the contractual maturity of any single investment did not exceed twelve months.  At December 31, 2008, the average portfolio duration was approximately two months and the contractual maturity of any single investment did not exceed twelve months.

Gross unrealized gains and losses were insignificant at December 31, 2009 and at December 31, 2008. 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.

During the years ended December 31, 2009 and 2008, we sold available-for-sale securities totaling $17.3 million and $70.1 million, respectively. We realized gains in the income statement of $0.1 million and $0.1 million in 2009 and 2008, respectively.   In 2009, we sold securities in response to a tender offer from a bond issuer and we sold securities which no longer met the minimum credit rating required by our investment policy.  During 2008 we sold securities to fund our convertible subordinated note repurchase.

At December 31, 2009 and 2008, we had letter of credit arrangements with certain financial institutions and vendors, including our landlord, totaling $2.9 million. These letters of credit are secured by investments of similar amounts.

 

 

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The following table represents the fair value hierarchy for our financial assets measured at fair value on a recurring basis as of December 31, 2009 (in thousands):

		Level 1				Level 2				Level 3				Total
Money market funds		$	24,585			$	—			$	—			$	24,585
U.S. corporate commercial paper			—				71,923				—				71,923
Obligations of U.S. corporations			—				160,458				—				160,458
Obligations of U.S. government agencies			—				125,731				—				125,731
Obligations of U.S. states and municipalities			—				4,995				—				4,995
Cash equivalents and available-for-sale investments		$	24,585			$	363,107			$	—			$	387,692
Cash															8,519
Cash, cash equivalents, and available-for-sale investments														$	396,211

 

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Level1—

Quoted prices in active markets for identical assets or liabilities.

Level2—

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.

Level3—

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):

		December 31,
		2009				2008
Raw materials		$	5,937			$	6,964
Work-in-process			—				1,743
Finished goods			534				612
Inventory		$	6,471			$	9,319

 

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 $3.3 million and $5.0 million as of December 31, 2009 and December 31, 2008, 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—Property and Equipment

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

 

		December 31,
		2009				2008
Building and leasehold improvements		$	62,973			$	62,260
Laboratory equipment			27,195				24,549
Manufacturing equipment			10,982				8,682
Furniture, fixtures and other equipment			16,876				14,717
Depreciable Property and equipment at cost		$	118,026			$	110,208
Less: accumulated depreciation			(54,400	)			(43,505	)
Depreciable Property and equipment, net			63,626				66,703
Construction-in-progress			14,637				6,875
Property and equipment, net		$	78,263			$	73,578

 

 

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Building and leasehold improvements include our commercial manufacturing, clinical manufacturing, research and development and administrative facilities and the related improvements to these facilities. Laboratory and manufacturing equipment includes assets that support both our manufacturing and research and development efforts. Construction-in-progress includes assets being built to enhance our manufacturing and research and development programs. Property and equipment includes assets acquired through capital leases (See Note 6).  During 2009, we made advanced payments of $4.3 million for equipment that had not been received by December 31, 2009; these advances were classified as Other Assets on our Consolidated Balance Sheets.

Depreciation expense, including depreciation of assets acquired through capital leases, for the years ended December 31, 2009, 2008, and 2007 was $12.7 million, $19.8 million, and $25.9 million, respectively.

On December 31, 2008, we sold certain assets and obligations related to our pulmonary technology, development and manufacturing operations to Novartis Pharmaceuticals Corporation and Novartis Pharma AG (together referred to as Novartis), including property and equipment with a gross book value of $108.0 million, accumulated depreciation of $70.7 million, and a net book value of $37.3 million (See Note 10).

Note 5 – Convertible Subordinated Notes

The outstanding balance of our convertible subordinated notes is as follows (in thousands):

	Semi-Annual		December 31,
	Interest Payment Dates		2009				2008
3.25% Notes due September 2012	March 28, September 28		$	214,955			$	214,955

Our convertible subordinated 3.25% notes due September 2012 (Notes) are unsecured and subordinated in right of payment to any future senior debt. Costs related to the issuance of these Notes are recorded in other assets in our Consolidated Balance Sheets and are generally amortized to interest expense on a straight-line basis over the contractual life of the Notes. The unamortized deferred financing costs were $1.0 million and $2.2 million as of December 31, 2009 and 2008, respectively.

Gain on Extinguishment of Debt

During the fourth quarter of 2008, we repurchased $100.0 million par value of the Notes for $47.8 million. The recognized gain on debt extinguishment of $50.1 million is net of transaction costs of $1.0 million and accelerated amortization of deferred financing costs of $1.1 million.

Conversion and Redemption

The Notes are convertible at the option of the holder at any time on or prior to maturity into shares of our common stock. The Notes have a conversion rate of 46.4727 shares per $1,000 principal amount, which is equal to a conversion price of approximately $21.52 per share. Additionally, at any time prior to maturity, if a fundamental change as defined in the Note agreement occurs, we may be required to pay a make-whole premium on notes converted in connection therewith by increasing the applicable conversion rate.

We may redeem the Notes in whole or in part for cash at a redemption price equal to 100% of the principal amount of the Notes plus any accrued but unpaid interest if the closing price of the common stock has exceeded 150% of the conversion price for at least 20 days in any consecutive 30 day trading period.

Note 6—Leases

Capital Leases

We lease office space and office equipment under capital lease arrangements. The gross carrying value by major asset class and accumulated depreciation as of December 31, 2009 and 2008 are as follows (in thousands):

 

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		December 31,
		2009				2008
Building and leasehold improvements		$	23,960			$	23,962
Furniture, fixtures and other equipment			—				261
Total assets recorded under capital leases		$	23,960			$	24,223
Less: accumulated depreciation			(10,072	)			(8,050	)
Net assets recorded under capital leases		$	13,888			$	16,173

 

We lease office space at 201 Industrial Road in San Carlos, California under capital lease arrangements. Under the terms of the lease, the rent will increase up to 3% annually.  The lease termination date is October 5, 2016.

Future minimum payments for our capital leases at December 31, 2009 are as follows (in thousands):

 

Years ending December 31,
2010		$	4,752
2011			4,854
2012			4,956
2013			5,062
2014			5,169
2015 and thereafter			9,314
Total minimum payments required		$	34,107
Less: amount representing interest			(13,760	)
Present value of future payments		$	20,347
Less: current portion			(1,547	)
Non-current portion		$	18,800

Operating Leases

During 2008 and 2007, we were party to an operating lease for our San Carlos manufacturing facility through 2012.  On December 31, 2008, this operating lease was assigned to Novartis Pharmaceuticals Inc as part of the pulmonary asset sale.  See Note 10.  We have no further liabilities related to this lease.

On September 30, 2009, we entered into an operating sublease (Sublease) with Pfizer, Inc. for a 102,283 square foot facility located at 455 Mission Bay Boulevard, San Francisco, California (Mission Bay Facility).  The Mission Bay Facility is currently under construction and is scheduled to be completed by the end of 2010.   We are responsible for all tenant improvement costs which we currently estimate to be approximately $20 million.  When completed, the Mission Bay Facility will include an R&D center with biology, chemistry, pharmacology, and clinical development capabilities, as well as all of our functions currently located in San Carlos, California, including our corporate headquarters.

Under the terms of the Sublease, we will begin making non-cancelable lease payments in 2014, after a four year free rent period currently estimated to end on August 1, 2014. The Sublease term commences in March 2010 and is 114 months, currently estimated to end on January 30, 2020.  Monthly base rent will start at $2.95 per square foot and will escalate over the term of the sublease at various intervals to $3.42 per square foot in the final period of the Sublease term.  Rent expense will be recognized ratably beginning March 2010, the inception of our tenant improvement construction period, though the end of the Sublease term.  In addition, throughout the term of the Sublease, we are responsible for paying certain costs and expenses specified in the sublease, including insurance costs and a pro rata share of operating expenses and applicable taxes for the Mission Bay Facility.

 

 

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Our future minimum lease payments under the Mission Bay sublease are as follows (in thousands):

Years ending December 31,
2010		$	—
2011			—
2012			—
2013			—
2014			1,509
2015 and thereafter			19,811
Total future minimum lease payments		$	21,320

We recognize rent expense on a straight-line basis over the lease period.  For the years ended December 31, 2009, 2008, and 2007, rent expense for operating leases was approximately $0.7 million, $3.5 million, and $4.3 million.

Note 7—Commitments and Contingencies

Royalty Expense

We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense, which is reflected in cost of goods sold in our Consolidated Statements of Operations, was approximately $3.9 million, $4.8 million, and $3.9 million for the years ended December 31, 2009, 2008, and 2007, respectively. The overall maximum amount of the obligations is based upon sales of the applicable product and cannot be reasonably estimated.

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. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, ruling, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. If any unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period or on our cash flows and liquidity.

Indemnifications in Connection with Commercial Agreements

As part of our collaboration agreement 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 agreement, 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 were 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 December 31, 2009 or 2008.

 

 

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Indemnification of Underwriters and Initial Purchasers of our Securities

In connection with our sale of equity and convertible debt securities, we have agreed to defend, indemnify and hold harmless our underwriters or initial purchasers, as applicable, as well as certain related parties from and against certain liabilities, including liabilities under the Securities Act of 1933, as amended. The term of these indemnification obligations is generally perpetual. There is no limitation on the potential amount of future payments we could be required to make under these indemnification obligations. We have never incurred costs to defend lawsuits or settle claims related to these indemnification obligations. If any of our indemnification obligations are triggered, however, we may incur substantial liabilities. Because the obligated amount of this agreement is not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations in our Consolidated Balance Sheets as of December 31, 2009 or 2008.

Director and Officer Indemnifications

As permitted under Delaware law, and as set forth in our Certificate of Incorporation and our Bylaws, we indemnify our directors, executive officers, other officers, employees, and other agents for certain events or occurrences that arose while in such capacity. The maximum potential amount of future payments we could be required to make under this indemnification is unlimited; however, we have insurance policies that may limit our exposure and may enable us to recover a portion of any future amounts paid. Assuming the applicability of coverage, the willingness of the insurer to assume coverage, and subject to certain retention, loss limits and other policy provisions, we believe any obligations under this indemnification are not material, other than an initial $500,000 per incident for securities related claims and $250,000 per incident for non-securities related claims retention deductible per our insurance policy. However, no assurances can be given that the covering insurers will not attempt to dispute the validity, applicability, or amount of coverage without expensive litigation against these insurers, in which case we may incur substantial liabilities as a result of these indemnification obligations. Because the obligated amount of this agreement is not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations in our Consolidated Balance Sheets as of December 31, 2009 or 2008.

Note 8—Stockholders’ Equity

Preferred Stock

We have authorized 10,000,000 shares of Preferred Stock, each share having a par value of $0.0001. Of these shares, 3,100,000 shares are designated Series A Junior Participating Preferred Stock (Series A Preferred Stock). The remaining shares are undesignated. We have no preferred shares issued and outstanding as of December 31, 2009 or 2008.

Series A Preferred Stock

On June 1, 2001, the Board of Directors approved the adoption of a Share Purchase Rights Plan. Terms of the Rights Plan provide for a dividend distribution of one preferred share purchase right for each outstanding share of our Common Stock. The Rights have certain anti-takeover effects and will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors. The dividend distribution was payable on June 22, 2001, to the stockholders of record on that date. Each Right entitles the registered holder to purchase from us one one-hundredth of a share of Series A Preferred Stock at a price of $225.00 per one one-hundredth of a share of Series A Preferred Stock, subject to adjustment. Each one one-hundredth of a share of Series A Preferred Stock has designations and powers, preferences and rights, and the qualifications, limitations and restrictions which make its value approximately equal to the value of one share of common stock.

The Rights are not exercisable until the Distribution Date (as defined in the Certificate of Designation for the Series A Preferred Stock). The Rights will expire on June 1, 2011, unless the Rights are earlier redeemed or exchanged by us. Each share of Series A Preferred Stock will be entitled to a minimum preferential quarterly dividend payment of $1.00, or if greater than $1.00, will be entitled to an aggregate dividend of 100 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Series A Preferred Stock would be entitled to $100 per share or, if greater than $100, an aggregate payment equal to 100 times the payment made per share of Common Stock. Each share of Series A Preferred Stock will have 100 votes, voting together with the Common Stock. Finally, in the event of any merger, consolidation or other transaction in which our Common Stock is exchanged, each share of Series A Preferred Stock will be entitled to receive 100 times the amount of consideration received per share of Common Stock. The Series A Preferred Stock would rank junior to any other future series of preferred stock. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder, including, without limitation, the right to vote or to receive dividends.

 

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Reserved Shares

At December 31, 2009, we have reserved shares of common stock for issuance as follows (in thousands):

		As of December 31, 2009
Convertible subordinated notes			9,989
Stock option plans			28,265
401(k) retirement plans			220
Total			38,476

Stock Option Plans

The following table summarizes information with respect to shares of our common stock that may be issued under our existing equity compensation plans as of December 31, 2009 (share number in thousands):

Plan Category		Number of securities to be issued upon exercise of outstanding options (a) (1)				Weighted-average exercise price of outstanding options (b)				Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in column(a)) (c)
Equity compensation plans approved by security holders (2)			8,726			$	9.61				10,967
Equity compensation plans not approved by security holders			5,513			$	9.17				3,029
Total			14,239			$	9.42				13,996

 

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(1)	Does not include options 31,738 shares we assumed in connection with the acquisition of Shearwater Corporation (with a weighted-average exercise price of $0.03 per share).
(2)	Includes shares of common stock available for future issuance under our ESPP as of December 31, 2009.

2008 Equity Incentive Plan

Our 2008 Equity Incentive Plan (2008 Plan) was adopted by the Board of Directors on March 20, 2008 and was approved by our stockholders on June 6, 2008. The purpose of the 2008 Equity Incentive Plan is to attract and retain qualified personnel, to provide additional incentives to our employees, officers, consultants and employee directors and to promote the success of our business. Pursuant to the 2008 Plan, we may grant or issue incentive stock options to employees and officers and non-qualified stock options, rights to acquire restricted stock, restricted stock units, and stock bonuses to consultants, employees, officers and non-employee directors.

The maximum number of shares of our common stock that may be issued or transferred pursuant to awards under the 2008 Plan is 9,000,000 shares. Shares issued in respect of any stock bonus or restricted stock award granted under the 2008 Plan will be counted against the plan’s share limit as 1.5 shares for every one share actually issued in connection with the award. The 2008 Plan will terminate on March 20, 2018, unless earlier terminated by the Board of Directors.

The maximum term of a stock option under the 2008 Equity Incentive Plan is eight years, but if the optionee at the time of grant has voting power of more than 10% of our outstanding capital stock, the maximum term of an incentive stock option is five years. The exercise price of stock options granted under the 2008 Plan must be at least equal to 100% (or 110% with respect to holders of more than 10% of the voting power of our outstanding capital stock) of the fair market value of the stock subject to the option as determined by the closing price of our common stock on the Nasdaq Global Market on the date of grant.

 

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To the extent that shares are delivered pursuant to the exercise of a stock option, the number of underlying shares as to which the exercise related shall be counted against the applicable share limits of the 2008 Plan, as opposed to only counting the shares actually issued. Shares that are subject to or underlie awards which expire or for any reason are cancelled or terminated, are forfeited, fail to vest or for any other reason are not paid or delivered under the 2008 Plan will again be available for subsequent awards under the 2008 Plan.

2000 Equity Incentive Plan

On April 19, 2000 the Board of Directors adopted our 2000 Equity Incentive Plan (2000 Plan) by amending and restating our 1994 Equity Incentive Plan.  On February 9, 2010, the 2000 Plan was terminated.  As a result, no new options may be granted, but existing options granted remain outstanding.  The purpose of the 2000 Equity Incentive Plan was to attract and retain qualified personnel, to provide additional incentives to our employees, officers, consultants and employee directors and to promote the success of our business. Pursuant to the 2000 Plan, we granted or issued incentive stock options to employees and officers and non-qualified stock options, rights to acquire restricted stock, restricted stock units, and stock bonuses to consultants, employees, officers and non-employee directors.

The maximum term of a stock option under the 2000 Plan is eight years, but if the optionee at the time of grant has voting power of more than 10% of our outstanding capital stock, the maximum term of an incentive stock option is five years. The exercise price of incentive stock options granted under the 2000 Equity Incentive Plan must be at least equal to 100% (or 110% with respect to holders of more than 10% of the voting power of our outstanding capital stock) of the fair market value of the stock subject to the option as determined by the closing price of our common stock on the Nasdaq Global Market on the date of grant.

2000 Non-Officer Equity Incentive Plan

Our 1998 Non-Officer Equity Incentive Plan was adopted by the Board of Directors on August 18, 1998, and was amended and restated in its entirety and renamed the 2000 Non-officer Equity Incentive Plan on June 6, 2000 (2000 Non-Officer Plan). The purpose of the 2000 Non-Officer Plan is to attract and retain qualified personnel, to provide additional incentives to employees and consultants and to promote the success of our business. Pursuant to the 2000 Non-Officer Plan, we may grant or issue non-qualified stock options, rights to acquire restricted stock and stock bonuses to employees and consultants who are neither Officers nor Directors of Nektar. The maximum term of a stock option under the 2000 Non-Officer Plan is eight years. The exercise price of stock options granted under the 2000 Non-Officer Plan are determined by the Board of Directors by reference to closing price of our common stock on the Nasdaq Global Market.

Non-Employee Directors’ Stock Option Plan

On February 10, 1994, our Board of Directors adopted the Non-Employee Directors’ Stock Option Plan under which options to purchase up to 400,000 shares of our Common Stock at the then fair market value may be granted to our non-employee directors. There are no remaining options available for grant under this plan as of December 31, 2009.

Restricted Stock Units

During the years ended December 31, 2009, 2008 and 2007, we issued RSU awards to certain officers, non-employees, directors, employees and consultants. RSU awards are similar to restricted stock in that they are issued for no consideration; however, the holder generally is not entitled to the underlying shares of common stock until the RSU award vests. Also, because the RSU awards are issued for $0.01 per share, the grant-date fair value of the award is equal to the intrinsic value of our common stock on the date of grant. The RSU awards were issued under both the 2000 Plan and the 2000 Non-Officer Plan and are settled by delivery of shares of our common stock on or shortly after the date the awards vest.

Beginning with shares granted in the year ended December 31, 2005, each RSU award depletes the pool of options available for grant under our equity incentive plans by a ratio of 1:1.5.

Employee Stock Purchase Plan

In February 1994, our Board of Directors adopted the ESPP, pursuant to section 423(b) of the Internal Revenue Code of 1986. Under the ESPP, 800,000 shares of common stock have been authorized for issuance. The terms of the ESPP provide eligible employees with the opportunity to acquire an ownership interest in Nektar through participation in a program of periodic payroll deductions for the purchase of our common stock. Employees may elect to enroll or re-enroll in the plan on a semi-annual basis. Stock is purchased at 85% of the lower of the closing price on the first day of the enrollment period or the last day of the enrollment period.

 

 

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401(k) Retirement Plan

We sponsor a 401(k) retirement plan whereby eligible employees may elect to contribute up to the lesser of 60% of their annual compensation or the statutorily prescribed annual limit allowable under Internal Revenue Service regulations. The 401(k) plan permits us to make matching contributions on behalf of all participants, up to a maximum of $3,000 per participant.  For the years ended December 31, 2009 and 2008, we recognized $0.8 million and $1.1 million, respectively, of compensation expense in connection with our 401(k) retirement plan.  For the year ended December 31, 2007, we issued approximately 161,000 shares of common stock valued at $1.6 million in connection with our 401(k) retirement plan.

Change in Control Severance Plan

On December 6, 2006, the Board of Directors approved a Change of Control Severance Benefit Plan (CIC Plan) and on February 14, 2007 and October 21, 2008, the Board of Directors amended and restated the CIC Plan. The CIC Plan is designed to make certain benefits available to eligible employees of the Company in the event of a change of control of the Company and, following such change of control, an employee’s employment with the Company or a successor company is terminated in certain specified circumstances. We adopted the CIC Plan to support the continuity of the business in the context of a change of control transaction. The CIC Plan was not adopted in contemplation of any specific change of control transaction. A brief description of the material terms and conditions of the CIC Plan is provided below.

Under the CIC Plan, in the event of a change of control of the Company and a subsequent termination of employment initiated by the Company or a successor company other than for Cause or initiated by the employee for a Good Reason Resignation (as hereinafter defined) in each case within twelve months following a change of control transaction, (i) the Chief Executive Officer would be entitled to receive cash severance pay equal to 24 months base salary plus annual target incentive pay, the extension of employee benefits over this severance period and the full acceleration of unvested outstanding equity awards, and (ii) the Senior Vice Presidents and Vice Presidents (including Principal Fellows) would each be entitled to receive cash severance pay equal to twelve months base salary plus annual target incentive pay, the extension of employee benefits over this severance period and the full acceleration of unvested outstanding equity awards. In the event of a change of control of the Company and a subsequent termination of employment initiated by the Company or a successor company other than for cause within twelve months following a change of control transaction, all other employees would each be entitled to receive cash severance pay equal to 6 months base salary plus annual target incentive pay, the extension of employee benefits over this severance period and the full acceleration of each such employee’s unvested outstanding equity awards.

On December 6, 2006, the Board of Directors approved an amendment to all outstanding stock awards held by non-employee directors to provide for full acceleration of vesting in the event of a change of control transaction.

Note 9 —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):

				Years ended December 31,
Partner		Agreement		2009				2008				2007
AstraZeneca AB		NKTR-118 and NKTR-119		$	25,073			$	—			$	—
Bayer Healthcare LLC		BAY41-6651 (NKTR-061, Amikacin Inhale)			4,928				10,054				1,306
F. Hoffmann La-Roche		Pegasys			214				1,000				—
Novartis Vaccines and Diagnostics, Inc.		Tobramycin inhalation powder (TIP)			564				13,723				17,036
Bayer Schering Pharma AG		Cipro Inhale (CIP)			—				11,653				8,116
Pfizer Inc.		Exubera® inhalation powder and Next-generation inhaled insulin (NGI)			—				—				49,490
Other					5,864				12,500				16,324
License, collaboration and other revenue				$	36,643			$	48,930			$	92,272

 

 

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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.  Under the terms of the agreement, AstraZeneca paid us an upfront payment of $125.0 million, which we received in the fourth quarter of 2009, of which we recognized $23.6 million as License, collaboration and other revenue in 2009.  As of December 31, 2009, we have deferred revenue of approximately $101.4 million, which we expect to amortize over through the technology transfer period, which is expected to be the end of 2010.  We are also entitled to development milestones and sales milestones upon achievement of certain annual sales targets and royalties based on annual worldwide net sales of Oral NKTR-118 and NKTR-119 products.  We recognized $1.5 million in reimbursement for technology transfer services related to this agreement during the year ended December 31, 2009.

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 of which we have recognized $0.2 million during the year ended December 31, 2009.  As of December 31, 2009, we have deferred revenue of approximately $30.8 million, which we expect to amortize over the period through which we are required to provide back-up manufacturing and supply services on an as-requested basis.

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, of which we have recognized $5.0 million, $10.1 million, and $1.3 million during the years ended December 31, 2009, 2008, and 2007, respectively.  As of December 31, 2009, we have deferred revenue of approximately $33.8 million, which we expect to amortize through July 2021, the estimated end of the life of the agreement.  We are entitled to development milestones and sales milestones upon achievement of certain development milestones and annual sales targets and royalties based on annual worldwide net sales of BAY 41-6651.

Novartis

Tobramycin inhalation powder (TIP)

We were party to a collaborative research, development and commercialization agreement with Novartis Vaccines and Diagnostics, Inc. related to the development of Tobramycin inhalation powder (TIP) for the treatment of lung infections caused by the bacterium Pseudomonas aeruginosa in cystic fibrosis patients. Our collaborative research, development and commercialization agreement with Novartis Vaccines and Diagnostics, Inc. for related to TIP was terminated on December 31, 2008. As part of the termination, we relinquished our rights to future research and development funding and milestone payments, as well as to any future royalty payments or manufacturing revenue.  Prior to the termination, we were reimbursed for the cost of work performed on a revenue per annual full-time equivalent (FTE) basis, plus out of pocket third party costs. Revenue recognized approximated the cost associated with these services and was $0.6 million, $14.3 million, and $17.0 million during the years ended December 31, 2009, 2008, and 2007, respectively.

 

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Bayer Schering Pharma AG

Cipro Inhale

We were party to a collaborative research, development and commercialization agreement with Bayer Schering Pharma AG related to the development of an inhaled powder formulation of Cipro Inhale for the treatment of chronic lung infections caused by Pseudomonas aeruginosa in cystic fibrosis patients. As of December 31, 2008, we assigned the collaborative research, development and commercialization agreement to Novartis Pharma AG through which we maintain the right to receive potential royalties in the future based on net product sales if Cipro Inhale receives regulatory approval and is successfully commercialized (See Note 10).  Prior to the termination, we were reimbursed for the cost of work performed on a revenue per annual FTE basis and out of pocket third party costs, as well as milestone and upfront fees. Revenue recognized approximated the cost associated with these services and totaled nil, $10.3 million, and $7.7 million during the years ended December 31, 2009, 2008, and 2007, respectively.

Pfizer Inc.

Exubera® inhalation powder and Next-generation inhaled insulin (NGI)

We were a party to collaboration agreements with Pfizer related to the development of Exubera and the next-generation inhaled insulin that terminated on November 9, 2007 (See Note 11).  Under the terms of the collaboration agreements, we received contract research and development revenue as well as milestone and upfront fees related to the Exubera bulk powder insulin manufacturing, Exubera inhaler device manufacturing through our contract manufacturers, and development related to NGI. We were reimbursed for the cost of work performed on a revenue per annual FTE basis, plus out of pocket third party costs. Revenue recognized approximates the cost associated with these services and was nil, nil, and $18.5 million during the years ended December 31, 2009, 2008, and 2007, respectively.

Note 10 - Novartis Pulmonary Asset Sale

On December 31, 2008, we completed the sale of certain assets related to our pulmonary business, associated technology and intellectual property to Novartis Pharma AG and Novartis Pharmaceuticals Corporation (together referred to as Novartis) for a purchase price of $115.0 million in cash (the Novartis Pulmonary Asset Sale). Pursuant to the asset purchase agreement entered between Novartis and us, we transferred to Novartis certain assets and obligations related to our pulmonary technology, development and manufacturing operations including:

•

dry powder and liquid pulmonary technology platform including but not limited to our pulmonary inhalation devices, formulation technology, manufacturing technology and related intellectual property;

•

manufacturing and associated development services payments for the Cipro Inhale program;

•

manufacturing and royalty rights to the TIP program;

•

capital equipment, information systems and facility lease obligations for our pulmonary development and manufacturing facility in San Carlos, California;

•

certain other interests that we had in two private companies, Pearl Therapeutics, Inc. and Stamford Devices Limited; and

•

approximately 140 of our personnel primarily dedicated to our pulmonary technology, development programs, and manufacturing operations, whom Novartis hired immediately following the closing of the transaction.

We have retained all of our rights to BAY41-6651 partnered with Bayer Healthcare LLC, certain royalty rights on commercial sales of Cipro Inhale by Bayer Schering Pharma AG, all rights to the development program for NKTR-063 and certain intellectual property rights specific to inhaled insulin.  We also entered into a service agreement pursuant to which we have subcontracted to Novartis certain services to be performed related to BAY41-6551 and a transition services agreement in which Novartis and we will provide 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.

 

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Gain on sale of pulmonary assets

On December 31, 2008, we recognized a Gain on sale of pulmonary assets for certain assets sold to Novartis, which is comprised of the following (in thousands):

		Year ended December 31, 2008
Proceeds from sale of certain pulmonary assets		$	115,000
Transaction costs(1)			(4,609	)
Net book value of property and equipment sold			(37,291	)
Equity investment in Pearl Therapeutics, net			(2,658	)
Goodwill related to pulmonary assets sold			(1,930	)
Other, net			1,060
Gain on sale of pulmonary assets		$	69,572

 

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(1)	Transaction costs of $4.4 million related to the Novartis Pulmonary Asset Sale were paid in 2009.

Additional Costs

In addition to the transaction costs recorded as part of the gain, we recognized approximately $0.1 million and $2.7 million of additional costs in connection with the Novartis Pulmonary Asset Sale for the years ended December 31, 2009 and 2008, respectively, of one-time employee termination and other costs that were recorded in Research and development expense in our Consolidated Statement of Operations.  All costs incurred have been paid as of December 31, 2009.  We expect to incur approximately $1.0 million as a result of the Novartis Pulmonary Asset Sale when we relocate our IT server room in 2010.

Note 11 – Termination of Pfizer Agreements and Inhaled Insulin Program

On November 9, 2007, we entered into a termination agreement and mutual release of our collaborative development and license agreement with Pfizer and all other related agreements (Pfizer agreements).  Under the termination agreement, we received a one-time payment of $135.0 million in November 2007 from Pfizer in satisfaction of all outstanding contractual obligation under our existing agreements related to Exubera and NGI.  Contractual obligations included billed and unbilled product sales and contract research revenue through November 9, 2007, outstanding accounts receivable and unrecovered capital costs as of November 9, 2007, and contract termination costs.

February 12, 2008, we entered into a Termination and 2008 Continuation Agreement (TCA) with Tech Group pursuant to which the manufacturing and supply agreement for the Exubera inhaler device (Exubera Inhaler MSA) was terminated in its entirety and we agreed to pay Tech Group $13.8 million in termination costs and $4.8 million in satisfaction of outstanding accounts payable. As part of the TCA, we agreed to compensate Tech Group to retain a limited number of core Exubera inhaler manufacturing personnel and its dedicated Exubera inhaler manufacturing facility for a limited period in 2008. We also entered into a letter agreement with Pfizer to retain a limited number of Exubera manufacturing personnel at Pfizer’s Terre Haute, Indiana, manufacturing facility during March and April 2008.

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

On April 9, 2008, we announced that we had ceased all negotiations with potential partners for Exubera and NGI as a result of new data analysis from ongoing clinical trials conducted by Pfizer which indicated an increase in the number of new cases of lung cancer in Exubera patients who were former smokers as compared to patients in the control group who were former smokers. Following the termination of our inhaled insulin programs on April 9, 2008, we terminated our continuation agreements with Tech Group and Pfizer.

 

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Gain on Termination of Collaborative Agreements, Net

During the year ended December 31, 2007, we recognized a Gain on termination of collaborative agreements, net which is comprised of the following (in thousands):

		Year ended December 31, 2007
Pfizer termination settlement payment received		$	135,000
Exubera Inhaler Manufacturing and Supply Agreement Termination
Tech Group			(13,765	)
Bespak			(18,598	)
			102,637
Settlement of assets and liabilities related to Pfizer			(23,459	)
Gain on termination of collaborative agreements, net		$	79,178

Idle Exubera Manufacturing Capacity Costs

Idle Exubera manufacturing capacity costs, which is disclosed as a component of Other cost of revenue, include costs payable to Pfizer and Tech Group under our continuation agreements and internal salaries, benefits and stock-based compensation related to Exubera commercial manufacturing employees, overhead at our San Carlos manufacturing facility, including rent, utilities and maintenance and depreciation of property and equipment. We incurred these costs from the termination of the Pfizer Agreements on November 9, 2007 through the termination of our inhaled insulin programs in April 2008. For the years ended December 31, 2009, 2008 and 2007, we recognized idle Exubera manufacturing capacity costs of nil, $6.8 million, and $6.3 million, respectively.

Accrued Expenses to Contract Manufacturer

As of December 31, 2007, we recorded $40.4 million of accrued expenses to Bespak and Tech Group for outstanding accounts payable and termination costs and expenses that were due and payable under the termination provisions of the Exubera Inhaler MSA.  This liability was repaid in its entirety in 2008.  As of December 31, 2008, we had no further liabilities related to the Pfizer Agreements.

Note 12—Impairment of Long Lived Assets

During the years ended December 31, 2009, 2008, and 2007, we recorded charges for the Impairment of long-lived assets of nil, $1.5 million, and $28.4 million, respectively.

During 2008, we determined that a specialized dryer used in our PEGylation manufacturing facility was not functioning properly and was not being used in operations currently. We performed an impairment analysis and determined the carrying value of the dryer exceeded its fair value based on a discounted cash flow model. As a result, we recorded an impairment loss for the related net book value of $1.5 million.

On November 9, 2007, we entered into a termination agreement and mutual release with Pfizer related to Exubera and NGI. As a result, we performed an impairment analysis of the property and equipment that supported Exubera commercial operations and NGI (Exubera-related assets), including machinery and equipment at our contract manufacturer locations and machinery, equipment, and leasehold improvements in San Carlos, and determined the fair value of such assets based on a discounted cash flow model. As of December 31, 2007, we concluded the carrying value of the Exubera-related assets exceeded the estimated future cash flows and recorded an impairment charge of $28.4 million (See Note 11).

Note 13—Workforce Reduction Plans

In an effort to reduce ongoing operating costs and improve our organizational structure, efficiency and productivity, we executed workforce reduction plans in May 2007 (2007 Plan) and February 2008 (2008 Plan) designed to streamline the Company, consolidate corporate functions, and strengthen decision-making and execution within our business units. The 2007 Plan and 2008 Plan reduced our workforce by approximately 290 full-time employees; both plans were substantially complete at December 31, 2008.  For the years ended December 31, 2009, 2008, and 2007 workforce reduction charges, comprised of severance, medical insurance, and outplacement services, were as follows (in thousands):

 

 

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		Years ended December 31,
		2009				2008				2007
Cost of goods sold, net of inventory change		$	—			$	148			$	974
Other cost of revenue			—				1,221				—
Research and development expense			—				3,087				5,791
General and administrative expense			—				517				1,617
Total workforce reduction charges		$	—			$	4,973			$	8,382

Note 14 – Stock-Based Compensation

We issued stock-based awards from our equity incentive plans, which are more fully described in Note 8.  Stock-based compensation cost was recorded as follows (in thousands):

		Years ended December 31,
		2009				2008				2007
Cost of goods sold, net of change in inventory		$	295			$	269			$	1,003
Research and development			3,377				4,642				6,275
General and administrative			6,654				4,960				5,915
Total compensation cost for share-based arrangements		$	10,326			$	9,871			$	13,193

For the years ended December 31, 2009, 2008, and 2007, we recorded approximately $0.8 million, $2.2 million, and $0.5 million, respectively, of stock-based compensation expense related to modifications of certain stock grants in connection with employment separation agreements. Generally, the modifications extended the option holder’s exercise period beyond the 90 day period after termination and accelerated a portion of the option holder’s unvested grants. Stock-based compensation charges are non-cash charges and as such have no impact on our reported cash flows.

For the year ended December 31, 2009, the annual forfeiture rate for options issued to directors and employees was estimated to be 15% and 11%, respectively.  For the year ended December 31, 2008, the annual forfeiture rate for options issued to directors and employees was estimated to 0% and 11%, respectively, and the annual forfeiture rate for employee RSU awards was estimated to be 25%.  For the year ended December 31, 2007, the annual forfeiture rate for options issued to both directors and to employees was estimated to be 4.7%.  All forfeiture rates are based on our qualitative and quantitative analysis of our historical forfeitures.

Aggregate Unrecognized Stock-based Compensation Expense

As of December 31, 2009, total unrecognized compensation expense related to unvested stock-based compensation arrangements is expected to be recognized over a weighted-average period of 1.88 years as follows (in thousands):

Fiscal Year		As of December 31, 2009
2010		$	10,056
2011			8,311
2012			3,787
2013 and thereafter			1,640
		$	23,794

Black-Scholes Assumptions

The following tables list the Black-Scholes assumptions used to calculate the fair value of employee stock options and ESPP purchases.

		Year ended December 31, 2009								Year ended December 31, 2008								Year ended December 31, 2007
		Employee Stock Options				ESPP				Employee Stock Options				ESPP				Employee Stock Options				ESPP
Average risk-free interest rate			1.6	%			0.3	%			2.5	%			2.0	%			4.2	%			4.8	%
Dividend yield			0.0	%			0.0	%			0.0	%			0.0	%			0.0	%			0.0	%
Volatility factor			61.0	%			82.4	%			51.6	%			72.3	%			53.3	%			38.4	%
Weighted average expected life		4.9 years				0.5 years				5.0 years				0.5 years				5.1 years				0.5 years

Expected volatility is based on historical volatility of our common stock.

 

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As permitted by the Securities and Exchange Commission (SEC) Staff Accounting Bulletin Topic 14.D.2, we estimated the expected life of stock options using the “simplified” method during the years ended December 31, 2009, 2008, and 2007. Under this method, the expected life was equal to the arithmetic average of the vesting term and the original contractual term of the option. We are using this method because we believe that applying historical data for options and awards is not a true reflection of future exercise patterns and timelines. Generally our stock-based grants have expected terms ranging from 51 months to 61 months.

Summary of Stock Option Activity

The table below presents a summary of stock option activity under our equity incentive plans (in thousands, except for price per share and contractual life information):

		Options Outstanding								Weighted- Average Exercise				Weighted- Average Remaining				Aggregate
		Number of Shares				Exercise Price Per Share				Price Per Share				Contractual Life (in years)				Intrinsic Value (1)
Balance at December 31, 2006			10,707			$	0.01–61.63			$	18.97				4.78			$	15,348
Options granted			5,257				5.98–15.24				9.87
Options exercised			(429	)			0.01–14.25				6.80							$	1,770
Options forfeited & canceled			(3,323	)			4.50–55.19				18.47
Balance at December 31, 2007			12,212			$	0.01–61.63			$	15.62				5.20			$	643
Options granted			6,180				2.83–7.13				6.02
Options exercised			(39	)			0.03–7.33				5.72							$	42
Options forfeited & canceled			(4,802	)			0.01–61.63				12.93
Balance at December 31, 2008			13,551			$	0.01–60.88			$	12.13				4.84			$	2,032
Options granted			4,608				4.20–9.61				5.53
Options exercised			(714	)			0.01–9.49				6.58							$	1,379
Options forfeited & canceled			(3,437	)			3.35–60.88				15.53
Balance at December 31, 2009			14,008			$	0.03–54.75			$	9.41				5.40			$	34,151
Exercisable at December 31, 2009			6,904							$	12.47				3.96			$	11,358
Exercisable at December 31, 2008			7,144							$	16.57				2.89			$	276
Exercisable at December 31, 2007			7,023							$	19.15				3.64			$	584

 

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(1)	Aggregate Intrinsic Value represents the difference between the exercise price of the option and the closing market price of our common stock on the exercise date or December 31, as applicable.

The weighted-average grant-date fair value of options granted during the years ended December 31, 2009, 2008, and 2007 was $2.86, $2.79, and $5.11, respectively. The estimated fair value of options that vested during the years ended December 31, 2009, 2008, and 2007 was $9.0 million, $9.8 million, and $8.7 million, respectively.

The following table provides information regarding our outstanding stock options as of December 31, 2009 (in thousands except for price per share and contractual life information):

		Options Outstanding												Options Exercisable
Range of Exercise Prices		Number of Shares				Weighted-Average Exercise Price Per Share				Weighted-Average Remaining Contractual Life (in years)				Number of Shares				Weighted-Average Exercise Price Per Share
$0.03 – $4.37			799			$	4.00				6.28				315			$	3.77
$4.44 – $4.65			2,927			$	4.65				7.10				482			$	4.64
$4.67 – $6.34			1,455			$	5.62				6.44				532			$	5.25
$6.36 – $6.46			659			$	6.46				5.90				310			$	6.46
$6.50 – $6.65			1,930			$	6.65				5.72				909			$	6.65
$6.67 – $7.78			1,410			$	7.01				5.75				707			$	7.05
$7.84 – $11.38			1,540			$	9.37				5.89				741			$	9.55
$11.41 – $16.85			1,405			$	14.06				4.02				1,066			$	13.95
$17.01 – $27.69			1,409			$	21.57				1.68				1,368			$	21.65
$27.88 – $54.75			474			$	32.23				0.83				474			$	32.23
			14,008			$	9.41				5.40				6,904			$	12.47

 

 

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RSU Awards

We issued RSU awards to certain officers and employees; the RSU awards granted in 2006 vest upon achievement of pre-determined performance milestones, while the RSU awards granted in 2007 and 2008 have a time-based vesting schedule.  We expense the grant date fair value of the RSU awards ratably over the expected service or performance period.  The weighted average life of the 2009, 2008, and 2007 RSU awards is estimated to be 1.0 years, 0.8 years, and 1.2 years, respectively.

We granted 1,088,300 performance-based RSU awards in 2006, which included three pre-determined milestones.  The first performance milestone was achieved and the RSU awards were vested and released in 2007.  In 2007, we determined the second performance milestone would not be achieved and we reversed previously recorded compensation expense of $2.8 million.  We currently expect the third milestone will be achieved in 2012.  If our actual experience in future periods differs from these current estimates, we may change our estimate of the period in which the milestone will be achieved and prospectively adjust the amortization period of the stock based compensation expense associated with these awards.

A summary of RSU award activity is as follows (in thousands except for contractual life and per share amounts):

		Units Issued				Weighted-Average Remaining Contractual Life (in years)				Weighted-Average Grant-Date Fair value				Aggregate Intrinsic Value (1)
Balance at December 31, 2006			1,084				1.52							$	16,479
Granted			345							$	11.01
Released			(334	)										$	3,808
Forfeited & canceled			(360	)
Balance at December 31, 2007			735				2.03							$	4,925
Granted			48							$	5.26
Released			(107	)										$	487
Forfeited & canceled			(411	)
Balance at December 31, 2008			265				2.48							$	1,472
Granted			35							$	8.37
Released			(28	)										$	142
Forfeited & canceled			(37	)
Balance at December 31, 2009			235				1.99							$	2,188

 

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(1)	Aggregate Intrinsic Value represents the difference between the exercise price of the award and the closing market price of our common stock on the exercise date or December 31, as applicable.

 

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Note 15 – Income Taxes

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

		Years ended December 31,
		2009				2008				2007
Domestic		$	(103,295	)		$	(69,350	)		$	(30,143	)
Foreign			523				34,208				(1,309	)
Total		$	(102,772	)		$	(35,142	)		$	(31,452	)

(Benefit) Provision  for Income Taxes

The (benefit) provision for income taxes consists of the following (in thousands):

		Years ended December 31,
		2009				2008				2007
Current:
Federal		$	(522	)		$	(970	)		$	194
State			(28	)			(69	)			782
Foreign			352				519				333
Total Current			(198	)			(520	)			1,309
Deferred:
Federal			—				—				—
State			—				—				—
Foreign			(55	)			(286	)			—
Total Deferred			(55	)			(286	)			—
(Benefit) Provision for income taxes		$	(253	)		$	(806	)		$	1,309

In 2009, we received a federal tax refund of $0.9 million as a result of the Housing and Economic Recovery Act of 2008, which allowed us to utilize previously recorded deferred tax assets.

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

		Years ended December 31,
		2009				2008				2007
U.S. federal provision (benefit)
At statutory rate		$	(35,970	)		$	(12,300	)		$	(10,998	)
State taxes			(28	)			(69	)			782
Change in valuation allowance			34,327				29,768				27,829
Foreign tax differential			114				(11,754	)			—
Unrecognized tax credits			(882	)			(2,366	)			(13,109	)
Expiring tax attributes			1,569				1,508				—
Capital lease true-up			—				(1,431	)			—
Foreign subsidiary investment			—				(4,777	)			—
Sale of Irish subsidiary			—				—				(3,604	)
Other			617				615				409
Total		$	(253	)		$	(806	)		$	1,309

Deferred Tax Assets and Liabilities

Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of our deferred tax assets for federal and state income taxes are as follows (in thousands):

 

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		December 31,
		2009				2008
Deferred tax assets:
Net operating loss carryforwards		$	321,874			$	289,631
Research and other credits			48,186				50,350
Capitalized research expenses			6,905				4,563
Deferred revenue			34,226				28,659
Reserve and accruals			5,184				9,629
Stock based compensation			22,303				20,315
Other			4,812				5,163
Deferred tax assets before valuation allowance			443,490				408,310
Valuation allowance for deferred tax assets			(442,473	)			(402,907	)
Total deferred tax assets		$	1,017			$	5,403
Deferred tax liabilities:
Depreciation			(678	)			(1,479	)
Acquisition related intangibles			—				(3,352	)
Other			—				(286	)
Total deferred tax liabilities		$	(678	)		$	(5,117	)
Net deferred tax assets		$	339			$	286

Realization of our deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Because of our lack of U.S. earnings history, the net U.S. deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $39.9 million and $27.6 million during the years ended December 31, 2009 and 2008, respectively. The valuation allowance includes approximately $35.6 million of benefit at both December 31, 2009 and December 31, 2008 related to stock based compensation and exercises, prior to the implementation of SFAS No. 123R, that will be credited to additional paid in capital when realized.

Undistributed earnings of our foreign subsidiary in India are considered to be permanently reinvested and accordingly, no deferred U.S. income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. income tax.

Net Operating Loss and Tax Credit Carryforwards

As of December 31, 2009, we had a net operating loss carryforward for federal income tax purposes of approximately $795.9 million, portions of which will begin to expire in 2010. We had a total state net operating loss carryforward of approximately $496.6 million, which will begin to expire in 2010. Utilization of the federal and state net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

We have federal research credits of approximately $21.3 million, which will begin to expire in 2010 and state research credits of approximately $14.2 million which have no expiration date. We have federal orphan drug credits of $12.8 million which will begin to expire in 2024.

Unrecognized tax benefits

We have the following activity relating to unrecognized tax benefits (in thousands):

		December 31,
		2009				2008				2007
Beginning balance		$	11,660			$	9,222			$	7,176
Tax positions related to current year
Additions:
Federal			415				1,274				1,497
State			318				1,164				548
Reductions			—				—				—
Tax positions related to prior year
Additions:			—				—				—
Federal			—				—				—
State			691				—				—
Reductions			—				—				—
Settlements			—				—				—
Lapses in statute of limitations			—				—				—
Ending balance		$	13,084			$	11,660			$	9,222

 

 

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It is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities. We do not anticipate any significant changes to unrecognized tax benefits over the next 12 months. During the years ended December 31, 2009 and 2008, no interest or penalties were required to be recognized relating to unrecognized tax benefits.

Note 16—Segment Reporting

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

Our revenue is derived primarily from clients in the pharmaceutical and biotechnology industries. Two of our partners, AstraZeneca AB and UCB Pharma, represented 35% and 17%, respectively, of our total revenue during the year ended December 31, 2009.  Four of our partners, Bayer (including Bayer Healthcare LLC and Bayer Schering Pharma AG), UCB Pharma, Novartis, and Roche represented 24%, 16%, 15%, and 14%, respectively, of our total revenue during the year ended December 31, 2008. Due to the termination of our collaborative agreements with Pfizer, Inc., we did not receive any revenue from Pfizer, Inc. in 2008 or 2009 related to Exubera or NGI. Revenue from Pfizer, Inc. represented 69% of our revenue for the year ended December 31, 2007.

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

		Years ended December 31,
		2009				2008				2007
United States		$	29,511			$	30,800			$	212,990
European countries			42,420				59,385				60,037
Total revenue		$	71,931			$	90,185			$	273,027

At December 31, 2009, approximately $64.5 million, or approximately 82%, of the net book value of our property and equipment of $78.3 million was located in the United States and $13.8 million, or approximately 18%, was located in India.  At December 31, 2008, $69.2 million, or approximately 94%, of the net book value of our property and equipment was located in the United States and $4.4 million, or approximately 6%, was located in India.

 

 

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Note 17—Selected Quarterly Financial Data (Unaudited)

The following table sets forth certain unaudited quarterly financial data. In our opinion, the unaudited information set forth below has been prepared on the same basis as the audited information and includes all adjustments necessary to present fairly the information set forth herein. We have experienced fluctuations in our quarterly results. We expect these fluctuations to continue in the future. Due to these and other factors, we believe that quarter-to-quarter comparisons of our operating results will not be meaningful, and you should not rely on our results for any one quarter as an indication of our future performance. Certain items previously reported in specific financial statement captions have been reclassified to conform to the current period presentation. Such reclassifications have not impacted previously reported revenues, operating loss or net loss. All data is in thousands except per share information.

		Fiscal Year 2009																Fiscal Year 2008
		Q1				Q2				Q3				Q4				Q1				Q2				Q3				Q4
Product sales and royalty revenue		$	6,470			$	10,525			$	7,461			$	10,832			$	10,371			$	9,010			$	9,474			$	12,400
License, collaboration and other revenue		$	3,241			$	2,463			$	2,762			$	28,177			$	9,621			$	11,392			$	11,965			$	15,952
Gross margin on product sales		$	844			$	146			$	1,327			$	2,023			$	3,144			$	3,566			$	4,125			$	2,204
Research and development expenses		$	23,363			$	24,002			$	23,031			$	24,713			$	37,373			$	33,500			$	38,265			$	45,279
General and administrative expenses		$	11,020			$	9,087			$	9,917			$	10,982			$	11,947			$	13,329			$	12,386			$	13,835
Impairment of long lived assets		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	1,458
Gain on sale of pulmonary assets		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	(69,572	)
Operating (loss) income		$	(30,298	)		$	(30,480	)		$	(28,859	)		$	(5,495	)		$	(41,889	)		$	(33,358	)		$	(34,561	)		$	27,156
Interest expense		$	3,337			$	2,948			$	2,928			$	2,963			$	3,918			$	3,929			$	3,988			$	3,357
Gain on extinguishment of debt		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	50,149
Net (loss) income		$	(31,807	)		$	(32,069	)		$	(30,967	)		$	(7,676	)		$	(40,705	)		$	(33,375	)		$	(37,038	)		$	76,782
Basic and diluted net income (loss) per share (1)(2)		$	(0.34	)		$	(0.35	)		$	(0.33	)		$	(0.08	)		$	(0.44	)		$	(0.36	)		$	(0.40	)		$	0.83

 

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(1)	Quarterly loss per share amounts may not total to the year-to-date loss per share due to rounding.

(2)	During the fourth quarter of 2008, there were approximately 81 dilutive shares outstanding.

 

 

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SCHEDULE II

NEKTAR THERAPEUTICS

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

YEARS ENDED DECEMBER 31, 2009, 2008, and 2007

Description		Balance at Beginning of Year				Charged to Costs and Expenses, Net of Reversals				Utilizations				Balance At End of Year
		(In thousands)
2009:
Allowance for doubtful accounts		$	92			$	—			$	(92	)		$	—
Allowance for inventory reserves		$	4,989			$	2,109			$	(3,762	)		$	3,336
2008:
Allowance for doubtful accounts		$	33			$	61			$	(2	)		$	92
Allowance for inventory reserves		$	5,772			$	2,668			$	(3,451	)		$	4,989
2007:
Allowance for doubtful accounts		$	357			$	(16	)		$	(308	)		$	33
Allowance for inventory reserves		$	4,160			$	4,670			$	(3,058	)		$	5,772

 

 

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. 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 the Chief Executive Officer and the 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, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cashflows for the periods presented.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making its assessment of internal control over financial reporting, management used the criteria described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on our evaluation under the framework described in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by an independent registered public accounting firm, as stated in their report, which is included herein.

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.  There was no change in our internal control over financial reporting during the quarter ended December 31, 2009, which was identified in connection with our management’s evaluation required by Exchange Act Rules 13a-15(f) and 15d-15(f) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls

Our management, including the 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 error or mistake. 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.

 

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Item 9B. Other Information

None.

 

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information relating to our executive officers required by this item is set forth in Part I—Item 1 of this report under the caption “Executive Officers of the Registrant” and is incorporated herein by reference. The other information required by this Item is incorporated by reference from the definitive proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A (Proxy Statement) not later than 120 days after the end of the fiscal year covered by this Form 10-K under the captions “Corporate Governance and Board of Directors,” “Proposal 1—Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

Information regarding our audit committee financial expert will be set forth in the Proxy Statement under the caption “Audit Committee,” which information is incorporated herein by reference.

In December 2003, we adopted a Code of Business Conduct and Ethics applicable to all employees, including the principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions. The Code of Business Conduct and Ethics is posted on our website at www.nektar.com. Amendments to, and waivers from, the Code of Business Conduct and Ethics that apply to any of these officers, or persons performing similar functions, and that relate to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K will be disclosed at the website address provided above and, to the extent required by applicable regulations, on a current report on Form 8-K.

As permitted by SEC Rule 10b5-1, certain of our executive officers, directors and other employees have set up a predefined, structured stock trading program with their broker to sell our stock. The stock trading program allows a broker acting on behalf of the executive officer, director or other employee to trade our stock during blackout periods or while such executive officer, director or other employee may be aware of material, nonpublic information, if the trade is performed according to a pre-existing contract, instruction or plan that was established with the broker during a non-blackout period and when such executive officer, director or employee was not aware of any material, nonpublic information. Our executive officers, directors and other employees may also trade our stock outside of the stock trading programs set up under Rule 10b5-1 subject to our blackout periods and insider trading rules.

Item 11. Executive Compensation

The information required by this Item is included in the Proxy Statement and incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is included in the Proxy Statement and incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions and Director Independence

The information required by this Item is included in the Proxy Statement and incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information required by this Item is included in the Proxy Statement and incorporated herein by reference.

 

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PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)

The following documents are filed as part of this report:

(1) Consolidated Financial Statements:

The following financial statements are filed as part of this Annual Report on Form 10-K under Item 8 “Financial Statements and Supplementary Data.”

	Page
Reports of Independent Registered Public Accounting Firm	53
Consolidated Balance Sheets at December 31, 2009 and 2008	55
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2009	56
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2009	57
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2009	58
Notes to Consolidated Financial Statements

(2) Financial Statement Schedules:

Schedule II, Valuation and Qualifying Accounts and Reserves, is filed as part of this Annual Report on Form 10-K under Item 8 “Financial Statements and Supplementary Data”. All other financial statement schedules have been omitted because they are not applicable, or the information required is presented in our consolidated financial statements and notes thereto under Item 8 of this Annual Report on Form 10-K.

(3) Exhibits.

Except as so indicated in Exhibit 32.1, the following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.

Exhibit Number		Description of Documents
2.1	(1)	Asset Purchase Agreement, dated October 20, 2008, by and between Nektar Therapeutics, a Delaware corporation, AeroGen, Inc., a Delaware corporation and wholly-owned subsidiary of Nektar Therapeutics, Novartis Pharmaceuticals Corporation, a Delaware corporation, and Novartis Pharma AG, a Swiss corporation+
3.1	(2)	Certificate of Incorporation of Inhale Therapeutic Systems (Delaware), Inc.
3.2	(3)	Certificate of Amendment of the Amended Certificate of Incorporation of Inhale Therapeutic Systems, Inc.
3.3	(4)	Certificate of Designation of Series A Junior Participating Preferred Stock of Nektar Therapeutics
3.4	(5)	Certificate of Designation of Series B Convertible Preferred Stock of Nektar Therapeutics
3.5	(6)	Certificate of Ownership and Merger of Nektar Therapeutics
3.6	(26)	Certificate of Ownership and Merger of Nektar Therapeutics AL, Corporation with and into Nektar Therapeutics
3.7	(7)	Amended and Restated Bylaws of Nektar Therapeutics
4.1		Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6 and 3.7.
4.2	(6)	Specimen Common Stock certificate
4.3	(4)	Rights Agreement, dated as of June 1, 2001, by and between Nektar Therapeutics and Mellon Investor Services LLC, as Rights Agent

 

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4.4	(4)	Form of Right Certificate
4.5	(8)	Indenture, dated September 28, 2005, by and between Nektar Therapeutics, as Issuer, and J.P. Morgan Trust Company, National Association, as Trustee
4.6	(8)	Registration Right Agreement, dated as of September 28, 2005, among Nektar Therapeutics and entities named therein
10.1	(9)	1994 Non-Employee Directors’ Stock Option Plan, as amended++
10.2	(10)	1994 Employee Stock Purchase Plan, as amended and restated++
10.3	(11)	2000 Non-Officer Equity Incentive Plan, as amended and restated++
10.4	(12)	Form of 2000 Non-Officer Equity Incentive Plan Stock Option Agreement (Nonstatutory Stock Option)++
10.5	(12)	Form of 2000 Non-Officer Equity Incentive Plan Stock Option Agreement (Nonstatutory (Unapproved) Stock Option)++
10.6	(13)	Forms of 2000 Non-Officer Equity Incentive Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement++
10.7	(14)	2000 Equity Incentive Plan, as amended and restated++
10.8	(15)	Form of Stock Option Agreement under the 2000 Equity Incentive Plan++
10.9	(13)	Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under the 2000 Equity Incentive Plan++
10.10	(16)	Form of Non-Employee Director Stock Option Agreement under the 2000 Equity Incentive Plan++
10.11	(16)	Form of Non-Employee Director Restricted Stock Unit Agreement under the 2000 Equity Incentive Plan++
10.12	(16)	Employment Transition and Separation Release Agreement, executed effective on September 4, 2007, with Louis Drapeau++
10.13	(16)	Employment Transition and Separation Release Agreement, executed effective on October 5, 2007, with David Johnston++
10.14	(17)	Amended and Restated Compensation Plan for Non-Employee Directors++
10.15	(11)	401(k) Retirement Plan++
10.16	(26)	2010 Discretionary Performance-Based Incentive Compensation Policy++
10.17	(1)	Amended and Restated Change of Control Severance Benefit Plan++
10.18	(19)	Transition and Retirement Agreement, dated March 13, 2006, with Ajit S. Gill++
10.19	(20)	Letter Amendment, dated October 5, 2006, with Ajit S. Gill, amending that certain Transition and Retirement Agreement, dated March 13, 2006, with Mr. Gill++
10.20	(1)	2008 Equity Incentive Plan++
10.21	(1)	Forms of Stock Option Grant Notice and of Stock Option Agreement under the 2008 Equity Incentive Plan++
10.22	(1)	Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under the 2008 Equity Incentive Plan++
10.23	(21)	Separation and General Release Agreement, dated November 17, 2008, with John S. Patton++

 

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10.24	(22)	Bonus and General Release Agreement, dated December 27, 2008, with Nevan C. Elam++
10.25	(16)	Form of Severance Letter for executive officers of the company++
10.26	(1)	Amended and Restated Letter Agreement, executed effective on December 1, 2008, with Howard W. Robin++
10.27	(1)	Amended and Restated Letter Agreement, executed effective on December 1, 2008, with John Nicholson++
10.28	(1)	Amended and Restated Letter Agreement, executed effective on December 1, 2008, with Bharatt M. Chowrira, Ph.D., J.D.++
10.29	(23)	Separation and General Release Agreement between Nektar Therapeutics and Randall W. Moreadith, M.D., Ph.D., dated November 23, 2009.++
10.30	(16)	Amended and Restated Built-to-Suite Lease between Nektar Therapeutics and BMR-201 Industrial Road LLC, dated August 17, 2004, as amended on January 11, 2005 and July 19, 2007
10.31	(25)	Sublease, dated as of September 30, 2009, by and between Pfizer Inc. and Nektar Therapeutics.+
10.32	(24)	Settlement Agreement and General Release, dated June 30, 2006, by and between The Board of Trustees of the University of Alabama, The University of Alabama in Huntsville, Nektar Therapeutics AL Corporation (a wholly-owned subsidiary of Nektar Therapeutics), Nektar Therapeutics and J. Milton Harris
10.33	(16)	Co-Development, License and Co-Promotion Agreement, dated August 1, 2007, between Nektar Therapeutics (and its subsidiaries) and Bayer Healthcare LLC+
10.34	(18)	Termination Agreement and Mutual Release, dated November 9, 2007, between Nektar Therapeutics and Pfizer Inc.+
10.35	(1)	Exclusive Research, Development, License and Manufacturing and Supply Agreement, by and among Nektar AL Corporation, Baxter Healthcare SA, and Baxter Healthcare Corporation, dated September 26, 2005, as amended+
10.36	(1)	Exclusive License Agreement, dated December 31, 2008, between Nektar Therapeutics, a Delaware corporation, and Novartis Pharma AG, a Swiss corporation+
10.37	(25)	License Agreement by and between AstraZeneca AB and Nektar Therapeutics, dated September 20, 2009.+
21.1	(26)	Subsidiaries of Nektar Therapeutics
23.1	(26)	Consent of Independent Registered Public Accounting Firm
24		Power of Attorney (reference is made to the signature page)
31.1	(26)	Certification of Nektar Therapeutics’ principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a)
31.2	(26)	Certification of Nektar Therapeutics’ principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a)
32.1*	(26)	Section 1350 Certifications

____________

+	Confidential treatment with respect to specific portions of this Exhibit has been requested, and such portions are omitted and have been filed separately with the SEC.

++	Management contract or compensatory plan or arrangement.

*

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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(1)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Annual Report on Form 10-K for the year ended December 31, 2008.

(2)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.

(3)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

(4)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on June 4, 2001.

(5)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on January 8, 2002.

(6)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on January 23, 2003.

(7)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on December 12, 2007.

(8)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on September 28, 2005.

(9)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.

(10)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Registration Statement on Form S-8 (No. 333-98321), filed on August 19, 2002.

(11)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

(12)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Registration Statement on Form S-8 (No. 333-71936), filed on October 19, 2001, as amended.

(13)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Annual Report on Form 10-K, as amended, for the year ended December 31, 2005.

(14)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on June 7, 2006.

(15)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.

(16)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.

(17)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on December 14, 2009.

(18)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Annual Report on Form 10-K for the year ended December 31, 2007.

(19)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K/A, filed on March 16, 2006.

(20)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

 

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(21)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on November 21, 2008.

(22)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on January 2, 2009.

(23)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on November 30, 2009.

(24)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

(25)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.

(26)	Filed herewith.

 

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SIGNATURES

Pursuant to 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, in the City of San Carlos, County of San Mateo, State of California on March 2, 2010.

By:	/s/ John Nicholson
	John Nicholson
	Senior Vice President and Chief Financial Officer
By:	/s/ Jillian B. Thomsen
	Jillian B. Thomsen
	Senior Vice President and Chief Accounting Officer

 

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POWER OF ATTORNEY

KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John Nicholson and Jillian B. Thomsen and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratify and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated:

SIGNATURE		TITLE		DATE
/s/ Howard W. Robin		Chief Executive Officer, President and Director		March 2, 2010
Howard W. Robin		(Principal Executive Officer)
/s/ John Nicholson		Senior Vice President and Chief Financial		March 2, 2010
John Nicholson		Officer (Principal Financial Officer)
/s/ Jillian B. Thomsen		Senior Vice President Finance and Chief
Jillian B. Thomsen		Accounting Officer (Principal Accounting Officer)		March 2, 2010
/s/ Robert B. Chess		Director, Chairman of the Board of Directors		March 2, 2010
Robert B. Chess
/s/ R. Scott Greer		Director		March 2, 2010
R. Scott Greer
/s/ Joseph J. Krivulka		Director		March 2, 2010
Joseph J. Krivulka
/s/ Christopher A. Kuebler		Director		March 2, 2010
Christopher A. Kuebler
/s/ Lutz Lingnau		Director		March 2, 2010
Lutz Lingnau
/s/ Susan Wang		Director		March 2, 2010
Susan Wang
/s/ Roy A. Whitfield		Director		March 2, 2010
Roy A. Whitfield
/s/ Dennis L. Winger		Director		March 2, 2010
Dennis L. Winger

 

 

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Except as so indicated in Exhibit 32.1, the following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.

Exhibit Number		Description of Documents
2.1	(1)	Asset Purchase Agreement, dated October 20, 2008, by and between Nektar Therapeutics, a Delaware corporation, AeroGen, Inc., a Delaware corporation and wholly-owned subsidiary of Nektar Therapeutics, Novartis Pharmaceuticals Corporation, a Delaware corporation, and Novartis Pharma AG, a Swiss corporation+
3.1	(2)	Certificate of Incorporation of Inhale Therapeutic Systems (Delaware), Inc.
3.2	(3)	Certificate of Amendment of the Amended Certificate of Incorporation of Inhale Therapeutic Systems, Inc.
3.3	(4)	Certificate of Designation of Series A Junior Participating Preferred Stock of Nektar Therapeutics
3.4	(5)	Certificate of Designation of Series B Convertible Preferred Stock of Nektar Therapeutics
3.5	(6)	Certificate of Ownership and Merger of Nektar Therapeutics
3.6	(26)	Certificate of Ownership and Merger of Nektar Therapeutics AL, Corporation with and into Nektar Therapeutics
3.7	(7)	Amended and Restated Bylaws of Nektar Therapeutics
4.1		Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6 and 3.7
4.2	(6)	Specimen Common Stock certificate
4.3	(4)	Rights Agreement, dated as of June 1, 2001, by and between Nektar Therapeutics and Mellon Investor Services LLC, as Rights Agent
4.4	(4)	Form of Right Certificate
4.5	(8)	Indenture, dated September 28, 2005, by and between Nektar Therapeutics, as Issuer, and J.P. Morgan Trust Company, National Association, as Trustee
4.6	(8)	Registration Right Agreement, dated as of September 28, 2005, among Nektar Therapeutics and entities named therein
10.1	(9)	1994 Non-Employee Directors’ Stock Option Plan, as amended++
10.2	(10)	1994 Employee Stock Purchase Plan, as amended and restated++
10.3	(11)	2000 Non-Officer Equity Incentive Plan, as amended and restated++
10.4	(12)	Form of 2000 Non-Officer Equity Incentive Plan Stock Option Agreement (Nonstatutory Stock Option)++
10.5	(12)	Form of 2000 Non-Officer Equity Incentive Plan Stock Option Agreement (Nonstatutory (Unapproved) Stock Option)++
10.6	(13)	Forms of 2000 Non-Officer Equity Incentive Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement++
10.7	(14)	2000 Equity Incentive Plan, as amended and restated++
10.8	(15)	Form of Stock Option Agreement under the 2000 Equity Incentive Plan++
10.9	(13)	Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under the 2000 Equity Incentive Plan++
10.10	(16)	Form of Non-Employee Director Stock Option Agreement under the 2000 Equity Incentive Plan++

 

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10.11	(16)	Form of Non-Employee Director Restricted Stock Unit Agreement under the 2000 Equity Incentive Plan++
10.12	(16)	Employment Transition and Separation Release Agreement, executed effective on September 4, 2007, with Louis Drapeau++
10.13	(16)	Employment Transition and Separation Release Agreement, executed effective on October 5, 2007, with David Johnston++
10.14	(17)	Amended and Restated Compensation Plan for Non-Employee Directors++
10.15	(11)	401(k) Retirement Plan++
10.16	(26)	2010 Discretionary Performance-Based Incentive Compensation Policy++
10.17	(1)	Amended and Restated Change of Control Severance Benefit Plan++
10.18	(19)	Transition and Retirement Agreement, dated March 13, 2006, with Ajit S. Gill++
10.19	(20)	Letter Amendment, dated October 5, 2006, with Ajit S. Gill, amending that certain Transition and Retirement Agreement, dated March 13, 2006, with Mr. Gill++
10.20	(1)	2008 Equity Incentive Plan++
10.21	(1)	Forms of Stock Option Grant Notice and of Stock Option Agreement under the 2008 Equity Incentive Plan++
10.22	(1)	Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under the 2008 Equity Incentive Plan++
10.23	(21)	Separation and General Release Agreement, dated November 17, 2008, with John S. Patton++
10.24	(22)	Bonus and General Release Agreement, dated December 27, 2008, with Nevan C. Elam++
10.25	(16)	Form of Severance Letter for executive officers of the company++
10.26	(1)	Amended and Restated Letter Agreement, executed effective on December 1, 2008, with Howard W. Robin++
10.27	(1)	Amended and Restated Letter Agreement, executed effective on December 1, 2008, with John Nicholson++
10.28	(1)	Amended and Restated Letter Agreement, executed effective on December 1, 2008, with Bharatt M. Chowrira, Ph.D., J.D.++
10.29	(23)	Separation and General Release Agreement between Nektar Therapeutics and Randall W. Moreadith, M.D., Ph.D., dated November 23, 2009.++
10.30	(16)	Amended and Restated Built-to-Suite Lease between Nektar Therapeutics and BMR-201 Industrial Road LLC, dated August 17, 2004, as amended on January 11, 2005 and July 19, 2007
10.31	(25)	Sublease, dated as of September 30, 2009, by and between Pfizer Inc. and Nektar Therapeutics.+
10.32	(24)	Settlement Agreement and General Release, dated June 30, 2006, by and between The Board of Trustees of the University of Alabama, The University of Alabama in Huntsville, Nektar Therapeutics AL Corporation (a wholly-owned subsidiary of Nektar Therapeutics), Nektar Therapeutics and J. Milton Harris
10.33	(16)	Co-Development, License and Co-Promotion Agreement, dated August 1, 2007, between Nektar Therapeutics (and its subsidiaries) and Bayer Healthcare LLC+
10.34	(18)	Termination Agreement and Mutual Release, dated November 9, 2007, between Nektar Therapeutics and Pfizer Inc.+
10.35	(1)	Exclusive Research, Development, License and Manufacturing and Supply Agreement, by and among Nektar AL Corporation, Baxter Healthcare SA, and Baxter Healthcare Corporation, dated September 26, 2005, as amended+

 

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10.36	(1)	Exclusive License Agreement, dated December 31, 2008, between Nektar Therapeutics, a Delaware corporation, and Novartis Pharma AG, a Swiss corporation+
10.37	(25)	License Agreement by and between AstraZeneca AB and Nektar Therapeutics, dated September 20, 2009.+
21.1	(26)	Subsidiaries of Nektar Therapeutics
23.1	(26)	Consent of Independent Registered Public Accounting Firm
24		Power of Attorney (reference is made to the signature page)
31.1	(26)	Certification of Nektar Therapeutics’ principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a)
31.2	(26)	Certification of Nektar Therapeutics’ principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a)
32.1*	(26)	Section 1350 Certifications

____________

+	Confidential treatment with respect to specific portions of this Exhibit has been requested, and such portions are omitted and have been filed separately with the SEC.

++	Management contract or compensatory plan or arrangement.

*

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.

(1)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Annual Report on Form 10-K for the year ended December 31, 2008.

(2)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.

(3)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

(4)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on June 4, 2001.

(5)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on January 8, 2002.

(6)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on January 23, 2003.

(7)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on December 12, 2007.

(8)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on September 28, 2005.

(9)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.

(10)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Registration Statement on Form S-8 (No. 333-98321), filed on August 19, 2002.

 

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(11)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

(12)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Registration Statement on Form S-8 (No. 333-71936), filed on October 19, 2001, as amended.

(13)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Annual Report on Form 10-K, as amended, for the year ended December 31, 2005.

(14)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on June 7, 2006.

(15)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.

(16)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.

(17)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on December 14, 2009.

(18)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Annual Report on Form 10-K for the year ended December 31, 2007.

(19)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K/A, filed on March 16, 2006.

(20)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

(21)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on November 21, 2008.

(22)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on January 2, 2009.

(23)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Current Report on Form 8-K, filed on November 30, 2009.

(24)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

(25)	Incorporated by reference to the indicated exhibit in Nektar Therapeutics’ Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.

(26)	Filed herewith.

 

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