$65M COST CUTTING POSITIVE STEPS; DO AVANDIA & EXUBERA
STORIES EXEMPLIFY OUR CULTURE? SHORT-TERM GAIN TRUMPS LONG-
TERM PAIN: FLAGS OF OUR FATHERS SALUTE FALLEN NEKTARINES

Stock Data
Revenues
12-Month Price Target
$19.00
FY ends December
2006A
2007E
2008E
52-Week Range
$21.22 - 11.03
Revenue (MM)
$217.7
$236.7
$207.4
10-Day Avg. Daily Volume
2,553,155
Previous Estimate (MM)
-
NC
NC
Price/Revenue
5.0x
4.6x
5.2x
EV/Revenue
4.7x
4.3x
4.9x
Secular Growth Rate
NM
Capitalization
Earnings Per Share*
Shares Outstanding (MM)
91.5
Q1
($0.33)
($0.28)A
NE
Market Capitalization (MM)
$1,078.2
Q2
($0.34)
NE
NE
Enterprise Value (MM)
$1,020.2
Q3
($0.22)
NE
NE
Debt/Total Cap. (3/31/06)
61.7%
Q4
($0.32)
NE
NE
Cash (3/31/06) (MM)
$398.0
Fiscal Year EPS
($1.21)
($0.95)
$0.00
Cash/Share (3/31/06)
$4.35
Previous Estimate
-
NC
NC
P/E
NM
NM
NM
*Earnings Per Share before extraordinary items
NC indicates no change from current estimate. NE indicates no estimate. NM indicates not meaningful.
Sources: WR Hambrecht + Co estimates and company reports

Please see the
Important Disclosures
Section
at the end of
this report.
May 24, 2007
SPECIALTY
PHARMACEUTICALS

Andrew Forman
aforman@wrhambrecht.com
703.279.6442
John Kwon
jkwon@wrhambrecht.com
703.279.6443

WR HAMBRECHT + CO
www.wrhambrecht.com

Investment Conclusion: New Nektar management has likely moved the right "Nektarines" up and
moved the non-essential personnel out with last nights announced $65M cost cutting initiatives that
will result in close to 350 employees (full and part time) leaving the company. Even if Exubera had
been a successful launch, we estimate about half these cuts were still necessary. But until Pfizer
Exubera sales catch up, with manufacturing that could be at least another year (less if Pfizer
marketing wakes up and starts a DTC campaign in the next few weeks to capture its share of the 1
million U.S. Avandia patients who can easily switch), the San Carlos insulin dry powder factory
could sit idle (and likely go to single shift in the coming months) for some time. At this critical
juncture, we can only applaud Nektars new CEO for taking action in just four short months. New
COO, Hoyung Huh, M.D., PhD., a cerebral giant who shaped Nektars focused strategic plan from
which new proprietary programs such as Pulmonary Amikacin with impressive Phase 2 results
published this week, gets to run operations, while Sr. VP Chris Searcy stays on to in-license,
partners or divest products and drug delivery technologies. Mike Simms, who we worked with over
a decade, ago brings decades of manufacturing experience is promoted to stay the course and we
presume to improve gross margins across all operations, which includes the PEG business which
could use more help. CFO Lou Drapeau will retire and with the tough balance decisions made
reducing the burn rate to around $40M per previous guidance, Nektar can take its time hiring a
replacement, in our view. In short, these look like all the right moves to us. As this was all expected
from the Q1 conference call, we arent changing estimates at this juncture, but we would like to
offer the following reflections on Exubera and Avandia whose stories may be more connected to
what our culture has become, and which may explain why diabetes has become the epidemic of
our time as short-term gains trump long-term sacrifice. Avandia & Exubera: Case Studies in U.S. Culture? Memorial Day is a time for reflection.
So as we head off on our annual pilgrimages to be with family and friends with links to
previous generations, (in this case to the origins of a diabetic born in the depression at the
Jersey Shore), it's worth taking some pause to consider the ancestors; the brave who have
fallen, and who paved the way for where we are today. Stepping out from the world as a
pharmaceutical analyst for just a minute, maybe what's changed more than anything in this
generation is our culture. The spread between the short-term gain and long-term investment
seems to have widened. Home equity ATMs vs. Dads paying off the mortgage early in the
late 60s; health care, global warming and budget deficits are being transferred to our kids'
generation so we can keep having it all today. So maybe it's no small wonder that the





Page 2 May 24, 2007





pharmaceutical industry, FDA, physicians, payors, patients, and perhaps most of all,
investors too have adapted to this culture. In diabetes, Glaxo played the HBA1C reduction
endpoint game instant results, but if the New England Journal of Medicine Avandia report
has it right, dramatically raised the complications' mortgage balance for millions of diabetics
by increasing the risk of heart disease by 64%. But that hidden cost, like the fine print from a
sub-prime mortgage, was hidden and didnt serve the vested interests of todays
stakeholders that now contribute to the now $2 trillion U.S. healthcare industry. Sure,
diabetics are at a greater risk of heart disease to begin with, but insulin doesnt do this, and
the convenience advantages of Exubera (not to mention better HBA1C vs. Avandia that
were compelling data two years ago), have been a great advance to diabetes disease
management. But so far, it would appear that our culture that pays a premium for short-term
easy fixes today while avoiding small sacrifices for a better tomorrow, has served as an
adoption barrier. No remote? Dont get off the couch. No easy pass? Stay home. Not a pill?
Unless theres some immediate dramatic benefit which Amylin's (AMLN: Buy) Byettas
weight loss has demonstrated within just weeks after injections, few of us want to do the
work. We suspect our fathers who planted flags, for the tens of thousands that perished,
many who might one day be diabetics, wouldnt wince about taking insulin injections and
would find Exubera easy to use. And the size? Exubera would be a proud badge of courage,
the weapon diabetic soldiers would display for all to see as they marched forward to battle
this lifelong disease.
But todays culture may not favor the diabetes management value proposition that Exubera
offers. Even Pfizer, which now has well over $3 billion in sunk costs dating back to 1995
(including some $500M in Exubera inventory today), wasnt able to move beyond the
pharma pill marketing model to disease management reality that we need to stop this $150B
health care problem at least not in the first year. But we believe theres still hope and great
opportunity (see our Carpe Diem note out May 22). As we gather this weekend with those
who may remember the past and remind us where we have come from, lets remember that
the greatest challenges of history whether military confrontations of yesterday and today or
health care crises of today and tomorrow, people from all walks of life came together and
stuck together for a long time to get to the top. Memorial Day reminds us of the Flags of our
Fathers, but with the news out of Nektar last night, no small measure of gratitude is in order
to nearly half the Nektarines who helped get Exubera to the top to NDA filing, FDA
approval and launch, who are being let go. Wars are hell and as weve seen, little seems to
go according to plan, as has certainly been the case as we approach this years ADA
anniversary when Exubera was launched. These Nektarines embraced in an epic struggle,
some having enlisted for over a decade, fought with purpose and resolve and most, we
suspect, received less compensation than they could have. Thats hard to find these days:
sacrificing today for a better tomorrow, that cant be seen today. Thats something the
greatest generation, as Tom Brokaw wrote, would be proud of. Nektar (NKTR)
Profit and Loss Statement
($ in millions, except per-share data)
2005
2006A
2007E
2008E
2009E
2010E
Total Product & Royalty Revenue
29.4
153.6
186.7
162.4
327.5
525.5
Contract Revenues
81.6
56.3
50.0
45.0
50.0
50.0
Exubera Commercial Readiness Revenues
15.3
7.9
0.0
0.0
0.0
0.0
Total Revenues
126.3
217.7
236.7
207.4
377.5
575.5
Cost of Sales
23.7
113.5
127.0
70.6
149.6
247.5
Gross Profit
102.5
104.3
109.7
136.7
227.8
328.0
R&D
151.7
140.9
140.0
100.0
110.0
118.0
SG&A
43.9
69.3
60.0
40.0
43.0
45.5
EBITDA
11.7
74.8
164.5
Depreciation & Amortization
15.0
15.0
15.0
15.0
0.0
0.0
Exubera Commercial Readiness Cost
12.3
4.6
0.0
0.0
0.0
0.0
Amortization of Intangible Assets
4.2
4.0
3.8
3.9
3.9
3.9
Operating Income (loss)
(109.4)
(114.6)
(94.1)
(7.2)
70.9
160.6
Interest Expense
11.8
20.3
20.0
12.0
14.0
14.0
Interest and Other Income, net
9.4
25.6
25.0
19.2
11.0
13.0
Pretax Income
(111.9)
(109.3)
(89.1)
0.0
67.9
159.6
Income Tax (benefit)
0.0
(0.8)
0.0
0.0
0.0
47.9
Net Income (Loss) before Extraordinary Charges
(111.9)
(108.5)
(89.1)
0.0
67.9
111.7
Average Shares Fully Diluted (millions)
85.9
89.8
94.0
108.5
110.0
112.0
EPS before Extraordinary Items
(1.30)
(1.21)
(0.95)
0.00
0.62
1.00
Growth Analysis
Total Revenues
10.5%
72.4%
8.7%
-12.4%
82.0%
52.5%
Product Revenues
17.1%
423.0%
21.6%
-13.0%
101.7%
60.5%
Gross Profit
8.5%
1.7%
5.3%
24.6%
66.6%
44.0%
R&D
13.6%
-7.1%
-0.6%
-28.6%
10.0%
7.3%
SG&A
41.6%
58.0%
-13.4%
-33.3%
7.5%
5.8%
Operating Income
-48.0%
-4.7%
17.9%
92.4%
1089.9%
126.4%
Pretax Income
-37.6%
2.3%
18.5%
100.0%
6790.0%
135.0%
Net Income before Extraordinary Charges
-37.8%
3.1%
17.9%
100.0%
6790.0%
64.5%
Earnings Per Share before Extraordinary Charges
-25.9%
7.3%
21.6%
100.0%
6200.0%
61.5%
Margin Analysis
Gross Profit Margin
81.2%
47.9%
46.4%
65.9%
60.4%
57.0%
Product Gross Margin
19.2%
26.