NEKTAR THERAPEUTICS - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Overview Strategic Direction of Our Business We are a clinical-stage biopharmaceutical company developing a pipeline of drug candidates that utilize our PEGylation and advanced polymer conjugate technology platforms, which are designed to enable the development of new molecular entities that target known mechanisms of action. Our current proprietary pipeline is comprised of drug candidates across a number of therapeutic areas including oncology, pain, anti-infectives, and immunology. Our research and development activities involve small molecule drugs, peptides and other biologic drug candidates. We create innovative drug candidates by using our proprietary advanced polymer conjugate technologies and expertise to modify the chemical structure of pharmacophores to create new molecular entities. Polymer chemistry is a science focused on the synthesis or bonding of polymer architectures with drug molecules to alter the properties of a molecule when it is bonded with polymers. Additionally, we may utilize established pharmacologic targets to engineer a new drug candidate relying on a combination of the known properties of these targets and our proprietary polymer chemistry technology and expertise.

Our drug candidates are designed to improve the overall benefits and use of a drug for patients by improving the metabolism, distribution, pharmacokinetics, pharmacodynamics, half-life and/or bioavailability of drugs. Our objective is to apply our advanced polymer conjugate technology platform to create new drug candidates in multiple therapeutic areas that address large potential markets.

Our most advanced proprietary product candidate, naloxegol (formerly known as NKTR-118), is a peripheral opioid antagonist which has completed Phase 3 clinical studies for the treatment of opioid-induced constipation (OIC). We are a party to an exclusive worldwide license agreement with AstraZeneca for the global development and commercialization of naloxegol and naloxegol fixed-dose combination products (formerly known as NKTR-119). The core Phase 3 clinical development program for naloxegol, which AstraZeneca calls the KODIAC program, is comprised of four clinical trials which are designed to investigate the safety and efficacy of naloxegol for the treatment of OIC in patients with non-cancer related pain. The outcome and timing of the naloxegol development program will have a substantial impact on our financial condition as we are entitled to up to $95 million in regulatory filing milestones and $140 million in commercial launch milestones.

On November 12, 2012, AstraZeneca announced positive top-line results from two Phase 3 efficacy and safety clinical trials and from a safety extension trial (KODIAC-04, -05, and -07). On February 26, 2013, AstraZeneca announced positive top-line results from the long-term safety study (KODIAC-08) of naloxegol in patients with OIC. AstraZeneca has stated that it plans to submit an NDA filing in the U.S. and a marketing authorization application (MAA) filing in the E.U.

in the third quarter of 2013, pending AstraZeneca's final preparation of the registration package and a pre-NDA meeting with the FDA. In the event regulatory approval filings are submitted by AstraZeneca and accepted by the U.S. Food and Drug Administration (FDA) and by the European Medicines Agency (EMA), we would be entitled to receive $95.0 million in milestone payments. As a 56-------------------------------------------------------------------------------- Table of Contents result, the outcome of AstraZeneca's determination to make regulatory filings for naloxegol with the FDA and EMA is critical to our financial position in 2013 as well as our future business prospects as a result of the significant economic stake that we have in success of the potential commercialization of naloxegol.

Our second most advanced proprietary drug candidate, etirinotecan pegol (formerly known as NKTR-102), is a next-generation topoisomerase I inhibitor.

Etirinotecan pegol is currently being evaluated as a single-agent therapy in a Phase 3 open-label, randomized, multicenter clinical study in patients with metastatic breast cancer. This Phase 3 clinical study, which we call the BEACON study (BrEAst Cancer Outcomes with NKTR-102), is scheduled to enroll approximately 840 patients with metastatic breast cancer that have previously received treatment with an anthracycline, a taxane, and capecitabine. The BEACON study will require a substantial investment over the next two years. In November 2012, etirinotecan pegol was designated by the FDA as a Fast Track development program for the treatment of patients with locally recurrent or metastatic breast cancer progressing after treatment with an anthracycline, a taxane, and capecitabine. We have completed an expanded Phase 2 clinical study for etirinotecan pegol in patients with platinum-resistant ovarian cancer. We are currently in the process of finalizing the data in furtherance of planned meetings with health authorities in 2013 which will guide our future development and regulatory strategy for etirinotecan pegol in ovarian cancer. In addition, a Phase 2 clinical study for etirinotecan pegol in patients with metastatic colorectal cancer is still open for enrollment.

We have a significant collaboration with Bayer Healthcare LLC (Bayer) to develop BAY41-6551 (Amikacin Inhale, formerly known as NKTR-061), which is an inhaled solution of amikacin, an aminoglycoside antibiotic, that has completed Phase 2 clinical development. We originally developed the liquid aerosol inhalation platform and Amikacin Inhale and entered into a collaboration agreement with Bayer in August 2007 to further advance the drug candidate's development and potential commercialization. The stability studies on the nebulizer device that needed to be completed prior to the start of the Phase 3 clinical study were successfully completed in February 2013. The Phase 3 clinical program is expected to be initiated by Bayer in March 2013. In 2011, Bayer achieved agreement with the FDA on the design of the planned Phase 3 clinical studies of BAY41-6551 under the Special Protocol Assessment process that is intended to support the submission of a NDA if the planned Phase 3 clinical study is successful.

We also have a significant collaboration with Baxter Healthcare to identify and develop PEGylated drug candidates with the objective of providing new long-acting therapies for hemophilia patients. Under the terms of this collaboration, we are providing a license to our intellectual property and our PEGylation technology and expertise. Baxter is responsible for all clinical development. The first drug candidate in this collaboration, BAX 855, is a longer-acting (PEGylated) form of a full-length recombinant factor VIII (rFVIII) protein which has completed Phase 1 clinical development in patients with hemophilia A. In February 2013, Baxter initiated a Phase 3 multi-center, open-label clinical study called PROLONG-ATE that will enroll more than 100 previously treated adult patients with severe hemophilia A to assess the efficacy, safety and pharmacokinetics of BAX 855 for prophylaxis and on-demand treatment of bleeding. If BAX 855 is approved by health authorities and is successfully commercialized by Baxter, this would represent a substantial royalty revenue opportunity for us, subject to significant risks and uncertainties relating to regulatory approval with health authorities and subsequent commercial success.

While the late stage clinical development programs described above are key elements of the future success of our company, we believe it is critically important that we continue to make substantial investments in our earlier-stage drug candidate pipeline. For example, in April 2012 we advanced NKTR-192, our short-acting opioid drug candidate, into Phase 1 clinical studies and in July 2012 we advanced NKTR-181 into a Phase 2 clinical study and plan to conduct a human abuse liability study for NKTR-181 in the first half of 2013. While we believe that our substantial investment in research and development has the potential to create significant value if one or more of our drug candidates demonstrate positive clinical results and receive regulatory approval in one or more major markets, drug research and development is an inherently uncertain process and there is a high risk of failure at every stage prior to approval and the timing and outcome of clinical trial results are extremely difficult 57-------------------------------------------------------------------------------- Table of Contents to predict. Clinical development successes and failures can have a disproportionate positive or negative impact on our scientific and medical prospects, financial prospects, financial condition, and market value.

Historically, we have entered into a number of license and supply contracts under which we manufactured and supplied our proprietary PEGylation reagents on a cost-plus or fixed price basis. Our current strategy is to manufacture and supply PEGylation reagents to support our proprietary drug candidates or our third party collaborators where we have a strategic development and commercialization relationship or where we derive substantial economic benefit.

As a result, whenever possible, we are renegotiating or not seeking renewal of legacy manufacturing supply arrangements that do not include a strategic development or commercialization component. For example, in October 2010, we entered into a supply, dedicated suite and manufacturing guarantee agreement with Amgen, Inc. and Amgen Manufacturing, Limited, which has significantly amended economic and other terms in the non-exclusive supply and license agreement we previously entered into with Amgen in 1995. In addition, in December 2010, we entered into an amended manufacturing and supply agreement with Merck (through its acquisition of Schering-Plough Corporation) to provide for transfer to an alternative manufacturer and revised economics for an interim supply arrangement until that transition is completed.

Key Developments and Trends in Liquidity and Capital Resources At December 31, 2012, we had approximately $302.2 million in cash, cash equivalents, and investments in marketable securities and $149.0 million in indebtedness. The indebtedness includes $125.0 million in aggregate principal amount of 12.0% senior secured notes due July 15, 2017 which we issued during the three months ended September 30, 2012, but excludes our long-term liability relating to the sale of future royalties under the Purchase and Sale Agreement with RPI Finance Trust (RPI). As is further described in Note 7, this royalty obligation liability will not be settled in cash, but we may be required to make a payment of up to $7.0 million in 2014 if the worldwide net sales thresholds of MIRCERA® in 2013 are not met. During the year-ended December 31, 2012, we retired $215.0 million in aggregate principal amount of our previously outstanding convertible subordinated notes.

As of December 31, 2012, we had at least twelve months of working capital to fund our current business plans. We expect the clinical development of our proprietary drug candidates including etirinotecan pegol, Amikacin Inhale, NKTR-181, and NKTR-192 will require significant investment in order to continue to advance in clinical development with the objective of entering into a collaboration partnership or obtaining regulatory approval. However, we have no credit facility or any other sources of committed capital. In addition, while in the past we have received a number of significant payments from license and collaboration agreements and other significant transactions, we do not currently anticipate completing new transactions with substantial upfront payments in the near -term. Our current business plan is also subject to significant uncertainties and risks as a result of, among other factors, expenses being higher than anticipated, unplanned expenses, cash receipts being lower than anticipated, and the need to satisfy contingent liabilities including litigation matters and indemnification obligations.

The availability and terms of various financing alternatives substantially depend on the success or failure of our drug development programs including naloxegol, etirinotecan pegol, BAX 855, Amikacin Inhale, NKTR-181, and NKTR-192.

The availability and terms of financing alternatives and any future significant payments from existing or new collaborations all depend on the positive outcome of ongoing or planned clinical studies, whether we or our partners are successful in obtaining health authority approvals in major markets, and if approved, the commercial success of these drugs. In particular, we are entitled to up to $235.0 million of regulatory and commercial launch milestones under our license agreement with AstraZeneca, $95.0 million of which is related to AstraZeneca submitting regulatory approval filings for naloxegol with the FDA and with the EMA. AstraZeneca has indicated that it plans to submit regulatory filings for naloxegol subject to subject to AstraZeneca's final preparation of the registration package and a pre-NDA meeting with the FDA. In the event we do not enter into any new collaboration partnerships with significant up-front payments or do not receive the naloxegol regulatory milestone payments in 2013, we would likely be required to pursue financing alternatives.

58-------------------------------------------------------------------------------- Table of Contents In the event we determine to explore financing alternatives, our objective would be to first pursue financing alternatives that are not dilutive to the ownership of our common stock security holders. However, if non-dilutive financing alternatives are not available to us on commercially reasonable terms or at all, we could be required to pursue dilutive equity-based financing alternatives such as an offering of convertible debt or common stock.

Results of Operations Years Ended December 31, 2012, 2011, and 2010 Revenue (in thousands, except percentages) Percentage Percentage Increase/ Increase/ Increase/ Increase/ Year Ended December 31, (Decrease) (Decrease) (Decrease) (Decrease) 2012 vs. 2011 vs. 2012 vs. 2011 vs.

2012 2011 2010 2011 2010 2011 2010 Product sales $ 35,399 $ 24,864 $ 27,412 $ 10,535 $ (2,548 ) 42 % (9 )% Royalty revenues 4,874 10,327 7,255 (5,453 ) 3,072 (53 )% 42 % Non cash royalty revenue related to sale of future royalties 10,791 - - 10,791 - 100 % N/A License, collaboration and other 30,127 36,289 124,372 (6,162 ) (88,083 ) (17 )% (71 )% Total revenue $ 81,191 $ 71,480 $ 159,039 $ 9,711 $ (87,559 ) 14 % (55 )% Our revenue is derived from our collaboration agreements, under which we may receive product sales revenue, royalties, license fees, milestone payments or contract research payments. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured. The amount of upfront fees received under our license and collaboration agreements allocated to continuing obligations, such as manufacturing and supply commitments, are recognized ratably over our expected performance period under the arrangement.

As a result, there may be significant variations in the timing of receipt of cash payments and our recognition of revenue. We make our best estimate of the period over which we expect to fulfill our performance obligations. Given the uncertainties in research and development collaborations, significant judgment is required by us to determine the performance periods.

Product sales Product sales include fixed price and cost-plus manufacturing and supply agreements with our collaboration partners. Product sales increased during the year ended December 31, 2012 compared to the year ended December 31, 2011 as a result of increased product demand from a number of our collaboration partners.

Product sales decreased during the year ended December 31, 2011 compared to the year ended December 31, 2010 due in part to the transfer of manufacturing activities to certain collaboration partners. The timing of shipments is based solely on the demand and requirements of our collaboration partners and is not ratable throughout the year. We expect product sales to increase in 2013 as compared to 2012.

Royalty revenues and non cash royalty revenue related to sale of future royalties We receive royalty revenue from certain of our collaboration partners based on their net sales of commercial products. Royalty revenues decreased during the year ended December 31, 2012 compared to the year ended December 31, 2011 primarily as a result of the sale of the royalties we receive from UCB's CIMZIA ® and Roche's MIRCERA® product sales as is further described below. Royalty revenues increased during the year ended December 31, 2011 as compared to the year ended December 31, 2010 primarily as a result of the increase in royalties received from net sales of CIMZIA® and MIRCERA ®. We expect royalties to decrease in 2013 as compared to 2012.

59-------------------------------------------------------------------------------- Table of Contents During the years ended December 31, 2011 and 2010, we recognized $8.3 million and $5.4 million, respectively, in aggregate royalties from net sales of CIMZIA® and MIRCERA ®. In February 2012, we sold all of our rights to receive future royalty payments on CIMZIA ® and MIRCERA® effective for all periods from January 1, 2012 through the life of the royalty obligation. As described in Note 7 to our Consolidated Financial Statements, this royalty sale transaction has been recorded as a liability that amortizes over the estimated royalty payment period. As a result of this liability accounting, even though the royalties from UCB and Roche are remitted directly to the purchaser, we will continue to record revenue for these royalties. During the year ended December 31, 2012, we recognized $13.5 million in aggregate royalties from net sales of CIMZIA® and MIRCERA®, of which the $2.7 million recognized in the three months ended March 31, 2012 was retained by us as these amounts resulted from product sales in the fourth quarter of 2011 and the $10.8 million recognized in the nine months ended December 31, 2012 was remitted directly to the purchaser as these amounts resulted from product sales in the first three quarters of 2012. We expect non cash royalties from net sales of CIMZIA® and MIRCERA® to increase in 2013 as compared to 2012.

License, collaboration and other revenue License, collaboration and other revenue includes amortization of upfront payments and milestone payments received in connection with our license and collaboration agreements and reimbursed research and development expenses. The level of license, collaboration and other revenue depends in part upon the estimated amortization period of the upfront payments, the achievement of milestones, the continuation of existing collaborations, the amount of reimbursed research and development work, and entering into new collaboration agreements, if any. License, collaboration and other revenue for the year ended December 31, 2012 decreased compared to the year ended December 31, 2011 primarily due to the recognition in 2011 of a $5.0 million license fee from an agreement signed in September 2011.

License, collaboration and other revenue for the year ended December 31, 2011 decreased compared to the year ended December 31, 2010 primarily due to the complete recognition as of December 31, 2010 of the $125.0 million upfront payment received in the fourth quarter of 2009 from AstraZeneca in connection with the global license agreement for naloxegol (formerly known as NKTR-118) and naloxegol fixed-dose combination program (formerly known as NKTR-119) This decrease was partially offset by the recognition of the $5.0 million license fee noted above, $6.0 million in milestones earned under existing collaboration agreements, and increases in revenue recognized in 2011 from upfront payments received by us during 2010.

We expect license, collaboration and other revenue in 2013 to increase as compared to 2012 primarily as a result of the recognition of milestones under existing collaboration agreements. In the event regulatory approval filings for naloxegol are submitted by AstraZeneca and accepted by the FDA and by the EMA, we would be entitled to $95.0 million in milestone payments. If these filings occur in 2013, our license, collaboration and other revenue in 2013 will increase significantly from 2012.

The timing and future success of our drug development programs and those of our collaboration partners are subject to a number of risks and uncertainties. See "Part I, Item 1A - Risk Factors" for discussion of the risks associated with the complex nature of our collaboration agreements.

60-------------------------------------------------------------------------------- Table of Contents Revenue by geography Revenue by geographic area is based on locations of our partners. The following table sets forth revenue by geographic area (in thousands): Year Ended December 31, 2012 2011 2010 United States $ 34,591 $ 37,896 $ 29,636 European countries 46,600 33,584 129,403 Total revenue $ 81,191 $ 71,480 $ 159,039 The increase in revenue attributable to European countries for the year ended December 31, 2012 compared to the year ended December 31, 2011 is primarily attributable to increased product sales and royalty revenues from our existing European collaboration partners. The decrease in revenue attributable to European countries for the year ended December 31, 2011 compared to the year ended December 31, 2010 is primarily attributable to the revenue we recognized in 2010 from the AstraZeneca license agreement.

Cost of goods sold (in thousands, except percentages) Percentage Percentage Increase/ Increase/ Increase/ Increase/ (Decrease) (Decrease) (Decrease) (Decrease) Year Ended December 31, 2012 vs. 2011 vs. 2012 vs. 2011 vs.

2012 2011 2010 2011 2010 2011 2010 Cost of goods sold $ 30,428 $ 21,891 $ 25,667 $ 8,537 $ (3,776 ) 39 % (15 )% Product gross profit 4,971 2,973 1,745 1,998 1,228 67 % 70 % Product gross margin 14 % 12 % 6 % Cost of goods sold increased during the year ended December 31, 2012 compared to the year ended December 31, 2011 primarily due to the $10.5 million increase in product sales in 2012. The increase in product gross margin during the year ended December 31, 2012 compared to the year ended December 31, 2011 is primarily due to the decreased cost per unit in 2012 resulting from increased manufacturing activity, resulting in improved overhead absorption.

The decrease in cost of goods sold during the year ended December 31, 2011 compared to the year ended December 31, 2010 is primarily due to the $2.5 million decrease in product sales in 2011 and an increase in overall commercial and proprietary manufacturing activity in 2011 compared to 2010 that resulted in decreased costs per unit. The increase in product gross margin during the year ended December 31, 2011 compared to the year ended December 31, 2010 is primarily due to the different mix of products sold and the decreased costs per unit in 2011 resulting from increased manufacturing activity.

We expect product gross margin to fluctuate in future periods depending on the level and mix of manufacturing orders from our customers due to the fixed cost base associated with our manufacturing activities.

Research and development expense (in thousands, except percentages) Percentage Percentage Increase/ Increase/ Increase/ Increase/ (Decrease) (Decrease) (Decrease) (Decrease) Year Ended December 31, 2012 vs. 2011 vs. 2012 vs. 2011 vs.

2012 2011 2010 2011 2010 2011 2010Research and development expense $ 148,675 $ 126,766 $ 108,065 $ 21,909 $ 18,701 17 % 17 % 61 -------------------------------------------------------------------------------- Table of Contents Research and development expense consists primarily of personnel costs (including salaries, benefits, and stock-based compensation), clinical study costs, direct costs of outside research conducted by clinical research organizations, materials, supplies, licenses and fees. Research and development expense also includes certain overhead allocations consisting of various support and facilities related costs.

The increase in research and development expense for the year ended December 31, 2012 compared to the year ended December 31, 2011 is primarily attributable to the $15.2 million increase in direct research and development program costs, a substantial portion of which is attributable to the etirinotecan pegol (NKTR-102) Phase 3 BEACON clinical study initiated in December 2011 as well as the NKTR-181 Phase 2 clinical study initiated in July 2012. In addition, research and development expense increased due to a $6.2 million increase in salaries and employee benefits resulting from increased headcount to support our expanded clinical development activities.

The increase in research and development expense for the year ended December 31, 2011 compared to the year ended December 31, 2010 is primarily attributable to a $7.5 million increase in direct research and development program and materials costs, a $3.0 million increase in salaries and employee benefits, and a $6.3 million increase in support and facilities-related costs, which includes increased non-cash depreciation and non-cash rent expenses related to the move to our facility in the Mission Bay Area of San Francisco, California (Mission Bay Facility) at the end of 2010.

We utilize our employee and infrastructure resources across multiple development and research programs. The following table shows expenses incurred for preclinical study support, clinical supplies, clinical and regulatory services provided by third parties and direct materials costs for each of our drug candidates. The table also presents other costs and overhead consisting of personnel, facilities and other indirect costs (in thousands): Clinical Year Ended December 31, Study Status (1) 2012 2011 2010 Etirinotecan pegol (NKTR-102) (topoisomerase I inhibitor-polymer conjugate)(2) Phase 3 $ 31,650 $ 13,106 $ 14,730 NKTR-181 (mu-opioid analgesic molecule for chronic pain) Phase 2 13,537 9,747 4,389 BAY41-6551 (Amikacin Inhale)(3) Completed Phase 2 13,512 11,389 12,606 NKTR-192 (mu-opioid analgesic molecule for acute pain) Phase 1 2,676 3,100 - Naloxegol (NKTR-118) (orally available peripheral opioid antagonist)(4) Phase 3 27 988 3,439 Other product candidates Various 4,236 12,071 9,597 Total third party and direct materials costs 65,638 50,401 44,761 Personnel, overhead and other costs 68,781 59,433 48,736 Stock-based compensation and depreciation 14,256 16,932 14,568 Research and development expense $ 148,675 $ 126,766 $ 108,065 (1) Clinical Study Status definitions are provided in the chart found in Part I, Item 1. Business.

(2) In addition, during the year ended December 31, 2011, we made $11.2 million of prepayments to certain vendors in our BEACON study.

(3) We partnered this program with Bayer Healthcare LLC in August 2007. As part of the Novartis Pulmonary Asset Sale in 2008, we retained an exclusive license to this technology for the development and commercialization of this drug candidate.

(4) We partnered this program with AstraZeneca AB (AstraZeneca) in 2009. In general, all development costs incurred by us after partnering with AstraZeneca are reimbursed by AstraZeneca.

62 -------------------------------------------------------------------------------- Table of Contents We expect research and development expense to increase in 2013 as compared to 2012 and to continue at or above the 2012 level for the next several years. We plan to continue to advance etirinotecan pegol in the Phase 3 BEACON study for metastatic breast cancer for which we expect patient enrollment to continue throughout 2013 and the clinical study to continue through 2014. We are also finishing data analysis from the expanded Phase 2 clinical study for etirinotecan pegol in patients with platinum resistant/refractory ovarian cancer in preparation for meetings with health authorities in 2013. At the same time, we continue to advance the Phase 2 clinical study for etirinotecan pegol in colorectal cancer patients. Our current plan is to fund all of the clinical development costs for etirinotecan pegol for the foreseeable future without reimbursement from a collaboration partner. The clinical development costs for the BEACON clinical study will continue to be significant. We estimate that the total third party and direct material costs over the life of the BEACON study will range from approximately $110.0 million to $120.0 million, of which $26.0 million was incurred through the end of 2012. We are unable to estimate the timing or costs to complete the clinical development for etirinotecan pegol across all the potential oncology indications.

In addition to our etirinotecan pegol development activities, in 2013, we plan to continue to enroll the ongoing Phase 2 clinical study for NKTR-181 and also initiate and complete a human abuse liability study for NKTR-181. Further, if the Phase 2 clinical results are successful, we plan to begin preparations for the commencement of Phase 3 clinical studies for NKTR-181. We also plan to continue to advance the development of NKTR-192. We are also actively advancing the preclinical development work for NKTR-171 and NKTR-214 in preparation for entering clinical development in the 2013-2014 timeframe.

In addition, we plan to continue to make substantial investments to support the clinical and commercial manufacturing preparation and scale-up for the nebulizer devices to supply Bayer for the Amikacin Inhale program. Under our collaboration agreement with Bayer, we are responsible for all clinical and commercial supply of the nebulizer devices for this drug candidate. We do not expect to have any significant future research and development costs associated with naloxegol or the naloxegol fixed-dose combination products as AstraZeneca is responsible for all further development and commercialization costs for these drug candidates.

In addition to our drug candidates that we plan to have in clinical development during 2013 and beyond, we believe it is vitally important to continue our substantial investment in a diverse pipeline of new drug candidates to continue to build the value of our drug candidate pipeline and our business. Our discovery research organization is identifying new drug candidates by applying our pegylation technology platform to a wide range of molecule classes, including small molecules and large proteins, peptides and antibodies, across multiple therapeutic areas. We plan to continue to advance our most promising early research drug candidates into preclinical development with the objective to advance these early stage research programs to human clinical studies over the next several years.

Our expenditures on current and future preclinical and clinical development programs are subject to numerous uncertainties in timing and cost to completion.

In order to advance our drug candidates through clinical development, each drug candidate must be tested in numerous preclinical safety, toxicology and efficacy studies. We then conduct clinical studies for our drug candidates that take several years to complete. The cost and time required to complete clinical trials may vary significantly over the life of a clinical development program as a result of a variety of factors, including but not limited to: • the number of patients required for a given clinical study design; • the length of time required to enroll clinical study participants; • the number and location of sites included in the clinical studies; • the clinical studies designs required by the health authorities (i.e.

primary, secondary end points and the size of the study needed to demonstrate efficacy and safety outcomes); • the potential for changing standards of care for the target patient population; 63 -------------------------------------------------------------------------------- Table of Contents • the competition for patient recruitment from competitive drug candidates being studied in the same clinical setting; • the costs of producing supplies of the product candidates needed for clinical trials and regulatory submissions; • the safety and efficacy profile of the drug candidate; • the use of clinical research organizations to assist with the management of the trials; and • the costs and timing of, and the ability to secure, approvals from government health authorities.

Furthermore, our strategy includes the potential of entering into collaborations with third parties to participate in the development and commercialization of some of our drug candidates such as those collaborations that we have already completed for naloxegol and Amikacin Inhale. In these situations, the clinical development program and process for a drug candidate and the estimated completion date will largely be under the control of that third party and not under our control. We cannot forecast with any degree of certainty which of our drug candidates will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements.

The risks and uncertainties associated with our research and development projects are discussed more fully in Item 1A - Risk Factors. As a result of the uncertainties discussed above, we are unable to determine with any degree of certainty the duration and completion costs of our research and development projects, anticipated completion dates or when and to what extent we will receive cash inflows from a collaboration arrangement or the commercialization of a drug candidate.

General and administrative expense (in thousands, except percentages) Percentage Percentage Increase/ Increase/ Increase/ Increase/ (Decrease) (Decrease) (Decrease) (Decrease) Year Ended December 31, 2012 vs. 2011 vs. 2012 vs. 2011 vs.

2012 2011 2010 2011 2010 2011 2010 General and administrative expense $ 41,614 $ 46,760 $ 40,986 $ (5,146 ) $ 5,774 (11 )% 14 % General and administrative expense includes the cost of administrative staffing, business development, marketing, finance, human resources and legal activities.

General and administrative expense decreased during the year ended December 31, 2012 compared to the year ended December 31, 2011 primarily as a result of a $2.7 million payment obligation incurred in 2011 related to the settlement of a commercial litigation matter as well as a $2.1 million decrease in non-cash stock-based compensation expense in 2012 as compared to 2011.

For the year ended December 31, 2011 compared to the year ended December 31, 2010, general and administrative expense increased by $2.7 million due to the payment obligation related to the settlement of a commercial litigation matter noted above. In addition, general and administrative expense increased due to personnel-related costs, support and facilities-related costs, and other administrative costs.

In 2013, we expect general and administrative expenses to increase modestly compared to 2012.

64 -------------------------------------------------------------------------------- Table of Contents Impairment of long lived assets (in thousands except percentages) Percentage Percentage Increase/ Increase/ Increase/ Increase/ (Decrease) (Decrease) (Decrease) (Decrease) Year Ended December 31, 2012 vs. 2011 vs. 2012 vs. 2011 vs.

2012 2011 2010 2011 2010 2011 2010 Impairment of long-lived assets $ 1,675 $ - $ 12,576 $ 1,675 $ (12,576 ) 100 % (100 )% In an effort to reduce ongoing operating costs and improve our organizational structure, efficiency and productivity, in March 2012, we announced a plan to consolidate our U.S.-based research activities at our existing San Francisco location and to cease the use of and offer for sale one of our buildings located in Huntsville, Alabama that was dedicated to research activities. As a result, we concluded that the combined carrying value of the land and building exceeded fair value and we recorded an impairment loss of $1.7 million in March 2012. No further impairment losses were recorded in the year ended December 31, 2012, however, until we dispose of these assets, we will update our analysis of their fair value on a regular basis and such updates could result in further impairment charges in future periods. As of December 31, 2012, the remaining net book value of these assets is $2.8 million.

During the year ended December 31, 2010, we relocated all of our operations previously located in San Carlos, California, including our corporate headquarters, to our Mission Bay Facility in San Francisco, California. We determined that the carrying value of the San Carlos facility exceeded its fair value based on a discounted cash flow model and an impairment charge of $12.6 million was recognized as a result. As of December 31, 2012, the remaining net book value of these assets is $1.4 million.

Interest income (in thousands except percentages) Percentage Percentage Increase/ Increase/ Increase/ Increase/ (Decrease) (Decrease) (Decrease) (Decrease) Year Ended December 31, 2012 vs. 2011 vs. 2012 vs. 2011 vs.

2012 2011 2010 2011 2010 2011 2010 Interest income $ 2,315 $ 2,244 $ 1,545 $ 71 $ 699 3 % 45 % Interest income for the year ended December 31, 2012 was consistent with the year ended December 31, 2011.

The increase in interest income for the year ended December 31, 2011 compared to the year ended December 31, 2010 is a result of higher average cash and investment balances partially offset by the impact of lower interest rates earned on our cash, cash equivalents, and available-for-sale investments.

Interest expense (in thousands except percentages) Percentage Percentage Increase/ Increase/ Increase/ Increase/ (Decrease) (Decrease) (Decrease) (Decrease) Year Ended December 31, 2012 vs. 2011 vs. 2012 vs. 2011 vs.

2012 2011 2010 2011 2010 2011 2010 Interest expense $ 15,489 $ 10,223 $ 11,174 $ 5,266 $ (951 ) 52 % (9 )% Non-cash interest expense on liability related to sale of future royalties $ 18,057 $ - $ - $ 18,057 $ - 100 % N/A 65 -------------------------------------------------------------------------------- Table of Contents The increase in interest expense for the year ended December 31, 2012 compared to the year ended December 31, 2011 is attributable to the interest expense recorded on the senior secured notes we issued in 2012. On July 11, 2012, we issued $125.0 million of 12% senior secured notes maturing on July 15, 2017. In connection with this transaction, we retired a principal amount of $42.5 million of our $215.0 million in aggregate principal amount of 3.25% convertible subordinated notes in exchange for $42.5 million in principal amount of 12% senior secured notes. We repaid the remaining $172.4 million in principal amount of convertible subordinated notes in full at maturity on September 28, 2012.

The increase in non-cash interest expense on liability related to sale of future royalties for the year ended December 31, 2012 compared to the year ended December 31, 2011 is attributable to the royalty sale transaction that we completed in 2012. On February 24, 2012, we sold all of our rights to receive future royalty payments on CIMZIA® and MIRCERA® in exchange for $124.0 million.

As described in Note 7 to our Consolidated Financial Statements, this royalty sale transaction has been recorded as a liability that amortizes over the estimated royalty payment period as CIMZIA ® and MIRCERA® royalties are remitted directly to the purchaser. We impute interest on the transaction and record interest expense at the effective interest rate, which we currently estimated to be approximately 17%. There are a number of factors that could materially affect the estimated interest rate and we will assess this estimate on a periodic basis. As a result, future interest rates could differ significantly and any such change in interest rate will be adjusted prospectively.

As a result of the timing of the royalty sale transaction and the issuance of the senior secured notes in 2012, we expect interest expense and non-cash interest expense to increase in 2013 as compared to 2012.

The decrease in interest expense for the year ended December 30, 2011 compared to the year ended December 31, 2010 is primarily attributable to the complete amortization of deferred financing costs during 2010 relating to our 3.25% convertible subordinated notes that matured in September 2012.

Liquidity and Capital Resources We have financed our operations primarily through revenue from product sales, royalties and research and development contracts, as well as public and private placements of debt and equity. As of December 31, 2012, we had cash, cash equivalents and investments in marketable securities of $302.2 million and indebtedness of $149.0 million. The indebtedness includes $125.0 million in aggregate principal amount of 12.0% senior secured notes due July 15, 2017, but excludes our long-term liability relating to the sale of future royalties. As is further described in Note 7 to our Consolidated Financial Statements, this royalty obligation liability will not be settled in cash, but we may be required to make a payment of up to $7.0 million in 2014 if the worldwide net sales thresholds of MIRCERA ® in 2013 are not met. On July 11, 2012, we issued $125.0 million in aggregate principal amount of senior secured notes. In connection with this transaction, we retired a principal amount of $42.5 million of our $215.0 million in aggregate principal amount of 3.25% convertible subordinated notes in exchange for $42.5 million in principal amount of senior secured notes.

As a result of these transactions, we received cash of $82.5 million, less approximately $4.5 million in transaction costs, of which $25.0 million is required to be maintained in a restricted account until July 1, 2015. On September 28, 2012, we repaid the remaining $172.4 million in principal amount on the convertible subordinated notes. Additionally at December 31, 2012, we had letter of credit arrangements with certain financial institutions and vendors, including our landlord, totaling $2.4 million. These letters of credit will expire during 2013 and are secured by investments of similar amounts. We have no material credit facility or other material committed sources of capital.

As of December 31, 2012, we had at least twelve months of working capital to fund our current business plans. We expect the clinical development of our proprietary drug candidates including etirinotecan pegol (NKTR-102), Amikacin Inhale, NKTR-181, and NKTR-192 will require significant investment in order to continue to advance in clinical development with the objective of entering into a collaboration partnership or obtaining regulatory approval. However, we have no credit facility or any other sources of committed capital. In addition, while in the past we have received a number of significant payments from license and collaboration 66 -------------------------------------------------------------------------------- Table of Contents agreements and other significant transactions, we do not currently anticipate completing new transactions with substantial upfront payments in the near -term.

Our current business plan is also subject to significant uncertainties and risks as a result of, among other factors, expenses being higher than anticipated, unplanned expenses, cash receipts being lower than anticipated, and the need to satisfy contingent liabilities including litigation matters and indemnification obligations.

The availability and terms of various financing alternatives substantially depend on the success or failure of our drug development programs including naloxegol, BAX 855, Amikacin Inhale, etirinotecan pegol, NKTR-181, and NKTR-192.

The availability and terms of financing alternatives and any future significant payments from existing or new collaborations all depend on the positive outcome of ongoing or planned clinical studies, whether we or our partners are successful in obtaining health authority approvals in major markets, and if approved, the commercial success of these drugs. In particular, we are entitled to up to $235.0 million of regulatory and commercial launch milestones under our license agreement with AstraZeneca, $95.0 million of which is related to AstraZeneca submitting regulatory approval filings for naloxegol with the FDA and with the EMA. AstraZeneca has indicated that it plans to submit regulatory filings for naloxegol subject to AstraZeneca's preparation of the NDA submission package and a pre-NDA meeting with the FDA. In the event we do not enter into any new collaboration partnerships with significant up-front payments or do not receive the naloxegol regulatory milestone payments in 2013, we would likely be required to pursue financing alternatives. In the event we determine to explore financing alternatives, our objective would be to first pursue financing alternatives that are not dilutive to the ownership of our common stock security holders. However, if non-dilutive financing alternatives are not available to us on commercially reasonable terms or at all, we could be required to pursue dilutive equity-based financing alternatives such as an offering of convertible debt or common stock.

Due to the potential for continued uncertainty in the credit markets in 2013 and thereafter, we may experience reduced liquidity with respect to some of our investments in marketable securities. These investments are generally held to maturity, which is less than two years. However, if the need arises to liquidate such securities before maturity, we may experience losses on liquidation. At December 31, 2012, the average time to maturity of the investments held in our portfolio was approximately four months and the maturity of any single investment did not exceed two years. To date we have not experienced any liquidity issues with respect to these securities, but if such issues arise, we may be required to hold some, or all, of these securities until maturity. We believe that, even allowing for potential liquidity issues with respect to these securities, our remaining cash, cash equivalents, and investments will be sufficient to meet our anticipated cash needs for at least the next twelve months.

Cash flows from operating activities Cash flows used in operating activities for the year ended December 31, 2012 totaled $129.8 million, which includes $148.3 million of net operating cash uses, partially offset by the receipt of $18.5 million from collaboration agreements. Net operating cash uses also include $6.7 million in interest payments on our convertible subordinated notes retired in full on September 28, 2012. We expect that cash flows used in operating activities, excluding upfront and milestone payments received, if any, will increase in 2013 as a result of increased spending on our proprietary research and development programs, in particular, our BEACON study.

Cash flows used in operating activities for the year ended December 31, 2011 totaled $113.7 million, which includes $7.0 million for semi-annual interest payments on our convertible subordinated notes, $11.2 million of prepayments to certain vendors in our BEACON study, and $125.0 million of other net operating cash uses, partially offset by the receipt of $29.5 million from collaboration agreements, of which $16.5 million was included in accounts receivable at December 31, 2010 resulting from an upfront payment obligation arising from an amendment to one of our manufacturing and supply agreements.

During the year ended December 31, 2010, net cash used in operating activities totaled $55.9 million, which primarily consisted of spending on operating costs and expenses and includes $7.0 million for interest payments 67-------------------------------------------------------------------------------- Table of Contents on our convertible subordinated notes, and was partially offset by a $50.0 million upfront payment received from Amgen under the supply, dedicated suite and manufacturing guarantee agreement that we entered into with Amgen in October 2010.

Cash flows from investing activities We purchased $10.6 million, $9.7 million, and $31.5 million of property and equipment in the years ended December 31, 2012, 2011, and 2010, respectively.

Our capital expenditures were higher in 2010 as we constructed the leasehold improvements for the Mission Bay Facility and completed our research and development facility in Hyderabad, India. We expect our capital expenditures in 2013 to be consistent with 2012.

Cash flows used in financing activities On February 24, 2012, we sold all of our rights to receive future royalty payments on CIMZIA ® and MIRCERA® in exchange for $124.0 million. As part of this sale, we incurred approximately $4.4 million in transaction costs.

On July 11, 2012, we issued $125.0 million of senior secured notes maturing on July 15, 2017. As part of this transaction, we incurred approximately $4.5 million in issuance costs. In connection with this transaction, we retired the principal amount of $42.5 million of our $215.0 million in aggregate principal amount of convertible subordinated notes in exchange for $42.5 million in principal amount of the senior secured notes. In addition, $25.0 million of the proceeds from the senior secured notes issuance is required to be maintained in a restricted account until July 1, 2015. On September 28, 2012, we repaid the remaining $172.4 million in principal amount of the convertible subordinated notes.

On January 24, 2011, we completed a public offering of our common stock with gross proceeds of approximately $220.4 million. As part of the public offering, we incurred approximately $0.6 million in legal and accounting fees, filing fees, and other offering expenses.

We received proceeds from issuance of common stock related to our employee option and stock purchase plans of $4.1 million, $4.5 million, and $8.9 million in the years ended December 31, 2012, 2011, and 2010, respectively.

Contractual Obligations (in thousands) Payments Due by Period <=1 Yr 2-3 Yrs 4-5 Yrs Total 2013 2014-2015 2016-2017 2018+ Obligations(1) 12% Senior secured notes due July 2017, including interest $ 200,000 $ 15,000 $ 30,000 $ 155,000 $ - Operating leases(2) 21,520 200 5,176 7,665 8,479 Capital leases, including interest(3) 19,634 5,129 10,471 4,034 - Purchase commitments(4) 14,648 14,648 - - - Litigation settlement, including interest 4,000 1,000 2,000 1,000 - $ 259,802 $ 35,977 $ 47,647 $ 167,699 $ 8,479 (1) The above table does not include certain commitments and contingencies which are discussed in Note 8 of Item 8. Financial Statements and Supplementary Data.

(2) In November 2010, we moved into our Mission Bay Facility, which includes our corporate headquarters and a research and development center. Under the terms of the sublease we entered into with Pfizer Inc. on 68 -------------------------------------------------------------------------------- Table of Contents September 30, 2009 for the Mission Bay Facility, we will begin making non-cancelable lease payments in 2014. On December 28, 2011, we amended the sublease of the Mission Bay Facility to include an additional 24,002 square feet of space. Under the terms of the amendment, beginning January 1, 2012, we began making lease payments for this additional space of $40,000 per month until at least May 31, 2013. The sublease is discussed in Note 6 of Item 8.

Financial Statements and Supplementary Data.

(3) These amounts primarily result from capital lease obligations arising from our office space lease at 201 Industrial Road in San Carlos, California. In November 2010, we ceased use of this space as a result of the relocation of all of our California functions to our Mission Bay Facility. We have subleased a portion of the San Carlos Facility and are currently seeking one or more subtenants for the remaining space. This is further discussed in Note 6 of Item 8. Financial Statements and Supplementary Data.

(4) Substantially all of this amount was subject to open purchase orders as of December 31, 2012 that were issued under existing contracts. This amount does not represent any minimum contract termination liabilities for our existing contracts.

Given our current cash requirements, we forecast that we will have sufficient cash to meet our net operating expense requirements and contractual obligations at least through December 31, 2013. We plan to continue to invest in the advancement of our research and development drug candidate pipeline and our future cash requirements will depend upon the timing and results of these investments. Our capital needs will depend on many factors, including continued progress in our research and development programs, progress with preclinical and clinical trials of our proprietary and partnered drug candidates, our ability to successfully enter into additional collaboration agreements for one or more of our proprietary drug candidates or intellectual property that we control, the time and costs involved in obtaining regulatory approvals, the costs of developing and scaling our clinical and commercial manufacturing operations, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims, the need to acquire licenses to new technologies and the status of competitive products.

Our substantial debt, the market price of our securities, and the general economic climate, among other factors, could have material consequences for our financial condition and could affect our sources of short-term and long-term funding. Our ability to meet our ongoing operating expenses and repay our outstanding indebtedness is dependent upon our and our partners' ability to successfully complete clinical development of, obtain regulatory approvals for and successfully commercialize new drugs. Even if we or our partners are successful, we may require additional capital to continue to fund our operations and repay our debt obligations as they become due. There can be no assurance that additional funds, if and when required, will be available to us on favorable terms, if at all.

Off Balance Sheet Arrangements We do not utilize off-balance sheet financing arrangements as a source of liquidity or financing.

Critical Accounting Policies 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.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources, and evaluate our estimates on an ongoing basis. Actual results may differ from those estimates under different assumptions or conditions. We have determined that for the periods reported in this report, the following accounting policies and estimates are critical in understanding our financial condition and results of our operations.

69 -------------------------------------------------------------------------------- Table of Contents Revenue Recognition License, collaboration and other research revenue is recognized based on the facts and circumstances of each contractual agreement and includes amortization of upfront fees. We defer income under contractual agreements when we have further obligations that indicate that a separate earnings process has not been completed. Upfront fees are recognized ratably over the expected performance period under each 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, or manufacturing activities through the completion of clinical development or the termination or expiration of the collaboration agreement. Given the complexities and uncertainties of collaboration arrangements, significant judgment is required by management to determine the duration of the performance period.

As of December 31, 2012, we had $25.8 million of deferred upfront fees related to two collaboration agreements that are being amortized over 11 to 14 years, or an average of 12.5 years. For our collaboration agreements, our performance obligations may span the life of the agreement. For these, the shortest reasonable period is the end of the development period (estimated to be 4 to 6 years) and the longest period is the contractual life of the agreement, which is generally 10-12 years from the first commercial sale. Given the statistical probability of drug development success in the bio-pharmaceutical industry, drug development programs have only a 5% to 10% probability of reaching commercial success. If we had determined a longer or shorter amortization period was appropriate, our annual upfront fee amortization for these agreements could be as low as $2.4 million or as high as $11.0 million as compared to the $3.2 million recognized in the year ended December 31, 2012.

As of December 31, 2012, we also had $90.4 million of deferred upfront fees related to seven license, manufacturing and supply agreements that are being amortized over periods from 5 to 10 years. Our performance obligations for these agreements may include technology transfer assistance and/or back-up manufacturing and supply services for a specified period of time; therefore, the time estimated to complete the performance obligations related to licenses is either specified or is much shorter than the collaboration agreements. We may experience delays in the execution of technology transfer plans, which may result in a longer amortization period for applicable agreements.

Our original estimates are periodically evaluated to determine if circumstances have caused the estimates to change and if so, amortization of revenue is adjusted prospectively.

On January 1, 2011, we adopted on a prospective basis 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." In the year ended December 31, 2012, we entered into our first arrangement that requires accounting under this guidance. Under this guidance, at the inception of each new multiple-element arrangement or the material modification of an existing multiple-element arrangement, we allocate arrangement consideration to all units of accounting based on the relative selling price method, generally based on our best estimate of selling price (ESP). The objective of ESP is to determine the price at which we would transact a sale if the product or service was sold on a stand-alone basis. We determine ESP for the elements in our collaboration arrangements by considering multiple factors including, but not limited to, technical complexity of the performance obligation and similarity of elements to those performed under previous arrangements. Since we apply significant judgment in arriving at the ESPs, any material changes would significantly affect the allocation of the total consideration to the different elements of a multiple element arrangement.

Clinical Trial Accruals We record accruals for the estimated costs of our clinical study activities performed by third parties. We generally accrue costs associated with the start-up and reporting phases of the clinical studies ratably over the 70-------------------------------------------------------------------------------- Table of Contents estimated duration of the start-up and reporting phases. If the actual timing of these phases varies from the estimate, we will adjust the accrual prospectively.

We generally accrue costs associated with the treatment phase of clinical studies based on the total estimated cost of the treatment phase on a per patient basis and we expense the per patient cost ratably based on patient enrollment in the studies. In addition, certain time-based costs are expensed ratably over the treatment phase. Advance payments for goods or services that will be used or rendered for future research and development activities are capitalized as prepaid expenses and recognized as expense as the related goods are delivered or the related services are performed.

Stock-Based Compensation We use the Black-Scholes option valuation model for each respective grant to determine the estimated fair value of stock options on the date of grant (grant date fair value) and common stock purchased under the ESPP. We expense the estimated fair value of each award, as adjusted by the estimated historical forfeiture rate, ratably over the expected service period of the award. 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 fair value estimates, 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 our employee stock purchase plan. In addition, management continually assesses the assumptions and methodologies used to calculate the estimated fair value of stock-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to the assumptions and methodologies, and which could materially impact our fair value determination, as well as our stock-based compensation expense.

In addition, for awards that vest upon the achievement of performance milestones, we estimate the vesting period based on our evaluation of the probability of achievement of each respective milestone and the related estimated date of achievement.

Non-cash Interest Expense on Liability Related to Sale of Future Royalties In February 2012, we sold all of our rights to receive future royalty payments from sales of the CIMZIA® and MIRCERA® drug products marketed by UCB and Roche, respectively. Although we are required to make payments to the purchaser only in certain situations, including the event of our breach of a representation, warranty or covenant in the Purchase and Sale Agreement that gives rise to a liability in accordance with the terms and conditions of such agreement, this royalty sale transaction was recorded as a liability (Royalty Obligation) that we will amortize using the interest method over the estimated life of the Purchase and Sale Agreement. As a result, we impute interest on the transaction and record interest expense at the estimated interest rate. Our estimate of the interest rate under the agreement is based on the amount of royalty payments to be received by RPI over the life of the arrangement and payments we may be required to make to RPI under the agreement, if any. We will periodically assess the expected royalty payments to RPI from UCB and Roche using a combination of historical results and forecasts from market data sources. To the extent such payments are greater or less than our initial estimates or the timing of such payments is materially different than our original estimates, we will prospectively adjust the amortization of the Royalty Obligation. There are a number of factors that could materially affect the amount and timing of royalty payments from CIMZIA ® and MIRCERA®, most of which are not within our control.

Such factors include, but are not limited to, changing standards of care, the introduction of competing products, manufacturing or other delays, biosimilar competition, intellectual property matters, adverse events that result in health authority imposed restrictions on the use of the drug products, and other events or circumstances that result in reduced royalty payments from CIMZIA® and MIRCERA®, all of which would result in a reduction of non-cash royalty revenues and non-cash interest expense over the life of the Royalty Obligation.

Conversely, if sales of CIMZIA® and MIRCERA® are higher than expected, non-cash royalty revenues and non-cash interest expense would also be greater over the term of the Royalty Obligation. If we had determined that the interest rate used in 2012 should have been one percentage point higher than our 71-------------------------------------------------------------------------------- Table of Contents current estimate of 17%, the non-cash interest expense recognized in the year ended December 31, 2012 would have increased by $1.2 million.

Recent Accounting Pronouncements On January 1, 2012, we were required to adopt new accounting guidance related to the presentation of comprehensive income that prohibits the presentation of other comprehensive income (OCI) in the statement of stockholders' equity and instead, provides the option of presenting OCI in a continuous statement of comprehensive income or as two separate consecutive statements. We elected to present OCI in two separate consecutive statements.

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