Special Delivery

The Big Picture. CEO Ajit Gill (right) and co-founder and chief scientific officer John Patton (left) discuss Nektar's strategy for profitability and independence.

Nektar—the drug delivery firm formerly know as Inhale—has been around for 14 years, but its pace during the last few has been dizzying. In 2001, the company made two major acquisitions that not only expanded its technology base from inhaled therapeutics to a broad range of exciting new technologies, but also gave it revenue from five products on the US market that use its technology and lined-up another four in Phase III. In 2002, Nektar brokered 11 collaborative partnerships, and in 2003, it generated $106 million in sales.

The company also established a business unit to develop proprietary drugs and changed its name in January 2003 to reflect its new strategy. Now its core technology (and longest-running project)—an inhaled insulin called Exubera, co-developed by Pfizer (and its partner Aventis)—has been filed for approval in Europe and is expected to hit the billion dollar sales mark.

To some extent, the company's progress parallels the evolution of drug delivery itself. Formulation used to be an afterthought; pharma companies viewed it as a way to extend a product's lifecycle and sought out delivery partners only after sales had peaked. Now, method of delivery is the foundation for many products and is incorporated into development in very earlier stages. For biotech products in particular—proteins, peptides, and enzymes—delivery is often the most important consideration. So the choice of development partners is equally critical.

Tenacity Pays

Nektar's co-founder and chief scientific officer, John Patton, PhD, a biologist with a specialty in peptide and protein delivery, is as tenacious as scientists come. In 1985, he was hired by Genentech to "find a way to get proteins into the body without needles." And he did just that. As head of Genentech's drug delivery group, he demonstrated the feasibility of systemic delivery of human growth hormone through the lungs. "But when I brought it up to the product development committee, which is the gatekeeper for spending big bucks," Patton recalls, "they said, 'This looks like a great idea, but we would rather put that money into a brand-new molecule.'"

So in 1990, Patton left Genentech to start his own company, where he could continue his pulmonary delivery research, this time with insulin. He and his partner Bob Platz, an aerosol specialist from Stanford Research Institute (SRI), had no real business experience, and, at first, venture capitalists were reluctant to invest in the enterprise. For a year, they struggled to keep the company afloat with their own money, while cold calling investors. "Then at the 11th hour, after all my savings and everything was gone, Onset Ventures funded us," Patton says.

What's Next

That close call with bankruptcy doesn't bother him. "I put everything into it. I went down to zero," he says. "But when people say, 'Oh you're so brave, how did you have the nerve?' I say, 'This isn't bravery or courage. This is fun.'"

Onset Ventures, which specializes in early start-up teams, initially invested $400,000 and helped the founders find a CEO, Robert Chess (now chairman), who had been president of a dermatological company, and a consultant, Ajit Gill, who would eventually become CEO. At first glance, Gill seems an unlikely choice. He's an electrical engineer with a background in software: He worked in Kodak's Interactive Systems division and Visicorp's business development unit. But Gill needed a change, and as often happens with startups, serendipity prevailed.

"I decided I wanted to work for a company where I really care about the product," he says. "I happened to know Rob Chess, and I happened to know the investors who provided the seed financing. And the timing just happened to work out."

But once the new executive team had funding, they put serendipity behind them and geared up to make things happen.

The Other Insulin

Nektar's first step was to find a partner to help it develop the inhaled insulin that Patton had been working on for years. In 1994, the company approached several major players in the insulin and various other markets, but Pfizer was the one willing to take on the project . (See "No More Needles?")

Development was slow going. In 1996, the companies announced their first Phase II data. In 1998, the American Diabetes Association called their product a "breakthrough." As Phase III trials continued, Pfizer took on Aventis as its partner in 1998 to share the expense. Finally, in March 2004, Exubera was submitted to the European Medicines Evaluation Agency (EMEA) for approval. When asked about a US application, Pfizer spokesperson Vanessa McGowan commented, "Right now we're working closely with FDA so we can put together the most robust package for filing."

Nektar executives and analysts alike believe Exubera has great potential. "If you price the product at $3 a day, all you need is seven percent of the target market, and it's a $1 billion product," Gill comments. When you consider that the number of people with diabetes is expected to double by 2025, according to the World Health Organization, the market seems wide open.

Mara Goldstein, an analyst with CIBC World Markets, is a bit more cautious: "The regulatory path of pulmonary absorption is still uncharted. But there's a little less uncertainty for the future of inhaled insulin today than there was a few years ago." But she rates the company at "sector perform" and adds, "Fundamentally, they've done a good job."

Pegging Its Future on PEG

Nektar's next move was to expand its core technology. First, it acquired the small-molecule pulmonary capability (PulmoSpheres) and particle processing technology of San Diego–based Alliance Pharmaceuticals in 1999. Then in 2001, it bought both UK-based Bradford Particle Design and Alabama-based Shearwater with its portfolio of PEGylation products.

PEGylation: Before and After. In the body, when bound to a protein or peptide, the PEG molecule"a polymer that can be synthesized at many molecular weights"takes on water, and begins to move rapidly to sweep away other molecules and protect the drug. The photo on the left shows a normal protein molecule; the one on the right has been PEGylated.

In simple terms, PEG technology binds a polyethylene glycol to a biological drug to extend its duration of action. The PEG molecule is a neutral, water soluble, nontoxic polymer that can be synthesized in many different weights and is used to thicken and/or stabilize medical products and consumer items such as cosmetics, toothpaste, and shampoo.

In the body, when bound to a drug, the molecule takes on water and begins to move rapidly to sweep away other molecules and protect the protein or peptide. (See "PEGylation: Before and After.") It not only prevents the protein drug from aggregating and producing an immune response, it also keeps the protein circulating in the body much longer than it would without the PEGylation. So PEGylated injectable drugs have a better safety profile and need to be administered less often, sometimes weekly instead of daily.

"To the body and the immune system, a PEG molecule looks pretty much like a big bubble of water," Patton says. "So it makes proteins more soluble and keeps them from sticking to each other, which is one of the causes of immune reaction. Gill explains the company's rationale for making the Shearwater acquisition: "The more we looked at it, we realized the technology was going after proteins and peptides, which is our sweet spot, our focus in the pulmonary area. And in some ways, it represented a competitor." It also represented a source of cash: Shearwater was drawing revenue from products on market using its PEGylation technology. There were three at the time of purchase, and two were approved after the merger:

• Amgen's Neulasta (pegfilgrastim) for neutropenia (low white blood cell count)

• Roche's Pegasys (peginterferon alpha-2a) to treat hepatitis C

• Schering-Plough's PegIntron (peginterferon alpha-2b) also for hepatitis C

• Pfizer's Somavert (pegylated human growth hormone receptor antagonist) indicated for acromegaly (pituitary tumor)

• Bristol-Myers Squibb's Definity, an ultrasound contrast agent.

For injectables, Patton says that PEG is the standard for all future macromolecule or biologic drugs. "If I was starting out as a young company with a new biological, I wouldn't even consider bringing a product on the market without PEGylation."

But acquiring the PEG technology was a strategic move that went beyond cash and competition. It also represented a way to improve Nektar's core competency: inhaled proteins. "We thought, 'What if you could deliver those drugs [PEG peptides and proteins] through the lungs?'" Gill recalls. "It would mean less frequent dosing of pulmonary delivery." So the company's proprietary unit is developing a PEGylated inhaled insulin that is essentially a long-acting version of Exubera. (No partner is on board yet.)

Particle Play

Even before PEGylation, the executive team was looking at opportunities to branch out into entirely new methods of delivery. After extended conversations with UK-based Bradford Particles Design about doing a joint project, in early 2001, Nektar decided that an acquisition made sense.

No More Needles?

"The thinking there was that a lot of what we do in pulmonary delivery is make particles," Gill explains. " And at the root of the Bradford technology was a similar capability that had some application in pulmonary delivery. But its real strength was in oral and injectable delivery, so we thought it would give us an entry into those areas."

The technology in question is the use of supercritical fluids to engineer the size, shape, and properties of dry powder particles, thus improving their absorption, solubility, and formulation stability. Patton gives a laymen's explanation: "What you do is, you shoot a liquid stream of drug, which is dissolved in some solvent, into another stream of supercritical CO2. It wisps away the solvent, and you get precipitation of the drug in a number of novel and unseen forms. So it's a way to make new particles like they've never been made before. You can make crystals or keep things from crystallizing. You can wrap other molecules around your molecules and keep them from tasting bad or sticking."

Supercritical fluid development is still in the investigative stage, but its proprietary drug unit is a little farther along. In addition to PEGylated inhaled insulin (preclinical), it has a second project, an inhaled supergeneric small molecule (an improved version of a generic drug), in Phase I.

"We've done some preliminary tests with some formulations in humans, and we've identified what we think are some great opportunities," Patton says, "but we are not telling people where they are right now." Gill adds, "The financial markets no longer reward you for a Phase I product, so why should we talk about it and tip off the competition?"

The long-term plan is to take its proprietary products as close to commercialization as possible before finding a marketing partner. In doing so, the company will be able to negotiate better deals and expand it revenue.

Pipeline Power

The company has another group of proprietary PEG-based products in Phase II that it can't talk about yet because of its partners' requests, but there's still plenty left in the pipeline to discuss. Altogether, Nektar has 16 products in clinical trials and more than 50 programs in development. (See "What's Next.")

One of its most exciting developments is an antibiotic. Inhaled tobramycin, co-developed with UK-based Chiron, should go into Phase III trials this year. Infections are the leading cause of death globally, and lung infections are the most common. "The rationale for topically applying an antibiotic to the lung is very compelling scientifically," Patton explains. "You can spare the body the whopping doses that it gets orally or through IV. And you get a much broader spectrum of killing: You have a chance to sterilize the lungs. It wasn't practical until we came along because the doses were pretty high, and you had to inhale on a nebulizer for a long, long time. We've reduced that delivery time down to just a few minutes." The product's lead indication is infections associated with cystic fibrosis, but other infections, such as those related to chronic bronchitis and chronic obstructive pulmonary disease (COPD), should follow.

Nektar has two other therapies in development that use pulmonary delivery. The first is a metered dose inhaler of dronabinol (synthetic tetrahydrocannabinol—the active ingredient in marijuana). Dronabinol, the active ingredient in Unimed/ Solvay's Marinol, is approved for nausea associated with chemotherapy and weight loss associated with AIDS. The second is an alliance with Enzon (based in New Jersey) for an inhaled version of leuprolide, the luteinizing hormone used to treat endometriosis and prostate cancer. The benefit over treatments already on the market is more controlled dosage and fewer hormone-related side effects.

Some of the most advanced pipeline projects using Nektar technology include:

• Macugen (pegaptanib), Eyetech's treatment for age-related macular degeneration

• CDP 870 (PEG anti-TNF-alpha antibody), Pharmacia's therapy for rheumatoid arthritis

• SprayGel, a biodegradable, water-based product intended to prevent postsurgical adhesions, developed by Confluent Surgical.

Toward Profitability

Acquiring two companies in one year had the potential to be disruptive to Nektar's forward progress. Issues of project ownership and scientific independence have been know to derail R&D for years after a merger. Not so in this case, says Patton: "We all realize this is a high-risk business, and we can't afford to be silly about stuff like that. After we all got married, the whole company said, 'Let's consolidate and integrate.' And I think we've done a terrific job. We have multiple projects going on between all sites."

But no merger is without some type of fallout. In December 2002, Nektar laid off 10 percent of its staff. But Gill says that move was mostly about reducing the company's burn rate. "It was probably the single biggest thing we did to free up resources so that we could work on proprietary products. We felt we just couldn't keep going to the market and raising more cash." (Much of that cash resulted from stock offerings: Nektar currently trades at around $20.) "I think it's important for the company to control its spending," Gill adds.

Some market watchers would agree. In a 2003 report, Morningstar analyst Daniel Quinn noted, "Despite three successful products on the market, including drugs that generate more than $1 billion in revenue for its partners, Nektar remains deep in the red."

But the company is determined to change that. In 2003, it reduced its spending by more than $20 million compared with 2002, and it increased its revenue by $12 million, ending the year $46 million in the red compared with $107 million in 2002. The company hasn't set a fixed date for getting into the black, but instead says it will be "within 12 months of a broad launch of insulin."

Nektar's success, of course, could jeopardize its independence. But Gill says he doesn't worry much about the company being bought out by Big Pharma. "The analogy I use is: You could have a great car and a great route plotted, but if you run out of gas, you're not going to get to your destination. On the other hand, just because you have a full tank of gas doesn't mean you're going to go anywhere worthwhile. You have to pay attention to all things and build the company. Then, if a buyout makes sense at some point, you look at it at that point. But hopefully it will be at a much later date."