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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

Commission File Number: 0-23556

NEKTAR THERAPEUTICS
(Exact name of registrant as specified in its charter)

150 Industrial Road
San Carlos, California 94070
(Address of principal executive offices)

650-631-3100
(Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None

        Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of Act). Yes ý    No o

        The approximate aggregate market value of voting stock held by non-affiliates of the Registrant, based upon the last sale price of the Company's Common Stock on June 28, 2002, as reported on the NASDAQ National Market was approximately $515,227,170. This calculation excludes approximately 971,633 shares held by directors and executive officers of the Company. Exclusion of these shares should not be construed to indicate that such person controls, is controlled by or is under common control with the Registrant. This calculation does not exclude shares held by organizations whose ownership exceeds 5% of the Registrant's outstanding Common Stock as of June 28, 2002 that have represented to the Company that they are registered investment advisers or investment companies registered under section 8 of the Investment Company Act of 1940. Determination of affiliate status for the purposes of this calculation is not necessarily a conclusive determination for any other purpose.

55,658,764
(Number of shares of common stock outstanding as of February 28, 2003)

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of Registrant's definitive Proxy Statement to be filed for its 2003 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

NEKTAR THERAPEUTICS
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

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Forward-Looking Statements

        This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "1934 Act"). All statements other than statements of historical fact are "forward-looking statements" for purposes of this annual report, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including but not limited to the risk factors set forth below and for the reasons described elsewhere in this annual report. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof and we do not intend to update any forward-looking statements except as required by law or applicable regulations.

PART I

Item 1. Business

Overview

        On January 15, 2003 we changed our name from Inhale Therapeutic Systems, Inc. to Nektar Therapeutics ("Nektar"). We believe our new name better reflects our broadened capabilities and approach to drug delivery. Our new corporate identity represents the integration of our three proprietary technology platforms developed through our internal research and development efforts as well as our acquisitions of Shearwater Corporation and Bradford Particle Design, Ltd. We are using this new corporate identity to act as a better symbol for our collective capabilities to enable improved drug products.

        Although we have developed three distinct technology platforms, our business is uniformly focused on producing differentiated therapeutics that may provide better and more convenient therapies for patients. Each of our technology platforms has the ability to create transformed therapeutics with differentiating properties based on the technology and the particular application of the technology.

        We are working to become one of the world's leading drug delivery products based companies by providing a portfolio of technologies and expertise that will enable us and our pharmaceutical and biotechnology partners to improve drug performance throughout the drug development process. Historically, drug delivery has been focused on life cycle management of older products facing patent expiration, or on seeking product line extensions. The advent of newer technologies, including high-throughput screening, combinatorial chemistry, genomics and proteomics, has led to an increase in the number of molecular leads for new drugs. This has led pharmaceutical companies to focus earlier in development on molecular characteristics such as toxicity, solubility and immunogenicity to improve clinical safety and efficacy of drugs. We believe it is now recognized that drug delivery spans the entire development process, with an emphasis on applying technologies that can optimize drug candidates, and places a premium on faster and more efficient drug development.

        Our mission is to provide drug delivery technologies that enable superior therapeutics that make a difference in patients' lives. Primarily, we want to partner with pharmaceutical and biotechnology

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companies seeking to improve and differentiate the products in their pipelines. In addition to our partner-funded programs, we have started applying our technology independently through internal early-stage proprietary product development efforts.

        We have three areas of technological focus:

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Nektar Molecule Engineering—using advanced PEGylation and PEG-based delivery systems to enable drug performance,



•

Nektar Particle Engineering—using our expertise in pulmonary particle technology and supercritical fluids technology to design and manufacture optimal drug particles, and



•

Nektar Delivery Solutions—using advanced systems for pulmonary administration to improve therapeutic outcomes.

        Our technologies are designed to improve either the performance of a drug molecule (e.g., bioavailability, safety, efficacy, stability, targeting, etc.) or how the drug is delivered (e.g., enabling new dosage form or delivery profile that improves how the therapeutic can treat patients).

        Our late stage technology, Nektar Molecule Engineering, has been approved for use in five products in the U.S. and another product only approved in Europe. Nektar Molecule Engineering is intended to enhance the efficacy and performance of most major drug classes, including macromolecules such as peptides and proteins, smaller sized molecular compounds and other drugs.

        Nektar Particle Engineering uses proprietary particle engineering methods designed to develop drug formulations to: obtain precision and consistency in particle formulation; improve dissolution for poorly soluble compounds; and increase bioavailability through high-surface area particles. We believe these technologies have the potential to create better performing drugs, achieve shorter product development times and reduce the risk of product instability or inconsistency.

        Nektar Delivery Solutions are focused on the formulation of molecules for multiple delivery platforms. Through this technology we are working to improve or enable drug delivery, enhance drug performance and improve therapeutic outcomes for large and small molecules utilizing pulmonary delivery systems.

        Our strategy is to enable our partners' drugs through partner funded programs and to selectively fund internal early-stage proprietary products with a view to partner after early stage clinical development. Our goal is to leverage our technology investments over a large pipeline that allows us to realize value by advancing our partners' and our proprietary products. As we identify the platforms and markets in which we see opportunities to establish leadership positions, we intend to continue to develop or acquire broadly applicable technologies to capitalize on such opportunities.

Opportunities for Improved Drug Delivery and Performance

        We currently have collaborations ongoing with more than 25 biotechnology and pharmaceutical companies, of which 22 have been announced. Our product pipeline includes 5 products approved in the United States, 4 products in Phase III trials and 10 products in Phase I and Phase II trials.

        The effectiveness of a drug is often dependent on various factors including the amount of time it takes for an active molecule to be cleared through the bloodstream (i.e. its rate of circulation), the rate at which the protein or other molecule degrades and the ability of the body to produce an immune response.

        Unmodified proteins may be less effective if they are quickly cleared from the bloodstream or degraded by other enzymes in the body. In addition, the human body has a natural immune response to proteins that cause them to lose potency over time. Any one of these variables can cause a particular protein to be less effective or necessitate frequent dosing, thereby increasing the cost of the therapy and decreasing patient compliance. We believe there is a significant market opportunity to apply technology to

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the modification of therapeutic proteins to address these variables and improve the overall therapeutic effect of these drugs. Likewise, other molecular compounds such as small molecules may be limited by poor solubility and rapid clearance from the body that could be improved by drug delivery.

        We believe that the application of Nektar Molecule Engineering to link polyethylene glycol ("PEG") chains of higher molecular weight to active drug compounds represents a significant commercial opportunity. Such a system could enhance the efficacy of current therapeutic proteins and other molecular compounds while increasing patient acceptance of drug therapies and compliance with prescribed regimens through reduced dosing. Additionally, advanced PEGylation technology may result in the development of new therapeutic protein compounds that in unmodified forms are ineffective due to high toxicity, low solubility or significant immunogenicity.

        We also believe there is an opportunity for improving the efficacy and patient acceptance of protein therapeutics and macromolecule drugs by improving the method by which many of these drugs are introduced into the body. Drugs typically enter the body through one of five routes of delivery. The four natural routes are through the digestive tract (oral), the skin (transdermal), the mucosal surfaces (for example, nasal and sublingual), and the lung (inhalation). Drugs are also commonly delivered by injection (subcutaneous, intramuscular or intravenous), bypassing the natural barrier to entry provided by the skin.

        The principal route of administration of macromolecule drugs, particularly proteins, has been injections. Drug injections administered in hospitals or doctors' offices can be expensive and inconvenient to patients. Many patients find self-injectable therapies unpleasant. As a result, injected drugs for many chronic and subchronic diseases meet with varying degrees of patient acceptance and compliance with the prescribed regimens, which can lead to increased incidence of medical complications and potentially higher disease management costs. In addition, some elderly, infirm or pediatric patients cannot administer their own injections and require assistance, thereby increasing both the inconvenience to these patients and the cost of therapy.

        We believe that the application of Nektar Delivery Solutions to develop an efficient and reproducible deep lung delivery system for systemic macromolecule drugs used in the treatment of chronic and subchronic diseases represents a significant commercial opportunity. Such a system could improve patient acceptance of systemic macromolecule drug therapy and compliance with prescribed regimens, thereby improving therapeutic outcomes and reducing the costs of administration and treatment of disease. Additionally, pulmonary delivery may enable new therapeutic uses of certain macromolecule drugs.

        In addition to developing a deep lung delivery system for macromolecules, we are investigating opportunities for the delivery of small molecules in the lung where there is a clear, demonstrable need for an alternative drug delivery system, and where our existing technology can be applied without significant modification. Examples include molecules that require rapid systemic absorption for efficacy (such as analgesics and antiemetics), molecules that undergo massive first pass metabolism when delivered orally or molecules used for local lung delivery for diseases such as asthma that are currently delivered by sub-optimal aerosol systems.

        We also believe a nascent commercial opportunity exists for the application of technology to the engineering and formulation of drug particles to address particular development and manufacturing challenges. We believe the use of Nektar Particle Engineering, through our supercritical fluids technology, to produce drug particles of uniform size, regular shape and smooth crystalline surfaces can improve drug efficacy as these properties can be critical in controlling absorption and dissolution of the active drug compound into and within the bloodstream. Additionally, we believe a nascent opportunity exists to apply our supercritical fluids technology to the improved development of therapeutic drugs as it permits the production of multiple crystal forms of drugs in a reproducible manner and may simplify the reproducible co-formulation of drugs with polymers to improve the solubility of drug compounds. Lastly, we believe that the use of our supercritical fluids technology may benefit the manufacturing process by potentially providing greater control over particle size.

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Our Strategy

        Our goal is to become the pre-eminent provider of drug delivery solutions. Our strategy is to enable our partners to improve drug performance throughout the drug development process. In addition to our partner-funded programs, we have started applying our technology independently through internal early-stage proprietary product development efforts. We believe this leverages our technology investments over a larger pipeline and allows us to realize value by advancing both our partners' and our own proprietary products.

        Our strategy incorporates the following principal elements:

•

Develop Broadly Applicable Drug Delivery Systems. We are developing our Nektar Molecule Engineering, Particle Engineering and Delivery Solutions systems. Particularly, we are working with our proprietary advanced PEGylation and supercritical fluids technology to improve the formulation of drug compounds so as to make them more effective through multiple delivery applications. We intend to focus our drug formulation technologies on drug compounds where we can substantially improve the performance of the active drug compound or improve the drug development or manufacturing process and to seek out additional formulation technology platforms that are consistent with this focus. We are developing our Nektar Delivery Solutions, particularly for the administration of therapeutics through our pulmonary delivery systems, to be applicable to a wide range of peptides, proteins and other molecules currently delivered by injection or poorly delivered by inhalation or other routes. We believe that through this platform we can: (1) expand market penetration for existing therapeutics currently delivered by injection, infusion or other routes; (2) commercialize new indications by using deep lung delivery as a new route of administration; and (3) extend existing patents or seek new patents to gain important competitive advantages for ourselves and our partners. In addition, we are expanding the use of our pulmonary delivery systems to apply to small molecules and for local lung disease applications.



•

Partner with Pharmaceutical and Biotechnology Companies. Our strategy is to market our proposed products through collaborative partners. We currently have collaborations with several large pharmaceutical and biotechnology companies. In a typical collaboration, our partner will provide the active pharmaceutical ingredient, fund clinical and formulation development, obtain regulatory approvals and market the resulting commercial product. We may manufacture and supply the drug delivery approach or drug formulation, and may receive revenues from drug manufacturing, as well as royalties from sales of most commercial products. In addition, for products using our pulmonary delivery systems, we may receive revenues from the supply of our device for the product along with revenues for any applicable drug processing or filling. Prior to commercialization, we receive revenues from our partners for partial or full funding of research and development activities and progress payments upon achievement of certain developmental milestones. More than 70% of our clinical pipeline involves molecules that are already approved by the FDA in another delivery form. In addition to the 19 therapeutic drugs and one compound used as a diagnostic agent incorporating our technologies that are in, or have completed, human trials, we have more than 70 drug projects using our technologies that are in various stages of research, feasibility, and preclinical work, many of these in conjunction with partners. We believe this partnering strategy enables us to develop a large and diversified potential product portfolio.



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Build Competitive Advantage Through Expertise in Multiple Disciplines. In developing our Nektar Molecule Engineering, Nektar Particle Engineering, and Nektar Delivery Solutions, we have used and expanded our expertise in molecule engineering, chemistry, pulmonary physiology, aerosol science, powder science, aerosol engineering, chemical engineering, mechanical engineering and product design, protein formulation, fine powder processing and filling. We believe this expertise creates multiple barriers to entry and multiple opportunities in certain disciplines, such as drug formulation or powder science, and enables us to develop additional drug delivery applications.

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Utilize Our Technology to Develop Proprietary Products with an Eye Toward Partnering. In addition to our partner-funded programs, we have started applying our technology independently through our internal early-stage proprietary product development efforts. We believe that there may be several off-patent or near-term patent expiration compounds that would benefit from the application of our technology to improve their performance and delivery. For these programs, we may perform initial feasibility screening work, formulations development and early stage clinical trials before entering into a partner relationship for further development and commercialization. It is our belief that we will be able to gain a greater share of product sales as a result of undertaking greater product development efforts.

Nektar Technology Platforms

        Our suite of drug delivery technologies encompasses Nektar Molecule Engineering, Nektar Particle Engineering and Nektar Delivery Solutions, for both small molecules and macromolecules, with applications to create pulmonary, injection and oral therapeutics.

NEKTAR MOLECULE ENGINEERING

        Nektar Molecule Engineering uses advanced PEGylation and PEG-based delivery systems to enable improved drug performance.

        Advanced PEGylation is designed to enhance the efficacy and performance of most drug classes including macromolecules such as peptides and proteins along with small molecules and other drugs. PEGylation is a method for improving drug formulations through the modification of proteins and other molecular compounds accomplished through the attachment of PEG to the active therapeutic molecule. The chemical attachment of PEG chains to a broad range of drug substances results in effectively increasing the drug's molecular weight. The advantages of PEGylation include the potential to improve drug solubility and stability, reduce immune responses, and in certain instances improve the efficacy and/or safety of a molecule.

        PEG is a neutral, water soluble, non-toxic polymer that is one of the few synthetic polymers approved for internal use by the FDA in a variety of foods, cosmetics, personal care products and pharmaceuticals. When dissolved in water, the long chain-like PEG molecule is heavily "hydrated" (meaning water molecules are bound to it) and is put in a state of rapid motion. This rapid motion leads to the PEG molecule preventing the approach of other molecules. Although PEG is largely invisible to biological systems, due to its unique properties it can improve stability and solubility of the drug compound, reduce the natural immune response to proteins and degradation by other enzymes, and increase concentration and circulation of the active drug compound throughout the system. As a result, the effectiveness of the active drug compound may be increased and the dosing frequency of the drug may be decreased.

        First generation PEG chemistry has been generally restricted to the use of PEG chains with low molecular weight because of the poor solubility characteristics traditionally observed with PEG chains of higher molecular weight. The attachment of low molecular weight PEG chains to proteins has been limited by the inherently unstable linkages of PEG chains to the molecular compound. Attachment of low molecular weight PEG chains can cause the modified compound to quickly degrade in a manner which may trigger an immune response to the active drug compound or otherwise hinder its effectiveness. The effectiveness of such PEG derivatives has also been limited by the ability of the relatively small PEG to penetrate poorly accessible regions on the surface of a protein resulting in degradation of the active drug compound or undesired side effects.

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Characteristics of our Advanced PEGylation Technology

        Our advanced PEGylation technologies are designed to overcome the shortcomings of first generation technology of pharmaceutical products. The attachment of our activated PEG derivatives is designed to yield one or more of the following benefits:

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Improved solubility and stability of the active drug compound;



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Reduced immunogenicity and degradation of the drug compound;



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Slower clearance from the body; and



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Improved efficacy and/or safety.

        As a result of these benefits, less frequent dosing may be possible due to increased circulation time, more of the administered dose may be available to reach its intended target, and the efficacy of a particular dose may be improved due to increased concentration of the drug and longer dwell time at the site of action by the active drug compound.

        Our advanced PEGylation technology is also designed to optimize the efficacy of the attached drug compounds and is characterized by the following features:

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Activated high-molecular weight PEGs that can be linked stably and site specifically to drugs, allowing prolonged performance of the drug in its PEGylated form;



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Stable linkage chemistry of the PEG to the drug compound to avoid problems associated with rapid degradation or clearance of the active drug compound;



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The availability of site-specific PEGylation in which the PEG is linked with the drug compound at a specific site on the compound to produce desired effects;



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Controlled release of the drug from the PEG-drug conjugated compound; and



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The availability of bi-functional PEG to facilitate targeting of the active drug compound.

Advanced PEGylation Applications

        We believe our advanced PEGylation technology can be of critical importance in facilitating a substantial number of emerging biopharmaceutical technologies, including the following:

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PEG-Proteins for Pharmaceutical Use. Our principal market strategy for our advanced PEGylation technology is to demonstrate and assist in developing drug compounds, particularly proteins that substantially enhance the therapeutic value of the active drug over unmodified forms. It has been demonstrated that the proteins with PEG attached remain active and have a greatly diminished or negligible immune response. As a result these PEG-proteins have substantially increased plasma lifetimes. In addition, active drugs attached to PEG result in making proteins or other compounds much larger and thus reduces their rate of clearance through the kidney, thereby allowing the active drug to remain active in the system for longer periods of time.



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PEG-Surfaces. In addition to molecular modifications, PEG can also be attached to surfaces to form protective, biocompatible coatings. A variety of applications may result, including PEG-coatings for arterial replacements, diagnostic apparatus and blood contacting devices. Similarly, capillary zone electrophoresis has emerged as an analytical technique in biochemistry, and PEG coatings on capillaries have been demonstrated to prevent absorption and provide critical control of electro-osmosis.



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PEG-Liposomes. Recent research has shown that incorporation of PEG into the outer coating of liposomes, which are particular membranes the biopharmaceutical industry is investigating as a

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means to provide controlled and specific delivery of drugs, can greatly increase serum lifetime, thereby potentially facilitating the use of liposomes for these purposes.

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Molecule-Molecule and Molecule-Surface Coupling. The nature of PEGs and their well-defined chemistry make them attractive for coupling or tethering molecules to molecules or molecules to surfaces. We believe this attribute could be critical to the next generation of drugs and biomaterials as developers seek to take advantage of unique properties resulting from binding particular molecules to other molecules or surfaces.



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Biological Purification. As biotechnology has continued to succeed in producing a variety of physiologically active proteins, we believe a need has been created for improved methods for isolation of the proteins produced. We believe that PEG may provide a useful approach in this area by using its binding qualities to extract the desired protein in a method of purification that partitions in an aqueous two-phase system.



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Solubilization of Insoluble Materials. PEG is soluble in both water and many organic solvents and through PEG attachment water-insoluble materials may become water-soluble. This characteristic of PEGs may be critical to the effectiveness of pharmaceuticals as well as to include in various other products such as dyes, flavors, substrates for enzymes and cofactors.

        As with our Particle Engineering and Delivery Solutions, we typically develop new products using our advanced PEGylation technology through collaborations with corporate partners. We also maintain a catalog of PEG reagents which can be purchased by our customers for coupling to drug compounds. More typically, however, our research personnel will work closely with our partners to choose the proper PEG derivative for a particular application and to optimize the PEG attachment. In a typical collaboration, we derive revenue from milestone payments during research and development and receive royalties on sales of approved products or other PEG applications. We may also receive additional revenue from manufacturing the PEG reagent.

        We have also initiated internal development of a few proprietary drugs utilizing our advanced PEGylation technology with the expectation that we will fund this activity through the early stages of clinical trials before establishing a partnership to market the final product. We believe that, in certain circumstances, this process may result in higher royalty payments for marketed products than collaborations initiated at earlier stages of development.

        Although a limited number of products using our Nektar Molecule Engineering are approved for use, there can be no assurance that Nektar Molecule Engineering will develop into a successful or commercially viable technology.

NEKTAR PARTICLE ENGINEERING

        Particles are the fundamental building blocks of most solid dosage forms. Lack of control at the particle level has been shown to lead to product inconsistency and instability, introducing risks associated with poor product performance.

        Nektar Particle Engineering includes both our expertise in pulmonary particle engineering and our supercritical fluids technology, each of which is designed to assist in the optimization of drug particles. By adjusting bulk powder properties, such as particle size and distribution, morphology, surface roughness and surface energy we believe we can potentially control the dosage form at the fundamental particle level.

        Nektar Particle Engineering strives to:

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Obtain better formulation stability, including room temperature stability for macromolecules.



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Obtain precision and consistency in particle formation.



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Improve dissolution for poorly soluble compounds.

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Increase bioavailability through high-surface area particles.

Components of the Nektar Particle Engineering for Pulmonary Delivery

        For pulmonary delivery, we believe Nektar Particle Engineering can potentially enable the efficient and reproducible deep lung delivery of particles and greater lung deposition in a single breath. Specifically, our development of spray-dried formulations of fine, aerodynamic drug particles potentially enables efficient dispersibility and reproducible delivery of both large and small molecules to the deep lung for systemic and local lung indications.

        Nektar Particle Engineering for pulmonary delivery integrates several technologies including customized formulation of drug compounds, dry powder processing, filling and packaging along with proprietary inhalation devices to enable efficient and consistent delivery of both macromolecule and small molecule drugs for systemic and local lung diseases. For specific drug products, we normally formulate and process bulk active pharmaceutical ingredients supplied by collaborative partners into dry powders, which are packaged into individual dosing units.

        Dry Powder Formulations for Pulmonary Delivery.    Each macromolecule drug poses different formulation challenges due to differing chemical and physical characteristics and dosing requirements. This requires significant optimization work for each specific drug. We have assembled a team with expertise in protein formulation, life science, powder science and aerosol science, and we are applying this expertise to develop proprietary techniques and methods that we believe will produce stable, fillable, shippable and dispersible dry powder drug formulations. We have developed several protein powders, which remain stable at room temperature in excess of one year. Through our work with numerous macromolecules, we are developing an extensive body of knowledge on aerosol dry powder formulations, including knowledge relating to the physiochemical properties of particles that make up powders and the resulting characteristics such as flowability, dispersability and solubility within the lung, as well as the related properties and influences of various excipients. We have filed and expect to continue to file patent applications on several of our formulations and, through strategic acquisitions, have acquired rights to certain U.S. and foreign patents and patent applications relating to stabilization of macromolecule drugs in dry powder formulations.

        Powder Processing.    We are modifying standard powder processing equipment and developing custom techniques to enable us to produce fine dry powders with particle aerosol diameters of between one and five microns without significant drug degradation or significant loss. We have scaled up powder processing to levels sufficient for producing candidate powders for late stage clinical trials. It is expected that production at these levels will be more than sufficient to satisfy the needs of small volume commercial products. We are also in the process of further scaling up our powder processing systems in order to produce quantities sufficient for commercial production of products we believe we will need to supply in high volumes, such as insulin.

        Powder Filling And Packaging.    Powders made up of fine particles intended for inhalation typically require handling that is technically more challenging than for powders comprised of larger particles. Common practice in the pharmaceutical industry is to increase the powder's effective particle size by various agglomerative techniques such as pelletization, spheronization, or blending with an excipient of significantly larger particle size, in order to yield materials that handle more favorably in existing processing equipment such as tablet presses and capsule fillers. Thus, currently available commercial filling and packaging systems are generally designed for filling powders of larger particle size and mass, and are most commonly applied to oral dosage forms. Although applications of these capsule-filling approaches to aerosol products do exist, they typically can only deliver accurate and precise fills for much higher dose masses than required for deep lung delivery. Further still, by their method of operation they may overcompress or even damage the morphology of fine, low density powders, and may make them much more difficult to disperse than when in their uncompressed state. We have developed and internally

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qualified a proprietary automated blister filling system suitable for use in production of clinical trial supplies and, for certain products, commercial quantities. The system has been tested across a wide variety of powders encountered to date and its performance yields accurate and precise fills across a wide range of dose masses, down to the order of a single milligram. The underlying technology is intended to allow its application to a broad variety of powder types, characteristics, and a wide range of target fill masses.

        To date there are no products using Nektar Particle Engineering for pulmonary delivery that have been approved for use and there can be no assurance that Nektar Particle Engineering for pulmonary delivery will be a successful or commercially viable technology or will work for any or all of its intended uses. Specifically, there can be no assurance that we will be successful in further scaling up our powder processing, powder filling and packaging operations on a timely basis or at a reasonable cost, or that our powder processing, powder filling or packaging systems will be applicable for every drug.

Nektar Particle Engineering: Supercritical Fluids Technology

        A majority of pharmaceutical products contain powder particles, either in the final form or at some point during the manufacturing process. It is generally believed that specific particle characteristics are fundamental to the effectiveness of drug delivery but precision and consistency in particle formation are difficult to achieve using conventional multi-stage methods of production.

        Our supercritical fluids technology uses substances such as carbon dioxide at elevated temperatures and pressures as alternative solvents and non-solvents to control the formation of powder particles for a wide variety of chemical substances. This technique is designed to reduce to a single step the current multi-stage powder manufacturing process for drug powders, while at the same time possibly improving product purity and consistency. It offers an alternative to typical crystallization processes for many small molecules with the potential benefits of better control over particle size, form, structure and surface characteristics resulting in the potential for improved drug absorption, easier and more efficient formulation of drug compounds and lower manufacturing costs. We believe this technology may also be useful in connection with technologies designed for taste masking and controlled release of drug compounds.

        In the supercritical fluids technology process, the supercritical fluid disperses and mixes a stream of drug solution while simultaneously extracting the organic solvent and rapidly forming dry particles. This is achieved by metering the solution and the supercritical fluid into a particle formation vessel held under controlled conditions of temperature and pressure above the critical point of the supercritical fluid-solvent mixture. Dry, solvent free particles are then recovered from the particle formation vessel.

        As a single-stage manufacturing process, we believe our supercritical fluids technology may provide greater control over batch to batch consistency, particle size, particle shape, powder flow, dissolution rate and residual solvent levels than traditional manufacturing methods.

        We believe our supercritical fluids technology can serve as a platform technology for a diverse range of therapeutic areas, including the following:

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Polymorph Separation. The process is designed to offer the ability to prepare separate polymorphic forms of drugs in a manner that is easily reproducible.



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Water Solubility. The process is designed to help provide enhanced dissolution of sparingly water-soluble drugs, by producing sub-micron sized particles and/or particles with high surface areas and/or through co-formulation with water-soluble polymers.



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Controlled Release. The process is designed to support the application of a wide range of polymers and other materials to modify drug dissolution and release profiles.



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Improved Powders for Inhaleable Drugs. We believe that particles designed with appropriate size and low cohesion may deliver more drug to the deep lung from a range of dry powder inhalation

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devices. By allowing greater control over the formation of particles during manufacture, we believe we can assist in the development of dry powders with these preferred characteristics.

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Taste Masking. We believe that the supercritical fluids technology process can be used to mask the taste of many oral drugs, particularly small organic molecules.



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Biologicals. The typical method for particle formation of peptides, proteins, nucleic acids and other biologicals involves freeze-drying and spray-drying, which may lead to significant batch variation and problems in downstream processing and manufacture. We believe that that supercritical fluids technology may offer a potential alternative to this method of particle formation for biologicals.

        We typically develop new products using Nektar Particle Engineering through collaborations with corporate partners. As with our other technologies, our collaborative research personnel will work closely with our partners in designing the preferred characteristics of the particle to be formulated and in applying the technology to achieve these characteristics consistently.

        To date there are no products using supercritical fluids technology that have been approved for use and all of our collaborations utilizing this technology are in very early stages of development. There can be no assurance that our supercritical fluids technology will be a successful or commercially viable technology.

NEKTAR DELIVERY SOLUTIONS

        We believe using drug delivery technology to enable new routes of administration has the potential to broaden the use of drugs, including extending their use to new populations or indications where the original administration route would not be cost-effective or acceptable to patients.

Pulmonary Delivery System

        Historically, we have focused on the non-injectable delivery of peptides and proteins to the body through the lungs. We approach pulmonary drug delivery with the objective of maximizing overall delivery system efficiency while addressing commercial requirements for reproducibility, particle engineering, safety and convenience. To achieve this goal we are developing a family of inhalers as part of our pulmonary delivery system to efficiently and reproducibly deliver both large and small molecules to the deep lung for both systemic and local lung drug administration. Our inhalers are being designed to disperse fine, dry, respirable powders, which are produced using our Nektar Particle Engineering for pulmonary delivery, in a reproducible fashion for optimal systemic or local lung delivery, creating an integrated pulmonary delivery system.

        Our proprietary pulmonary inhaler is being designed to achieve the following:

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Effectively Disperse Fine Particles into an Aerosol Cloud. Fine powders have different dispersion requirements or characteristics than large powders. Most current dry powder inhalers use larger powders and are not efficient in dispersing powders with aerosol diameters of one to five microns. We have developed and are refining the dispersion system for our pulmonary inhaler specifically for fine powders. Our inhaler is being designed to efficiently remove powders from the packaging, effectively disperse the powder particles and create an aerosol cloud while maintaining the integrity of the drug.



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Efficiently and Reproducibly Deliver the Aerosol Cloud to the Deep Lung. We are developing a proprietary aerosol cloud handling system in our inhaler that is intended to facilitate deep lung powder deposition and reproducible patient dosing. The handling system design is intended to enable the aerosolized particles to be transported from the inhaler to the deep lung during a patient's breath, reducing losses in the throat and upper airways. In addition, the aerosol cloud handling system, in conjunction with the dispersion mechanism and materials used in the inhaler, is designed to reduce powder loss in the inhaler itself.

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•

Eliminate the Use of Propellants to Avoid Associated Environmental Concerns and Formulation Difficulties. Our inhaler does not use propellants. The oily surfactants required to stabilize propellant formulations used in many metered dose inhaler ("MDI") formulations can cause aggregation of macromolecules. In addition, current chlorofluorocarbon propellants are being phased out in many countries due to environmental concerns.

Nektar Small Dry Powder Inhaler ("DPI")

        We are developing a palm-sized, easy to use dry powder inhaler device. It is being developed to be appropriate for the delivery of either large or small molecules for short-term use.

Nektar Metered Dose Inhaler

        We are also working to develop drugs for use in MDIs. We believe our expertise in pulmonary drug formulations and inhalers allows for stable formulations with new hydrofluoroalkane propellants and the delivery of many molecules more efficiently to the deep lung compared with traditional MDIs.

        To date there are no products using Nektar Delivery Solutions that have been approved for use and there can be no assurance that any of our Nektar Delivery Solutions, including our pulmonary delivery system or any of its components such as pulmonary inhaler devices, will be a successful or commercially viable technology.

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Nektar Product Pipeline and Partner Development Programs

        The following table summarizes our partner development programs for products approved for use or in clinical trials, including the indication for the particular drug or product, its present stage of clinical development or approval and, with respect to our announced partner development programs, the identity of the corporate partner for such program.

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(1)

Status means:

Approved—regulatory approval to market and sell product obtained.

New Drug Application ("NDA") filed—clinical trials completed and new drug application filed with the FDA.

Phase III—large-scale clinical trials conducted to obtain regulatory approval to market and sell a drug; initiated following encouraging Phase II trial results.

Phase II—clinical trials to establish dosing and efficacy in patients.

Phase I—clinical trials typically in healthy subjects to test safety. (Phase 1 trials for inhaled tobramycin and inhaled leuprolide were conducted by us prior to our collaborations with Chiron and Enzon, respectively. We believe our partners will conduct additional Phase I trials in the future with these products).

Selected Partner Development Programs

FDA Approved Products

PEG-INTRON™ Program (PEG Interferon Alpha)

        We are a party to a manufacturing agreement with Schering-Plough Corporation originally executed in February 2000 in connection with the PEG reagent used in PEG-INTRON (PEG-interferon alpha) for use in the treatment of the hepatitis C virus. Under the terms of this agreement, we manufacture the PEG reagent and Schering-Plough holds an exclusive worldwide license to PEG-INTRON, the first and only PEGylated interferon product approved for marketing in the United States and worldwide.

        Chronic hepatitis C is estimated to affect some 10 million people in the major world markets. The Centers for Disease Control and Prevention ("CDC") estimate that between 2.7 and 4 million people living in the United States are chronically infected with the hepatitis C virus with 70 percent of infected patients going on to develop chronic liver disease. Hepatitis C infection contributes to the deaths of an estimated 8,000 to 10,000 Americans each year and this toll is expected to triple by the year 2010, according to the CDC.

Definity® Program (PEG)

        We are a party to an agreement with Dupont Pharmaceuticals, now part of Bristol Myers-Squibb, originally executed in 1996. Bristol Myers-Squibb is using our advanced PEGylation technology in its Definity ultrasound system for diagnostically visualizing the heart.

        Definity is the first ultrasound contrast agent in the United States that is non-blood derived. It is comprised of gas-filled microspheres that are injected or infused into the body. When exposed to ultrasound waves, the microspheres resonate and echo strong signals back to the ultrasound machine.

Neulasta™ Program (PEG-G-CSF)

        We are a party to a license, manufacturing and supply agreement with Amgen Inc. originally executed in July 1995, to supply its proprietary 20kDa PEG derivative, which is utilized in the manufacture of pegfilgrastim for Amgen's Neulasta product. Neulasta was approved for marketing in the United States by the FDA in late January 2002.

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        Neulasta is indicated for decreasing the incidence of infection, as manifested by febrile neutropenia (fever associated with a severe drop in infection-fighting white blood cells) in patients with non-myeloid malignancies receiving myelosuppressive anti-cancer drugs. Febrile neutropenia is a serious and common complication of many cancer chemotherapies. Up to half of cancer chemotherapy patients develop severe neutropenia, potentially placing them at risk for life-threatening infections. On average, less than 10% of these patients receive proactive protection from neutropenia and studies have shown that 30% to 40% of patients receiving certain types of chemotherapy who do not get a white blood cell booster will experience neutropenia with fever. Thousands of patients are hospitalized for neutropenia and its complications each year, in an age when most chemotherapy patients are treated in the outpatient setting.

PEGASYS™ Program (PEG Interferon Alpha)

        We are a party to a license, manufacturing and supply agreement with F. Hoffmann-La Roche Ltd. originally executed in November 1998, whereby we licensed to Roche the PEG reagent used in Roche's Pegasys product for the treatment of chronic hepatitis C. This agreement provides us with milestone payments, royalty payments, and manufacturing revenues related to the PEG reagent. In connection with a patent infringement litigation settlement, we share a portion of the profits on this product with Enzon Pharmaceuticals, Inc. We are also a party to a subsequent agreement with Roche executed in April 1999, related to further collaborative work on Pegasys, a PEGylated interferon alpha-2a product.

        Roche announced in December 2002, that the FDA has approved combination therapy with Pegasys (peginterferon alfa-2a), which uses our technology to create a PEGylated interferon, and Copegus™ (ribavirin) for the treatment of adults with chronic hepatitis C who have compensated liver disease and have not previously been treated with interferon alpha. Pegasys and Copegus combination therapy was granted priority review designation by the FDA. Pegasys was approved as monotherapy for the treatment of adults with chronic Hepatitis C in October 2002. Currently, between 2.7 and 4 million people living in the United States are chronically infected with hepatitis C.

Somavert® Program (PEG-hGHRa)

        We are a party to a license, manufacturing and supply agreement with Sensus Drug Development Corporation originally executed in April 2000, for the PEGylation of Somavert (pegvisomant for injection), a human growth hormone receptor antagonist. This agreement provides us with milestone payments, and manufacturing revenues related to the PEG reagent. In March 2001, Sensus was acquired by Pharmacia Corp. Pharmacia announced on July 15, 2002 that they signed a definitive agreement with Pfizer Inc. providing for Pfizer to acquire Pharmacia.

        Somavert has been approved for marketing in the U.S. and Europe for the treatment of certain patients with acromegaly. Pricing approval in Europe is pending. Patients with acromegaly often suffer from headache, excessive sweating, soft-tissue swelling, joint disorders and a progressive coarsening of facial features and enlargement of the hands, feet and jaw. In acromegaly, excess production of growth hormone is usually caused by a pituitary tumor, which is a condition affecting an estimated 40,000 patients in the U.S., Europe and Japan.

        Relating to the above five FDA approved products, our revenue is based solely on the manufacture and supply of the PEG reagents. This revenue amounts to less than 1% of our partners' product sales.

Non FDA Approved Products

Exubera® Program (inhaleable insulin)

        Insulin is a protein hormone naturally secreted by the pancreas to induce the removal of glucose from the blood into cells. Diabetes, the inability of the body to properly regulate blood glucose levels, is caused by insufficient production of insulin by the pancreas or resistance to the insulin produced. Over time, high blood glucose levels can lead to failure of the microvascular system, which may lead to blindness, loss of

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circulation, kidney failure, heart disease or stroke. Insulin, in its injectable form, is supplied by various manufacturers, including Lilly, Novo-Nordisk A/S and Aventis Pharma.

        According to the United States Centers for Disease Control and Prevention, approximately 16 million people in the United States have diabetes, 10.3 million of which are diagnosed with diabetes and another 5.4 million of which have undiagnosed diabetes. There are approximately 798,000 new cases of diabetes diagnosed each year. All Type 1 diabetics, estimated at between 5% and 15% of all diabetics, require insulin therapy. Type 1 diabetics require both basal insulin in the form of long-acting insulin and multiple treatments of regular, or short acting, insulin throughout the day. Type 2 diabetics, depending on the severity of their disease, may or may not require insulin therapy. Because of the inconvenience and unpleasantness of injections, many Type 2 patients who do not require insulin to survive, despite the fact that they would benefit from it, are reluctant to start insulin treatment.

        Insulin therapy in Type 2 patients is generally given twice daily and is a combination of a short and long acting insulin. A ten-year study by the National Institutes of Health ("NIH"), however, demonstrated that the side effects of diabetes could be significantly reduced by dosing more frequently. The NIH study recommended dosing regular insulin three to four times per day, a regimen that would more closely mirror the action of naturally produced insulin in non-diabetics. Because of the risk of severe hypoglycemia, this course of treatment is not recommended for children, older adults, people with heart disease or with a history of frequent severe hypoglycemia. In addition, many patients are reluctant to increase their number of daily doses because they find injections unpleasant and inconvenient. Similar results were demonstrated in Type 2 patients in a UK trial.

        Per the terms of a collaborative agreement originally entered into in January 1995, we are developing with Pfizer an inhaleable version of regular human insulin (Exubera) that can be typically administered in one to three blisters per dose using our pulmonary delivery system. We believe that our delivery system could provide increased user convenience and result in greater patient compliance by eliminating some injections for Type 1 and Type 2 patients and all injections for some Type 2 patients. In addition, we believe that because inhaleable insulin has a more rapid onset of action than injectable insulin, it offers simpler pre-meal dosing than the slower acting regular insulin.

        Phase I and Phase IIa clinical trials indicated that inhaleable insulin was absorbed systemically, reduced blood glucose levels and provided the same control of diabetes as injected insulin. In October 1996, Pfizer initiated a multi-site Phase IIb outpatient trial to include up to 240 diabetes patients, the results of which were announced in June 1998. In 70 Type 1 diabetics treated with either inhaleable or conventional injected insulin therapy for three months, blood levels of hemoglobin Alc, or ("HbAlc"), the best index of blood glucose control, were statistically equivalent. Virtually identical results were obtained in a group of Type 2 diabetics. In September 1998, Pfizer released additional Phase II data from a study of diabetics whose blood glucose was poorly controlled by oral agents alone. In that study, patients who were given inhaleable insulin in addition to their oral medications showed marked improvement in their blood glucose control.

        In November 1998, Pfizer and Aventis Pharma announced that they entered into a worldwide agreement to manufacture insulin and to co-develop and co-promote inhaleable insulin. Under the terms of the agreement, Pfizer and Aventis Pharma have constructed a jointly owned insulin manufacturing plant in Frankfurt, Germany. If Exubera is approved for use, we will continue to have responsibility for manufacturing at least 50% of the inhaleable insulin drug powders, and for supplying inhalers. In addition to receiving revenues for the manufacture and supply of drug powders and inhalers, we will receive a royalty on inhaleable insulin products marketed jointly by Pfizer and Aventis Pharma.

        In June 1999, Pfizer began dosing in Phase III clinical trials. In June 2000, Pfizer reported new data on patients using inhaleable insulin therapy from a Phase II continuation, or extension, study being conducted by Pfizer and Aventis Pharma. The goal of the extension study was to determine if safety and efficacy results from previously reported short-term Phase II clinical trials could be maintained in the long term.

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These data showed that HbAlc, the long-term measurement of blood glucose control, remained stable in patients for up to 30 months of therapy. At the time that this data was compiled, 83 patients had completed 24 months of inhaleable insulin therapy. Further data presented indicated similar results for patients who completed 30 months of therapy.

        In June 2001, Pfizer reported on data released from Phase III studies showing that more patients with Type 2 diabetes who were treated with inhaleable insulin achieved the recommended blood glucose levels than patients who received only insulin injections. In addition the frequency and nature of adverse events were comparable between groups. Patients who used inhaleable insulin developed increased insulin antibody serum binding, but there did not appear to be any related clinical significance. Additional data released from these Phase III studies suggested that patients with Type 1 diabetes using inhaleable insulin multiple times a day with one bedtime long acting insulin injection achieved comparable control of blood glucose to that seen in patients receiving multiple daily insulin injections. An additional Phase III study indicated that Type 2 diabetic patients who were poorly controlled on a combination of two oral diabetes therapies demonstrated improved glycemic control and greater overall satisfaction and acceptance of therapy when inhaleable insulin was added to their treatment regimen or when it replaced oral therapies. Any eventual label claims for Exubera will be subject to regulatory approval of the product and its labeling.

        In December 2001, Pfizer announced that it had decided to include an increased level of controlled, long-term safety data in its proposed NDA with respect to inhaleable insulin. In May and June 2002, Pfizer Inc. and Aventis Pharma released data from Phase III studies conducted with the Exubera inhaleable insulin product. The data showed that patients with Type 2 diabetes, who had failed to meet recommended blood glucose levels with combination oral therapy, achieved better glycemic control with Exubera than patients who received oral agents. In addition, the study results showed that Exubera provides glycemic control equal to insulin injections in patients with Type 1 diabetes. However, the data also indicated a small relative decrease in one of the pulmonary function tests in the Exubera treatment group. In October 2002, Pfizer and Aventis announced that they would complete additional long-term studies already underway for Exubera to determine whether there is clinical significance to the pulmonary function data, and that they were continuing their discussions with regulatory agencies regarding the timing of an NDA submission for the product. In January 2003, during Pfizer's quarterly financial results conference call, Pfizer commented that it would not file an NDA for approval of Exubera in 2003.

        In January 1995 and October 1996, Pfizer made two $5.0 million equity investments in our company.

        There can be no assurance that Pfizer will file for an NDA approval of Exubera and, if such filing is made, there can be no assurance that Pfizer will obtain FDA approval to market Exubera. The failure to file for or obtain regulatory approval of Exubera would significantly harm our business.

Macugen™ Program

        In February 2002, we announced a long-term commercial supply agreement with Eyetech Pharmaceuticals, Inc., a privately held biopharmaceutical company. Eyetech is currently conducting a Phase II/III pivotal clinical trial to evaluate the safety and efficacy of Macugen, a PEGylated anti-Vascular Endothelial Growth Factor aptamer, for the treatment of age-related macular degeneration ("AMD"), which is the leading cause of blindness among Americans over the age of 55.

        Macugen is also in Phase II testing for the treatment of diabetic macular edema ("DME"). The FDA has granted Macugen "fast-track" status for the treatment of exudative or "wet" form of AMD as well as for DME because of the product's expected potential to fulfill a significant unmet medical need.

        Under the agreement, we will provide Eyetech with advanced PEGylation technology for use in the development of Macugen and we will receive milestone payments, royalties on sales of commercialized products and revenues from exclusive manufacturing of the PEG derivative.

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SprayGel™ Program (PEG-hydrogel)

        We are a party to a license, supply and manufacturing agreement with Confluent Surgical, Inc. originally executed in August 1999, for use of our PEG-hydrogel in Confluent's SprayGel adhesion barrier system. Under the terms of this arrangement, we manufacture and supply PEG components used in the SprayGel system and receive royalty payments on sales of commercialized products, and manufacturing and supply revenues from Confluent. SprayGel was approved for commercial distribution in Europe, receiving product certification by European regulatory authorities in November 2001. In June 2002, Confluent initiated Phase II/III pivotal trials in the US of SprayGel.

        SprayGel is a biodegradable, water-based, coating material designed to prevent postoperative adhesions formation. Adhesions can be responsible for severe pain and discomfort as well as small bowel obstructions and are the leading cause of infertility in women following gynecological surgery. Approximately 500,000 surgical procedures are performed annually to remove adhesions.

PEG CDP 870 Program

        We are a party to a license, manufacturing and supply agreement for PEG CDP 870 with Celltech Group plc executed in 2000, which was subsequently assigned to Pharmacia for the rheumatoid arthritis indication. In October 2002, Pharmacia Corporation initiated Phase III clinical trials with CDP 870. Pharmacia announced in July 2002, that they signed a definitive agreement with Pfizer Inc. providing for Pfizer to acquire Pharmacia.

        Under the agreement, we receive milestone payments, royalties on product sales and PEG manufacturing revenues if the product is commercialized, which are partially shared with Enzon. Celltech is also assessing CDP 870 in Phase II studies as a treatment for Crohn's disease.

        Rheumatoid arthritis affects an estimated 2.1 million Americans. This systemic autoimmune disease is characterized by inflammation of the lining of the joint. Current therapies are directed at treating the symptoms of rheumatoid arthritis or at modifying the disease, or a combination of the two, requiring daily or weekly administration.

PEG CDP 860 Program

        In October 2002, we announced a licensing, manufacturing and supply agreement for three products with Celltech Group, plc, including CPD 860, a PEGylated antibody fragment drug in Phase II clinical testing for the treatment of cancer tumors. CDP 860 is being assessed in a Phase II study to determine whether it is able to increase the blood flow into a solid tumor.

        We are also currently collaborating on PEGylated antibody fragment products CDP 791 and CDP 484 for cancer and rheumatoid arthritis respectively with Celltech. Both programs are currently in pre-clinical development.

        Under the terms of the agreement, we will provide exclusive development and manufacturing for each activated PEG for all three products. In exchange, we will receive milestone payments, manufacturing revenues and royalties on sales of commercialized products.

Alpha-1 Proteinase Inhibitor Program

        In January 1997, we entered into a collaborative agreement with Aventis Behring to develop a pulmonary formulation of alpha-1 proteinase inhibitor to treat patients with alpha-1 antitrypsin deficiency, or genetic emphysema. Alpha-1 proteinase inhibitor is approved in the United States and several European countries for augmentation treatment of alpha-1 antitrypsin deficiency. Current treatment is given by systemic intravenous infusion on a weekly basis. This "replacement therapy" consists of a concentrated form of alpha-1 proteinase inhibitor derived from human plasma. Under the terms of the collaboration, Aventis Behring will receive commercialization rights worldwide excluding Japan and we

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will receive royalties on product sales, an up-front signing fee and research and development funding and milestone payments. Inhaled alpha-1 has received orphan drug status in the U.S. and Europe.

        We and Aventis Behring have completed preclinical work, and Phase I clinical trials indicate our dry powder formulation of Aventis Behring's alpha-1 proteinase inhibitor has the potential to improve significantly the efficiency of delivery compared with current infusion therapy. We believe our pulmonary delivery system could significantly reduce the amount of drug needed for genetic emphysema therapy since alpha-1 proteinase inhibitor could be delivered directly to the lung where it acts. Aventis Behring is currently negotiating to secure rights under patents that have been granted in Europe directed to aerosol formulations for the treatment of the lung containing serine protease inhibitors, including alpha-1 proteinase inhibitor. Aventis Behring has not yet indicated when and if they plan to conduct clinical trials beyond Phase I.

Inhaled Tobramycin Program

        In December 2001, we entered into a collaboration with Chiron Corporation to develop a next-generation inhaleable formulation of tobramycin for the treatment of pseudomonas aeruginosa in cystic fibrosis patients and to explore the development of other inhaled antibiotics using our pulmonary delivery system. Cystic fibrosis is a hereditary disease that primarily affects people of caucasian origin. About 30,000 people in the United States and about 70,000 people worldwide have cystic fibrosis. Patients with cystic fibrosis typically suffer from chronic respiratory infections, digestive disorders, reduced male fertility and other problems. Chiron's existing tobramycin product, TOBI™, was introduced in 1998 as the first inhaled antibiotic approved for treating pseudomonas aeruginosa lung infections in cystic fibrosis patients.

        Under the terms of the tobramycin collaboration, we will be responsible for the development of the next generation formulation of inhaleable tobramycin as well as clinical and commercial manufacturing of the drug formulation and delivery device combination. Chiron will be responsible for the clinical development and worldwide commercialization of the combination. We will receive research and development funding, milestone payments as the program progresses through further clinical testing, and royalty payments and manufacturing revenues once the product is commercialized. It is expected that the additional drug formulations to be investigated under the agreement will also relate to antibiotic products for the treatment of lung infections.

Strategic Alliance—Enzon

        In January 2002, we announced a strategic alliance with Enzon Pharmaceuticals, Inc. that includes an agreement making us solely responsible for licensing Enzon's PEGylation patents, an option for Enzon to license our PEGylation patents, an agreement to explore the development of non-invasive delivery of single-chain antibody products via the pulmonary route and settlement of a patent infringement litigation originally initiated by Enzon. We will have the option to license Enzon's PEGylation patents for use in our proprietary products. Enzon will receive a royalty or a share of profits on final product sales of any products that use Enzon's patented PEG technology, including branched PEG. As part of this broad alliance, we entered into a collaboration to develop three products using our pulmonary delivery system and/or supercritical fluids technology. The first potential product under this collaboration may be an inhaleable formulation of leuprolide acetate, a peptide analog used to treat prostate cancer and endometriosis. Under the terms of this collaboration, we will be responsible for the development of drug formulations for the agreed upon pharmaceutical agents as well as clinical and commercial manufacturing of the drug formulation and device combination. Enzon will be responsible for the clinical development and worldwide commercialization of such combination. We may receive research and development funding and milestone payments as the program progresses through further clinical testing, and will receive royalty payments if the product is commercialized. As part of this alliance, Enzon made a $40.0 million equity

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investment in our convertible preferred stock. On February 20, 2003, Enzon announced it has entered into an agreement to merge with NPS Pharmaceuticals, Inc.

Dental Regeneration Products

        In January 2003, we announced an agreement with the Straumann Group to license, manufacture and supply Nektar's PEG-based hydrogel technology for dental regeneration products. The proposed PEG-based hydrogel product will be designed for use by dentists to support tissue regeneration in dental surgery.

        Under the agreement, Straumann will license and source our PEG-based hydrogel technology and material exclusively for a proprietary formulation. We will receive milestone and manufacturing payments as well as royalties on commercialized products.

PA 2794 Inhaleable Antibiotic Program

        In July 2002, we announced that we are collaborating with Chiron Corporation to develop an antibiotic product using our pulmonary delivery system.

        Based on feasibility work completed by us, the product developed under this collaboration will be an inhaleable powder version of PA 2794, a proprietary Chiron antibiotic from a class commonly used to treat pulmonary infections. We will use our pulmonary delivery system to develop an inhaleable version of the antibiotic that can treat lung infections directly. We believe that such a powder formulation may enable easier delivery to the site of infection, with potentially more rapid resolution of symptoms and reduced gastrointestinal side effects.

        Under the terms of the collaboration, we will develop the formulation and be responsible for clinical and commercial manufacturing of the drug powder and delivery device combination. Chiron will be responsible for the clinical development and worldwide commercialization of the combination. We will receive research and development funding and milestone payments as the program progresses through clinical testing, and royalty payments on product sales and manufacturing revenues if the product is commercialized.

Johnson and Johnson Collaboration

        In October 2001, we entered into a collaboration with the R.W. Johnson Pharmaceutical Research Institute and the Janssen Research Foundation, subsidiaries of Johnson & Johnson, for the development of multiple small molecule compounds using our pulmonary delivery system. Feasibility work has been completed and we are reviewing the future of this program.

Marinol® Program

        In February 2002, we entered into a collaboration with Unimed Pharmaceuticals, Inc., a wholly owned subsidiary of Solvay Pharmaceuticals, Inc., to develop an MDI formulation of dronabinol (synthetic delta-9-tetrahydrocannabinol) to be used for multiple indications. Dronabinol is the active ingredient in Unimed's MARINOL capsules. MARINOL capsules are approved in the U.S. for the treatment of anorexia associated with weight loss in patients with AIDS and for the treatment of refractory nausea and vomiting associated with cancer chemotherapy.

        Under the terms of the collaboration, we will be responsible for development of the formulation, as well as clinical and commercial manufacturing of the drug formulation and device combination. Unimed will be responsible for the clinical development and worldwide commercialization of the combination. We will receive research and development funding, milestone payments as the program progresses through further clinical testing, and royalty payments on product sales and manufacturing revenues if the product is commercialized.

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Supplemental Agreement with Alliance Pharmaceutical Corp.

        In March 2002, we announced the expansion of our agreement with Alliance Pharmaceutical Corp. ("Alliance") regarding the PulmoSphere® particle and particle processing technology, aspects of which we initially acquired from Alliance in November 1999. The PulmoSphere technology is a particle engineering method designed to enhance the performance of drugs delivered via the lung in propellant-based metered-dose inhalers and dry powder inhalers. As a result of the supplemental agreement, we paid Alliance $5.25 million in exchange for rights beyond inhaleable applications and other considerations. Under the terms of the supplemental agreement, we have the right to use the PulmoSphere technology for alternative methods of delivery in addition to inhaleable applications. Further, Alliance assigned five new patent applications covering methods of producing microparticles to us. Alliance retains the rights to use the technology on products to be instilled directly into the lung, and obtains the rights to commercialize up to four products administered with inhalers, two of which will be royalty-free. We will pay Alliance future milestone or royalty payments on a reduced number of products developed by us or our licensees utilizing the technology.

Fortéo™ Program

        In January 1997, we entered into a collaborative agreement with Eli Lilly and Company ("Lilly") to develop an inhaleable formulation of Fortéo, a version of parathyroid hormone, PTH 1-34, used in the treatment of osteoporosis. Under the terms of the agreement we were to receive research, development and milestone payments, and royalties on sales of marketed products.

        In October 2002, we announced that the two companies had mutually agreed to terminate the program. We intend to seek a new partner to carry forward this program.

        There is no assurance that any of our partner programs will be successful or result in commercially viable products.

Feasibility Studies

        In addition to the partner collaborations mentioned above and other development programs, we have conducted and continue to conduct feasibility studies of additional drug formulations both on our own account and in cooperation with potential collaboration partners. We will continue to pursue these and other feasibility programs to determine the potential for collaborative development programs with respect to these drugs. There can be no assurance that any of our feasibility studies will be successful or result in collaborative development programs.

Manufacturing

        Our goal in manufacturing is to achieve the following:

•

Provide economies of scale by utilizing manufacturing capacity for multiple products;

•

Improve our ability to retain any manufacturing know-how; and

•

Allow our customers to bring products to market faster.

        With respect to products based on our pulmonary delivery system, we generally plan to formulate, manufacture and package the powders for our pulmonary delivery products and to subcontract the manufacture of our proprietary pulmonary delivery devices. Our device for use with Exubera, the pulmonary inhaler, is still in clinical testing and production scale-up work is ongoing. Further work is underway to enable large scale commercial manufacturing and additional work may be required to optimize the device for regulatory approval, field reliability or other issues that may be important to its commercial success. Additional design and development work may lead to a delay in regulatory approval, efforts to seek regulatory approval for any product that incorporates the device or the time the device could be ready for commercial launch. Under our collaborative agreement with Pfizer to develop Exubera,

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we will manufacture inhaleable insulin powders and Pfizer will be primarily responsible for filling and packaging blisters. The terms of the supply agreement with Pfizer provide that prior to the commercialization of Exubera, we must build and have validated a powder processing facility and a device manufacturer or manufacturers. We will be the commercial powder manufacturer at launch, if any. Pfizer has the right to manufacture a portion of the powder requirement post-launch.

        We have built a powder manufacturing and packaging facility in San Carlos, California capable of producing powders in quantities we believe are sufficient for clinical trials of products based on our pulmonary delivery system. This facility has been inspected and licensed by the State of California and is used to manufacture and package powders under current Good Manufacturing Practices. We have completed construction of a commercial facility to meet our future manufacturing commitments. We believe that scale-up and validation will be completed in time for commercial operations should a product using our pulmonary delivery system be approved for use.

        We are working to further scale-up our powder processing to a larger production scale system and to further develop the necessary powder packaging technologies. Fine particle powders and small quantity packaging (such as those to be used in our delivery system) require special handling. Current commercial packaging systems are designed for filling larger quantities of larger particle powders and therefore must be modified to dispense finer particles in the small quantities we require for our pulmonary delivery system. We have developed and internally qualified a proprietary prototype automated filling system, which we believe is capable of supporting our partners' requirements through Phase III trials and into commercial production for some products.

        We have developed a high capacity automated filling unit capable of filling blisters on a production scale for moderate and large volume products using our pulmonary delivery system. The technology has been transferred to Pfizer who will have the responsibility of commercial packaging and filling the bulk drug powders for Exubera.

        One of our proprietary pulmonary inhaler devices is being developed for commercial use and is being used in the Phase III Exubera and other trials. We have identified and have established formal supply agreements with contract manufacturers that we believe have the technical capabilities and production capacity to manufacture our pulmonary delivery devices. It is believed that these contract manufacturers can successfully receive the device technology and know-how transferred from our device development group, scale up the manufacturing process, and meet the requirements of current Good Manufacturing Practices. The contract manufacturers have completed construction of their facilities. Manufacturing scale-up and qualification efforts are underway. We are examining scale-up and validation plans to support their commercial operations.

        With respect to Nektar Molecule Engineering products using advanced PEGylation technology, we have one facility in Huntsville, Alabama for the manufacture of PEG-derivatives. We forecast increasing capacity to handle current and future demand based on our current pipeline.

        With respect to products using our Nektar Particle Engineering using our supercritical fluids technology, we currently have one facility in Bradford, England for the production of dry powder material. We believe this capacity is sufficient for the production of materials necessary to complete a substantial portion of early-stage clinical trials undertaken by our collaborative partners. We forecast expanding our manufacturing capabilities to demonstrate pilot plant scale-up to meet latent customer demands.

        There can be no assurance that we will be able to successfully process drug powders, or manufacture products on our autofiller system in a timely manner or at commercially reasonable cost. Any failure or delay in further developing this technology would delay product development or inhibit commercialization of our products and would have a materially adverse effect on us. There can be no assurance that we will be able to successfully transfer our filling and packaging technology to Pfizer for the commercial manufacture of the Exubera product, if approved. Moreover, there can be no assurance that we will be able to successfully scale-up and validate our contract manufacturers, or that we will be able to maintain

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satisfactory contract manufacturing on commercially acceptable terms. Our dependence upon third parties for the manufacture of our pulmonary inhaler device and its supply chain may adversely affect our cost of goods and our ability to develop and commercialize products on a timely and competitive basis.

Government Regulation

        The research and development, clinical testing, manufacture and marketing of products using our technologies are subject to regulation by the FDA and by comparable regulatory agencies in other countries. These national agencies and other federal, state and local entities regulate, among other things, research and development activities and the testing (in vitro and in animals and in human clinical trials), manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products.

        The process required by the FDA before a product using our technologies may be marketed in the United States depends on whether the compound has existing approval for use in other dosage forms. If the drug is a new chemical entity that has not been previously approved, the process includes the following:

•

Extensive preclinical laboratory and animal testing;

•

Submission of an Investigational New Drug application, or IND;

•

Adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for the intended indication; and

•

Submission to the FDA for approval of a New Drug Application, or NDA, for drugs or a Biological License Application, or BLA, for biological products.

        If the drug has been previously approved, the approval process is similar, except that certain preclinical tests relating to systemic toxicity norma