Note 4 — Liability related to sale of future royalties

On February 24, 2012, we entered into a Purchase and Sale Agreement (Purchase and Sale Agreement) with RPI Finance Trust (RPI), an affiliate of Royalty Pharma, pursuant to which, on February 24, 2012, we sold, and RPI purchased, our right to receive royalty payments (the Royalty Entitlement) arising in respect of worldwide net sales, from and after January 1, 2012, of (a) CIMZIA^®, under Nektar's license, manufacturing and supply agreement with UCB Pharma (UCB), and (b) MIRCERA^®, under Nektar's license, manufacturing and supply agreement with Roche. We received an aggregate cash purchase price for the Royalty Entitlement of $124.0 million. As part of this sale, we incurred approximately $4.4 million in transaction costs. As is further described below, although we sold all of our rights to receive royalties from CIMZIA^® and MIRCERA^® products, we will continue to account for these royalties as revenue and have recorded the $124.0 million in proceeds from this transaction as a liability as a result of our ongoing manufacturing and supply obligations related to the generation of these royalties.

Pursuant to the Purchase and Sale Agreement, we are required to pay to RPI (a) $3.0 million if certain worldwide net sales thresholds of MIRCERA^® for the 12 month period ending on December 31, 2012 are not achieved and (b) up to an additional $7.0 million if certain worldwide net sales thresholds of MIRCERA^® for the 12 month period ending on December 31, 2013 are not achieved. The Purchase and Sale Agreement grants RPI the right to receive certain reports and other information relating to the Royalty Entitlement and contains other representations and warranties, covenants and indemnification obligations that are customary for a transaction of this nature. In particular, if we breach our obligations under the Purchase and Sale Agreement, we could be required to pay damages to RPI that are not limited to the purchase price we received in the sale transaction.

Except as described above, RPI is entitled only to the future royalty payments arising from sales of CIMZIA^® and MIRCERA^®, pursuant to our agreements with UCB and Roche. However, we have determined that we have significant continuing involvement in the generation of these future royalty payments through our ongoing manufacturing and supply obligations. As a result, we recorded the $124.0 million as a long-term liability (Royalty Obligation) on our condensed consolidated balance sheet that will be amortized using the interest method over the estimated life of the Purchase and Sale Agreement. We believe the $124.0 million carrying amount of the Royalty Obligation is consistent with its fair value at March 31, 2012. The model used to estimate the fair value of the rights sold to RPI requires us to make estimates regarding, among other things, the assumptions market participants would make regarding the timing, probability and amount of future royalties, as well as the appropriate financial discount rates. We consider the assumptions and estimates used in the analysis to fall within Level 3 of the fair value hierarchy.

As a result of this liability accounting, even though the royalties from UCB and Roche will be remitted directly to RPI starting in the second quarter of 2012 for royalties arising from product sales in the first quarter of 2012, we will continue to record revenue for these royalties. During the three months ended March 31, 2012 and 2011, we recognized $2.7 million and $1.8 million, respectively, in aggregate royalties from net sales of CIMZIA^® and MIRCERA^®.

As royalties are remitted to RPI from Roche and UCB, the balance of the Royalty Obligation will be effectively repaid over the life of the agreement. Based on the estimated amount of future royalty payments to be received by RPI and any payments we are required to make to RPI as noted above, if any, over the life of the arrangement less the $124.0 million proceeds we received, as of March 31, 2012, our estimate of the interest rate under the agreement is approximately 17%. We will periodically assess the royalty payments to RPI from UCB and Roche and to the extent such payments are greater or less than our initial estimates, or the timing of such payments is materially different than our original estimates, we will adjust the amortization of the Royalty Obligation. There are a number of factors that could affect the amount and timing of royalty payments from CIMZIA^® and MIRCERA^®, most of which are not within our control. Such factors include, but are not limited to, changing standards of care, the introduction of competing products, manufacturing or other delays, biosimilar competition, intellectual property matters, adverse events that result in governmental health authority imposed restrictions on the use of the drug products, and other events or circumstances that result in reduced royalty payments from CIMZIA^® and MIRCERA^®, all of which would result in a reduction of interest expense over the life of the Royalty Obligation. Conversely, if sales of CIMZIA^® and MIRCERA^® are more than expected, interest expense would also be greater over the term of the Royalty Obligation.

The following table shows the activity within the liability account:


	Three months ended March 31, 2012
Beginning balance	$	—
Proceeds from sale of future royalties		124,000
Non-cash interest expense		1,785
CIMZIA^® and MIRCERA^® royalties remitted to RPI		—

Ending balance	$	125,785