Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
---------------- ----------------
Commission File Number 0-23272
------------------------------
NPS PHARMACEUTICALS, INC.
(Exact name of Registrant as Specified in Its Charter)
Delaware 87-0439579
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
420 Chipeta Way, Salt Lake City, Utah 84108-1256
(Address of Principal Executive Offices) (Zip Code)
(801) 583-4939
(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value
Preferred Stock Purchase Rights
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 at least the past 90 days. YES [X] NO [ ]
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. [ ]
The approximate aggregate market value of the Common Stock held by
non-affiliates of the Registrant was $855,485,258 as of March 1, 2002, based
upon the closing price for the shares of common stock reported on The Nasdaq
Stock Market and The Toronto Stock Exchange, on such date. This excludes
1,463,576 shares of Common Stock held by directors and officers as of March 1,
2002. The determination of affiliate status is not a conclusive determination
for other purposes.
The number of shares of Common Stock outstanding as of March 1, 2002 was
30,219,383, which includes 422,321 Exchangeable Shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report on Form 10-K incorporates by reference portions of
the Registrant's definitive Proxy Statement for the Registrant's Annual Meeting
of Stockholders, to be held May 23, 2002, which will be filed with the
Securities and Exchange Commission.
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities and Exchange Act of 1934. These
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to the differences include,
but are not limited to, those discussed in the Section entitled "Business--Risk
Factors," as well as other parts of this Annual Report. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. We undertake no obligation to publicly release
updates or revisions to these statements.
PART I
ITEM 1. Business
Overview
Our objective is to build a profitable biopharmaceutical company by
discovering, developing and commercializing small molecule drugs and recombinant
proteins. Our current product candidates are primarily for the treatment of bone
and mineral disorders, gastrointestinal disorders and central nervous system
disorders.
We have three product candidates in active clinical development and several
preclinical product candidates. Two of these product candidates, PREOS(TM) and
AMG 073, are in Phase III clinical trials. Our third product candidate, ALX-
0600, is in a pilot Phase II clinical trial. PREOS and ALX-0600 are proprietary
to and are being developed by us. PREOS is our recombinant, full-length
parathyroid hormone for the treatment of osteoporosis, and ALX-0600 is our
analog of glucagon-like peptide 2 for the treatment of gastrointestinal
disorders. AMG 073, our orally active, small molecule compound for the treatment
of hyperparathyroidism, is being developed by our licensees, Amgen Inc. and
Kirin Brewery Company, Ltd. We collaborate on three preclinical programs with
AstraZeneca AB, GlaxoSmithKline, and Janssen. Pharmaceutica N.V., a subsidiary
of Johnson & Johnson.
Strategy
We intend to achieve our objective through the following strategy:
. Build a diversified pipeline of products addressing a variety of
medical conditions. We are developing a diverse pipeline of product
candidates that are in various stages of clinical and preclinical
development. Our portfolio approach allows us to reduce our exposure
to the impact of any single product failure and increases our
flexibility to focus on our most promising programs. We believe this
strategy increases the likelihood that we will successfully develop
commercially viable pharmaceutical products.
. Develop sales, marketing and manufacturing capabilities to facilitate
product commercialization, either internally or through contract
relationships. In order to commercialize our proprietary drug
candidates and to exploit our co-promotion rights, we intend to
develop sales and marketing capabilities, either internally or through
contract relationships. We also intend to develop pre-launch and
commercial-scale production capabilities through agreements with
contract manufacturers.
. Collaborate to reduce our risk and accelerate the commercialization of
select product candidates. We believe collaborators with clinical
development and marketing expertise in specific therapeutic areas will
facilitate more rapid entry into the market for certain of our
products and accelerate their acceptance by healthcare providers and
third-party payors. We selectively enter into collaboration agreements
and licenses with pharmaceutical and biotechnology companies to
enhance our financial flexibility. This strategy allows us to devote
greater resources to proprietary programs and to pursue a greater
number of product candidates than would otherwise be possible.
. In-license or acquire complementary products, technologies or
companies. In addition to our internal discovery efforts, we intend to
pursue our product portfolio strategy by identifying and evaluating
potential products and technologies developed by third parties that we
believe fit within our overall portfolio strategy. In 1999, we
acquired Allelix Biopharmaceuticals Inc., in part because its product
candidates complemented our existing programs in osteoporosis and
central nervous system disorders and brought late-stage candidates to
our product pipeline.
. Continue to develop and leverage our core discovery competencies and
proprietary expertise. We believe that the continued evaluation,
selection and winnowing of candidates in our product development
pipeline will be effective based in part on the ability of our
scientists to apply techniques related to our core competencies. We
intend to continue to use these abilities to identify molecular
targets for the development of new drugs and to identify, evaluate,
select, and winnow drug candidates meriting continued evaluation. Our
multidisciplinary discovery teams focus on developing a broad product
pipeline covering a variety of disorders.
2
Our Product Development Programs
The following is a summary of our product development programs by
therapeutic area:
Licensees and
Product or Program Indication(s) Status Collaborators
------------------- ------------- ------ -------------
Bone and Mineral Disorders
PREOS (formerly ALX1-11) Osteoporosis Phase III Proprietary
Calcilytic Compounds Osteoporosis Preclinical GlaxoSmithKline*
AMG 073 Hyperparathyroidism
Primary Phase II Amgen, Kirin
Secondary Phase III Amgen, Kirin
Gastrointestinal Disorders
ALX-0600 Short Bowel Syndrome Pilot Phase II Proprietary
Central Nervous System
Disorders
Metabotropic Glutamate Psychiatric and Neurological
Receptors Disorders and Pain Preclinical AstraZeneca*
Glycine Reuptake Inhibitors Schizophrenia and Dementia Preclinical Janssen*
- ----------
* We retain co-promotion rights for product candidates from these
collaborations.
Bone and Mineral Disorders
Overview. Bone and mineral disorders include a range of diseases affecting
nearly every major organ system in the body. The most common bone and mineral
disorder is osteoporosis, an age-related disease characterized by reduced bone
mineral density and increased susceptibility to fractures. Although bone loss is
a universal consequence of age, the process is accelerated in women following
menopause. Osteoporosis is often diagnosed only after fractures in weakened
bones. Fractures of the hip, spine or wrist can result in serious long-term
disability.
Another bone and mineral disorder is hyperparathyroidism. In
hyperparathyroidism, there is an oversecretion of parathyroid hormone by the
parathyroid glands located in the neck. Symptoms of hyperparathyroidism may
include bone loss and pain, bone deformities, muscle weakness, severe
generalized itching and abnormal calcification of soft tissues, including the
heart. Patients may also experience depression and cognitive dysfunction.
Hyperparathyroidism is characterized as either primary or secondary. Primary
hyperparathyroidism is primarily an age-related disorder that is characterized
by enlargement of one or more of the four parathyroid glands. Secondary
hyperparathyroidism is primarily a physiological response to failing kidneys. As
renal function deteriorates, the body is unable to maintain proper levels of
calcium, Vitamin D, and phosphorus in the blood. To compensate, parathyroid
glands enlarge and produce increased amounts of parathyroid hormone in an
attempt to increase calcium and decrease phosphorus levels in the blood.
PREOS and Calcilytic Compounds for Osteoporosis
We are pursuing two separate but related programs for the treatment of
osteoporosis. We are developing PREOS internally, and we are pursuing calcilytic
compounds in conjunction with GlaxoSmithKline.
PREOS. PREOS is our recombinant, full-length, human parathyroid hormone
being developed for the treatment of osteoporosis. We expect that PREOS will be
delivered subcutaneously on a daily basis through an injection pen device
designed to make delivery of the drug simple and relatively painless. Although
chronically high levels of parathyroid hormone are known to cause bone loss, as
in hyperparathyroidism, preclinical and clinical studies conducted to date show
that pulsatile dosing with PREOS, in which parathyroid hormone levels rise
rapidly and then return to normal levels within a few hours, actually stimulates
bone growth. In a Phase II clinical trial of over 200 post-menopausal women
completed in 1997, daily injections of PREOS produced a clinically and
statistically significant average increase in bone mineral density in the lumbar
spine of nearly seven percent in only one-year. We are
3
conducting a pivotal Phase III clinical trial with PREOS in post-menopausal
women for osteoporosis and another ancillary Phase III trial in osteoporotic
women undergoing estrogen replacement therapy.
Market Opportunity. Approximately 10 million American women have advanced
osteoporosis and another 18 million women are osteopenic, or approaching
osteoporosis, and are at high risk of fractures because of low bone mineral
density. A recent study published in the Journal of the American Medical
Association demonstrated that nearly one-half of post-menopausal women have
undetected low bone mineral density, and women identified with low bone mineral
density were at a significantly increased risk of fracture. In addition, 50
percent of women over 50 years of age in the United States will suffer an
osteoporosis-related fracture during their lifetime. According to the National
Institutes of Health, osteoporosis is responsible for more than 1.5 million
fractures annually. The National Osteoporosis Foundation reports that an average
of 24 percent of hip fracture patients age 50 and over die within one year after
their fracture, and 25 percent of those who were ambulatory before their hip
fracture require long-term care afterward. The size of the United States
population aged 50 years and over is expected to increase significantly over the
next several decades as a result of the aging of the "baby boomer" generation
and longer life expectancies. Estimated United States expenditures for
osteoporosis and related fractures is $14.0 billion each year.
Current therapies for osteoporosis include supplementing dietary calcium
and vitamin D, which may help to slow the rate of bone loss. Other therapies
include estrogen replacement therapy in post-menopausal women, bisphosphonates
and raloxifene, a selective estrogen receptor modulator. All of these therapies
act to prevent further bone loss by inhibiting bone resorption. These therapies
have been shown to reduce the incidence of fracture, but they have only a
limited positive effect on bone mineral density. For example, Fosamax, a
bisphosphonate sold by Merck, showed a reduction in fractures but an increase in
bone mineral density of only seven to ten percent over three years. Merck
reported sales of Fosamax in 2001 of $1.8 billion.
We believe there exists a significant need for improved therapy that will
increase bone mineral density to a greater degree and at a faster rate, thereby
reducing the risk of fracture. Parathyroid hormone treatment, such as our
product candidate, PREOS, and Lilly's parathyroid hormone-fragment, Forteo, are
designed to address this medical need and supplement currently available
treatments.
The FDA's Endocronologic and Metabolic Drug Advisory Committee recently
recommended Forteo for the treatment of osteoporosis, which we believe further
validates the clinical benefit of parathyroid hormone treatment. PREOS is our
recombinant parathyroid hormone consisting of all 84 amino acids found in the
naturally occurring human parathyroid hormone. Lilly's Forteo is a fragment of
the naturally occurring parathyroid hormone and is only comprised of the first
34 amino acids. Data from Lilly's Phase III clinical trial indicated that, in
post-menopausal women with severe osteoporosis, daily injections of Forteo
provided statistically significant reductions in fractures and rapid and
significant increases in bone mineral density. Because PREOS consists of 84
amino acids found in the naturally occurring human parathyroid hormone, we
believe that our Phase III clinical trials will also show efficacy in the
treatment of osteoporosis. In addition, studies currently being conducted by us
and our academic collaborators are designed to confirm what, if any, therapeutic
advantage our full-length human parathyroid hormone may have compared to
fragments of parathyroid hormone.
PREOS Development Status. We are currently conducting a Phase III clinical
trial for PREOS. This trial, referred to as the Treatment of Osteoporosis with
Parathyroid hormone Study, or TOP Study, is a double-blind, placebo-controlled,
multi-center clinical trial designed to demonstrate the ability of PREOS to
reduce fractures and build bone mineral density in women with osteoporosis. The
TOP Study is evaluating the effects of PREOS in post-menopausal women who have
low bone mineral density and may have suffered a fracture, but who are not
receiving drug or hormone therapy for osteoporosis. Women participating in the
study receive daily, subcutaneous injections of PREOS or placebo. Dosing in this
study is planned to last for 18 months. We originally designed the TOP Study for
enrollment of 1,800 patients by the end of 2001. We reached this goal, but we
decided to expand our original enrollment target and continue the period of
enrollment into the first quarter of 2002 to provide us with strengthened
clinical results and greater analytic flexibility. Enrollment will be completed
no later than March 31, 2002.
We are also conducting a Phase III clinical study to measure the effects of
PREOS in osteoporotic women undergoing estrogen replacement treatment. We refer
to this trial as the Parathyroid Hormone for Osteoporotic Women on Estrogen
Replacement Study, or POWER Study. This study will be conducted at selected
clinical sites in Europe, which is the largest pharmaceutical market for
osteoporosis after the United States. Participants will receive daily,
subcutaneous injections of PREOS or placebo in addition to their ongoing hormone
replacement therapies. Dosing in the trial is expected to last for 24 months. By
completing this trial in European countries, we expect to provide additional
support for our regulatory submissions in Europe and our worldwide marketing
efforts.
In addition, PREOS is being tested in a clinical trial coordinated by the
University of California at San Francisco and sponsored by the National
Institutes of Health. This randomized, double-blind trial is referred to as the
parathyroid hormone and alendronate in combination for the treatment of
osteoporosis, or PaTH, study. This trial enrolled approximately 240 women with
low bone mineral density and will test, over a 12 month period, whether PREOS is
more effective in building bone mineral density than Fosamax, and whether the
combination of PREOS and Fosamax is more effective in building bone mineral
density than either therapy alone.
4
Calcilytic Compounds Development Status. We are collaborating with
GlaxoSmithKline on the discovery, identification and characterization of
calcilytic compounds for the treatment of osteoporosis. Calcilytic compounds are
aimed at temporarily increasing the secretion of the body's own parathyroid
hormone. In animal studies, we demonstrated that intermittent increases in
circulating levels of parathyroid hormone can be obtained through the use of
calcilytics. In these studies, we observed that increased levels of parathyroid
hormone achieved by this mechanism are equivalent to those achieved by an
injection of parathyroid hormone sufficient to cause bone growth. As a result,
we believe that orally administered calcilytic drugs that act on the parathyroid
cell calcium receptors could provide a cost-effective treatment for
osteoporosis. We conducted preclinical studies in conjunction with
GlaxoSmithKline on some of the lead compounds identified in this program.
GlaxoSmithKline has conducted a proof-of-principle Phase I clinical trial with a
calcilytic compound for which we received a $1.0 million milestone payment. The
purpose of this trial was to establish the safety of calcilytic compounds in
humans. We and GlaxoSmithKline continue our evaluation of calcilytic compounds
to identify a lead candidate to take into the clinic to test for both safety and
efficacy.
GlaxoSmithKline has paid us a total of $33.2 million for license fees,
research support, milestone payments and equity purchases as part of our
collaboration. We will receive additional payments of up to an aggregate of
$13.0 million if certain clinical milestones are achieved. Our agreement also
provided for royalties on any sales by GlaxoSmithKline of products
commercialized based on compounds identified in this collaboration. In addition
to the milestone and royalty payments, we have a limited right to co-promote any
products that are developed through our collaboration and we will receive
co-promotion revenue if we elect to exercise these rights. For more information
about our agreement, see the section of this report on Form 10-K entitled
"Business--Collaborative Research, Development, and License Agreements."
AMG 073 for Hyperparathyroidism
AMG 073 is our orally active, small molecule compound being developing for
the treatment of both primary and secondary hyperparathyroidism. In 1993, we and
our collaborators at The Brigham and Women's Hospital in Boston were the first
to isolate and clone calcium receptors. We have discovered small molecules that
mimic the role of calcium and cause a decrease in the secretion of parathyroid
hormone. These compounds are called calcimimetic compounds and include AMG 073,
which we licensed for development to Amgen and Kirin. In December 2001, Amgen
commenced Phase III clinical trials of AMG 073 for the treatment of secondary
hyperparathyroidism. Amgen continues to conduct Phase II clinical trials of AMG
073 for the treatment of primary hyperparathyroidism.
Market Opportunity. Over 75,000 people in the United States develop new
cases of primary hyperparathyroidism each year, and over 500,000 people in the
United States are estimated to suffer from the disorder. The current treatment
for primary hyperparathyroidism is the surgical removal of one or more of the
parathyroid glands in the neck. There are currently no effective pharmaceutical
therapies for the treatment of primary hyperparathyroidism. Studies suggest that
over 30 percent of the estimated two million patients in the United States with
chronic renal failure are affected by secondary hyperparathyroidism. Secondary
hyperparathyroidism commonly develops during the early stages of chronic renal
failure before dialysis is necessary. Approximately 85 percent of the estimated
300,000 acute renal failure patients who require either dialysis or renal
transplant suffer from secondary hyperparathyroidism. Current treatment for
secondary hyperparathyroidism includes calcium supplements, phosphate binding
chemicals and vitamin D, none of which directly regulate the secretion of
parathyroid hormone.
Development Status. We licensed AMG 073 to Kirin in the territories of
Japan, China, Taiwan and Korea, and to Amgen for the rest of the world. In
December 2001, Amgen commenced Phase III clinical trials of AMG 073 for
secondary hyperparathyroidism, which resulted in milestone payments to us in the
aggregate amount of $6.0 million from Amgen and Kirin. Results from Amgen's
earlier Phase II clinical trials in patients with primary hyperparathyroidism
were presented at the American Society for Bone and Mineral Research meeting in
October 2001 and other Amgen Phase II clinical trial results in patients with
secondary hyperparathyroidism were presented at the First World Congress on
Nephrology in October 2001.
The results from Amgen's Phase II clinical trial in patients with primary
hyperparathyroidism, presented at the American Society of Bone and Mineral
Research conference, confirmed earlier Phase II studies and indicated that AMG
073 normalized total calcium in the blood and reduced levels of parathyroid
hormone in the blood safely and effectively. Results typical of those seen in
several other Phase II studies were seen in a double-blind, placebo-controlled
24-week trial with 78 patients with primary hyperparathyroidism. In this study,
patients were given a range of doses up to a maximum of 50 mg of AMG 073
administered twice daily to find a dose at which calcium in the blood would be
returned to normal levels. Eighty-eight percent of patients who received AMG 073
experienced a return to normal levels of calcium in the blood, defined as less
than or equal to 10.3 mg/dL over the course of the 12-week maintenance phase of
the study. Only five percent of patients receiving placebo showed a return to
normal levels of calcium during the 12-week maintenance period. It was also
noted that during the maintenance period, patients who received AMG 073
experienced a 7.6 percent reduction in mean parathyroid hormone levels at 12
hours post-dose, while those receiving placebo experienced a 7.7 percent
increase in mean parathyroid hormone levels at the same interval. This reduction
in parathyroid hormone is directly related to the reduction of calcium and
demonstrates the potential utility of calcimimetic compounds such as AMG 073 in
exerting a therapeutic effect on parathyroid glands. In the study, AMG 073 was
well-tolerated with no significant difference in adverse events between the
treatment and control groups.
5
At the First World Congress of Nephrology, Amgen presented data from four
Phase II clinical trials of AMG 073 in patients with secondary
hyperparathyroidism. These studies involved larger numbers of patients and
higher maximum drug doses than studies reported a year earlier. The aggregate
results of three separate 12-week studies in 216 patients with secondary
hyperparathyroidism and chronic renal failure indicated that AMG 073 effectively
reduced both parathyroid hormone and calcium-phosphorus product levels and was
safe and well tolerated at daily doses up to 100 mg. Mean parathyroid hormone
levels were reduced by 20 to 33 percent in the AMG 073 groups and increased by
16 percent in the combined placebo group. In addition, mean calcium-phosphorus
product decreased in the AMG 073 groups by 7.1 percent and increased in the
placebo groups by 14.3 percent. Persistently elevated calcium-phosphorus product
has been implicated as a cause of soft tissue and vascular calcification in
patients with secondary hyperparathyroidism.
The fourth study was an 18-week study in 71 hemodialysis patients with
secondary hyperparathyroidism who were receiving vitamin D therapy and phosphate
binders throughout the course of the study. Treatments with AMG 073 safely and
effectively reduced circulating parathyroid hormone by an additional 32 percent
while simultaneously reducing calcium-phosphorus product by an additional 7.9
percent. The results from this study further indicate the safety and efficacy of
AMG 073 when used in combination with other standard therapies used by renal
failure patients.
Amgen has paid to us license fees, research support payments, and milestone
payments, and has made equity purchases totaling $22.5 million, including the
milestone payment for the commencement of Phase III trials in secondary
hyperparathyroidism. Amgen will pay us up to an additional $23.0 million if it
achieves other development and regulatory milestones. Amgen will also pay us
royalties on any sales of AMG 073 in its territories. Kirin has paid to us $19.0
million in license fees, research and development support payments and milestone
payments, and under the terms of our agreement is required to pay us up to an
additional $6.0 million upon accomplishment of additional milestones. Kirin also
is required to pay us royalties on any sales of AMG 073 in its territories. For
more information about our agreement, see the section of this Form 10-K entitled
"Business--Collaborative Research, Development, and License Agreements."
Gastrointestinal Disorders
Overview
The gastrointestinal tract is a complex system of organs involved in the
transport, digestion and absorption of nutrients. It also plays an important
role in the excretion of toxic chemicals, pathogens and byproducts of digestive
processes, and in balancing the absorption and secretion of electrolytes and
water. Gastrointestinal disorders can have severe consequences on the quality of
life of the people that suffer from them.
One disorder in particular that affects the ability of the gastrointestinal
tract to absorb nutrients and water is short bowel syndrome. Short bowel
syndrome is a condition arising from surgical removal of a large portion of the
small intestine resulting in an inadequate surface area for absorption of
nutrients, electrolytes and fluids. In some patients, all or portions of the
large intestine may also be removed. Short bowel syndrome results in symptoms
such as diarrhea, weight loss and fatigue. Patients with short bowel syndrome
often must be fed intravenously by a technique called total parenteral nutrition
for a period of time and, in some cases, permanently.
ALX-0600 for Short Bowel Syndrome
We are independently developing ALX-0600 for the treatment of short bowel
syndrome. ALX-0600 is an analog of glucagon-like peptide 2, a naturally
occurring hormone that regulates growth and proliferation of the cell lining of
the small intestine. Our animal studies have indicated that ALX-0600 has the
ability to stimulate the regeneration of cells lining the small intestine,
expanding the surface area for absorption of nutrients. In animal studies,
ALX-0600 induced an approximately 50 percent increase in the weight of the small
intestine within 10 days of administration. Further, these studies suggest the
growth-promoting properties of ALX-0600 appear to be highly tissue-specific,
predominantly affecting the small intestine, and thereby potentially reducing
the risk of adverse side effects. We have completed dosing patients in a pilot
Phase II clinical trial with ALX-0600 in a small number of patients with short
bowel syndrome and are presently evaluating the results of the trial.
Market Opportunity. Approximately 25,000 adults and 7,000 children in North
America are afflicted with short bowel syndrome. Many of these patients require
total parenteral nutrition, the cost of which can exceed $100,000 annually per
patient. There are currently no effective therapies available for enhancing the
growth and repair of the cell lining of the small intestine. We believe that the
short bowel syndrome market is an attractive one because of the high cost of
treating patients and the absence of any effective drug therapies. We have been
granted orphan drug designation for ALX-0600 for short bowel syndrome from the
FDA, which provides, subject to several restrictions, seven years of marketing
exclusivity once a product is approved for treatment of diseases that afflict
fewer than 200,000 patients. The Commission of the European Communities has also
recently designated ALX-0600 an orphan medicinal product for the treatment of
short bowel syndrome.
6
We believe that ALX-0600, if successful in the treatment of short bowel
syndrome, may also be useful in treating other gastrointestinal conditions
marked by inefficient absorption or altered absorptive capacity. Examples of
these conditions include Crohn's disease, inflammatory bowel disease and
intestinal mucositis in cancer patients.
Development Status. We have recently completed dosing in a pilot Phase II
clinical trial in a small number of patients receiving treatment for short bowel
syndrome. This trial was designed to measure improvement in nutrient absorption
and physical changes in the small intestine, as well as safety and tolerability.
We are currently evaluating the results of the trial and determining next steps
in the clinical development of ALX-0600. Preliminary data presented to the
European Society for Enteral and Parenteral Nutrition in September 2001 showed
that ALX-0600 was safe and well-tolerated and significantly increased intestinal
absorption and body weight in parenteral nutrition-dependent short bowel
syndrome patients with no large intestine. Additional results from this study
have been submitted to the American Gastroenterological Association for
presentation at its annual meeting in May 2002.
Prior to our acquisition of Allelix in December 1999, Allelix entered into
a research funding agreement with the Canadian government through a program
known as Technology Partnerships Canada. Under the agreement, the Canadian
government will reimburse us up to Cdn. $8.4 million for our qualified costs
related to research and development of ALX-0600 through December 2002. As of
December 31, 2001, a total of Cdn. $4.7 million had been invoiced by both
Allelix, prior to the effective date of the acquisition, and us, for
reimbursement under the terms of the agreement. The agreement provides Canada
with a 10 percent royalty on revenues we receive from the sale or license of
ALX-0600. Our royalty obligation terminates on December 31, 2008 if we have paid
at least Cdn. $23.9 million prior to that time. If we have not paid that amount
by that date, we must continue to pay royalties until the earlier of the date we
have paid Cdn. $23.9 million in royalties or December 31, 2017. The agreement
places certain obligations on us for Canada based activities in the
manufacturing and development of ALX-0600, which could adversely affect or make
impracticable our continued development of ALX-0600. In the past we have
demonstrated to Canada certain impracticalities of certain terms and Canada has
granted us waivers from those terms. For more information about our agreement,
see the section entitled "Business--Collaborative Research, Development, and
License Agreements."
Central Nervous System Disorders
Overview
Central nervous system disorders are broad, complex and severe diseases,
that are a major focus of current medical research. However, few central nervous
system disorders are able to be effectively treated, creating an opportunity for
novel therapies. Central nervous system disorders affect a broad portion of the
population through diseases such as epilepsy, bipolar disorder, stroke,
Alzheimer's disease, Parkinson's disease, dementia, anxiety, depression,
schizophrenia and pain. Recent reports indicate that nearly $36.0 billion is
expended annually in retail prescription drug sales for central nervous system
related products on a worldwide basis. However, many of these treatments are
palliative, not curative, and a need for new and improved treatment exists. We
are addressing central nervous system disorders on a number of different fronts.
Metabotropic Glutamate Receptor Program
Since 1996, we have been working to find compounds that act on targets in
the central nervous system called metabotropic glutamate receptors, or mGluRs.
Because these nerve cell receptors are structurally related to calcium
receptors, we have been able to leverage our expertise in calcium receptors to
create proprietary methods for screening drug candidates active at mGluRs. We
have discovered a number of compounds that activate or inhibit mGluRs and that
are highly selective for specific subtypes of mGluRs. Our animal studies with a
number of these compounds have demonstrated their potential as drug candidates
for the treatment of central nervous system disorders such as chronic pain.
There are three principal groups of mGluRs and several subtypes of mGluRs
within those groups that differ in their chemical composition, their effects on
cellular metabolism and their location in the central nervous system. Published
research indicates that different mGluRs are variously involved in diseases such
as stroke, epilepsy, Alzheimer's disease, schizophrenia and pain. Because we
have the ability to identify compounds that are selective for the various mGluR
subtypes, we believe that it is possible that we will be able to pursue the
development of products that will treat several central nervous system
disorders.
In March 2001, we entered into an agreement with AstraZeneca under which we
will collaborate exclusively on a number of mGluR subtypes. We granted
AstraZeneca exclusive rights to commercialize mGluR subtype-selective compounds.
If certain milestones are met, AstraZeneca is required to pay us up to $30.0
million. AstraZeneca is also required to pay us royalties on sales of products
that include those compounds. We have the right to co-promote any resulting
product in the United States and Canada and receive co-promotion revenue, if
any. Should we elect to co-promote products, in some circumstances we will be
required to share in the development and regulatory costs associated with those
products, and we may not receive some late-stage milestone payments. For more
information about our agreement, see the section entitled "Business--
Collaborative Research, Development, and License Agreements."
Other Programs for Central Nervous System Disorders
We collaborated with Janssen on glycine reuptake inhibitors to identify
prospective drug candidates for schizophrenia and dementia. In November 2001 we
received a milestone payment from Janssen as a result of the selection of a
preclinical compound for
7
further development as a potential treatment for schizophrenia. We will receive
additional milestone payments of up to $20.5 million from Janssen and royalties
on sales of any drugs developed or sold by Janssen under this collaboration
agreement.
We have completed several Phase I clinical trials with NPS 1776, a small
molecule compound for the treatment of epilepsy, to evaluate its safety and
tolerability and its ability to be delivered in a sustained release formulation.
Our analysis of the data indicates that the drug was safe and well tolerated.
Our preclinical studies show that NPS 1776 is effective in a number of animal
models of epilepsy.
In March 2000, we entered into an agreement with Abbott Laboratories Inc.
in which we granted Abbott worldwide marketing rights to NPS 1776 in exchange
for Abbott's commitment to fund further development of this product candidate
and pay us milestone payments as well as royalties on any sales. In January
2002, Abbott terminated the agreement. As a result, all rights to NPS 1776 were
returned to us. In addition, we are entitled to use all studies and information
generated by Abbott under the agreement in our development effort for NPS 1776.
We are presently reviewing all information related to NPS 1776 and will decide
the future of this program when that review is complete.
In 1998 we completed a Phase I clinical trial with ALX-0646, a small
molecule compound, for the treatment of migraine, in healthy volunteers. In
August 2000, we entered into an agreement with Forest Laboratories Inc. in which
we granted to Forest worldwide commercialization rights to ALX-0646 in return
for Forest's commitment to fund further development of ALX-0646 and pay us
milestone payments of up to $25.0 million, as well as royalties on any sales of
ALX-0646. In November 2001, we earned and received a $1.0 million milestone
payment from Forest for developments made by Forest with the compound. In
January 2002, Forest notified us that we had earned a $2.0 million milestone
payment for the achievement of certain clinical and preclinical developments
related to Forest's preclinical work with ALX-0646 for treating migraine. Forest
read and approved a press release by us announcing that event. In March 2002, we
received notice from Forest that it was terminating the agreement and returning
all rights to ALX-0646 to us. Forest also indicated that it believes this
obviates its obligation to pay the $2.0 million milestone payment. We disagree
with this assertion. Nevertheless, absent resolution of this issue, we will not
recognize revenue for the $2.0 million milestone in the first quarter of 2002.
We expect to review all information related to ALX-0646 and will decide the
future of this program when that review is complete.
Internal Discovery Research
Through internal discovery efforts, we have developed a diverse product
pipeline covering a variety of disorders. This pipeline allows us to reduce our
exposure to the impact of any single product failure and increases our
flexibility to focus on our most promising programs. The continued expansion of
our product pipeline is based on the ability of our scientists to apply
techniques related to our core competencies such as the use of proteins as
therapies, manipulating G-protein coupled receptors and finding compounds that
act on those receptors. Our current discovery research activities span the
spectrum from target identification and validation through late stage
preclinical safety assessment.
Our internal discovery research group is comprised of 57 staff members, 21
of whom hold doctorate degrees, with 28 members in our Salt Lake City location
and 29 members in our Toronto location. The disciplines within our discovery
research group include medicinal chemistry, molecular biology, pharmacology, and
drug metabolism and pharmacokinetics. Areas of expertise within the group
include bone and mineral metabolism, gastrointestinal physiology and
pharmacology, and central nervous system physiology and pharmacology. We intend
to continue our focus on scientific discovery by retaining creative scientists
who we believe can make breakthrough discoveries leading to innovative products.
Collaborative Research, Development, and License Agreements
We selectively enter into collaboration agreements and licenses with
pharmaceutical and biotechnology companies to leverage our financial investment
in our discovery, development and commercialization programs. These agreements
generally include the payment of research support payments to fund research
performed by us over an agreed period of time, the payment of milestone payments
on the achievement of defined preclinical and clinical events and ultimately,
the payment of royalties on sales of products developed under the terms of the
particular agreement. In return for these financial benefits, we grant to the
particular collaborator an exclusive license to the technology that is the
subject of the collaboration as well as to the products developed under the
agreement. This strategy allows us to devote greater resources to selected
programs and to pursue a greater number of programs and products than would
otherwise be possible. In addition, we believe collaborators with clinical
development and marketing expertise in specific therapeutic areas will
facilitate more rapid entry into the market for our products and accelerate
their acceptance by healthcare providers and third-party payors. We currently
have collaborative research, development or license agreements with several
collaborators, including Amgen, GlaxoSmithKline, AstraZeneca, Janssen, and
Kirin.
We also enter into research support agreements with various academic and
other not-for-profit institutions. These agreements generally require us to fund
certain research at the institution over a specific period of time in exchange
for which we acquire the right
8
to use the results of the research and obtain an option to exclusively license
from the institution any inventions made during the term of the research on
terms mutually agreed to at that time.
Amgen
In March 1996, we entered into a development and license agreement with
Amgen in which we granted Amgen the exclusive right to develop and commercialize
AMG 073 and related compounds for the treatment of hyperparathyroidism and any
other indications other than osteoporosis worldwide, excluding Japan, China,
Hong Kong, North and South Korea and Taiwan, territories in which we licensed
such rights to Kirin. If our agreement with Kirin is terminated, Amgen's
territory becomes worldwide. Under the terms of our agreement, Amgen is
authorized and responsible to conduct, fund and pursue all aspects of the
development, submissions for regulatory approvals, manufacture and
commercialization of the AMG 073 compound in its territories. Amgen paid us an
initial up-front license fee upon signing the agreement. In addition, if
specified milestones are achieved, then Amgen is required to make additional
milestone payments and must pay royalties to us on any sales of AMG 073. We may
terminate the agreement if Amgen breaches the agreement and does not cure the
breach within 120 days of receiving notice of the breach. Amgen may terminate
the agreement for any reason on 90 days' prior written notice. If there is a
termination for a reason other than our breach of the agreement, we would
reacquire the technology, patent and commercialization rights to AMG 073.
GlaxoSmithKline
In November 1993, we entered into a collaborative research and worldwide
exclusive license agreement with GlaxoSmithKline for the research, development
and commercialization of calcium-receptor active compounds for the treatment of
osteoporosis and other bone metabolism disorders, excluding hyperparathyroidism.
GlaxoSmithKline also has a first right to negotiate for a collaboration
arrangement regarding other research that might be related to bone metabolism
disorders, and an exclusive right to negotiate for a license to compounds
developed under the agreement for purposes other than bone metabolism disorders.
Once compounds have been selected for development, GlaxoSmithKline has the
authority and responsibility to conduct and fund all product development,
including clinical trials and regulatory submissions, and manufacturing. We have
the right to co-promote, in the United States, products resulting the
collaboration. In addition to research funding, and some previously paid
milestone payments, GlaxoSmithKline has agreed to pay us additional amounts as
it achieves certain development or marketing milestones, and must pay royalties
on any sales of products for osteoporosis and other bone metabolism disorders
that include compounds developed by GlaxoSmithKline under the agreement and a
percentage of profits from co-promotion of the products. GlaxoSmithKline may
terminate the agreement on 30 days' written notice and after a six-month waiting
period, or in the event we breach the agreement on 60 days' written notice for
our breach. Upon termination, rights and licenses we granted GlaxoSmithKline
revert to us. The collaborative research portion of this agreement is now
continuing on a month-to-month basis with considerably more work being done by
GlaxoSmithKline than by us. We are discussing with GlaxoSmithKline appropriate
next phases of our agreement.
AstraZeneca
In March 2001, we entered into an exclusive research collaboration and
license agreement with AstraZeneca to collaborate on the discovery, development
and marketing of small molecule therapies for the treatment of various disorders
of the central nervous system. Specifically, the collaboration focuses on the
identification of small molecules active on mGluRs. We granted AstraZeneca an
exclusive license to the worldwide development and commercialization of any
mGluR-active compounds identified under the collaboration, including
improvements. During the five-year research term, we will work together on the
identification of mGluR-active compounds. Once compounds have been selected for
development, AstraZeneca will conduct and fund product development, including
all human clinical trials, regulatory submissions, commercializations and
manufacturing. We have the right to co-promote any resulting product in the
United States and Canada and receive co-promotion revenue, if any. Should we
elect to co-promote products, in some circumstances we will be required to share
in the development and regulatory costs associated with those products. If we
elect not to co-promote, we are entitled to milestone payments and royalties on
any sales of products developed and marketed under the agreement. We may
terminate the agreement if AstraZeneca breaches the agreement and does not cure
the breach within 60 days of receiving notice of the breach. After two years of
the research program, either party may terminate the agreement on six months'
prior written notice. After the research term, AstraZeneca may terminate the
agreement at anytime upon 90 days' prior written notice. Termination by
AstraZeneca for reasons other than our breach will result in the return to us of
all rights we granted and the related technology, including improvements.
Janssen
In October 1998, we entered into a collaborative agreement with Janssen for
the research, development and commercialization of new drugs for the treatment
of schizophrenia and dementia. The research phase of this collaboration ended in
October 2000. In addition, Janssen controls and is responsible for development
and commercialization of the compounds, including manufacturing, and including
all costs and expenses associated with the development efforts. While Janssen
has the right to market products worldwide, we may co-promote, in Canada, any
products developed under the agreement. We will receive milestone
9
payments if Janssen reaches certain milestones, and royalties from any product
sales resulting from the collaboration. We may terminate the agreement if
Janssen breaches the agreement and does not cure the breach within 60 days of
receiving notice of the breach. In that case, all rights granted to Janssen
revert to us. Janssen may terminate, for any reason, on 90 days notice to us. If
Janssen terminates, other than for our breach, then the rights to any compounds
or products are transferred to us. We can also terminate Janssen's rights if
Janssen does not launch the product in the United States, but must pay a royalty
to Janssen on product sales after that termination.
Kirin
In June 1995, we entered into a collaborative research and license
agreement with Kirin to develop and commercialize AMG 073 for the treatment of
hyperparathyroidism and any other indications other than osteoporosis and bone
metabolism disorders in Japan, China, Hong Kong, North and South Korea and
Taiwan. Kirin is responsible for conducting clinical trials and obtaining
regulatory approvals in its territories, and for developing and commercializing
products within its territories. The agreement also requires Kirin to use
reasonable good faith efforts to introduce a product to market. Kirin paid us an
initial up-front license fee and agreed to pay us certain milestone payments on
the achievement of specified events. Kirin is required to pay us royalties on
any sales of products containing AMG 073 or a similar compound within its
territories. We may terminate the agreement if Kirin breaches the agreement and
does not cure the breach within 90 days of receiving notice of the breach. Kirin
may terminate the agreement for any reason on 90 days' prior written notice, and
on a country by country basis on specified conditions relating to market size.
If Kirin terminates the agreement, Amgen would receive rights to develop and
commercialize AMG 073 for the treatment of hyperparathyroidism and other
indications, except osteoporosis, in the terminated territories. We are advised
that Kirin and Amgen have executed a separate data sharing agreement related to
clinical data under their separate agreements with us. We have also authorized
them to enter into a manufacturing agreement with one or more manufacturing
companies for clinical and commercial supplies.
Sponsored and Government Funded Research Programs
We have entered into certain research and license agreements that require
us to make research support payments to academic or research institutions when
the research is performed. Additional payments may be required upon the
accomplishment of research milestones by the institutions or as license fees or
royalties to maintain the licenses.
For example, in February 1993, we entered into a collaborative research
agreement and a patent license agreement with The Brigham and Women's Hospital,
an affiliate of Harvard University Medical School. The patent license agreement
grants us an exclusive license to certain calcium receptor and inorganic ion
receptor technology covered by patents we jointly own with the hospital. The
research agreement grants us a right of first negotiation for exclusive license
rights to any patentable subject matter arising out of research that we sponsor
at the hospital. The Brigham and Women's Hospital is also entitled to a royalty
on any sales of certain products under the patent license agreement, and we have
committed to promote sales of any licensed products for hyperparathyroidism for
which we receive regulatory approval.
Prior to the time that we acquired Allelix in December 1999, Allelix had
entered into a research funding agreement with the Government of Canada pursuant
to the Technology Partnerships Canada program. Under the agreement, Canada is
obligated to reimburse us for up to 30 percent of the eligible research and
development costs we incur for our ALX-0600 product candidate through December
2002 up to a maximum of Cdn. $8.4 million. As of December 31, 2001, a total of
Cdn. $4.7 million had been invoiced by both Allelix, prior to the effective date
of the acquisition, and us, for reimbursement under the terms of the agreement.
The agreement provides Canada with a 10 percent royalty on revenues we receive
from the sale or license of ALX-0600. Our royalty obligation terminates on
December 31, 2008 if we have paid at least Cdn. $23.9 million. If we have not
paid that amount by that date, our royalty obligation continues until the
earlier of the date we have paid Cdn. $23.9 million in royalties or December 31,
2017.
The agreement contains a number of significant limitations on our ability
to develop, manufacture and commercialize ALX-0600 outside of Canada. For
example, the agreement requires us to produce in Canada clinical and commercial
supplies of ALX-0600. In addition, the agreement requires us to enter into a
licensing arrangement with a pharmaceutical company operating in Canada for the
conduct of Phase III clinical trials and commercialization of ALX-0600.
10
The agreement also prohibits us from entering into any licensing agreement for
the further development, production and marketing of ALX-0600 without the prior
written consent of the Canadian government. In general, the agreement includes
on-going commitments to create manufacturing, marketing and sales jobs in
Canada.
If we were to fail to meet our obligations under the agreement, or obtain a
waiver of the obligation, Canada would have the right to declare us in default.
If we were unable to cure the default, we would suffer adverse consequences,
including the payment of liquidated damages, repaying all amounts received from
Canada, or surrendering all intellectual property rights associated with
ALX-0600, in some circumstances.
We have been unable to identify a Canadian manufacturer capable of
producing ALX-0600 in compliance with cGMP with the quality and in the quantity
we need for our future development efforts. As a result, we have arranged for a
contract manufacturer outside of Canada to manufacture ALX-0600 in bulk form,
which is then being formulated by a Canadian company. We have notified the
Canadian government of our arrangements and received its authorization to
proceed with the manufacture of ALX-0600 for our Phase II clinical trials.
New Drug Development and Approval Process
Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacture and marketing of
pharmaceuticals and in our ongoing research and development activities. All of
our product candidates will require regulatory approval by governmental agencies
prior to commercialization. In particular, drug candidates are subject to
rigorous preclinical testing and clinical trials and other premarketing approval
requirements by the FDA and regulatory authorities in other countries. In the
United States, various federal, and in some cases state statutes and regulations
also govern or affect the manufacturing, safety, labeling, storage, record
keeping and marketing of such products. The lengthy process of seeking required
approvals and the continuing need for compliance with applicable statutes and
regulations require the expenditure of substantial resources. Regulatory
approval, when and if obtained, may significantly limit the indicated uses for
which our products may be marketed. Further, approved drugs, as well as their
manufacturers, are subject to ongoing review and discovery of previously unknown
problems with such products may result in restrictions on their manufacturer,
sale or use or in their withdrawal from the market.
The steps required by the FDA before our drug candidates may be marketed in
the United States include, among other things:
. the performance of preclinical laboratory and animal tests and
formulation studies;
. the submission to the FDA of an Investigational New Drug application,
or IND, which must become effective before human clinical trials may
commence;
. the completion of adequate and well-controlled human clinical trials
to establish the safety and efficacy of the drug;
. the submission of a New Drug Application, or NDA, to the FDA; and
. FDA approval of the NDA.
The testing and approval process requires substantial time, effort and
financial resources and we cannot be certain that any approvals for any of our
proposed products will be granted on a timely basis, if at all.
11
Prior to commencing a clinical trial, we must submit an IND to the FDA. The
IND becomes effective 30 days after receipt by the FDA, unless within the 30-day
period, the FDA raises concerns or questions with respect to the conduct of the
trial. In such a case, the IND sponsor and the FDA must resolve any outstanding
concerns before the study can begin. The submission of an IND may not result in
FDA authorization to commence a clinical trial. Further, an independent
institutional review board at the medical center or centers proposing to conduct
the trial must review and approve the plan for any clinical trial before it
commences.
Human clinical trials are typically conducted in three sequential phases
that may overlap:
. PHASE I: the drug is initially introduced into healthy human subjects
or patients and tested for safety, dosage tolerance, absorption,
metabolism, distribution and excretion.
. PHASE II: involves studies in a limited patient population to identify
possible adverse effects and safety risks, to determine the efficacy
of the product for specific targeted diseases and to determine optimal
dosage.
. PHASE III: when Phase II evaluations demonstrate that a dosage range
of the product is effective and has an acceptable safety profile,
Phase III trials are undertaken to further evaluate dosage and
clinical efficacy and to further test for safety in an expanded
patient population at geographically dispersed clinical study sites.
We cannot be certain that we or any of our collaborative partners will
successfully complete Phase I, Phase II or Phase III testing of any compound
within any specific time period, if at all. Furthermore, the FDA or the study
sponsor may suspend clinical trials at any time on various grounds, including a
finding that the subjects or patients are being exposed to an unacceptable
health risk.
The results of product development, preclinical studies and clinical trials
are submitted to the FDA as part of an NDA. The FDA may deny an NDA if the
applicable regulatory criteria are not satisfied or may require additional
clinical data. Even if such data is submitted, the FDA may ultimately decide
that the NDA does not satisfy the criteria for approval. If approved, the FDA
may withdraw product approval if compliance with regulatory standards is not
maintained or if problems occur after the product reaches the market. In
addition, the FDA may require testing and surveillance programs to monitor the
effect of approved products that have been commercialized, and the FDA has the
power to prevent or limit further marketing of a product based on the results of
these post-marketing programs.
Satisfaction of the above FDA requirements or similar requirements of
state, local and foreign regulatory agencies typically takes several years and
the actual time required may vary substantially, based upon the type, complexity
and novelty of a product or indication.
Government regulation may delay or prevent marketing of potential products
for a considerable period of time and impose costly procedures upon our or our
partner's activities. The FDA or any other regulatory agency may not grant any
approvals on a timely basis, if at all. Success in early stage clinical trials
does not assure success in later stage clinical trials. Data obtained from
clinical activities is not always conclusive and may be susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. Even
if a product receives regulatory approval, the approval may be significantly
limited to specific indications and dosages. Further, even if regulatory
approval is obtained, later discovery of previously unknown problems with a
product may result in restrictions on the product or even complete withdrawal of
the product from the market. Delays in obtaining, or failures to obtain
regulatory approvals may have a material adverse effect on our business. In
addition, we cannot predict what adverse governmental regulations may arise from
future United States or foreign governmental action.
Any products manufactured or distributed by us or our partners pursuant to
FDA approvals are subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experiences with
the drug. Drug manufacturers are required to register their establishments with
the FDA and certain state agencies, and are subject to periodic unannounced
inspections by the FDA for compliance with current good manufacturing practice,
or cGMP, regulations which impose certain procedural and documentation
requirements upon us and our contract manufacturers. We cannot be certain that
we or our present or future suppliers will be able to comply with the cGMP
regulations and other FDA regulatory requirements.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a rare disease or condition, which is generally a
disease or condition that affects fewer than 200,000 individuals in the United
States. Orphan drug designation must be requested before submitting an NDA.
After the FDA grants orphan drug designation, the generic identity of the
therapeutic agent and its potential orphan use are disclosed publicly by the
FDA. Orphan drug designation does not convey any advantage in or shorten the
duration of the regulatory review and approval process. If a product that has
orphan drug designation subsequently receives FDA approval for the disease for
which it has such designation, the product is entitled to orphan exclusivity.
For example, the FDA may not approve any other applications to market the same
drug for the same disease, except in very limited circumstances, for seven
years. We intend to file for orphan drug designation for those diseases which
meet the criteria for orphan
12
exclusivity. Although obtaining FDA approval to market a product with orphan
drug exclusivity can be advantageous, there can be no assurance that it would
provide us with a material commercial advantage.
Steps similar to those in the United States must be undertaken in virtually
every other country comprising the market for our product candidates before any
such product can be commercialized in those countries. The approval procedure
and the time required for approval vary from country to country and may involve
additional testing. There can be no assurance that approvals will be granted on
a timely basis, or at all. In addition, regulatory approval of prices is
required in most countries other than the United States. There can be no
assurance that the resulting prices would be sufficient to generate an
acceptable return to us.
Patents and Other Proprietary Technology
Our intellectual property portfolio includes patents, patent applications,
trade secrets, know-how and trademarks. Our success will depend in part on our
ability to obtain additional patents, maintain trade secrets and operate without
infringing the proprietary rights of others, both in the United States and in
other countries. We periodically file patent applications to protect the
technology, inventions and improvements that may be important to the development
of our business. We rely on trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain our competitive
position.
We file patent applications on our own behalf as assignee and, when
appropriate, have filed and expect to continue to file, applications jointly
with our collaborators. These patent applications cover compositions of matter,
methods of treatment, methods of discovery, use of novel compounds and novel
modes of action, as well as recombinantly expressed receptors and gene sequences
that are important in our research and development activities. Some of our
principal intellectual property rights related to processes, compounds, uses and
techniques related to calcium receptor science are now protected by issued
United States patents. We intend to file additional patent applications relating
to our technology and to specific products, as we think appropriate.
We hold patents directed to potential therapeutic products such as new
chemical entities, pharmaceutical compositions and methods of treating diseases.
We hold patents directed also to nucleic acid and amino acid sequences of novel
cellular receptors and methods of screening for compounds active at such
cellular receptors. We continue actively to seek patent protection for these and
related technologies in the United States and in foreign countries.
We also rely on trade secrets and contractual arrangements to protect our
trade secrets. Much of the know-how important to our technology and many of its
processes are dependent upon the knowledge, experience and skills of our key
scientific and technical personnel and are not the subject of pending patent
applications or issued patents. To protect our rights to know-how and
technology, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the
unauthorized use of, and restrict the disclosure of, confidential information
and require disclosure and assignment to us of their ideas, developments,
discoveries and inventions.
In connection with our research and development activities, we have
sponsored research at various university and government laboratories. For
example, we have executed license and research agreements regarding research in
the area of calcium and other ion receptors with The Brigham and Women's
Hospital. We have also sponsored work at other government and academic
laboratories for various evaluations, assays, screenings and other tests.
Generally, under these agreements, we fund the work of investigators in exchange
for the results of the specified work and the right or option to a license to
any patentable inventions that may result in certain designated areas. If the
sponsored work produces patentable subject matter, we generally have the first
right to negotiate for license rights related to that subject matter. Any
resulting license would be expected to require us to pay royalties on net sales
of licensed products.
Competition
We and our collaborators and licensees are pursuing areas of product
development in which we believe there is a potential for extensive technological
innovation in relatively short periods of time. We operate in a field in which
new discoveries occur at a rapid pace. Our competitors may succeed in developing
technologies or products that are more effective than ours, or in obtaining
regulatory approvals for their drugs more rapidly than we are able to, which
could render our products obsolete or noncompetitive. Competition in the
pharmaceutical industry is intense and is expected to continue to increase. Many
competitors, including biotechnology and pharmaceutical companies, are actively
engaged in research and development in areas where we are also developing
products, including the fields of osteoporosis, hyperparathyroidism, and
neurological disorders. For osteoporosis, there are a number of therapies which
are currently being marketed, including estrogen replacement therapies like
Wyeth-Ayerst's Premarin, bisphosphonates like Merck's Fosamax, and selective
estrogen receptor modulators, like Lilly's Evista. Lilly also has been
developing Forteo, which will compete as a bone-building agent for the treatment
of osteoporosis. Lilly has filed an NDA for Forteo administered by subcutaneous
injection, and an FDA advisory committee has recommended that the FDA approve
Forteo as a treatment for osteoporosis in postmenopausal women. Lilly has also
received an Approvable Letter from the FDA for Forteo as a treatment for
osteoporosis. Lilly's product will likely be the first to market in the
treatment of osteoporosis using an
13
injectable bone-building drug. Lilly has also announced that it is investigating
alternate methods of delivery of Forteo. For hyperparathyroidism, Bone Care
International is presently marketing Hectoral, a vitamin D analog to relieve
some symptoms of secondary hyperparathyroidism, and Genzyme is currently
marketing RenaGel for the treatment of hyperphosphatemia, a condition resulting
from secondary hyperparathyroidism.
Many of our competitors have substantially greater financial, technical,
marketing and personnel resources. In addition, some of them have considerable
experience in preclinical testing, human clinical trials and other regulatory
approval procedures. Moreover, certain academic institutions, governmental
agencies and other research organizations are conducting research in the same
areas in which we are working. These institutions are becoming increasingly
aware of the commercial value of their findings and are more actively seeking
patent protection and licensing arrangements to collect royalties for the
technology that they have developed. These institutions may also market
competitive commercial products on their own or through joint ventures and will
compete with us in recruiting highly qualified scientific personnel. Our ability
to compete successfully will depend, in part, on our ability to:
. develop marketing, sales and distribution capabilities for our
proprietary products;
. leverage our established collaborations and enter into new
collaborations for the development of our products;
. identify new product candidates through our internal discovery effort
or through acquisition;
. develop products that reach the market first;
. develop products that are superior to other products in the market;
. develop products that are cost-effective and competitively priced; and
. obtain and enforce patents covering our technology.
Manufacturing
We currently rely, and will continue to rely for at least the foreseeable
future, on contract manufacturers to provide sufficient quantities of our
product candidates for use in our preclinical and clinical trials and for our
pre-launch and commercial launch needs. We have contracted with, and continue to
negotiate with, various contract manufacturers for supplies of PREOS to meet our
clinical trial and commercial launch requirements. Clinical supplies of PREOS
are produced on an on-going basis. We do not have on hand sufficient supplies of
PREOS to meet all our clinical trial requirements. If clinical supplies of PREOS
are disrupted, exhausted, or fail to arrive when needed, we will have to
substantially curtail or terminate the Phase III trials of PREOS. Additionally,
our current contract manufacturers do not have sufficient capacity to meet our
expected full commercial requirements of PREOS after product launch. As a
result, we will need to contract with one or more other commercial
manufacturers.
We are also seeking arrangements with contract manufacturers for
supplies of ALX-0600 to be used in future clinical trials. Our agreement with
the Canadian government requires that the ALX-0600 we use in clinical trials and
for commercial launch be manufactured by a Canadian company. We have been unable
to identify a Canadian manufacturer capable of manufacturing and formulating
ALX-0600 in compliance with cGMP and with sufficient quantity and quality for
our future clinical development program. As a result, we have arranged for a
contract manufacturer outside of Canada to manufacture the bulk compound, which
is then formulated into ALX-0600 by a Canadian company. We have notified the
Canadian government of our arrangements and received their authorization to
proceed with the manufacture of ALX-0600 for our Phase II clinical trials. If
clinical supplies of ALX-0600 are disrupted, exhausted, or fail to arrive when
needed, we will have to substantially curtail or postpone initiation of planned
clinical trials with ALX-0600.
Employees
As of December 31, 2001, we employed 146 individuals full-time, of which 33
hold Ph.D. degrees and 32 hold other advanced degrees. A total of 97 full-time
employees are engaged in research, development and support activities. A total
of 49 full-time employees are employed in finance, legal, human resources,
market research, corporate development and general administrative activities.
None of our employees are covered by collective bargaining agreements and our
management considers its relations with our employees to be good.
14
RISK FACTORS
Before you make an investment decision with respect to any of our securities,
you should be aware of various risks, including those described below. You
should carefully consider the following risk factors, together with all of the
other information included in this Annual Report on Form 10-K , before you make
an investment decision regarding any of our securities. The risks set out below
are not the only risks we face. If any of the following risks occur, our
business, financial condition or results of operations would likely suffer. In
that case, the trading price of our securities could fall, and you may lose all
or part of the money you paid to buy our securities.
We have a history of operating losses. We expect to incur net losses and we may
never achieve or maintain profitability.
With the exception of 1996, we have not been profitable since our inception
in 1986. As of December 31, 2001, we had an accumulated deficit of approximately
$161.0 million. We have not generated any revenue from product sales to date,
and it is possible that we will never have significant product sales revenue, if
any. We expect to continue to incur losses for at least the next several years
as we and our collaborators and licensees pursue clinical trials and research
and development efforts. To become profitable, we, either alone or with our
collaborators and licensees, must successfully develop, manufacture and market
our current product candidates, particularly PREOS and AMG-073, as well as
continue to identify, develop, manufacture and market new product candidates. It
is possible that we will never have significant product sales revenue or receive
significant royalties on our licensed product candidates.
We do not have, and may never develop, any commercial drugs or other products
that generate revenues.
Our existing product candidates will require significant additional
development, clinical trials, regulatory clearances and additional investment
before they can be commercialized. Our product development efforts may not lead
to commercial drugs for a number of reasons, including the failure of our
product candidates to be safe and effective in clinical trials or because we
have inadequate financial or other resources to pursue the programs through the
clinical trial process. We do not expect to be able to market any of our
existing product candidates for a number of years, if at all.
We are dependent on the successful outcome of the clinical trials for our two
most advanced product candidates, PREOS and AMG 073. If either or both of these
product candidates fail to advance in the clinic, our business will be
materially harmed and our stock price will be adversely affected.
We are currently conducting Phase III clinical trials for PREOS, our
proprietary product candidate for the treatment of osteoporosis. Amgen, our
licensee, is conducting Phase III clinical trials for AMG 073, a compound
intended to treat hyperparathyroidism. Our success will depend, to a great
degree, on the success of these and subsequent clinical trials. In order to
successfully commercialize PREOS and AMG 073, we and Amgen must be able to,
among other things, obtain required regulatory approvals for these product
candidates. Prior to receiving approval for commercialization, we must
demonstrate with substantial evidence from well-controlled clinical trials, and
to the satisfaction of the FDA and comparable foreign regulatory authorities,
that each of these product candidates is both safe and efficacious. While no
significant safety issues have emerged in Phase I and Phase II clinical trials
with respect to either of these product candidates, we will still need to
demonstrate their efficacy for the treatment of their respective specific
indications, as well as their continued safety through the conduct of Phase III
clinical trials. The successful outcome of our and Amgen's Phase III clinical
trials for PREOS and AMG 073 will depend in part on our and Amgen's ability to
successfully complete enrollment in the trials and completion of the study, a
process that can be difficult and may result in delays in the completion or
suspension of the trials. To date, neither long-term safety nor efficacy has
been demonstrated in clinical trials with either of these product candidates.
Accordingly, the results of future studies may indicate that the candidates are
unsafe, ineffective or both, notwithstanding the results of earlier clinical
trials. We cannot assure you that either or both of these products will continue
to prove to be safe or efficacious in accordance with regulatory requirements.
Further, we cannot assure you that these product candidates will be approved in
a timely manner, if at all. If we or Amgen fail to successfully obtain
regulatory approvals for PREOS or AMG 073, our business will be materially
harmed and our stock price will be adversely affected.
The FDA has not approved any of our product candidates and we cannot assure you
that data collected from preclinical and clinical trials of our product
candidates will be sufficient to support approval by the FDA, the failure of
which could delay our profitability and adversely affect our stock price.
Many of our research and development programs are at an early stage.
Clinical trials are long, expensive and uncertain processes. Clinical trials may
not be commenced or completed on schedule, and the FDA may not ultimately
approve our product candidates for commercial sale. Further, even if the results
of our preclinical studies or clinical trials are initially positive, it is
possible that we will obtain different results in the later stages of drug
development or that results seen in clinical trials will not continue with
longer term treatment. Drugs in late stages of clinical development may fail to
show the desired safety and efficacy traits despite
15
having progressed through initial clinical testing. For example, positive
results in early Phase I or Phase II clinical trials may not be repeated in
larger Phase II or Phase III clinical trials. All of our potential drug
candidates are prone to the risks of failure inherent in drug development. The
clinical trials of any of our drug candidates could be unsuccessful, which would
prevent us from commercializing the drug. Our failure to develop safe,
commercially viable drugs would substantially impair our ability to generate
revenues and sustain our operations and would materially harm our business and
adversely affect our stock price.
If we fail to maintain our existing or establish new collaborative
relationships, or if our collaborators do not devote adequate resources to the
development and commercialization of our licensed drug candidates, we may have
to reduce our rate of product development and may not see products brought to
market or be able to achieve profitability.
Our strategy for developing, manufacturing and commercializing our products
includes entering into various relationships with large pharmaceutical companies
to advance many of our programs. We have granted exclusive development,
commercialization and marketing rights to a number of our collaborators for some
of our key product development programs, including AMG 073, calcilytics, mGluRs
and glycine reuptake inhibitors. Except in the case of our collaboration with
AstraZeneca for research involving mGluRs, our collaborators have full control
over those efforts in their territories and the resources they commit to the
programs. Accordingly, the success of the development and commercialization of
product candidates in those programs depends on their efforts and is beyond our
control. For us to receive any significant milestone or royalty payments from
our collaborators, they must advance drugs through clinical trials, establish
the safety and efficacy of our drug candidates, obtain regulatory approvals or
achieve market acceptance of those products.
Under our collaboration with AstraZeneca, we are required to co-direct the
research and to pay for an equal share of the research through a minimum of 30
months and, under certain circumstances, for the full term of 60 months. This
commitment of personnel and capital may limit or restrict our ability to
initiate or pursue other research efforts. As part of our product development
strategy, we evaluate whether to seek collaborators for our product candidates.
If we elect to collaborate, we may not be able to negotiate collaborative
arrangements for our product candidates on acceptable terms, if at all. If we
are unable to establish collaborative arrangements, we will either need to
increase our expenditures and undertake the development and commercialization
activities at our own expense or delay further development of the effected
product candidate. Our research funding agreement with the Canadian government
significantly limits our ability to establish collaborations for ALX-0600
without its consent.
Collaborative agreements, including our existing agreements, pose the
following risks:
. our contracts with collaborators may be terminated and we may not
be able to replace our collaborators;
. the terms of our contracts with our collaborators may not be
favorable to us in the future;
. our collaborators may not pursue further development and
commercialization of compounds resulting from their
collaborations with us;
. a collaborator with marketing and distribution rights to one or
more of our products may not commit enough resources to the
marketing and distribution of our product candidates;
. disputes with our collaborators may arise, leading to delays in
or termination of the research, development or commercialization
of our product candidates, or resulting in significant litigation
or arbitration;
. contracts with our collaborators may fail to provide significant
protection if one or more of them fail to perform;
. in some circumstances, if a collaborator terminates an agreement,
or if we are found to be in breach of our obligations, we may be
unable to secure all of the necessary intellectual property
rights to continue developing the same compound or product;
. our collaborators could independently develop, or develop with
third parties, drugs that compete with our products; and
. we may be unable to meet our financial or other obligations under
our collaborative agreements; for example, we have had to obtain
a waiver of our obligation to have manufactured in Canada
clinical supplies of ALX-0600 because no such Canadian
manufacturer could be identified, and we could face similar
issues in the future, which might lead to a loss of significant
rights or require us to pay significant damages.
16
There is a great deal of uncertainty surrounding the success of our current
and future collaborative efforts. If our collaborative efforts fail, our
business and financial condition would be materially harmed.
Because we do not have marketing, sales or distribution capabilities, we may be
unable to market and sell our products and generate revenues.
We have recruited and continue to recruit marketing, market research, and
product planning personnel. However, we currently have no sales, marketing or
distribution capabilities. In order to commercialize any product candidates for
which we receive FDA approval, we will have to develop a sales and marketing
force or rely on third parties to perform these functions. To market products
directly, we will have to develop a marketing and sales force with technical
expertise and supporting distribution capability. Our inability to develop
expertise and attract skilled marketing and sales personnel to establish in-
house sales and distribution capabilities may limit our ability to gain market
acceptance for our products and generate revenues. For example, if we are
successful in our Phase III clinical trials with PREOS, and the FDA grants
approval for the commercialization of PREOS, we will be unable to introduce the
product to market without developing these capabilities. We have only recently
begun to develop our internal sales and marketing force and cannot assure you
that we will be successful in our efforts to establish this force. Further, if
we rely on relationships with one or more large pharmaceutical companies with
established distribution systems and direct sales forces to market any or all of
our product candidates, we cannot assure you that we will be able to enter into
or maintain agreements with these companies on acceptable terms, if at all.
In addition, we expect to begin to incur significant expenses in developing
sales, marketing and distribution capabilities in advance of determining our
commercialization strategy with respect to one or more of our product
candidates. The determination of our commercialization strategy with respect to
a product candidate will depend on a number of factors, including:
. the extent to which we have funded the development of the product
candidate independently;
. the extent to which our agreement with our collaborators permits
us to exercise marketing or promotion rights with respect to the
product candidate; and
. how our product candidates compare with competitive products with
respect to labeling, pricing and therapeutic effect.
A number of these factors will be difficult to determine until additional
information is known and are otherwise outside of our control. Therefore, we may
change commercialization strategies by entering into agreements with our
collaborators or third parties after we have incurred significant expenses in
developing internal sales, marketing and distribution capabilities. A change of
this nature could result in increased expenses or delays in commercialization
and therefore could delay revenues and adversely affect our future operating
results.
We have no manufacturing capabilities. We depend on third parties for
manufacturing and storage of our product candidates and our clinical trials and
product introductions may be delayed or suspended if the manufacture of our
products is interrupted or discontinued.
We do not have manufacturing facilities to produce sufficient supplies of
either PREOS or ALX-0600 to support clinical trials and preparations for
commercial launch of these products, if they are approved. We are dependent on
third parties for manufacturing and storage of our product candidates. If we are
unable to contract for a sufficient supply of our product candidates on
acceptable terms, or if we encounter delays or difficulties in manufacturing
process or our relationships with our manufacturers, we may not have sufficient
product to conduct or complete our clinical trials or support preparations for
the commercial launch of our product candidates, if approved.
We have entered into agreements with contract manufacturers to manufacture
PREOS for use in clinical trial activities and for commercial launch if PREOS is
approved by the FDA. These contract manufacturers are currently our only source
for the production and formulation of PREOS. To date, these contract
manufacturers have produced only small quantities of PREOS relative to those
needed for commercialization. They may be unable to scale production when
necessary to allow preparations for commercial launch or accurately and reliably
manufacture commercial quantities of PREOS at reasonable costs, on a timely
basis, and in compliance with the FDA's current good manufacturing practices, or
cGMP. We will need to contract with one or more other commercial manufacturers
to supply commercial grade quantities of PREOS.
Our agreement with the Canadian government requires that the ALX-0600 we
use in clinical trials and for commercial launch be manufactured by a Canadian
company. This agreement also contains a number of other significant restrictions
on our ability to develop, manufacture and commercialize ALX-0600 outside of
Canada. To the extent that we are unable to comply with any performance
obligation or obtain a waiver of the obligation, the Canadian government would
have the right to declare us in default. If we were unable to cure the default,
we could suffer adverse consequences, including the payment of liquidated
damages that would be
17
material to us or surrendering all intellectual property rights associated with
ALX-0600 in some circumstances. We have been unable to identify a Canadian
manufacturer capable of manufacturing and formulating ALX-0600 in compliance
with cGMP and with sufficient quantity and quality for our future clinical
development program. As a result, we have arranged for a contract manufacturer
outside of Canada to manufacture the bulk compound, which is then formulated
into ALX-0600 by a Canadian company. We have notified the Canadian government of
our arrangements and received their authorization to proceed with the
manufacture of ALX-0600 for our Phase II clinical trials.
We may be unable to maintain our current relationships or establish new
relationships with contract manufacturers on acceptable terms, if at all.
Moreover, our reliance on contract manufacturers exposes us to the following
additional risks:
. delays in scale-up to quantities needed for clinical trials or
failure to manufacture such quantities to our specifications, or
delivery of such quantities on the dates we require could cause
us to delay or suspend clinical trials, regulatory submissions
and commercialization of our products in development;
. our current and future manufacturers are subject to ongoing,
periodic, unannounced inspection by the FDA and corresponding
state and international regulatory authorities for compliance
with strictly enforced cGMP regulations and similar foreign
standards, and we do not have control over our contract
manufacturers' compliance with these regulations and standards;
. our current and future manufacturers may not be able to comply
with applicable regulatory requirements, which would prohibit
them from manufacturing products for us;
. if we need to change to other commercial manufacturing
contractors, the FDA and comparable foreign regulators must
approve these contractors prior to our use, which would require
new testing and compliance inspections, and the new manufacturers
would have to be educated in, or themselves develop substantially
equivalent processes necessary for, the production of our
products;
. our manufacturers might not be able to fulfill our commercial
needs, which would require us to seek new manufacturing
arrangements and may result in substantial delays in meeting
market demand; and
. we may not have intellectual property rights, or may have to
share intellectual property rights, to any improvements in the
manufacturing processes or new manufacturing processes for our
products.
Any of these factors could cause us to delay or suspend clinical trials,
regulatory submission, required approvals or commercialization of our products
under development, entail higher costs and result in our being unable to
effectively commercialize our products.
We do not currently intend to manufacture any of our product candidates,
although we may choose to do so in the future. If we decide to manufacture our
products, we would be subject to the regulatory risks and requirements described
above. We would also be subject to similar risks regarding delays or
difficulties encountered in manufacturing our pharmaceutical products and we
would require additional facilities and substantial additional capital. We
cannot assure you that we would be able to manufacture any of our products
successfully in accordance with regulatory requirements and in a cost-effective
manner.
We may need additional financing, but our access to capital funding is
uncertain.
Our current and anticipated operations, particularly our product
development and commercialization programs for PREOS and ALX-0600, require
substantial capital. We expect that our existing cash and cash equivalents will
sufficiently fund our operations through at least 2003. However, our future
capital needs will depend on many factors, including receiving milestone
payments from our collaborators and making progress in our internally funded
research, development and commercialization activities. Our capital requirements
will also depend on the magnitude and scope of these activities, our ability to
maintain existing and establish new collaborations, the terms of those
collaborations, the success of our collaborators in developing and marketing
products under their respective collaborations with us, competing technological
and market developments, the time and cost of obtaining regulatory approvals,
the extent to which we choose to commercialize our future products through our
own sales and marketing capabilities, the cost of preparing, filing,
prosecuting, maintaining and enforcing patent and other rights and our success
in acquiring and integrating complementary products, technologies or companies.
We do not have committed external sources of funding and we cannot assure you
that we will be able to obtain additional funds on acceptable terms, if at all.
If adequate funds are not available, we may be required to:
. engage in equity financing that would be dilutive to current
shareholders;
18
. delay, reduce the scope of or eliminate one or more of our
development programs;
. obtain funds through arrangements with collaborators or others
that may require us to relinquish rights to technologies, product
candidates or products that we would otherwise seek to develop or
commercialize ourselves; or
. license rights to technologies, product candidates or products on
terms that are less favorable to us than might otherwise be
available.
If funding is insufficient at any time in the future, we may not be able to
develop or commercialize our products, take advantage of business opportunities
or respond to competitive pressures.
Because of the uncertainty of pharmaceutical pricing, reimbursement and
healthcare reform measures, we may be unable to sell our products profitably.
The availability of reimbursement by governmental and other third-party
payors affects the market for any pharmaceutical product. These third-party
payors continually attempt to contain or reduce the costs of healthcare. There
have been a number of legislative and regulatory proposals to change the
healthcare system and further proposals are likely. Under current guidelines,
Medicare does not reimburse patients for self-administered drugs. Medicare's
policy may decrease the market for our products that are designed to treat
patients with age-related disorders, such as osteoporosis and
hyperparathyroidism. Significant uncertainity exists with respect to the
reimbursement status of newly approved healthcare products. In addition,
third-party payors are increasingly challenging the price and cost-effectiveness
of medical products and services. We might not be able to sell our products
profitably or recoup the value of our investment in product development if
reimbursement is unavailable or limited in scope, particularly for product
candidates addressing small patient populations, such as ALX-0600 for the
treatment of short bowel syndrome.
As a result of intense competition and technological change in the
pharmaceutical industry, the marketplace may not accept our products and we may
not be able to compete successfully against other companies in our industry and
achieve profitability.
Many of our competitors have drug products that have already been approved
or are in development, and operate large, well-funded research and development
programs in these fields. For example, Forteo, a fragment of the full-length
parathyroid hormone for the treatment of osteoporosis, was recently recommended
for approval by the FDA's Endocrinologic and Metabolic Drugs Advisory Committee
for the treatment of osteoporosis and Lilly has received an Approvable Letter
from the FDA for Forteo as a treatment for osteoporosis. If PREOS is approved by
the FDA, it will compete directly with Forteo and other approved therapies,
including estrogen replacement therapies, bisphosphonate and selective estrogen
modulators therapies. Similarly, Hectoral, a product of Bone Care International,
Inc., is currently being marketed as a treatment to relieve some symptoms of
secondary hyperparathyroidism and will compete directly with AMG 073, if it is
approved by the FDA. Also, Genzyme Pharmaceuticals, Inc. is currently marketing
RenaGel, which is a treatment for hyperphosphatemia, a condition resulting from
secondary hyperparathyroidism. Many of our competitors have substantially
greater financial and management resources, superior intellectual property
positions and greater manufacturing, marketing and sales capabilities, areas in
which we have limited or no experience. In addition, many of our competitors
have significantly greater experience than we do in undertaking preclinical
testing and clinical trials of new or improved pharmaceutical products and
obtaining required regulatory approvals. Consequently, our competitors may
obtain FDA and other regulatory approvals for product candidates sooner and be
more successful in manufacturing and marketing their products than we or our
collaborators.
Existing and future products, therapies and technological approaches will
compete directly with the products we seek to develop. Current and prospective
competing products may provide greater therapeutic benefits for a specific
problem or may offer comparable performance at a lower cost. Any product
candidate that we develop and that obtains regulatory approval must then compete
for market acceptance and market share. Our product candidates may not gain
market acceptance among physicians, patients, healthcare payors and the medical
community. Further, any products we develop may become obsolete before we
recover any expenses we incurred in connection with the development of these
products. As a result, we may never achieve profitability.
We may be unable to obtain patents to protect our technologies from other
companies with competitive products, and patents of other companies could
prevent us from manufacturing, developing, or marketing our products.
The patent positions of pharmaceutical and biotechnology firms are
uncertain and involve complex legal and factual questions. In addition, the
scope of the claims in a patent application can be significantly modified during
prosecution before the patent is issued. Consequently, we cannot know whether
our pending applications will result in the issuance of patents or, if any
patents are issued, whether they will provide us with significant proprietary
protection or will be circumvented, invalidated, or found to be unenforceable.
Until recently, patent applications in the United States were maintained in
secrecy until the patents issued, and publication of discoveries in scientific
or patent literature often lags behind actual discoveries. Patent applications
filed in the United States after November 2000 generally will be published 18
months after the filing date unless the applicant certifies that the invention
19
will not be the subject of a foreign patent application. We cannot assure you
that, even if published, we will be aware of all such literature. Accordingly,
we cannot be certain that the named inventors of our products and processes were
the first to invent that product or process or that we were the first to pursue
patent coverage for our inventions.
Moreover, we may have to participate in interference proceedings declared
by the United States Patent and Trademark Office to determine priority of
invention, which could result in substantial cost and delay, even if the
eventual outcome is favorable to us. We cannot assure you that our pending
patent applications, if issued, would be held valid or enforceable. Third
parties may assert infringement or other intellectual property claims against us
based on their patents or other intellectual property rights. An adverse outcome
in these proceedings could subject us to significant liabilities to third
parties, require disputed rights to be licensed from third parties or require us
to cease or modify our use of the technology. Additionally, many of our foreign
patent applications have been published as part of the patent prosecution
process in such countries. Protection of the rights revealed in published patent
applications can be complex, costly and uncertain.
The pursuit of patents is intensely competitive for therapeutic products in
our areas of research. A number of pharmaceutical companies, biotechnology
companies, universities and research institutions have filed patent applications
or received patents in these and related fields. Some of these applications or
patents may limit or preclude our applications and could result in a significant
reduction in the coverage of our patents.
In order to protect goodwill associated with our company and product names,
we rely on trademark protection for our marks. We have filed to register the
"PREOS" trademark with the United States Patent and Trademark Office, which may
or may not register this mark. Third parties may oppose this mark. Failure to
timely register the PREOS mark or objections by the FDA could force us to select
a new name for PREOS, which could cause us to incur additional expense or delay
its introduction to market.
We also rely on trade secrets, know-how and confidentiality provisions in
our agreements with our collaborators, employees and consultants to protect our
intellectual property. However, these and other parties may not comply with the
terms of their agreements with us, and we might be unable to adequately enforce
our rights against these people or obtain adequate compensation for the damages
caused by their unauthorized disclosure or use.
Finally, if we are found to be in noncompliance with one or more of our
obligations under the terms of our research funding agreement with the Canadian
government, we may be required to surrender all intellectual property rights
associated with ALX-0600, or, at our option, pay liquidated damages.
We are subject to extensive government regulation that may cause us to cancel or
delay the introduction of our products to market.
Our research and development activities and the clinical investigation,
manufacture, distribution and marketing of drug products are subject to
extensive regulation by governmental authorities in the United States and other
countries. Prior to marketing in the United States, a drug must undergo rigorous
testing and an extensive regulatory approval process implemented by the FDA
under federal law, including the Federal Food, Drug and Cosmetic Act. To receive
approval, we or our collaborators must, among other things, demonstrate with
substantial evidence from well-controlled clinical trials that the product is
both safe and effective for each indication where approval is sought. Depending
upon the type, complexity and novelty of the product and the nature of the
disease or disorder to be treated, that approval process can take several years
and require substantial expenditures. Data obtained from testing are susceptible
to varying interpretations that could delay, limit or prevent regulatory
approvals of our products. Drug testing is subject to complex FDA rules and
regulations, including the requirement to conduct human testing on a large
number of test subjects. We, our collaborators or the FDA may suspend human
trials at any time if a party believes that the test subjects are exposed to
unacceptable health risks. We cannot assure you that any of our product
candidates will be safe for human use. Other countries also have extensive
requirements regarding clinical trials, market authorization and pricing. These
regulatory schemes vary widely from country to country, but, in general, are
subject to all of the risks associated with United States approvals.
If any of our products receive regulatory approval, the approval will be
limited to those disease states and conditions for which the product is safe and
effective, as demonstrated through clinical trials. Even if regulatory approval
is obtained, later discovery of previously unknown problems may result in
restrictions of the product, including withdrawal of the product from the
market. Further, governmental approval may subject us to ongoing requirements
for post-marketing studies. Even if we obtain governmental approval, a marketed
product, its manufacturer and its manufacturing facilities are subject to
unannounced inspections by the FDA and must comply with the FDA's cGMP and other
regulations. These regulations govern all areas of production, record keeping,
personnel and quality control. If a manufacturer fails to comply with any of the
manufacturing regulations, it may be subject to, among other things, product
seizures, recalls, fines, injunctions, suspensions or revocations of marketing
licenses, operating restrictions and criminal prosecution. Other countries also
impose similar manufacturing requirements.
20
If we fail to attract and retain key employees, we may have to delay the
development and commercialization of our products.
We are highly dependent on the principal members of our scientific and
management staff. If we lose any of these persons, our ability to develop
products and become profitable could suffer. The risk of being unable to retain
key personnel may be increased by the fact that we have not executed long-term
employment contracts with our employees. Our future success will also depend in
large part on our continued ability to attract and retain other highly qualified
scientific and management personnel. We face competition for personnel from
other companies, academic institutions, government entities and other
organizations.
If product liability claims are brought against us, we may incur substantial
liabilities that could reduce our financial resources.
The clinical testing and commercial use of pharmaceutical products involves
significant exposure to product liability claims. We have obtained limited
product liability insurance coverage for our clinical trials on humans. Our
insurance coverage may be insufficient to protect us against product liability
damages. We might not be able to obtain or maintain product liability insurance
in the future on acceptable terms or in sufficient amounts to protect us against
product liability damages. If we are required to pay a product liability claim,
we may not have sufficient financial resources to complete development or
commercialization of any of our product candidates and our business and results
of operations will be adversely affected.
Our operations involve hazardous materials and we must comply with environmental
laws and regulations, which can be expensive and restrict how we do business.
Our research and development activities involve the controlled use of
hazardous materials, radioactive compounds and other potentially dangerous
chemicals and biological agents. Although we believe our safety procedures for
these materials comply with governmental standards, we cannot entirely eliminate
the risk of accidental contamination or injury from these materials. If an
accident or environmental discharge occurs, we could be held liable for any
resulting damages, which could exceed our financial resources.
Our stock price has been and may continue to be volatile and an investment in
our common stock could suffer a decline in value.
You should consider an investment in our common stock as risky and invest
only if you can withstand a significant loss and wide fluctuations in the market
value of your investment. We receive only limited attention by securities
analysts and frequently experience an imbalance between supply and demand for
our common stock. The market price of our common stock has been highly volatile
and is likely to continue to be volatile. Factors affecting our common stock
price include:
. fluctuations in our operating results;
. announcements of technological innovations or new commercial
products by us, our collaborators or our competitors;
. published reports by securities analysts;
. the progress of our and our collaborators' clinical trials;
governmental regulation; changes in medical and pharmaceutical
product reimbursement policies;
. developments in patent or other intellectual property rights;
. publicity concerning the discovery and development activities by
our licensees;
. public concern as to the safety and efficacy of drugs that we and
our competitors develop; and
. general market conditions.
Anti-takeover provisions in our Certificate of Incorporation, Bylaws,
stockholders rights plan and under Delaware law may discourage or prevent a
change of control.
Provisions of our Certificate of Incorporation, Bylaws and Section 203 of
the Delaware General Corporation Law could delay or prevent a change of control
of NPS. For example, our Board of Directors, without further stockholder
approval, may issue preferred stock that could delay or prevent a change of
control as well as reduce the voting power of the holders of common stock, even
to the extent of losing control to others. In addition, our Board of Directors
has adopted a stockholder rights plan, commonly known as a "poison pill," that
may delay or prevent a change of control.
ITEM 2. Properties.
We have ongoing operations in both Salt Lake City, Utah and Toronto,
Ontario. In Salt Lake City, we lease approximately 54,000 square feet of
laboratory, support and administrative space in the Research Park of the
University of Utah. Our lease in Salt Lake City expires in September 2004, but
may be extended for three additional three-year terms. In Toronto, we own a
building
21
consisting of approximately 90,000 square feet of laboratory, support and
administrative space. We currently anticipate that our existing space will meet
our needs for at least the next two years.
ITEM 3. Legal Proceedings.
From time to time, we are involved in certain litigation arising out of our
operations. We maintain liability insurance, including product liability
coverage, in amounts our management believes is adequate. We are not currently
engaged in any legal proceedings that we expect would materially harm our
business or financial condition.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to the stockholders during the fourth quarter of
2001.
Executive Officers of the Registrant.
The following table sets forth certain information concerning our executive
officers and directors as of December 31, 2001:
Name Age Position
===============================================================================================================================
Hunter Jackson, Ph.D. ............... 52 Chief Executive Officer, President and Chairman of the Board
David L. Clark ...................... 48 Vice President, Operations, Business Development and Corporate Communications
N. Patricia Freston, Ph.D. .......... 61 Vice President, Human Resources
G. Thomas Heath ..................... 52 Senior Vice President, Sales and Marketing
James U. Jensen, J.D ................ 57 Vice President, Corporate Development and Legal Affairs, and Secretary
Thomas B. Marriott, Ph.D. ........... 53 Vice President, Development Research
Robert K. Merrell ................... 46 Vice President, Finance, Chief Financial Officer and Treasurer
Alan L. Mueller, Ph.D. .............. 47 Vice President, Discovery Research
Edward F. Nemeth, Ph.D. ............. 48 Vice President and Chief Scientific Officer
Hunter Jackson, Ph.D. has been Chief Executive Officer and Chairman of our
board since founding NPS in 1986. He was appointed to the additional position of
President in January 1994. Before founding NPS, he was an Associate Professor in
the Department of Anatomy at the University of Utah School of Medicine. Dr.
Jackson received a Ph.D. in Psychobiology from Yale University. He received
postdoctoral training in the Department of Neurosurgery, University of Virginia
Medical School.
David L. Clark has been Vice President, Business Development and Corporate
Communications since January 2000 and Vice President, Operations since March
2000. Before being appointed to these positions, he served as Director of
Business Development and Corporate Communications for us from September 1998 to
December 1999. He served as Director of Corporate Communications for us from
March 1996 to September 1998. From 1988 to 1996 he served as Vice President,
Business Development for Agridyne Technologies Inc., a publicly held
biotechnology company. Mr. Clark received an M.S. in Plant Genetics from the
University of Illinois. He received an M.B.A. from the University of Utah.
N. Patricia Freston, Ph.D. has been Vice President, Human Resources since
March 1997. From 1980 to February 1997, she served as Manager of Personnel
Services, Questar Corporation, a publicly held, integrated energy company. From
1977 to 1980, Dr. Freston was Assistant Director of Training for Mountain Fuel
Supply, a subsidiary of Questar. From 1971 to 1977, she was Director of Academic
Programming for the Division of Continuing Education, University of Utah. Dr.
Freston received a Ph.D. in Industrial Psychology from the University of Utah.
G. Thomas Heath, has been Senior Vice President, Sales and Marketing since
November 2001. In 1997, Mr. Heath co-founded Echelon Research Laboratories Inc.,
where he served as President and continues to serve as a director. From 1976 to
1996, Mr. Heath served in various marketing and sales positions at Pfizer Inc.,
where he managed the pre-launch planning and successful introductions of a
number of new pharmaceutical products. Mr. Heath also served as Vice President,
Sales and Marketing at Pfizer Canada, where he managed a force of over 250
salespeople. Mr. Heath received B.A. and M.B.A. degrees from the University of
Utah.
22
James U. Jensen, J.D. has been Vice President, Corporate Development and
Legal Affairs and Secretary since August 1991. He has been Secretary of NPS
since 1987, and served as a director from 1987 to 2001. From 1986 to July 1991,
he was a partner in the law firm of Woodbury, Jensen, Kesler & Swinton, P.C., or
its predecessor firm, concentrating on technology transfer and licensing and
corporate finance. From July 1985 until October 1986, he served as Chief
Financial Officer of Cericor, a software company. He serves as a director of
Wasatch Funds, Inc., a registered investment company, and various private
companies. Mr. Jensen received J.D. and M.B.A. degrees from Columbia University.
Thomas B. Marriott, Ph.D. has been Vice President, Development Research
since August 1993. From February 1990 to July 1993, he served as Director,
Clinical Investigations for McNeil Pharmaceutical, a subsidiary of Johnson &
Johnson, with responsibility for developing and implementing clinical trial
strategies for a number of products. From 1986 to 1990, Dr. Marriott was
Director, Drug Metabolism for McNeil Pharmaceutical with the responsibility for
planning, initiating and completing bioanalytical drug disposition and clinical
biopharmaceutics and pharmacokinetics research required for investigational new
drug applications and new drug applications. He received a Ph.D. in Chemistry
from the University of Oregon.
Robert K. Merrell has been Vice President, Finance, Chief Financial Officer
and Treasurer since January 1995 and served us as Director of Finance and
Administration and Treasurer from December 1993 to December 1994. He joined NPS
as Controller/Treasurer in September 1988. Prior to that time, he was a Senior
Manager at KPMG LLP. Mr. Merrell has been a licensed C.P.A. since 1980. He
received an M.M. from Kellogg Graduate School of Management at Northwestern
University.
Alan L. Mueller, Ph.D. has been Vice President, Discovery Research since
January 2001. Before being appointed to that position, he served us as Director,
Discovery Research from September 1999 to January 2001. He joined NPS in
February 1989 as a Senior Scientist. Prior to that time, he was a Pharmacologist
at Abbott Laboratories. Dr Mueller received a Ph.D. in Pharmacology from the
University of Colorado Health Sciences Center, Denver.
Edward F. Nemeth, Ph.D. has been a Vice President of NPS since January 1994
and was appointed Chief Scientific Officer in July 1997. He joined NPS as
Director of Pharmacology in March 1990. From 1986 until joining NPS, Dr. Nemeth
was an Assistant Professor in the Department of Physiology and Biophysics at
Case Western Reserve University School of Medicine. He received a Ph.D. in
Pharmacology from Yale University.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Since May 26, 1994, our common stock has been quoted on the Nasdaq National
Market under the symbol "NPSP." The shares of NPS Allelix, our Canadian
subsidiary, are traded on the Toronto Stock Exchange under the symbol "NX" and
are exchangeable into shares of our common stock at any time on a one-for-one
basis. The following table sets forth, for the periods indicated, the high and
low sales prices for our common stock, as reported on the Nasdaq National
Market.
High Low
------- -------
2000
First Quarter.................................. $ 31.56 $ 9.63
Second Quarter................................. 28.75 8.00
Third Quarter.................................. 58.00 25.38
Fourth Quarter................................. 56.56 31.75
2001
First Quarter.................................. $ 47.13 $ 15.00
Second Quarter................................. 43.00 17.56
Third Quarter.................................. 40.13 25.21
Fourth Quarter................................. 41.40 28.80
As of December 31, 2001, there were approximately 340 holders of record of
our common stock, which includes approximately 150 holders of the exchangeable
shares of NPS Allelix.
We have never declared or paid cash dividends on capital stock. We intend
to retain any future earnings to finance growth and development and therefore do
not anticipate paying cash dividends in the foreseeable future.
We have adopted a policy and implemented procedures allowing directors and
officers to effect sales of the Company's securities under SEC Rule 10b5-1.
Under this rule, directors and officers may adopt a prearranged contract,
instructions, or written plan arranging for the sale of Company securities on
specified conditions. To this effect, certain prearranged plans have already
been implemented and additional such plans may be adopted from time to time.
23
ITEM 6. Selected Financial Data.
The selected consolidated financial data presented below are for each
fiscal year in the five-year period ended December 31, 2001, and for the period
from October 22, 1986 (inception) through December 31, 2001. This is derived
from, and qualified by reference to, NPS's audited consolidated financial
statements and notes thereto. The selected quarterly data presented below are
derived from our unaudited consolidated financial statements. NPS is considered
a development stage enterprise as described in note 1 of the consolidated
financial statements.
Year Ended December 31,
-----------------------
Consolidated Statements of
Operations Data: October 22, 1986
(inception) through
2001 2000 1999 1998 1997 December 31, 2001
--------- -------- -------- -------- -------- -------------------
(in thousands, except per share amounts)
Revenues from research and
license agreements $ 10,410 $ 7,596 $ 3,445 $ 3,568 $ 5,842 $ 73,519
Operating expenses:
Research and development 60,090 27,888 16,935 17,856 15,090 179,546
General and administrative 12,099 12,036 5,983 5,546 5,587 59,151
Amortization of goodwill
and acquired intangibles 3,411 3,561 -- -- -- 6,972
In process research and
development acquired -- -- 17,760 -- -- 17,760
-------- -------- -------- -------- -------- ---------
Total operating expenses 75,600 43,485 40,678 23,402 20,677 263,429
Operating loss (65,190) (35,889) (37,233) (19,834) (14,835) (189,910)
Other income, net 15,522 4,277 1,579 2,672 3,308 30,725
-------- -------- -------- -------- -------- ---------
Loss before income tax expense (49,668) (31,612) (35,654) (17,162) (11,527) (159,185)
Income tax expense 300 -- -- -- 167 1,318
-------- -------- -------- -------- -------- ---------
Loss before cumulative effect of
change in accounting principle (49,968) (31,612) (35,654) (17,162) (11,694) (160,503)
Cumulative effect on prior years
(to December 31, 1999) of
changing to a different revenue
recognition method(1) -- (500) -- -- -- (500)
-------- -------- -------- -------- -------- ---------
Net loss $(49,968) $(32,112) $(35,654) $(17,162) $(11,694) $(161,003)
======== ======== ======== ======== ======== =========
Diluted loss per share:
Loss before cumulative effect of
of change in accounting
principle $ (1.67) $ (1.32) $ (2.77) $ (1.39) $ (0.98)
Cumulative effect on prior
years (to December 31, 1999) of
changing to a different revenue
recognition method (1) -- (0.02) -- -- --
-------- -------- -------- -------- --------
Net loss per share (2) $ (1.67) $ (1.34) $ (2.77) $ (1.39) $ (0.98)
======== ======== ======== ======== ========
Diluted weighted average
shares outstanding (2) 29,912 24,007 12,863 12,337 11,956
Proforma amounts assuming
revenue recognition method
is applied retroactively:
Net loss $(34,654) $(16,162) $(10,694) $(161,003)
Diluted net loss per share $ (2.69) $ (1.31) $ (0.89)
- ----------
(1) During the fourth quarter of 2000, the Company adopted Staff Accounting
Bulletin No. 101, Revenue Recognition (SAB No. 101). SAB No. 101 provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements. The result of the adoption of SAB No. 101 was to
reduce recognition of previously reported license fee revenues prior to
December 31, 1999 by $500,000 through a cumulative effect of accounting
change for the year ended December 31, 2000. These revenues were recognized
as income in the year ended December 31, 2000.
(2) See note 1 to the consolidated financial statements for information
concerning the computation of net loss per share.
24
Consolidated Balance Sheets Data: Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
--------- --------- -------- -------- --------
(in thousands)
Cash, cash equivalents, and
marketable investment securities $ 207,518 $ 246,936 $ 35,679 $ 43,444 $ 57,942
Working capital 206,314 244,712 32,532 40,767 56,365
Total assets 234,976 269,270 64,966 48,111 62,634
Long-term portion of capital
leases and long-term debt -- 54 1,940 32 65
Deficit accumulated during
development stage (161,003) (111,035) (78,923) (43,269) (26,107)
Stockholders' equity 221,935 265,340 56,079 45,146 60,319
Quarterly Financial Data:
Quarter Ended
-------------
December 31 September 30 June 30 March 31
----------- ------------ -------- --------
(in thousands, except per share amounts)
2001
- ----
Revenue from research and license
agreements $ 9,033 $ 395 $ 491 $ 491
Operating loss (16,761) (17,014) (20,094) (11,321)
Net loss (13,608) (14,125) (16,167) (6,068)
Basic and diluted loss per common and common
share equivalent (2) $ (0.45) $ (0.47) $ (0.54) $ (0.20)
2000 December 31 September 30 June 30 (1) March 31 (1)
- ---- ----------- ------------ -------- --------
(in thousands, except per share amounts)
Revenue from research and license
agreements $ 1,788 $ 1,654 $ 1,957 $ 2,196
Operating loss (8,854) (8,616) (8,207) (10,213)
Loss before cumulative effect of change
in accounting principle (6,210) (7,383) (7,434) (10,585)
Net loss (6,210) (7,383) (7,434) (11,085)
Basic and diluted loss per common and common
share equivalent: (2)
Loss before cumulative effect of change
in accounting principle $ (0.22) $ (0.30) $ (0.32) $ (0.53)
Net loss $ (0.22) $ (0.30) $ (0.32) $ (0.56)
- ----------
(1) The first and second quarter financial data of 2000 have been restated to
reflect the Company's adoption of SAB No. 101 in the fourth quarter of
2000. The third quarter of 2000 was not impacted by the change.
(2) Earnings per share are computed independently for each of the quarters
presented and therefore may not sum to the total for the year.
25
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
You should read this discussion together with the consolidated financial
statements and notes thereto included elsewhere in this report.
Overview
Our objective is to build a profitable biopharmaceutical company by
discovering, developing and commercializing small molecule drugs and recombinant
proteins. Our product candidates are primarily for the treatment of bone and
mineral disorders, gastrointestinal disorders and central nervous system
disorders. We have product drug candidates in active clinical development and
several preclinical product candidates. We have incurred cumulative losses from
inception through December 31, 2001 of approximately $161.0 million, net of
cumulative revenues from research and license agreements of approximately $73.5
million. We expect to continue to incur significant operating losses over at
least the next several years as we continue our current and anticipated
development projects, particularly our clinical trial programs for PREOS and
ALX-0600, as we maintain our contractual commitment to fund research activities
in our metabolic glutamate receptor program, and as we develop internal
marketing and sales capabilities and manufacturing relationships.
On December 23, 1999 we acquired all of the outstanding common stock of
Allelix Biopharmaceuticals Inc., a biopharmaceutical company based in Ontario,
Canada for 6,516,923 shares of our common stock and assumed options and warrants
for the issuance of an additional 675,520 shares of our common stock. The
acquisition was accounted for under the purchase method of accounting, with an
effective date of December 31, 1999. Accordingly, operating results of Allelix
are only included in our consolidated statements of operations for periods after
that date. We did, however, record an expense of $17.8 million in 1999 for
in-process research and development that we acquired as part of our purchase of
Allelix.
Results of Operations
Revenues. Substantially all of our revenues have come from license fees and
research and development support or milestone payments from our licensees and
collaborators. These revenues fluctuate from year to year. Our revenues were
$10.4 million in 2001, $7.6 million in 2000, and $3.4 million in 1999. The
increase in revenues from 2000 to 2001 was primarily due to the recognition of
milestone payments from our licensees Amgen Inc., Kirin Brewery Company, Ltd.,
Forest Laboratories, Inc., and Janssen Pharmaceutica N.V. The increases in
revenues in 2000 from 1999 were primarily due to revenues from license
agreements we acquired as a result of our purchase of Allelix. We recognized
revenue from our agreements as follows:
. under our agreement with GlaxoSmithKline we recognized $750,000 in
2001, $1.8 million in 2000, and $2.0 million in 1999;
. under our agreement with Kirin, we recognized $3.0 million in 2001 and
$1.0 million in each of 2000 and 1999;
. under our agreement with Amgen we recognized $3.0 million in 2001 and
$400,000 in each of 2000 and 1999;
. under our agreement with Forest, we recognized $1.0 million in 2001,
$200,000 in 2000 and nothing in 1999;
. under our agreement with Lilly Canada, we recognized $1.7 million in
2000, and nothing in each of 2001 and 1999;
. under our agreement with Janssen, we recognized $1.0 million in 2001,
$1.9 million in 2000, and nothing in 1999; and
. under our research funding agreement with the Government of Canada, we
recognized $1.3 million in 2001, $404,000 in 2000 and nothing in 1999.
Research and Development Expenses. Our research and development expenses
arise primarily from compensation and other related costs of our personnel who
are dedicated to research and development activities and from the fees paid and
costs reimbursed to outside professionals to conduct research, clinical studies
and trials, and for manufacturing of drug compounds and related supplies prior
to FDA approval. Our research and development expenses increased to $60.1
million in 2001 from $27.9 million in 2000 and $16.9 million in 1999. Research
and development expenses increased from 2000 to 2001 principally due to an
increase in the number of patients participating in a pivotal Phase III clinical
trial for PREOS, the increased manufacturing of PREOS, and the ongoing pilot
Phase II study with ALX-0600 in patients with short bowel syndrome. The increase
from 1999 to 2000 was principally due to the commencement of the Phase III
clinical trial for PREOS and the pilot Phase II clinical trial for ALX-0600.
General and Administrative Expenses. Our general and administrative
expenses consist primarily of the costs of our management and administrative
staff, business insurance, taxes, professional fees, and market research and
promotion activities for our product candidates. Our general and administrative
expenses increased to $12.1 million in 2001 from $12.0 million in 2000 and $6.0
million in 1999. The increase from 1999 to 2000 was primarily the result of
increased costs of our operations, including our acquisition of Allelix in
December 1999, and a charge of $990,000 for compensation expense for stock
options held by management that vested on the signing of a license agreement in
2000.
26
Amortization of Goodwill and Acquired Intangibles. We are required to
amortize goodwill and other acquired intangibles as a result of our acquisition
of Allelix in December 1999. The remaining intangible assets at December 31,
2001 totaled approximately $10.8 million. We are amortizing these assets over
their expected lives, which range from two to six years at the time of
acquisition. We recorded amortization expense of $3.4 million in 2001 compared
to $3.6 million in 2000. We did not record any amortization of goodwill and
acquired intangibles in 1999 since the effective date of the Allelix acquisition
for accounting purposes was December 31, 1999. Beginning January 1, 2002, we
have unamortized goodwill in the amount of $6.8 million and unamortized
identifiable intangible assets in the amount of $3.9 million, all of which will
be subject to the transition provisions of Statement of Financial Accounting
Standards (SFAS) Nos. 141 and 142.
In-Process Research and Development Acquired. We recorded an expense of
$17.8 million in 1999 for in-process research and development that we acquired
as part of our purchase of Allelix. The acquired in-process research and
development consisted of five drug development programs, of which PREOS, for
osteoporosis, and ALX-0600, for gastrointestinal disorders, accounted for 83
percent of the total value.
Since the date of the acquisition, we revised our plans for the next series
of clinical trials for PREOS and ALX-0600. We started a pivotal Phase III
clinical trial with PREOS. We also started enrolling a small number of patients
in a pilot Phase II clinical trial with ALX-0600. Since the date of acquisition
and through December 31, 2001, we have incurred development costs of
approximately $55.1 million for PREOS and $4.8 million for ALX-0600. Total
development costs and time-to-completion for each of these product candidates
will depend on the costs we incur to conduct current clinical trials and to
perform any additional work we find necessary to obtain FDA approval.
We believe the assumptions we used in the valuation of the in-process
research and development we acquired from Allelix were reasonable at the time of
the acquisition. However, we have modified our development plans, as new data
have become available regarding each product candidate. Accordingly, actual
results may vary from the projected results in the valuation.
Total Other Income, Net. Our total other income, net, increased to $15.5
million in 2001 from $4.3 million in 2000 and $1.6 million in 1999. The increase
from 2000 to 2001 and from 1999 to 2000 was mainly the result of increased
interest income of $7.2 million in 2001 and $3.0 million in 2000. The increase
in interest income is the result of higher average balances of cash, cash
equivalents and marketable investment securities. These balances increased
primarily due to proceeds we received from the private placement offering of 3.9
million shares of our common stock which was closed in April 2000 and from a
public offering of 4.6 million shares of our common stock which was completed in
November 2000. In addition, the gain on sale of marketable investment securities
increased by $1.5 million in 2001 and by $300,000 in 2000 due to a decreasing
interest rate environment resulting in larger realized gains on marketable
investment securities. Finally, during 2001, we recognized income of $1.7
million from an equity-method investment.
In 2000, we recognized $1.1 million loss on disposition of equipment,
leasehold improvements, and leases. The loss on disposition of equipment,
leasehold improvements, and leases in 2000 is primarily due to a loss of
approximately $1.2 million associated with closing a facility in New Jersey
following the acquisition of Allelix. We anticipated at the time of the
acquisition that we would sublease the facility for the remaining nine-year term
of our lease obligation and retain the existing leasehold improvements. However,
we were able to negotiate a release of our obligation from the landlord subject
to our forfeiting the leasehold improvements and certain office furniture and
equipment which had a net book value of approximately $1.2 million.
Taxes
As of December 31, 2001, we had a United States federal income tax net
operating loss carryforward of approximately $77.1 million and a United States
federal income tax research credit carryforward of approximately $5.2 million.
We also had a Canadian federal and provincial income tax net operating loss
carryforward of approximately $6.9 million and $16.4 million, respectively, a
Canadian research pool carryforward of approximately $132.7 million and a
Canadian investment tax credit carryforward of approximately $13.6 million. Our
ability to utilize the United States operating loss and credit carryforwards
against future taxable income will be subject to annual limitations in future
periods pursuant to the "change in ownership rules" under Section 382 of the
Internal Revenue Code of 1986.
Cumulative Effect on Prior Years (to December 31, 1999) of Changing to a
Different Revenue Recognition Method.
During the fourth quarter of 2000, we adopted Staff Accounting Bulletin No
101, Revenue Recognition (SAB No. 101). SAB No. 101 provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements.
Under our previous accounting policy, revenues from nonrefundable licensing fees
were recognized when received when we had no further obligations relative to
such licensing fees. In compliance with SAB No. 101, we now recognize revenues
from nonrefundable licensing fees over the continuing involvement period with
each licensee. The adoption of SAB No. 101 resulted in an increase in operating
income of
27
$500,000 and no change in the net loss for the year ended December 31, 2000.
Prior-year financial statements have not been restated to reflect the change in
accounting principle.
Future Outlook
We estimate that revenues in the first quarter of 2002 will be
approximately $500,000 from existing research and development funding and
license agreements. In January 2002, Forest notified us that we had earned a
$2.0 million milestone payment as a result of the achievement of certain
preclinical and clinical developments. Forest approved issuance of a press
release by us announcing that event. In March 2002, we received notice from
Forest that it was terminating the agreement and returning all rights to
ALX-0646 to us. Forest also indicated that it believes this obviates its
obligation to pay the $2.0 million milestone payment. We disagree with this
assertion and are evaluating arbitration as provided under the agreement.
Nevertheless, we will not recognize revenue for the $2.0 million milestone
payment in the first quarter. We expect that research and development expenses
in the first quarter of 2002 will be between $20.0 and $24.0 million and general
and administrative expenses will be between $3.5 and $4.0 million. We expect
amortization of purchased intangibles to be approximately $325,000 and other
income, net, to be between $1.9 million and $2.3 million.
On a per quarter basis during 2002, we anticipate that research and
development expenses will fluctuate between $20.0 and $25.0 million as we
conduct current and planned clinical studies for PREOS and anticipated clinical
trials for ALX-0600 and as we increase our pre-launch manufacturing and market
development costs for these product candidates. Quarter to quarter fluctuations
may be significant for both revenues and expenses, but we anticipate that our
operations will use between $90.0 and $100.0 million of cash, cash equivalents
and marketable investment securities in 2002. This guidance reflects the
substantial increase in our enrollment in the TOP clinical trial for
osteoporosis over earlier expected targets, the planned pace and scope of the
TOP and other clinical trials and planned manufacturing arrangements for PREOS.
Any changes to current plans for clinical trials or manufacturing could have an
impact on cash expenditures in 2002.
Liquidity and Capital Resources
We have financed operations since inception primarily through collaborative
research and license agreements and the private and public issuance and sale of
equity securities. As of December 31, 2001, we had recognized $73.5 million of
cumulative revenues from payments for research support, license fees and
milestone payments and $329.0 million from the sale of equity securities for
cash. Our principal sources of liquidity are cash, cash equivalents, and
marketable investment securities, which totaled $207.5 million at December 31,
2001. The primary objectives for the company's marketable investment security
portfolio are liquidity and safety of principal. Investments are made to achieve
the highest rate of return to the Company, consistent with these two objectives.
The Company's investment policy limits investments to certain types of
instruments issued by institutions with investment grade credit ratings and
places restrictions on maturities and concentration by type and issuer.
We could receive future milestone payments of up to $92.5 million in the
aggregate if each of our current licensees accomplishes the specified research
and/or development milestones provided in the respective agreements. In
addition, all of the agreements require the licensees to make royalty payments
to us if they sell products covered by the terms of our license agreements.
However, we do not control the subject matter, timing or resources applied by
our licensees to their development programs. Thus, potential receipt of
milestone and royalty payments from these licensees is largely beyond our
control. Some of the late-stage development milestone payments from AstraZeneca
will not be due if we elect a co-promotion option under which we may
commercialize products. Further, each of these agreements may be terminated
before its scheduled expiration date by the respective licensee either for any
reason or under certain conditions.
Prior to the time that we acquired Allelix in December 1999, Allelix had
entered into a research funding agreement with the Government of Canada pursuant
to the Technology Partnership Canada program. Under this agreement, Canada is
obligated to reimburse us for up to 30 percent of eligible research and
development costs we incur for our ALX-0600 product candidate through December
2002 up to a maximum of Cdn. $8.4 million. As of December 31, 2001, we had
invoiced Canada for a total of Cdn. $4.7 million for reimbursement. The
agreement provides Canada with a 10 percent royalty on revenues we receive from
the sale or license of ALX-0600. Our royalty obligation terminates on December
31, 2008 if we have paid at least Cdn. $23.9 million. If we have not paid that
amount by that date, our royalty obligation continues until the earlier of the
date we have paid Cdn. $23.9 million or December 31, 2017. The agreement
contains a number of significant limitations on our ability to develop and
commercialize ALX-0600 outside of Canada.
We have entered into sponsored research, license, and purchase agreements
that obligate us to make research support and milestone payments to academic or
commercial research institutions and individuals. As of December 31, 2001, we
have a total commitment of up to $1.8 million for future research support and
milestone payments. Further, depending on the commercial success of certain of
our products, we may be required to pay license fees or royalties. We expect to
enter into additional sponsored research and license agreements in the future.
28
Under our agreement with AstraZeneca, we are required to co-direct the
research and pay for an equal share of the research costs, including personnel
and capital, through at least September 2003 and, under certain circumstances,
through March 2006. Additionally, as of December 31, 2001, we have a non-
cancelable commitment for future manufacturing of PREOS of approximately $17.6
million over a four-year period commencing in June 2001. We expect to enter into
additional collaborative research agreements and manufacturing agreements in the
future, which may require long-term commitments of cash.
We expect that our existing capital resources including interest earned
thereon, will be sufficient to allow us to maintain our current and planned
operations through at least 2003. However, our actual needs will depend on
numerous factors, especially with regard to the clinical trial programs and
pre-launch market development and production costs for PREOS and ALX-0600. If we
advance current proprietary programs; if we in-license or otherwise acquire
other technologies, product candidates or companies; or if current clinical
trials are accelerated, delayed or terminated for any reason, we may need to
make substantial additional expenditures or we may need to substantially reduce
planned expenditures. Our clinical trials may be accelerated, delayed, or
terminated for several reasons including the risk that our product candidates
will demonstrate safety concerns, the risk that regulatory authorities may not
approve our product candidates for further development or may require additional
or expanded clinical trials to be performed, and the risk that contract
manufacturers may not be able to supply sufficient quantities of our drug
candidates to support our clinical trials, which could lead to a cessation of
the clinical trials. We do not have on hand sufficient supplies of our product
candidates to meet our clinical trial requirements and we are dependent on
outside contract manufacturers to provide these supplies on a timely basis. If
any of the events that pose these risks comes to fruition, we may have to
substantially curtail or postpone current and planned clinical trials, our
business may be materially harmed, our stock price may be adversely affected,
and our ability to raise additional capital may be impaired.
We need to raise substantial additional funds to support our long-term
research, product development, and commercialization programs. To provide for
financial flexibility and increased liquidity, the Company filed a shelf
registration statement in January 2002. Under the shelf registration statement,
the Company may offer up to $250.0 million of debt securities, common stock,
preferred stock, depository shares, and/or warrants, with terms to be determined
by market conditions. We may also seek additional funding through strategic
alliances, collaborations, or license agreements and other financing mechanisms.
There can be no assurance that additional financing will be available on
acceptable terms, if at all. If adequate funds are not available, we may be
required to delay, reduce the scope of, or eliminate one or more of our research
and development programs, or to obtain funds through arrangements with licensees
or others that may require us to relinquish rights to certain of our
technologies or product candidates that we may otherwise seek to develop or
commercialize on our own.
Critical Accounting Policies
Our critical accounting policies are as follows:
. revenue recognition;
. accounting for income taxes; and
. valuation of long-lived and intangible assets and goodwill.
Revenue Recognition. We earn our revenue from research and development
support payments, license fees, and milestone payments. As described below,
significant management judgment and estimates must be made and used in
connection with the revenue recognized in any accounting period. Material
differences may result in the amount and timing of our revenue for any period if
our management made different judgments or utilized different estimates.
We apply the provisions of Staff Accounting Bulletin No. 101, Revenue
Recognition (SAB No. 101), to all of our revenue transactions. We recognize
revenue from our research and development support agreements as related research
and development costs are incurred and from milestone payments as agreed upon
events representing the achievement of substantive steps in the development
process are achieved and where the amount of the milestone payment, approximates
the value of achieving the milestone. We recognize nonrefundable license fees
over the period we have continuing involvement. Cash received in advance of the
performance of the related research and development support and for
nonrefundable license fees when we have continuing involvement is recorded as
deferred revenue.
Accounting for Income Taxes. As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves us
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as depreciation
expense for tax and accounting purposes. These differences result in deferred
tax assets and liabilities. We must then assess the likelihood that our deferred
tax assets will be recovered from future taxable income and to the extent we
believe that recovery is not likely, we must establish a valuation allowance. To
the extent we establish a valuation allowance or increase this allowance in a
period, we must include an expense within the tax provision in the statement of
operations.
29
Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $97.3 million as of December 31, 2001, due to
uncertainties related to our ability to utilize some of our deferred tax assets,
primarily consisting of certain net operating losses carried forward and foreign
tax credits, before they expire. The valuation allowance is based on our
estimates of taxable income by jurisdiction in which we operate and the period
over which our deferred tax assets will be recoverable. In the event that actual
results differ from these estimates or we adjust these estimates in future
periods we may need to reduce our valuation allowance which could materially
impact our financial position and results of operations.
Valuation of Long-lived and Intangible Assets and Goodwill. We assess the
impairment of identifiable intangibles, long-lived assets and related goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important which could trigger an
impairment review include the following:
. significant underperformance relative to expected historical or
projected future operating results;
. significant changes in the manner of our use of the acquired
assets or the strategy for our overall business;
. significant negative industry or economic trends;
. significant decline in our stock price for a sustained period;
and
. our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived
assets, and related goodwill and enterprise level goodwill may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, we measure any impairment based on a projected discounted cash flow
method using a discount rate determined by our management to be commensurate
with the risk inherent in our current business model. Net intangible assets,
long-lived assets, and goodwill amounted to $15.6 million as of December 31,
2001.
In 2002, SFAS No. 142, Goodwill and Other Intangible Assets, became
effective and as a result, we will cease to amortize goodwill. In lieu of
amortization, we are required to perform an initial impairment review of our
goodwill in 2002 and an annual impairment review thereafter. We expect to
complete our initial review during the first quarter of 2002. Beginning January
1, 2002, we have unamortized goodwill in the amount of $6.8 million and
unamortized identifiable intangible assets in the amount of $3.9 million, all of
which will be subject to the transition provisions of SFAS No. 142. Amortization
expense related to goodwill and the assembled work force component of
identifiable intangible assets was $1.8 million and $319,000, respectively, for
the year ended December 31, 2001. The assembled workforce component of
identifiable intangible assets was fully amortized as of December 31, 2001. We
currently do not expect to record an impairment charge upon completion of the
initial impairment review. However, there can be no assurance that at the time
the review is completed, a material impairment charge will not be recorded.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 prohibits the use of the pooling-of-interests
method of accounting and requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001 and is applicable to
all purchase method business combinations completed after June 30, 2001. SFAS
No. 141 also specifies that intangible assets acquired in a purchase method
business combination must meet certain criteria to be recognized and reported
apart from goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately. SFAS No. 142 will require that
goodwill and intangible assets with indefinite useful lives no longer be
amortized effective January 1, 2002; rather, these assets must be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 will also require that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.
Beginning January 1, 2002, we have unamortized goodwill in the amount of
$6.8 million and unamortized identifiable intangible assets in the amount of
$3.9 million, all of which will be subject to the transition provisions of SFAS
Nos. 141 and 142. Amortization expense related to goodwill and the assembled
work force component of identifiable intangible assets was $1.8 million and
$319,000, respectively, for the year ended December 31, 2001 and 2000. The
assembled workforce component of identifiable intangible assets was fully
amortized as of December 31, 2001. We expect to complete our impairment review
of goodwill during the first quarter of 2002 and do not expect to record an
impairment charge upon completion of the initial review. However, there can be
no assurance that at the time the review is completed, a material impairment
charge may not be recorded.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or normal use of the asset.
30
We are required and plan to adopt the provisions of SFAS No. 143 for the
quarter ending March 31, 2003. To accomplish this, we must identify legal
obligations for asset retirement obligations, if any, and determine the fair
value of these obligations on the date of adoption. Because of the effort
necessary to comply with the adoption of SFAS No. 143, it is not practicable for
management to estimate the impact of adopting this Statement as of the date of
this report on Form 10-K.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. SFAS No. 144 retains
the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with SFAS No. 121. SFAS No. 144 retains the basic provisions of APB
Opinion 30 on how to present discontinued operations in the income statement but
broadens that presentation to include a component of an entity rather than a
segment of a business.
We are required and we plan to adopt the provisions of SFAS No. 144 for the
quarter ending March 31, 2002. We do not expect the adoption of SFAS No. 144 for
long-lived assets held for use to have a material impact our consolidated
financial statements because the impairment assessment under SFAS No. 144 is
largely unchanged from SFAS No. 121. The provisions of the statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities. We
cannot determine the potential effects that adoption of SFAS No. 144 will have
on our consolidated financial statements.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk. Our primary objectives in managing our investment
portfolio are to preserve principal, maintain proper liquidity to meet operating
needs and maximize yields. The securities we hold in our investment portfolio
are subject to interest rate risk. At any time, sharp changes in interest rates
can affect the fair value of the investment portfolio and its interest earnings.
After a review of our marketable investment securities, we believe that in the
event of a hypothetical 10 percent increase in interest rates, the resulting
decrease in fair market value of our marketable investment securities would be
insignificant to the financial statements. Currently, we do not hedge these
interest rate exposures. We have established policies and procedures to manage
exposure to fluctuations in interest rates. We place our investments with high
quality issuers and limit the amount of credit exposure to any one issuer and do
not use derivative financial instruments in our investment portfolio. We
maintain an investment portfolio of various issuers, types and maturities, which
consist mainly of highly liquid, investment-grade securities and money market
funds. These securities are classified as available-for-sale and, consequently,
are recorded on the balance sheet at fair value with unrealized gains or losses
reported as accumulated other comprehensive income as a separate component in
stockholders' equity.
Foreign Currency Risk. Some of our research and development operations are
in Canada. As a result, our financial results could be affected by factors such
as a change in the foreign currency exchange rate between the United States
dollar and the Canadian dollar, or by weak economic conditions in Canada. When
the United States dollar strengthens against the Canadian dollar, the cost of
expenses in Canada decreases. When the United States dollar weakens against the
Canadian dollar, the cost of expenses in Canada increases. The monetary assets
and liabilities in our foreign subsidiary that are impacted by the foreign
currency fluctuations are cash, accounts receivable, accounts payable and
certain accrued liabilities. A hypothetical 10 percent increase or decrease in
the exchange rate between the United States dollar and the Canadian dollar from
the December 31, 2001 rate would cause the fair value of such monetary assets
and liabilities in Canada to change by an insignificant amount. We are not
currently engaged in any foreign currency hedging activities.
ITEM 8. Financial Statements and Supplementary Data.
Financial statements and notes thereto appear on pages F-1 to F-31 of this
Form 10-K Annual Report.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
There have been no changes in and disagreements with accountants on
accounting and financial disclosure.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
Certain of the information required by this item will be contained in
our definitive Proxy Statement with respect to our Annual Meeting of
Stockholders, to be held on May 23, 2002, under the captions "Election of
Directors," and "Compliance with
31
Section 16(a) of the Exchange Act" and is incorporated by reference herein. For
information regarding executive officers see Part I of this Form 10-K under the
caption "Executive Officers of the Registrant."
ITEM 11. Executive Compensation.
Certain of the information required by this item will be contained in our
definitive Proxy Statement with respect to our Annual Meeting of Stockholders,
to be held on May 23, 2002, under the caption "Executive Compensation," and,
except for the information appearing under the captions "Report of the
Compensation Committee of the Board of Directors" and "Performance Measurement
Comparison," is incorporated by reference herein.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this item will be contained in our definitive Proxy
Statement with respect to our Annual Meeting of Stockholders, to be held on May
23, 2002, under the caption "Security Ownership of Certain Beneficial Owners and
Management," and is incorporated by reference herein.
ITEM 13. Certain Relationships and Related Transactions.
Information required by this item will be contained in our definitive Proxy
Statement with respect to our Annual Meeting of Stockholders, to be held on May
23, 2002, under the caption "Certain Transactions," and is incorporated by
reference herein.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Index to consolidated financial statements and report of
independent auditors. The consolidated financial statements required
by this item are submitted in a separate section beginning on page F-1
of this report.
Page Number
-----------
Table of Contents to Consolidated Financial Statements ...................................F-1
Independent Auditors' Report..............................................................F-2
Consolidated Balance Sheets ..............................................................F-3
Consolidated Statements of Operations ....................................................F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)...........F-5
Consolidated Statements of Cash Flows.....................................................F-12
Notes to Consolidated Financial Statements ...............................................F-13
2. Index to financial statement schedules. There are no financial
statements schedules included because they are either not applicable
or the required information is shown in the consolidated financial
statements or the notes thereto.
3. Exhibits.
Exhibit
Number Exhibit
- ------ -------
2.1 Arrangement Agreement made as of September 27, 1999, as amended by
Amendment No. 1 as of October 28, 1999 and as amended and restated as
of November 15, 1999 between Allelix Biopharmaceuticals Inc. and NPS
Pharmaceuticals, Inc.(11)
3.1 Amended and Restated Certificate of Incorporation of the Registrant(1)
3.2 Amended and Restated Bylaws of the Registrant(1)
3.3 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of the Registrant, dated December 16, 1999(13)
3.4 Amendment to Certificate of Designation of Series A Junior
Participating Preferred Stock, dated September 5, 2000(13)
4.1 Rights Agreement, dated as of December 4, 1996, between NPS
Pharmaceuticals, Inc. and American Stock Transfer & Trust, Inc., with
Exhibit A, Form of Certificate of Designation of Series A Junior
Participating Preferred Stock; Exhibit B, Form of Right Certificate;
and Exhibit C, Summary of Rights to Purchase Shares of Preferred
Stock(6)
4.2 Provisions attaching to the Exchangeable Shares of NPS Allelix
Inc.(11)
4.3 Support Agreement made as of December 22, 1999 among NPS
Pharmaceuticals, Inc., and NPS Holdings Company, and NPS Allelix
Inc.(11)
32
4.4 Voting and Exchange Trust Agreement made as of December 22, 1999
between NPS Pharmaceuticals, Inc., and NPS Allelix Inc., and CIBC
Mellon Trust Company(11)
4.5 First Amendment to the Rights Agreement and Certificate of Compliance
with Section 27 thereof, dated December 31, 2001(14)
10.1 Stock Purchase Agreement between the Registrant and S.R. One, Limited,
dated November 18, 1993(1)
10.2 Amended Agreement and Waiver, among the Registrant and the other
parties thereto, dated November 18, 1993(1)
10.3 Form of Registrant's 1994 Non-Employee Directors' Stock Option Plan(1)
10.4 Form of Registrant's 1994 Equity Incentive Plan and Form of Stock
Option Agreements(1)
10.5 Registrant's 1987 Stock Option Plan, as amended, and Form of Stock
Option Agreement(1)
10.6 Form of Registrant's 1994 Employee Stock Purchase Plan and Form of
Offering Document(1)
10.7 Master Lease Agreement between the Registrant and LINC Scientific
Leasing, dated October 7, 1992, with related addenda(1)
10.8 Form of Indemnity Agreement entered into between the Registrant and
its officers and directors(1)
10.9* Collaborative Research and License Agreement between the Registrant
and SmithKline Beecham Corporation, now GlaxoSmithKline, dated
November 1, 1993(1)
10.10* Patent Agreement between the Registrant and The Brigham and Women's
Hospital, Inc., dated February 19, 1993, with related amendment(1)
10.11* Research Agreement between the Registrant and The Brigham and Women's
Hospital, Inc., dated February 19, 1993, with related amendment(1)
10.15* Collaborative Research and License Agreement between the Registrant
and Kirin Brewery Company, Ltd. dated June 29, 1995(3)
10.16* Development and License Agreement between the Registrant and Amgen
Inc. effective as of December 27, 1995(7)
10.17* Stock Purchase Agreement between Registrant and Amgen Inc. dated March
18, 1996(7)
10.18 Lease Agreement with GATX dated June 1, 1995, with related addenda(3)
10.19 Office Lease between Salt Lake Research Park Associates and Registrant
dated June 3, 1994, with related amendments(3)
10.20 Consultant Services Agreement between the Registrant and Thomas N.
Parks, Ph.D., dated January 30, 1989(1)
10.21 Consulting Agreement between the Registrant and Plexus Ventures, Inc.
dated August 5, 1994, as amended(2)
10.22* Binding Letter of Intent between Amgen Inc. and the Registrant dated
December 27, 1995(4)
10.23* Amendment effective February 7, 1996 to Research Agreement between the
Registrant and The Brigham and Women's Hospital, Inc. dated February
19, 1993(7)
10.24* Amendment effective February 7, 1996 to Patent Agreement between the
Registrant and The Brigham and Women's Hospital, Inc., dated February
19, 1993(7)
10.25* Amendment effective January 29, 1996 to the Collaborative Research and
License Agreement between the Registrant and GlaxoSmithKline, dated
November 1, 1993(7)
10.26 Form of Registrant's 1994 Employee Stock Purchase Plan and Form of
Offering Document as amended and adopted by the Board of Directors
dated December 1996(5)
10.27 Form of Registrant's 1994 Non-Employee Directors' Stock Option Plan as
amended and adopted by the Board of Directors dated December 1996(5)
10.28 Form of Registrant's 1994 Equity Incentive Plan as amended and adopted
by the Board of Directors dated December 1996(5)
10.29 Consulting Services Agreement between the Registrant and Donald E.
Kuhla, Ph.D. dated November 1, 1996(7)
10.30* Amendment Agreement between GlaxoSmithKline and NPS Pharmaceuticals,
Inc. dated October 28, 1996(6)
10.31 1997 Research Agreement Amendment between The Brigham and Women's
Hospital, Inc. and NPS Pharmaceuticals, Inc., effective March 1,
1997(7)
10.32 Research and Development Agreement between Systems Integration Drug
Discovery Company, Inc. (doing business as SIDDCO, Inc.) and NPS
Pharmaceuticals, Inc., dated July 16, 1997(8)
10.33 Amendment Agreement between GlaxoSmithKline and NPS Pharmaceuticals,
Inc., dated October 24, 1997(9)
10.34 Amendment Agreement between GlaxoSmithKline and NPS Pharmaceuticals,
Inc., dated October 27, 1997(9)
10.35 Amendment to the Collaborative Research and License Agreement between
GlaxoSmithKline and NPS Pharmaceuticals, Inc., dated November 26,
1997(9)
10.36 Stock Purchase Agreement between GlaxoSmithKline and NPS
Pharmaceuticals, Inc., dated November 26, 1997(9)
10.37 First Amendment to the Research & Development Agreement between
SIDDCO, INC. and NPS Pharmaceuticals, Inc.(10)
10.38 Consulting Services Agreement between Tamar Howson and NPS
Pharmaceuticals, Inc., dated July 3, 2000(12)
21.1 Subsidiaries of the Registrant
23.1 Consent of independent certified public accountants
24.1 Power of Attorney (incorporated in the signature page of the Form
10-K)
- ----------
* Confidential treatment has been granted.
33
(1) Incorporated herein by reference to the Company's Registration
Statement on Form S-1 filed January 21, 1994 (Commission File No.
33-74318).
(2) Incorporated herein by reference to the Company's Form 10-K for the
fiscal year ended December 31, 1994.
(3) Incorporated herein by reference to the Company's Form 10-K for the
fiscal year ended December 31, 1995.
(4) Incorporated herein by reference to the Company's Form 8-K dated
February 29, 1996.
(5) Incorporated herein by reference to the Company's Form S-8 dated
December 9, 1996.
(6) Incorporated herein by reference to the Company's Form 8-K dated
December 19, 1996.
(7) Incorporated herein by reference to the Company's Form 10-K for the
fiscal year ended December 31, 1996.
(8) Incorporated herein by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 1997.
(9) Incorporated herein by reference to the Company's Form 8-K dated
January 27, 1998.
(10) Incorporated herein by reference to the Company's Form 10-K for the
fiscal year ended December 31, 1997.
(11) Incorporated herein by reference to the Company's Definitive Proxy
Statement filed November 18, 1999.
(12) Incorporated herein by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 2000.
(13) Incorporated herein by reference to the Company's Registration
Statement on Form S-3 filed September 6, 2000 (Commission File No.
333-45274).
(14) Incorporated herein by reference to the Company's Form 8-A dated
December 31, 2001
(b) Reports on Form 8-K:
. none
(c) See Exhibits listed under Item 14(a)(3).
(d) The financial statement schedules required by this Item are
listed under Item 14(a)(2).
34
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 19th
day of March 2002.
NPS Pharmaceuticals, Inc.
By: /s/ JAMES U. JENSEN
-------------------------------------------
James U. Jensen, Vice President,
Corporate Development and Legal Affairs
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Hunter Jackson and James U. Jensen, and each of
them, his true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, and
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents or
their substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following person in the
capacities and on the date indicated.
Name Title Date
- ---- ----- ----
/s/ HUNTER JACKSON President, Chief Executive Officer, March 19, 2002
- ------------------------------------- and Chairman of the Board
Hunter Jackson, Ph.D.
/s/ ROBERT K. MERRELL Vice President, Finance, Chief Financial March 19, 2002
- ------------------------------------- Officer, and Treasurer (Principal Financial
Robert K. Merrell and Accounting Officer)
/s/ JAMES U. JENSEN Vice President, Corporate Development March 19, 2002
- -------------------------------------
James U. Jensen and Legal Affairs, Secretary, and Director
/s/ SANTO J. COSTA Director March 19, 2002
- -------------------------------------
Santo J. Costa
/s/ JOHN R. EVANS Director March 19, 2002
- -------------------------------------
John R. Evans
/s/ JAMES G. GRONINGER Director March 19, 2002
- -------------------------------------
James G. Groninger
35
/s/ JOSEPH KLEIN, III Director March 19, 2002
- -------------------------------------
Joseph Klein, III
/s/ DONALD E. KUHLA Director March 19, 2002
- -------------------------------------
Donald E. Kuhla, Ph.D.
/s/ THOMAS N. PARKS Director March 19, 2002
- -------------------------------------
Thomas N. Parks, Ph.D.
/s/ EDWARD RYGIEL Director March 19, 2002
- -------------------------------------
Edward Rygiel
/s/ CALVIN STILLER Director March 19, 2002
- -------------------------------------
Calvin Stiller, M.D.
/s/ PETER G. TOMBROS Director March 19, 2002
- -------------------------------------
Peter G. Tombros
36
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Table of Contents
Page
----
Independent Auditors' Report..................................................................... F-2
Consolidated Balance Sheets...................................................................... F-3
Consolidated Statements of Operations............................................................ F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss).................. F-5
Consolidated Statements of Cash Flows............................................................ F-12
Notes to Consolidated Financial Statements....................................................... F-13
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
NPS Pharmaceuticals, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of NPS
Pharmaceuticals, Inc. and subsidiaries (a development stage enterprise) as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity and comprehensive income (loss), and cash flows
for each of the years in the three-year period ended December 31, 2001, and for
the period from October 22, 1986 (inception) through December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NPS Pharmaceuticals,
Inc. and subsidiaries (a development stage enterprise) as of December 31, 2001
and 2000, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2001, and for the period
from October 22, 1986 (inception) through December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of recognizing revenue on nonrefundable licensing fees in
2000.
Salt Lake City, Utah
January 24, 2002,
except as to the note 3(d)
which is as of March 12, 2002
/s/ KPMG LLP
F-2
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Balance Sheets
(in thousands, except share data)
December 31,
---------------------
2001 2000
--------- --------
Assets
Current assets:
Cash and cash equivalents $ 39,142 131,083
Marketable investment securities (note 4) 168,376 115,853
Accounts receivable 8,609 523
Other current assets 3,228 1,129
--------- --------
Total current assets 219,355 248,588
--------- --------
Restricted marketable investment securities (note 4) -- 754
Plant and equipment (note 5):
Land 409 434
Building 1,097 1,164
Equipment 8,892 7,532
Leasehold improvements 2,988 2,767
--------- --------
13,386 11,897
Less accumulated depreciation and amortization 8,518 6,922
--------- --------
Net plant and equipment 4,868 4,975
Goodwill, net of accumulated amortization of $3,419 and
$1,814 at December 31, 2001 and 2000 6,838 9,072
Purchased intangible assets, net of accumulated
amortization of $3,230 and $1,714 at December 31, 2001 and 2000 3,913 5,867
Other assets 2 14
--------- --------
$ 234,976 269,270
========= ========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of obligations under capital leases (note 5) $ 4 305
Accounts payable 10,737 813
Accrued expenses 2,060 2,604
Accrued severance (note 11) 240 154
--------- --------
Total current liabilities 13,041 3,876
Obligations under capital leases, excluding current installments (note 5) -- 54
--------- --------
Total liabilities 13,041 3,930
--------- --------
Stockholders' equity (notes 6 and 7):
Preferred stock, $.001 par value. Authorized 5,000,000 shares;
none issued and outstanding -- --
Common stock, $.001 par value. Authorized 45,000,000 shares;
issued and outstanding 30,164,597 shares at December 31, 2001
and 29,691,472 shares at December 31, 2000 30 30
Additional paid-in capital 382,681 377,802
Deferred compensation (34) (800)
Accumulated other comprehensive income (loss) 261 (657)
Deficit accumulated during development stage (161,003) (111,035)
--------- --------
Total stockholders' equity 221,935 265,340
Commitments and contingencies (notes 3, 5, 7, and 13)
--------- --------
$ 234,976 269,270
========= ========
See accompanying notes to consolidated financial statements.
F-3
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Statements of Operations
(in thousands, except share data)
October 22,
1986
(inception)
Years ended December 31, through
------------------------------- December 31,
2001 2000 1999 2001
-------- ------- -------- ------------
Revenues from research and license agreements $ 10,410 7,596 3,445 73,519
Operating expenses:
Research and development 60,090 27,888 16,935 179,546
General and administrative 12,099 12,036 5,983 59,151
Amortization of goodwill and purchased intangibles 3,411 3,561 -- 6,972
In-process research and development acquired (note 2) -- -- 17,760 17,760
-------- ------- -------- --------
Total operating expenses 75,600 43,485 40,678 263,429
-------- ------- -------- --------
Operating loss (65,190) (35,889) (37,233) (189,910)
-------- ------- -------- --------
Other income (expense):
Interest income 12,010 4,836 1,812 28,552
Gain (loss) on sale of marketable investment securities 1,642 181 (102) 1,840
Gain (loss) on disposition of equipment, leasehold improvements,
and leases 11 (1,096) (131) (1,187)
Interest expense (5) (96) (4) (806)
Foreign currency transaction gain 51 137 -- 188
Other 1,813 315 4 2,138
-------- ------- -------- --------
Total other income 15,522 4,277 1,579 30,725
-------- ------- -------- --------
Loss before income tax expense (49,668) (31,612) (35,654) (159,185)
Income tax expense (note 8) 300 -- -- 1,318
-------- ------- -------- --------
Loss before cumulative effect of change in
accounting principle (49,968) (31,612) (35,654) (160,503)
Cumulative effect on prior years (to December 31, 1999) of
changing to a different revenue recognition method -- (500) -- (500)
-------- ------- -------- --------
Net loss $(49,968) (32,112) (35,654) (161,003)
======== ======= ======== ========
Basic and diluted loss per common and common-equivalent share:
Loss before cumulative effect of change in accounting principle $ (1.67) $ (1.32) $ (2.77)
Cumulative effect on prior years (to December 31, 1999) of
changing to a different revenue recognition method -- (0.02) --
-------- ------- --------
Net loss $ (1.67) $ (1.34) $ (2.77)
======== ======= ========
Pro forma amounts assuming the new revenue recognition method is applied
retroactively:
Net loss $(34,654)
========
Basic and diluted loss per common and common equivalent share $ (2.69)
========
Weighted average common and common-equivalent shares outstanding during the
year:
Basic and diluted 29,912 24,007 12,863
======== ======= ========
See accompanying notes to consolidated financial statements.
F-4
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
October 22, 1986 (inception) through December 31, 2001
(in thousands, except share data)
Accumulated
Deficit other
accumulated Compre- compre- Total
Additional Deferred during hensive hensive stock-
Preferred Common paid-in compen- development income income holders'
stock stock capital sation stage (loss) (loss) equity
--------- ------ ---------- -------- ----------- ------- ----------- --------
Balances, December 31, 1985 $-- -- -- -- -- -- --
Issuance of 1,125,000 shares of
common stock for cash
and equipment valued at
fair value upon incorporation
at October 22, 1986 -- 1 14 -- -- -- 15
Net loss -- -- -- -- (12) (12) -- (12)
------ --- ---
Comprehensive loss -- -- -- -- -- $ (12) -- --
--- --- --- --- --- ====== --- ---
Balances, December 31, 1986 -- 1 14 -- (12) -- 3
Repurchase of 375,000 shares
of common stock -- -- (5) -- -- -- (5)
Issuance of 82,500 shares of
common stock for services -- -- 1 -- -- -- 1
Net income -- -- -- -- 121 121 -- 121
------ --- ---
Comprehensive income -- -- -- -- -- $ 121 -- --
--- --- --- --- --- ====== --- ---
Balances, December 31, 1987 -- 1 10 -- 109 -- 120
Issuance of 55,556 shares of
preferred stock for cash 6 -- 294 -- -- -- 300
Issuance of 11,448 shares of
common stock for cash under
option plan -- -- 1 -- -- -- 1
Issuance of 97,500 shares of
common stock for services under
option plan -- -- 33 -- -- -- 33
Net loss -- -- -- -- (106) (106) -- (106)
------ --- ---
Comprehensive loss -- -- -- -- -- $ (106) -- --
--- --- --- --- --- ====== --- ---
Balances, December 31, 1988 6 1 338 -- 3 -- 348
Issuance of 37,037 shares of
preferred stock for cash 4 -- 336 -- -- -- 340
Issuance of 7,500 shares of
common stock for services under
option plan -- -- 3 -- -- -- 3
Net loss -- -- -- -- (5) (5) -- (5)
------ --- ---
Comprehensive loss -- -- -- -- -- $ (5) -- --
--- --- --- --- --- ====== --- ---
Balances, December 31, 1989 10 1 677 -- (2) -- 686
F-5
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
October 22, 1986 (inception) through December 31, 2001
(in thousands, except share data)
Accumulated
Deficit other
accumulated Compre- compre- Total
Additional Deferred during hensive hensive stock-
Preferred Common paid-in compen- development income income holders'
stock stock capital sation stage (loss) (loss) equity
--------- ------ ---------- -------- ----------- -------- ----------- --------
Issuance of 37,037 shares of
preferred stock for cash 3 -- 337 -- -- 340
Issuance of 2,475 shares of
common stock for cash under
option plan -- -- 1 -- -- -- 1
Net loss -- -- -- -- (213) (213) -- (213)
------
Comprehensive loss -- -- -- -- -- $ (213) -- --
----- ----- ------- ----- ------ ======= ----- ------
Balances, December 31, 1990 13 1 1,015 -- (215) -- 814
Issuance of 4,500 shares of
common stock for cash under
option plan -- -- 2 -- -- -- 2
Net loss -- -- -- -- (462) (462) -- (462)
------- ----- ------
Comprehensive loss -- -- -- -- -- $ (462) -- --
----- ----- ------- ----- ------ ======= ----- ------
Balances, December 31, 1991 13 1 1,017 -- (677) -- 354
Issuance of 3,675 shares of
common stock for cash under
option plan -- -- 2 -- -- -- 2
Issuance of 230,334 shares of
common stock upon conversion of
129,630 shares of preferred stock (13) -- 13 -- -- -- --
Repurchase and cancellation of
83,334 shares of common stock
for cash -- -- (300) -- -- -- (300)
Issuance of 781,250 shares of
preferred stock for cash, net of
offering costs 1 -- 4,937 -- -- -- 4,938
Issuance of 678,573 shares of
preferred stock for cash, net of
offering costs 1 -- 4,694 -- -- -- 4,695
Issuance of 101,452 shares of
common stock for services related
to preferred stock offering -- -- -- -- -- -- --
Net loss -- -- -- -- (2,607) (2,607) -- (2,607)
-------
Comprehensive loss -- -- -- -- -- $(2,607) -- --
--- -- ------- -- ------ ======= ----- ------
Balances, December 31, 1992 2 1 10,363 -- (3,284) -- 7,082
F-6
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
October 22, 1986 (inception) through December 31, 2001
(in thousands, except share data)
Accumulated
Deficit other
accumulated Compre- compre- Total
Additional Deferred during hensive hensive stock-
Preferred Common paid-in compen- development income income holders'
stock stock capital sation stage (loss) (loss) equity
--------- ------ ---------- -------- ----------- ------- ----------- --------
Issuance of 37,524 shares of
common stock for cash under
option plan -- -- 26 -- -- -- 26
Issuance of 583,334 shares of
preferred stock for cash, net
of offering costs -- -- 6,968 -- -- -- 6,968
Issuance of 6,050 shares of
preferred stock for services -- -- 73 -- -- -- 73
Deferred compensation related
to grant of stock options, net of
current year expense -- -- 766 (745) -- -- 21
Net loss -- -- -- -- (7,159) (7,159) -- (7,159)
-------
Comprehensive loss -- -- -- -- -- $(7,159) -- --
------ ------ ------ ------ ------- ======= ------ ------
Balances, December 31, 1993 2 1 18,196 (745) (10,443) -- 7,011
Issuance of 3,475,666 shares of
common stock upon conversion of
2,049,207 shares of preferred stock (2) 4 (2) -- -- -- --
Issuance of 2,000,000 shares of
common stock for cash, net of
offering costs -- 2 9,530 -- -- -- 9,532
Issuance of 20,000 shares of
common stock for services -- -- 96 -- -- -- 96
Issuance of 46,118 shares of
common stock for cash and options
for 432 shares under option plans -- -- 27 -- -- -- 27
Amortization of deferred compensation -- -- -- 255 -- -- 255
Net loss -- -- -- -- (6,756) (6,756) -- (6,756)
-------
Comprehensive loss -- -- -- -- -- $(6,756) -- --
------ ------ ------ ------ ------- ======= ------ ------
Balances, December 31, 1994 -- 7 27,847 (490) (17,199) -- 10,165
Issuance of 242,385 shares of
common stock for cash and options
for 14,816 shares under option plans -- -- 100 -- -- -- 100
Issuance of 39,771 shares of
common stock for cash under
employee purchase plan -- -- 110 -- -- -- 110
Issuance of 3,287 shares of
common stock for services -- -- 10 -- -- -- 10
Amortization of deferred compensation -- -- -- 255 -- -- 255
Net loss -- -- -- -- (3,318) (3,318) -- (3,318)
-------
Comprehensive loss -- -- -- -- -- $(3,318) -- --
------ ------ ------ ------ ------- ======= ------ ------
Balances, December 31, 1995 -- 7 28,067 (235) (20,517) -- 7,322
F-7 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
October 22, 1986 (inception) through December 31, 2001
(in thousands, except share data)
Accumulated
Deficit other
accumulated Compre- compre- Total
Additional Deferred during hensive hensive stock-
Preferred Common paid-in compen- development income income holders'
stock stock capital sation stage (loss) (loss) equity
--------- ------ ---------- -------- ----------- -------- ----------- --------
Issuance of 1,000,000 shares of
common stock for cash $ -- 1 7,499 -- -- -- 7,500
Issuance of 3,450,000 shares of
common stock for cash, net of
offering costs -- 4 47,909 -- -- -- 47,913
Issuance of 223,940 shares of
common stock for cash and options
for 5,746 shares under option plans -- -- 221 -- -- -- 221
Issuance of 24,814 shares of
common stock for services under
option plans -- -- 334 -- -- -- 334
Issuance of 18,147 shares of
common stock for cash under
employee purchase plan -- -- 110 -- -- -- 110
Issuance of 17,519 shares of
common stock for warrants for 2,731
shares upon exercise of warrants -- -- -- -- -- -- --
Consulting expense related to the
grant of stock options for services
rendered -- -- 130 -- -- -- 130
Amortization of deferred compensation -- -- -- 235 -- -- 235
Net income -- -- -- -- 6,105 6,105 -- 6,105
--------
Comprehensive income -- -- -- -- -- $ 6,105 -- --
------- ------- -------- ------ ------- ======== ------ -------
Balances, December 31, 1996 -- 12 84,270 -- (14,412) -- 69,870
Issuance of 160,000 shares of
common stock for cash -- -- 1,554 -- -- -- 1,554
Issuance of 211,554 shares of
common stock for cash and 11,864
shares under option plans -- -- 302 -- -- -- 302
Issuance of 11,200 shares of
common stock for services under
option plans -- -- 128 -- -- -- 128
Issuance of 20,343 shares of
common stock for cash under
employee purchase plan -- -- 160 -- -- -- 160
Net loss -- -- -- -- (11,695) (11,695) -- (11,695)
--------
Comprehensive loss -- -- -- -- -- $(11,695) -- --
------- ------- -------- ------ ------- ======== ------ -------
Balances, December 31, 1997 -- 12 86,414 -- (26,107) -- 60,319
F-8 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
October 22, 1986 (inception) through December 31, 2001
(in thousands, except share data)
Accumulated
Deficit other
accumulated Compre- compre- Total
Additional Deferred during hensive hensive stock-
Preferred Common paid-in compen- development income income holders'
stock stock capital sation stage (loss) (loss) equity
--------- ------ ---------- -------- ----------- -------- ----------- --------
Issuance of 204,000 shares of
common stock for cash $ -- -- 1,299 -- -- -- 1,299
Issuance of 124,252 shares of
common stock for cash under
option plans -- -- 243 -- -- -- 243
Issuance of 16,097 shares of
common stock for services under
option plans -- -- 121 -- -- -- 121
Issuance of 31,669 shares of
common stock for cash under
employee purchase plan -- -- 215 -- -- -- 215
Gross unrealized gains on
marketable securities 433
Reclassification for realized gains
on marketable securities (323)
--------
Net unrealized gains on marketable
investment securities -- -- -- -- -- 110 110 110
Net loss -- -- -- -- (17,162) (17,162) -- (17,162)
--------
Comprehensive loss -- -- -- -- -- $(17,052) -- --
-------- ------- ------- ------- -------- ======== ------ -------
Balances, December 31, 1998 -- 12 88,292 -- (43,269) 110 45,145
Issuance of 249,000 shares of
common stock for cash -- 1 1,323 -- -- -- 1,324
Issuance of 124,365 shares of
common stock for cash under
option plans -- -- 251 -- -- -- 251
Issuance of 15,062 shares of
common stock for services under
option plans -- -- 105 -- -- -- 105
Issuance of 38,034 shares of
common stock for cash under
employee purchase plan -- -- 222 -- -- -- 222
Issuance of 6,516,923 shares
and options and warrants to purchase
675,520 shares of common stock
in purchase business combination
(note 2) -- 7 44,746 -- -- -- 44,753
Compensation expense on stock option
issuances -- -- 97 -- -- -- 97
Gross unrealized loss on marketable
securities (266)
Reclassification for realized losses
on marketable securities 102
--------
Net unrealized losses on marketable
investment securities -- -- -- -- -- (164) (164) (164)
Net loss -- -- -- -- (35,654) (35,654) -- (35,654)
--------
Comprehensive loss -- -- -- -- -- $(35,818) -- --
-------- ------- ------- ------- -------- ======== ------ -------
Balances, December 31, 1999 -- 20 135,036 -- (78,923) (54) 56,079
F-9 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
October 22, 1986 (inception) through December 31, 2001
(in thousands, except share data)
Accumulated
Deficit other
accumulated Compre- compre- Total
Additional Deferred during hensive hensive stock-
Preferred Common paid-in compen- development income income holders'
stock stock capital sation stage (loss) (loss) equity
--------- ------ ---------- -------- ----------- -------- ----------- --------
Issuance of 3,900,000 shares of
common stock for cash (note 6) -- 4 43,314 -- -- -- 43,318
Issuance of 210,526 common
shares in exchange for minority
interest (note 6) -- -- 2,500 -- -- -- 2,500
Issuance of 168,492 shares of
common stock for cash (note 6) -- -- 2,000 -- -- -- 2,000
Issuance of 4,600,000 shares of
common stock for cash (note 6) -- 5 180,716 -- -- -- 180,721
Issuance of 1,254,791 shares of
common stock for cash of $11,109
and receivables of $193 under option
and warrant plans (note 6) -- 1 11,301 -- -- -- 11,302
Issuance of 10,700 shares of
common stock for services -- -- 241 -- -- -- 241
Issuance of 17,243 shares of
common stock for cash under
employee purchase plan -- -- 136 -- -- -- 136
Compensation expense on stock
option issuances -- -- 1,758 -- -- -- 1,758
Deferred compensation, net of
current year expense -- -- 800 (800) -- -- --
Gross unrealized gain on marketable
securities 426
Reclassification for realized gain/
losses on marketable securities (181)
--------
Net unrealized gains on marketable
investment securities -- -- -- -- -- 245 245 245
Foreign currency translation loss -- -- -- -- -- (848) (848) (848)
Net loss -- -- -- -- (32,112) (32,112) -- (32,112)
--------
Comprehensive loss -- -- -- -- -- $(32,715) -- --
-------- ------- ------- ------- -------- ======== ------- -------
Balances, December 31, 2000 -- 30 377,802 (800) (111,035) (657) 265,340
F-10 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
October 22, 1986 (inception) through December 31, 2001
(in thousands, except share data)
Accumulated
Deficit other
accumulated Compre- compre- Total
Additional Deferred during hensive hensive stock-
Preferred Common paid-in compen- development income income holders'
stock stock capital sation stage (loss) (loss) equity
--------- ------ ---------- -------- ----------- -------- ----------- --------
Issuance of 432,216 shares of
common stock for cash of $2,741
and receivables of $271 under option
and warrant plans (note 6) $ -- -- 3,012 -- -- -- 3,012
Issuance of 20,096 shares of
common stock for services -- -- 402 -- -- -- 402
Issuance of 20,813 shares of
common stock for cash under -- -- 337 -- -- -- 337
employee purchase plan
Compensation expense on stock
option issuances -- -- 1,894 -- -- -- 1,894
Deferred compensation, net of
current year expense -- -- (766) 766 -- -- --
Gross unrealized gain on marketable
securities -- -- -- -- -- 3,481 -- --
Reclassification for realized gain/losses
on marketable securities -- -- -- -- -- (1,642) -- --
--------
Net unrealized gains on marketable
investment securities -- -- -- -- -- 1,839 1,839 1,839
Foreign currency translation loss -- -- -- -- -- (921) (921) (921)
Net loss -- -- -- -- (49,968) (49,968) -- (49,968)
--------
Comprehensive loss -- -- -- -- -- $(49,050) -- --
--------- ------ ------- ------- -------- ======== -------- --------
Balances, December 31, 2001 $ -- 30 382,681 (34) (161,003) 261 221,935
========= ====== ======= ======= ======== ======== ========
See accompanying notes to consolidated financial statements.
F-11
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(in thousands)
October 22,
1986
(inception)
Years ended December 31, through
----------------------------------- December 31,
2001 2000 1999 2001
-------- -------- ------- ------------
Cash flows from operating activities:
Net loss (49,968) (32,112) (35,654) (161,003)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,066 5,428 1,196 17,204
Loss (gain) on disposition of equipment, leasehold improvements
and leases (11) 1,096 131 1,186
Realized loss (gain) on sale of marketable investment securities (1,642) (181) 102 (1,840)
Issuance of common and preferred stock in lieu of cash for services 402 241 105 1,678
Compensation expense on stock options 1,894 1,758 96 4,515
Write-off of in-process research and development -- -- 17,760 17,760
Decrease (increase) in operating assets:
Accounts receivable (8,182) 270 (325) (8,339)
Other current assets and other assets (1,655) (461) 125 (2,154)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and accrued severance 9,551 838 (1,703) 10,909
Deferred income -- (1,255) 94 (486)
-------- -------- ------- --------
Net cash used in operating activities (44,545) (24,378) (18,073) (120,570)
-------- -------- ------- --------
Cash flows from investing activities:
Net sale (purchase) of marketable investment securities (48,406) (93,118) 7,129 (153,995)
Acquisitions of equipment and leasehold improvements (1,682) (273) (641) (11,883)
Proceeds from sale of equipment 11 199 -- 1,286
Cash paid for acquisition, net of cash received -- -- (676) (676)
-------- -------- ------- --------
Net cash provided by (used in) investing activities (50,077) (93,192) 5,812 (165,268)
-------- -------- ------- --------
Cash flows from financing activities:
Proceeds from note payable to bank -- -- -- 124
Proceeds from issuance of preferred stock -- -- -- 17,581
Proceeds from issuance of common stock 3,271 237,284 1,797 311,680
Proceeds from long-term debt -- -- -- 1,166
Principal payments on note payable to bank -- -- -- (124)
Principal payments under capital lease obligations (344) (367) (26) (2,157)
Principal payments on long-term debt -- (1,490) (9) (2,854)
Repurchase of preferred stock -- -- -- (300)
-------- -------- ------- --------
Net cash provided by financing activities 2,927 235,427 1,762 325,116
-------- -------- ------- --------
Effect of exchange rate changes on cash (246) 110 -- (136)
-------- -------- ------- --------
Net increase (decrease) in cash and cash equivalents (91,941) 117,967 (10,499) 39,142
Cash and cash equivalents at beginning of period 131,083 13,116 23,615 --
-------- -------- ------- --------
Cash and cash equivalents at end of period 39,142 131,083 13,116 39,142
======== ======== ======= ========
Supplemental disclosures of cash flow information:
Cash paid for interest 5 96 4 806
Cash paid for taxes 300 -- -- 1,318
Supplemental schedule of noncash investing and financing activities:
Acquisition of equipment through incurrence of capital lease obligations -- -- -- 1,478
Acquisition of leasehold improvements through incurrence of debt -- -- -- 197
Issuance of stock for stock subscription receivable 271 193 -- 4,271
Unrealized (loss) gain on marketable investment securities 1,839 245 (164) 2,030
See accompanying notes to consolidated financial statements.
F-12
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Organization and Summary of Significant Accounting Policies
The consolidated financial statements are comprised of the financial
statements of NPS Pharmaceuticals, Inc. (NPS) and its subsidiaries,
collectively referred to as the Company. The Company, a development stage
enterprise, is engaged in the discovery, development and commercialization
of pharmaceutical products. Since inception, the Company's principal
activities have been performing research and development, raising capital,
and establishing research and license agreements. The following significant
accounting policies are followed by the Company in preparing its
consolidated financial statements:
(a) Cash Equivalents
The Company considers all highly liquid investments with maturities at
the date of purchase of three months or less to be cash equivalents.
Cash equivalents consist of commercial paper, money market funds, and
debt securities of approximately $36.2 million and $125.8 million at
December 31, 2001 and 2000, respectively. At December 31, 2001 and
2000, the book value of cash equivalents approximates fair value.
(b) Revenue Recognition
The Company earns revenue from research and development support
payments, license fees, and milestone payments. The Company recognizes
revenue from its research and development support agreements as
related research and development costs are incurred and from milestone
payments as agreed-upon events representing the achievement of
substantive steps in the development process are achieved and where
the amount of the milestone payments approximates the value of
achieving the milestone. Cash received in advance of the performance
of the related research and development support is recorded as
deferred income.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101, Revenue Recognition (SAB No. 101),
to provide guidance on the recognition, presentation and disclosure of
revenue in financial statements. SAB No. 101 explains the SEC's
general framework for revenue recognition.
The Company adopted SAB No. 101 in the fourth quarter of 2000 and in
accordance with Accounting Principles Board (APB) Opinion No. 20,
Accounting Changes, and Statement of Financial Accounting Standards
(SFAS) No. 3, Reporting Accounting Changes in Interim Financial
Statements, results of operations for the first, second, and third
quarter of 2000 have been restated to reflect the new revenue
recognition policy. The effect of the adoption of SAB No. 101 on
retained earnings as of January 1, 2000 has been reflected as a
cumulative effect of change in accounting principle in the net loss
for the year ended December 31, 2000. Prior to September 30, 2000, the
Company recognized revenue from nonrefundable license fees at the
inception of an agreement when the Company had no further obligations
relative to such licensing fees. Upon adoption of SAB No. 101, the
Company changed its revenue recognition policy with respect to
nonrefundable licensing fees.
Based on the criteria included in SAB No. 101, the Company concluded
that nonrefundable license fees should be recognized over the period
wherein the Company has continuing involvement. The cumulative effect
includes the reversal of $500,000 related to revenue recognized in
prior periods, which was then recognized in the year ended December
31, 2000; as such, the net loss did not change for the year ended
December 31, 2000. Prior year consolidated financial statements have
not been restated to reflect the change in accounting principle.
(c) Plant and Equipment
Plant and equipment are stated at cost. Equipment under capital lease
is stated at the lower of the present value of minimum lease payments
at the beginning of the lease term or fair value of the equipment at
the inception of the lease.
F-13 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
Depreciation of plant is calculated on the straight-line method over
its estimated useful life of 15 years. Depreciation and amortization
of equipment (including equipment held under capital lease) are
calculated on the straight-line method over their estimated useful
lives of 3 to 5 years. Leasehold improvements are amortized using the
straight-line method over the shorter of the life of the asset or
remainder of the lease term. Amortization of assets held under capital
lease is included with depreciation and amortization expense.
(d) Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases, operating loss, and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(e) Loss per Common Share
Basic loss per common share is the amount of loss for the period
applicable to each share of common stock outstanding during the
reporting period. Diluted loss per common share is the amount of loss
for the period applicable to each share of common stock outstanding
during the reporting period and to each share that would have been
outstanding assuming the issuance of common shares for all dilutive
potential common shares outstanding during the period.
Potential common shares of approximately 2.6 million, 2.5 million, and
3.1 million during the years ended December 31, 2001, 2000, and 1999,
respectively, that could potentially dilute basic earnings per share
in the future were not included in the computation of diluted loss per
share because to do so would have been antidilutive for the period.
(f) Stock-Based Compensation
The Company employs the footnote disclosure provisions of SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages
entities to adopt a fair-value based method of accounting for stock
options or similar equity instruments. However, it also allows an
entity to continue measuring compensation cost for stock-based
compensation using the intrinsic-value method of accounting prescribed
by APB Opinion No. 25, Accounting for Stock Issued to Employees (APB
25). The Company has elected to continue to apply the provisions of
APB 25 and provide pro forma footnote disclosures required by SFAS No.
123. The Company uses the straight-line method of amortization for
stock-based compensation.
(g) Use of Estimates
Management of the Company has made estimates and assumptions relating
to reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial
statements in conformity with accounting principles generally accepted
in the United States of America. Actual results could differ from
those estimates.
(h) Marketable Investment Securities
The Company classifies its marketable investment securities as
available-for-sale. Available-for-sale securities are recorded at fair
value. Unrealized holding gains and losses, net of the related tax
effect, are excluded from earnings and are reported as a separate
component of stockholders' equity until realized. A decline in the
market value below cost that is deemed other than temporary is charged
to results of operations resulting in the establishment of a new cost
basis for the security. Premiums and discounts are amortized or
accreted over the
F-14 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
life of the related security as adjustments to yield using the
effective-interest method. Interest income is recognized when earned.
Realized gains and losses from the sale of marketable investment
securities are included in results of operations and are determined on
the specific-identification basis.
(i) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all subsidiaries in which it owns a majority voting
interest. Investments in a limited partnership and in nonpublic
corporations in which the Company has the ability to exercise
significant influence, but not control, are accounted for by the
equity method. The Company carries one other investment in a nonpublic
corporation at cost, and the Company eliminates all intercompany
accounts and transactions in consolidation. The Company reports all
monetary amounts in U.S. dollars unless specified otherwise.
(j) Goodwill and Other Purchased Intangibles
Goodwill and other purchased intangibles represent the excess of the
purchase price over the fair value of the net tangible assets acquired
in connection with the acquisition of Allelix Biopharmaceuticals Inc.
(Allelix) on December 23, 1999. The excess purchase price includes
goodwill, assembled work force, and patents which are being amortized
using the straight-line basis over lives ranging from two to six
years.
(k) Accounting for Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of their carrying amount or fair value less cost
to sell.
(l) Foreign Currency Translation
The local foreign currency is the functional currency for the
Company's foreign subsidiaries. Assets and liabilities of foreign
operations are translated to U.S. dollars at the current exchange
rates as of the applicable balance sheet date. Revenues and expenses
are translated at the average exchange rates prevailing during the
period. Adjustments resulting from translation are reported as a
separate component of stockholders' equity. Certain transactions of
the foreign subsidiaries are denominated in currencies other than the
functional currency, including transactions with the parent company.
Transaction gains and losses are included in other income (expense)
for the period in which the transaction occurs. The Company's
subsidiaries operating in Canada had net assets of approximately $8.8
million and $20.4 million as of December 31, 2001 and 2000,
respectively.
(m) Operating Segments
The Company is engaged in the discovery, development, and
commercialization of pharmaceutical products and in its current state
of development, considers its operations to be a single reportable
segment. Financial results of this reportable segment are presented in
the accompanying consolidated financial statements. The Company's only
non-United States revenues relate to the Company's Canadian subsidiary
and represent 22 percent and 30 percent of the Company's total
revenues for the years ended December 31, 2001 and 2000, respectively.
There was no non-United States revenue for the year ended December 31,
1999.
(n) Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other
gains and losses affecting stockholders' equity that, under accounting
principles generally accepted in the United States of America, are
excluded from
F-15 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
net income (loss). For the Company, these consist of net unrealized
gains or losses on marketable investment securities and foreign
currency translation gains and losses.
(o) Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) Business Acquisition
On December 23, 1999, the Company acquired all of the outstanding common
stock of Allelix for 6,516,923 shares of the Company's common stock,
including 3,476,009 exchangeable shares as discussed more fully in note
6(b), which was valued at approximately $42.8 million. In addition, the
Company converted all outstanding Allelix options and warrants into options
to purchase approximately 675,520 shares of common stock of the Company
with a fair value of approximately $1.9 million and incurred transaction
costs of approximately $1.5 million. There are no outstanding warrants as
of December 31, 2001. The acquisition was accounted for by the purchase
method. Although the acquisition closed on December 23, 1999, for
accounting purposes, it was recorded on December 31, 1999, as the operating
results from December 23, 1999 to December 31, 1999 were not material.
The total purchase price and final allocation among the tangible and
intangible assets and liabilities acquired (including acquired in-process
research and development) is summarized as follows (in thousands):
Total purchase price:
Total stock consideration $42,816
Value of options and warrants assumed 1,937
Transaction costs 1,488
-------
$46,241
=======
Amortization
period (years)
--------------
Purchase price allocation:
Net tangible assets acquired $ 16,997
Net liabilities assumed (7,566)
Intangible assets:
Assembled workforce 680 2
Patents 7,140 5
Goodwill 11,230 6
In-process research and development 17,760 Expensed
--------
$ 46,241
========
Unaudited pro forma net revenue of $10.2 million, net loss of $36.8
million, and basic and diluted net loss per share of $1.90 for the year
ended December 31, 1999 presents the combined results of operations of NPS
and Allelix as if the acquisition had occurred as of the beginning of 1999
after giving effect to adjustments, including, but not limited to,
amortization of goodwill and purchased intangibles, and entries to conform
Allelix to the Company's accounting policies. The $17.8 million write-off
for acquired in-process research and development has been excluded from the
pro forma results as it is a nonrecurring charge. The pro forma financial
information does not necessarily reflect the results of operations that
would have occurred had NPS and Allelix constituted a single entity during
such periods.
F-16 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
The Company recorded an expense of $17.8 million in December 1999 for
in-process research and development that was acquired as part of the
Company's purchase of Allelix. The acquired in-process research and
development consisted of five drug development programs, of which PREOS(TM)
(human parathyroid hormone), formerly known as ALX1-11, for osteoporosis,
and ALX-0600, for gastrointestinal disorders, accounted for 83 percent of
the total value.
The Company determined the fair value assigned to the in-process research
and development by estimating the total costs to develop the product
candidates into commercially viable products (i.e., to obtain FDA
approval). The Company then discounted the projected net cash flows related
to these product candidates back to their present value using a
risk-adjusted discount rate. At the date of the acquisition, the product
candidates had not yet received FDA approval and had no alternative future
uses.
Since the date of the acquisition, the Company revised its plans for the
next series of clinical trials for PREOS and ALX-0600. The Company started
a pivotal Phase III clinical trial with PREOS. The Company also started
enrolling a small number of patients in a pilot Phase II clinical trial
with ALX-0600. Since the date of acquisition, and through December 31,
2000, the Company has incurred development costs of approximately $55.1
million for PREOS and $4.8 million for ALX-0600. Total development costs
and time-to-completion for each of these product candidates will depend on
the costs the Company incurs to conduct current clinical trials and any
additional testing that is necessary to obtain FDA approval.
The Company believes the assumptions used in the valuation of the
in-process research and development acquired from Allelix were reasonable
at the time of the acquisition. However, the Company has modified
development plans as new data has become available regarding each product
candidate. Accordingly, actual results may vary from the projected results
in the valuation.
(3) Collaborative and License Agreements
The Company is pursuing product development both on an independent basis
and in collaboration with others. Because the Company has granted exclusive
development, commercialization, and marketing rights to each party
(Licensee) under certain of the below described collaborative research,
development and license agreements, the success of each program is
dependent upon the efforts of the Licensee. Each of the respective
agreements may be terminated early. If any of the Licensees terminates an
agreement, such termination may have a material adverse effect on the
Company's operations. Following is a description of significant current
collaborations and license agreements:
(a) Amgen Inc.
Effective December 1995, the Company entered into a development and
license agreement with Amgen Inc. (Amgen) to develop and commercialize
compounds for the treatment of hyperparathyroidism and indications
other than osteoporosis. Amgen paid the Company a $10.0 million
nonrefundable license fee and agreed to pay up to $400,000 per year in
development support for five years, potential additional development
milestone payments totaling $26.0 million, and royalties on any future
product sales. The funded development period expired in 2000. Amgen is
required to pay all costs of developing and commercializing products.
Amgen received exclusive worldwide rights excluding Japan, China,
Korea, and Taiwan. Amgen is an equity investor in the Company. The
Company recognized research and licensing revenue of $3.0 million in
2001 and $400,000 in 2000 and 1999, respectively, under the contract.
(b) AstraZeneca
In March 2001, the Company entered into a collaborative effort with
AstraZeneca AB (AstraZeneca) to discover, develop and market new small
molecule therapies for the treatment of various disorders of the
central nervous system. Under the terms of the agreement, the Company
licensed to AstraZeneca its proprietary technology related to protein
structures known as metabotropic glutamate receptors (mGluRs).
Additionally,
F-17 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
the Company granted AstraZeneca exclusive rights to commercialize
mGluRs subtype-selective compounds. If certain milestones are met, the
Company may receive milestone payments of up to $30.0 million and
royalties on sales of products that include those compounds. During
the five-year research term, the Company and AstraZeneca will work
together on the identification of mGluR-active compounds. The Company
is required to co-direct the research and pay for an equal share of
the research costs through a minimum of 30 months and, under certain
circumstances, for the full term of 60 months. Once compounds have
been selected for development, AstraZeneca will conduct and fund
product development. The Company has the right to co-promote any
resulting product in the United States and Canada and receive
co-promotion revenue, if any. Should the Company elect to co-promote
products, in some circumstances it will be required to share in the
development and regulatory costs associated with those products and
the Company may not receive some late-stage milestone payments.
(c) Eli Lilly and Company and Lilly Canada
In December 1989, Allelix entered into a collaborative research and
license agreement with Lilly. Lilly is solely responsible for
development, preclinical and clinical testing and commercialization of
any products related to excitatory amino acid receptors under the
collaboration, and has an exclusive worldwide license to manufacture
and market products developed under the agreement. The Company is
entitled to royalties on any sales of products developed under the
agreement. The Company recognized research and licensing revenue of
$1.7 million in 2000. The funded research period expired in November
2000.
(d) Forest Laboratories, Inc.
In August 2000, the Company entered into an exclusive worldwide
license with Forest Laboratories, Inc. for the development and
commercialization of ALX-0646. Under the Forest agreement, the Company
has recognized research and licensing revenues of $1.0 million and
$200,000 in 2001 and 2000, respectively. On March 12, 2002, the
Company received notice from Forest that it was terminating the
agreement and returning all rights to ALX-0646 to the Company.
(e) GlaxoSmithKline
Effective November 1, 1993, the Company entered into an agreement with
GalxoSmithKline (GSK) to collaborate on the discovery, development and
marketing of drugs to treat osteoporosis and other bone metabolism
disorders, excluding hyperparathyroidism. The GSK agreement
established a three-year research collaboration between the parties,
which was extended through October 2001. The Company and GSK have
agreed to continue the funded research on a month-to-month basis.
Under the GSK agreement, the Company granted GSK the exclusive license
to develop and market worldwide compounds described under the GSK
agreement, subject to the Company's right to co-promote in the United
States. Once compounds have been selected for development, GSK has
agreed to conduct and fund all development of such products, including
all human clinical trials and regulatory submissions.
Under the GSK agreement, the Company has recognized research and
licensing revenue of $750,000, $1.8 million, and $2.0 million in 2001,
2000, and 1999, respectively. The Company is entitled to receive
additional payments upon the achievement of specific development and
regulatory milestones. The Company is entitled to receive royalties on
sales of such compounds by GSK and a share of the profits from
co-promoted products.
GSK is an equity investor in the Company.
F-18 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(f) Janssen Pharmaceutica N.V.
On October 30, 1998, Allelix entered into a collaborative agreement
with Janssen Pharmaceutica N.V. (Janssen), a wholly owned subsidiary
of Johnson & Johnson, for the research, development, and marketing of
new drugs for neuropsychiatric disorders. Under the terms of the
agreement, the Company may receive total milestone payments of up to
$21.5 million and royalties from any product sales under this license.
Janssen has the right to market products worldwide, subject to an NPS
Allelix option for co-promotion in Canada. Under the Janssen
agreement, the Company has recognized research and licensing revenue
of $1.0 million and $1.9 million in 2001 and 2000, respectively. The
funded research period expired in November 2000.
Johnson & Johnson Development Corporation, an affiliate of Janssen, is
an equity investor in the Company.
(g) Kirin Brewery Company, Limited
Effective June 30, 1995, the Company entered into a five-year
agreement with the pharmaceutical division of Kirin Brewery Company,
Ltd., a Japanese company (Kirin), to develop and commercialize
compounds for the treatment of hyperparathyroidism in Japan, China,
Korea, and Taiwan. Kirin paid the Company a $5.0 million license fee
and agreed to pay up to $7.0 million in research support, potential
additional milestone payments totaling $13.0 million, and royalties on
product sales. Kirin research support payments were $500,000 per
quarter through June 1997 and were $250,000 per quarter through June
2000. The funded research period expired in 2000. Any payments
subsequent to June 2000 represent milestone and royalty payments.
Kirin received exclusive rights to develop and sell products within
its territory. The parties participate in a collaborative research
program utilizing the Company's parathyroid calcium receptor
technology.
The Company recognized research and licensing revenue of $3.0 million,
$500,000 and $1.0 million in 2001, 2000 and 1999, respectively.
Additionally, as a consequence of implementing SAB No. 101, the
Company recognized $500,000 of revenue during 2000 for licensing fees
paid by Kirin as part of the $5.0 million license fee which was
initially recognized in 1995.
(h) Technology Partnerships Canada
In November 1999, Allelix entered into an agreement with the
government of Canada pursuant to the Technology Partnerships Canada
program, which provides for the Canadian government to reimburse the
Company for research expenses incurred pursuing treatments for various
intestinal disorders utilizing the ALX-0600 technology. Under the
terms of the agreement, the Canadian government will reimburse the
Company for 30 percent of the qualified costs incurred through
December 2002 up to a maximum of Cdn. $8.4 million. As of December 31,
2001, a total of Cdn. $4.7 million had been invoiced by both Allelix,
prior to the effective date of the acquisition, and the Company, for
reimbursement under the terms of the agreement. As a result of the
funding, the Company will pay a 10 percent royalty to the Canadian
government on revenues received through December 2008 from the sale or
license of any product developed from the funded research. If such
payments have not reached a total of Cdn. $23.9 million by that date,
then royalty payments shall continue until that amount is reached or
until December 2017, whichever occurs first. If the Canadian
government declares an event of default under the agreement, the
Company could be required to repay all amounts received from Canada,
plus interest and other damages. The Company recognized $1.3 million
and $404,000 as research support revenue in 2001 and 2000,
respectively.
(i) In-License and Purchase Agreements
The Company has entered into certain sponsored research, license, and
purchase agreements that require the Company to make research support
and milestone payments to academic or commercial research
institutions. During 2001, 2000, and 1999, the Company paid to these
institutions $885,000, $1.0 million, and $1.4 million, respectively,
in sponsored research payments and license fees. As of December 31,
2001, the Company had a total commitment of up to $1.8 million for
future research support and milestone payments. Depending on the
commercial success of certain products, the Company may be required to
pay license fees or royalties.
F-19 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(4) Marketable Investment Securities
Investment securities available for sale as of December 31, 2001 are
summarized as follows (in thousands):
Gross
Gross unrealized
Amortized unrealized holding
cost holding gains losses Fair value
--------- ------------- ---------- ----------
Equity securities:
Common stock $ 1 -- -- 1
Preferred stock 4,000 -- -- 4,000
Debt securities:
Treasury 23,040 35 -- 23,075
Corporate 84,651 1,611 -- 86,262
Municipal 4,000 -- -- 4,000
Government agency 50,654 403 (19) 51,038
-------- ------- -------- --------
$166,346 2,049 (19) 168,376
======== ======= ======== ========
Investment securities available for sale as of December 31, 2000 are
summarized as follows (in thousands):
Gross
Gross unrealized
Amortized unrealized holding
cost holding gains losses Fair value
--------- ------------- ---------- ----------
Equity securities:
Common stock $ 1 1 -- 2
Preferred stock 2,500 -- -- 2,500
Debt securities:
Treasury 18,021 52 -- 18,073
Corporate 19,245 33 (7) 19,271
Commercial paper 13,548 3 -- 13,551
Municipal 26,010 -- (1) 26,009
Government agency 37,091 110 -- 37,201
--------- --- --- -------
116,416 199 (8) 116,607
Less marketable investment securities
classified as restricted (754) -- -- (754)
--------- ----- ----- -------
$ 115,662 199 (8) 115,853
========= ===== ===== =======
F-20 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
Maturities of investment securities available for sale are as follows at
December 31, 2001 (in thousands):
Amortized cost Fair value
-------------- ----------
Due within one year $ 21,603 21,734
Due after one year through five years 140,279 142,166
Due between five and ten years 463 475
-------- -------
Total debt securities 162,345 164,375
Equity securities 4,001 4,001
-------- -------
$166,346 168,376
======== ========
For the years ended December 31, 2001, 2000, and 1999, purchases of
marketable investment securities were $422.7 million, $314.1 million, and
$73.6 million, respectively. For the years ended December 31, 2001, 2000,
and 1999, sales and maturities of marketable investment securities were
$374.3 million, $221.0 million, and $80.8 million, respectively.
(5) Leases
The Company is obligated under one capital lease for certain equipment that
expires in May 2002. Future minimum lease payments on capital leases are
$4,000. The Company also has noncancelable operating leases for office and
laboratory space that expire in 2004 and noncancelable operating leases for
certain equipment that expire in 2006. Rental expense for these operating
leases was approximately $1.1 million, $1.1 million and $895,000 for 2001,
2000, and 1999, respectively. The future lease payments under noncancelable
operating leases as of December 31, 2001 are as follow (in thousands):
Operating leases
----------------
Year ending December 31:
2002 $ 689
2003 707
2004 526
2005 5
2006 3
-------
Total minimum lease payments $ 1,930
=======
At December 31, 2001 and 2000, the gross amount of equipment and related
accumulated amortization recorded under capital leases were as follows (in
thousands):
2001 2000
--------- -------
Equipment $ 1,630 1,649
Less accumulated amortization (1,581) (1,489)
--------- -------
Net equipment $ 49 160
========= =======
F-21 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(6) Capital Stock
(a) Stockholders Rights Plan
In December 1996, the Board of Directors approved the adoption of a
Stockholder Rights Plan (the Rights Plan). The Rights Plan was
subsequently amended on December 31, 2001 to increase the purchase
price of a share of Series A Junior Participating Preferred Stock and
to extend the expiration date of the Rights Plan. The Rights Plan
provides for the distribution of a preferred stock purchase right
(Right) as a dividend for each outstanding share of the Company's
common stock. This Right entitles stockholders to acquire stock in the
Company or in an acquirer of the Company at a discounted price in the
event that a person or group acquires 20 percent or more of the
Company's outstanding voting stock or announces a tender or exchange
offer that would result in ownership of 20 percent or more of the
Company's stock. Each right entitles the registered holder to purchase
from the Company 1/100th of a share of Series A Junior Participating
Preferred Stock, par value $0.001 per share at a price of $300 per
1/100th of a preferred share, subject to adjustment. The Rights may
only be exercised on the occurrence of certain events related to a
hostile takeover of the Company as described above. In any event, the
Rights will expire on December 31, 2011. The Rights may be redeemed by
the Company at $0.01 per right at any time prior to expiration or the
occurrence of an event triggering exercise. At December 31, 2001, the
Rights were not exercisable.
(b) Exchangeable Shares of NPS Allelix Inc.
On December 23, 1999, in connection with the acquisition of all of the
outstanding common shares of Allelix, NPS Allelix Inc., an acquisition
subsidiary of the Company, issued 3,476,009 exchangeable shares to
certain Canadian stockholders of Allelix in exchange for their shares
of Allelix. The exchangeable shares are designed to be the functional
and economic equivalent of the Company's common stock, and were issued
to such stockholders in lieu of shares of the Company's common stock
because of Canadian tax considerations. The terms and conditions of
the exchangeable share provisions provide each Canadian registered
holder with the following rights:
i) the right to exchange such exchangeable shares for the Company's
common stock on a one-for-one basis at any time;
ii) the right to receive dividends, on a per share basis, in amounts
(or property in the case of non-cash dividends) which are the
same as, and which are payable at the same time as, dividends
declared on the Company's common stock;
iii) the right to vote, on a per share equivalent basis, at all
stockholder meetings at which the holders of the Company's common
stock are entitled to vote; and
iv) the right to participate, on a per share equivalent basis, in a
liquidation, dissolution or other winding-up of the Company, on a
pro rata basis with the registered holders of the Company's
common stock in the distribution of assets of the Company,
through the medium of a mandatory exchange of exchangeable shares
for the Company's common stock.
The exchangeable shares are exchangeable at any time by their holder
solely into shares of the Company's common stock on a one-for-one
basis. On or after December 31, 2004, the Company has the right to
cause the exchange of all outstanding exchangeable shares for shares
of the Company's common stock on a one-for-one basis. Also, the
Company has the right to effect such an exchange at any time (i) if
there are fewer than 1,000,000 exchangeable shares outstanding (other
than those held by the Company and its affiliates); or (ii) on or
after the occurrence of a change in control of the Company where it is
not reasonably practicable to substantially replicate the existing
terms and conditions of the exchangeable shares in connection with
such a transaction. As of December 31, 2001, the Company had 444,597
exchangeable shares outstanding.
F-22 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
The exchangeable shares do not have liquidation rights in NPS Allelix
Inc. and, as such, the consolidated financial statements do not
include minority interest.
The Company has created a special voting share, not separately
disclosed on the consolidated balance sheets, held in trust as a
mechanism to accomplish the voting rights objectives of the
exchangeable shares which are included as outstanding common shares on
the Company's consolidated balance sheets.
(c) Capital Stock Transactions
In February 2000, the Company completed a private placement of 3.9
million shares of its common stock to selected institutional and other
accredited investors which closed on April 24, 2000, with net
proceeds, after deducting offering costs of $3.5 million, to the
Company of approximately $43.3 million.
In March 2000, 80,000 options held by management with an exercise
price per option of $6.625 vested upon the signing of a license
agreement. The Company recognized compensation expense of $990,000 as
a result of the vesting.
On May 2, 2000, the Company issued 210,526 shares of common stock in
exchange for 1,000 preferred shares of NPS Allelix Inc. that were
recorded as a minority interest of $2.5 million at December 31, 1999.
The value of the minority interest was allocated using the purchase
method effective December 31, 1999 as the amount was fixed and
determinable based upon contractual terms of the exchange. The
minority interest was eliminated upon issuance of the common shares.
On May 11, 2000, the Company sold 168,492 shares of its common stock
for $2.0 million based upon the average of the bid and ask prices of
the Company's common stock during a period of 20 consecutive trading
days prior to the sale under the terms of an on-going corporate
license agreement. The fair value on May 11, 2000 of the shares issued
on the closing date was $2,021,904.
In November 2000, the Company completed a public offering of 4.6
million shares of its common stock at $42.00 per share, with net
proceeds, after deducting offering costs of $12.5 million, to the
Company of approximately $180.7 million.
As of December 31, 2001 and 2000, other current assets included
$271,000 and $193,000, respectively, in amounts receivable for stock
options recently exercised. Such amounts were collected shortly after
the respective year-ends.
(7) Stock-Based Compensation Plans
As of December 31, 2001, the Company has four stock option plans: the 1987
Stock Option Plan (the 1987 Plan), the 1994 Equity Incentive Plan (the 1994
Plan), the 1994 Non-employee Directors' Stock Option Plan (the Directors'
Plan), and the 1998 Stock Option Plan (the 1998 Plan). An aggregate of
4,023,909 shares are authorized for issuance under the four plans.
As of December 31, 2001, there are no shares reserved for future grant
under the 1987 Plan, there are 279,034 shares reserved for future grant
under the 1994 Plan, there are 12,530 shares reserved for future grant
under the Directors' Plan, and there are 1,100,400 shares reserved for
future grant under the 1998 Plan. Under the Company's 1994 Plan and the
1998 Plan, the exercise price of options granted is generally not less than
the fair market value on the date of grant. The number of shares, terms,
and exercise period are determined by the Board of Directors on an
option-by-option basis, and the exercise period does not extend beyond ten
years from the date of the grant.
F-23 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
Under the Directors' Plan, each new director who is not an employee of the
Company is initially granted options to purchase 15,000 shares of common
stock. Additional options for 3,000 shares are granted annually for each
year of service. The exercise price of options granted is the fair market
value on the date of grant.
On March 26, 2001, the Company modified the 1994 Plan and the 1998 Plan
such that all outstanding options at the date of modification vest upon a
change in control of the Company. The March 26, 2001 intrinsic value of the
remaining unvested modified options is $8.7 million at December 31, 2001.
The Company has not recorded compensation expense for the intrinsic value
of unvested options as a change in control is not considered likely as of
December 31, 2001. At such time that a change in control is considered
likely, the Company may incur a charge to compensation expense.
The Company also has an Employee Stock Purchase Plan (the Purchase Plan)
whereby qualified employees are allowed to purchase limited amounts of the
Company's common stock at the lesser of 85 percent of the market price at
the beginning or end of the offering period. The Company has authorized
260,000 shares for purchase by employees. Employees purchased 20,813,
17,243 and 38,034 shares under the Purchase Plan in the years ended
December 31, 2001, 2000 and 1999, respectively, and 73,981 shares remain
available for future purchase.
A summary of activity related to aggregate options under all four plans is
indicated in the following table (shares in thousands):
Years ended December 31,
---------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
average average average
Number exercise Number exercise Number exercise
of shares price of shares price of shares price
--------- --------- --------- --------- --------- ---------
Options outstanding at
beginning of year 2,485 $ 8.74 2,821 $ 7.19 2,306 $7.01
Options granted 694 29.24 709 13.33 418 5.07
Options assumed in
acquisition -- -- -- -- 407 9.24
----- ----- -----
3,179 3,530 3,131
----- ----- -----
Options exercised 460 7.40 973 7.34 145 2.70
Options canceled 87 18.68 72 12.10 165 8.31
----- ----- -----
547 1,045 310
----- ----- -----
Options outstanding at end
of year 2,632 $ 14.05 2,485 $ 8.74 2,821 $7.19
===== ===== =====
Options exercisable at end
of year 1,417 $ 8.45 1,362 $ 7.65 1,995 $7.54
Weighted-average fair
value of options
granted during the
year $ 19.60 $ 8.66 $3.62
F-24 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated financial Statements
December 31, 2001, 2000 and 1999
The following table summarizes information about stock options outstanding
at December 31, 2001 (shares in thousands):
Option outstanding Options exercisable
---------------------------------------- -----------------------
Weighted-
average Weighted- Weighted-
Range of remaining average Exercisable average
exercise Outstanding contractual exercise as of exercise
prices as of 12/31/01 life price 12/31/01 price
- ----------------- -------------- ----------- --------- ----------- ---------
$ 0.00 - 5.63 548 5.2 $ 3.57 390 $ 3.19
5.64 - 11.26 1,270 6.7 9.23 904 8.98
11.27 - 16.89 66 5.5 12.98 52 12.88
16.90 - 22.52 33 5.3 20.38 24 20.38
22.53 - 28.15 11 2.9 25.23 11 25.23
28.16 - 33.78 630 9.1 29.57 26 28.57
33.79 - 39.41 57 9.4 35.99 4 36.12
39.42 - 45.05 6 8.8 41.14 2 41.54
45.06 - 50.68 5 7.8 46.98 2 46.96
50.69 - 56.31 6 8.7 54.02 2 54.07
----- ----- ------ ----- ------
2,632 7.0 $14.05 1,417 $ 8.45
===== ===== ====== ===== ======
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized when the exercise price of the
option equals the market price of the stock on the date of grant. Had
compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net loss and net loss per share would have been
increased to the following pro forma amounts (in thousands, except per
share amounts):
2001 2000 1999
-------- ------- -------
Net loss:
As reported $(49,968) (32,112) (35,654)
Pro forma (55,578) (34,899) (38,338)
Net loss per share as reported:
Basic and diluted $ (1.67) (1.34) (2.77)
Pro forma:
Basic and diluted $ (1.86) (1.45) (2.98)
F-25 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated financial Statements
December 31, 2001, 2000 and 1999
Pursuant to SFAS No. 123, the Company has estimated the fair value of each
option grant on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used
for grants in 2001, 2000, and 1999, respectively: risk free interest rates
of 4.9 percent, 6.7 percent, and 7.0 percent; expected dividend yields of
-0- percent; expected lives of 5 years; and expected volatility of 76
percent, 73 percent, and 85 percent. The weighted-average fair value of
employee stock purchase rights granted under the Employee Stock Purchase
Plan (the Purchase Plan) in 2001, 2000, and 1999 was $23.03, $12.74, and
$2.87, respectively. The fair value for the employee stock purchase rights
was estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions in 2001, 2000, and 1999,
respectively: risk free interest rates of 4.1 percent, 6.1 percent, and 4.7
percent; expected dividend yields of -0- percent; expected lives of .5
years; and expected volatility of 103 percent, 134 percent, and 85 percent.
The Company granted options in 2001 and 2000 to nonemployees for the
performance of services. Deferred compensation is being amortized using the
straight-line method. The fair value of the options granted to nonemployees
was estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions in 2001 and 2000, respectively: risk
free interest rates of 5.4 percent and 6.1 percent; expected dividend
yields of -0- percent; contract lives of 5.7 years and 2.8 years; and
expected volatility of 71 percent and 84 percent.
(8) Income Taxes
The Company has foreign income tax expense for the year ended December 31,
2001 of $300,000 and no income tax expense for the years ended December 31,
2000 and 1999.
Income tax differed from the amounts computed by applying the U.S. federal
income tax rate of 34 percent to loss before income tax expense as a result
of the following (in thousands):
2001 2000 1999
-------- ------- -------
Computed expected tax benefit $(16,887) (10,748) (12,122)
Goodwill amortization 529 809 --
Foreign tax rate differential 2,078 (2,616) --
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets
attributable to operations 9,484 14,448 7,400
Adjustment to deferred tax assets for enacted
changes in foreign tax laws and rates 12,930 -- --
U.S. and foreign tax credits (7,953) (1,384) (652)
State income taxes, net of federal tax effect 117 (226) (575)
In-process research and development -- -- 6,038
Other 2 (283) (89)
-------- ------- -------
$ 300 -- --
======== ======= =======
F-26 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated financial Statements
December 31, 2001, 2000 and 1999
Domestic and foreign components of income (loss) before taxes are as follows (in
thousands):
2001 2000 1999
-------- ------- -------
Domestic $ 3,893 (8,578) (17,894)
Foreign (53,561) (23,034) (17,760)
-------- ------- -------
Total loss before taxes $(49,668) (31,612) (35,654)
======== ======= =======
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at December 31, 2001 and 2000 are presented below (in
thousands):
2001 2000
------------------ ------------------
Domestic Foreign Domestic Foreign
-------- ------- -------- -------
Deferred tax assets:
Stock compensation expense $ 1,412 -- 656 --
Equipment and leasehold improvements, principally
due to differences in depreciation 400 54 211 98
Intangible assets -- 3,859 -- 4,741
Financing charges -- -- -- 73
Research and development pool carryforward -- 39,963 -- 38,482
Net operating loss carryforward 28,987 2,831 28,647 3,747
Research credit carryforward 5,212 -- 4,839 --
Investment tax credit carryforward -- 13,619 -- 3,788
Capital loss carryforward 872 -- -- --
Minimum tax credit carryforward 112 -- 112 --
-------- ------- ------- -------
Total gross deferred tax assets 36,995 60,326 34,465 50,929
Less valuation allowance (36,995) (60,326) (34,465) (50,929)
-------- ------- ------- -------
Deferred tax assets -- -- -- --
Deferred tax liabilities -- -- -- --
-------- ------- ------- -------
Net deferred tax asset (liability) $ -- -- -- --
======== ======= ======= =======
F-27 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated financial Statements
December 31, 2001, 2000 and 1999
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of December 31, 2001 will be allocated as
follows: 1) To the extent that the Allelix acquired net deferred tax assets
are recognized, the tax benefit will be applied to reduce any remaining
unamortized goodwill and then any remaining unamortized other purchased
intangible assets related to the acquisition. At December 31, 2001, the
remaining unamortized goodwill and other intangible assets equaled $10.8
million. 2) Tax benefits in excess of the acquired goodwill and other
purchased intangibles related to the acquisition will be reported as a
reduction of income tax expense. The valuation allowance includes the
benefit for stock option exercises which increased the size of the domestic
net operating loss carryovers. Future reductions to the domestic valuation
allowance will be allocated $30.7 million to operations and $6.3 million to
paid-in capital.
The valuation allowance for deferred tax assets as of January 1, 2001 and
2000 was $85.4 million and $69.4 million, respectively. The net change in
the Company's total valuation allowance for the years ended December 31,
2001, 2000 and 1999, was an increase of $11.9 million, $16.0 million and
$51.0 million, respectively.
At December 31, 2001, the Company had domestic and foreign net operating
loss and credit carryforwards available to offset future income for tax
purposes approximately as follows (in thousands):
Domestic
net
operating
loss carry- Domestic Canadian
forward for research Canadian research
regular credit Canadian net operating loss research pool carry-
income tax carry- carryforward for regular pool carry- forward
purposes forward income tax purposes forward (net of tax)
----------- -------- --------------------------- ----------- ---------------
Federal Provincial
------- ----------
Expiring:
2005 $ 247 -- -- -- -- --
2006 244 -- 513 2,839 -- --
2007 -- 49 5,969 13,207 -- 981
2008 2,452 334 378 378 -- 1,751
2009 6,342 317 -- -- -- 1,656
2010 2,928 166 -- -- -- 1,524
2011 58 360 -- -- -- 7,707
2012 10,890 846 -- -- -- --
2018 19,497 1,035 -- -- -- --
2019 18,529 988 -- -- -- --
2020 15,432 744 -- -- -- --
2021 452 373 -- -- -- --
------- ----- ----- ------ -------- ------
Total $77,071 5,212 6,860 16,424 132,680 13,619
======= ===== ===== ====== ======== ======
The Company also has domestic state net operating loss carryovers in
varying amounts depending on the different state laws. The Company's
domestic tax loss carryover for alternative minimum tax purposes is
approximately the same as the Company's regular tax loss carryover. The
Company's Canadian research pool carryover of $132.7 million carries
forward indefinitely.
As measured under the rules of the Tax Reform Act of 1986, the Company has
undergone a greater than 50 percent change of ownership since 1986.
Consequently, use of the Company's domestic net operating loss carryforward
and
F-28 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated financial Statements
December 31, 2001, 2000 and 1999
research credit carryforward against future taxable income in any one year
may be limited. The maximum amount of carryforwards available in a given
year is limited to the product of the Company's fair market value on the
date of ownership change and the federal long-term tax-exempt rate, plus
any limited carryforward not utilized in prior years. Management does not
believe that these rules will adversely impact the Company's ability to
utilize the above losses and credit in the aggregate.
(9) Employee Benefit Plan
The Company maintains a tax-qualified employee savings and retirement plan
(the 401(k) Plan) covering all of the Company's employees in the United
States. Pursuant to the 401(k) Plan, employees may elect to reduce their
current compensation by the lesser of 15 percent of eligible compensation
or the prescribed IRS annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not
require, additional matching contributions to the 401(k) Plan by the
Company on behalf of all participants. The Company matched one-half of
employee contributions in 2001 up to a maximum contribution from the
Company of the lesser of three percent of employee compensation or $5,100.
Total matching contributions for the years ended December 31, 2001, 2000
and 1999 were $164,000, $152,000 and $160,000, respectively.
Additionally, the Company maintains a tax-qualified defined contribution
pension plan for its Canadian employees. Employees may elect to reduce
their current compensation by two percent or four percent of eligible
compensation up to a maximum of Cdn $6,750 per year and have the amount of
such reduction contributed to the pension plan. The Company matches 100
percent of such contributions. Total matching contributions for the years
ended December 31, 2001 and 2000 were Cnd. $180,000 and Cnd. $182,000,
respectively.
(10) Disclosure About the Fair Value of Financial Instruments
The carrying value for certain short-term financial instruments that mature
or reprice frequently at market rates approximates fair value. Such
financial instruments include: cash and cash equivalents, accounts
receivable, accounts payable, and accrued and other liabilities. The fair
values of marketable investment securities are based on quoted market
prices at the reporting date. The Company does not invest in derivatives.
(11) Accrued Severance
As of December 31, 2000, the Company has a balance of approximately
$154,000 for accrued severance for salaries and benefits payable to former
employees under formal plans of termination. This entire amount was paid in
severance benefits during 2001.
Effective February 6, 2001, the Company terminated the employment of five
administrative employees. The Company recorded $516,000 for severance
benefits during 2001. Approximately $211,000 of this amount was paid in
severance benefits through 2001, and approximately $234,000 was charged to
additional paid-in capital during 2001.
Additionally, effective November 30, 2001, the Company terminated the
employment of one research employee. The Company recorded $180,000 for
severance benefits for this employee, which was included in research and
development expense during 2001. Approximately $11,000 of this amount was
paid in severance benefits during 2001.
Accrued severance liability activity for the years ended December 31, 2001,
2000, and 1999 is summarized as follows (in thousands):
F-29 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated financial Statements
December 31, 2001, 2000 and 1999
2001 2000 1999
----- ------ ------
Accrued severance at
beginning of year $ 154 1,455 --
Severance costs incurred 696 -- 1,100
Assumed liability with
Allelix acquisition -- 1,455
Severance paid (376) (1,301) (1,100)
Severance charged to
additional paid-in capital (234) -- --
----- ------ ------
Accrued severance at end of
year $ 240 154 1,455
===== ====== ======
(12) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FSAB) issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 prohibits the use of the
pooling-of-interests method of accounting and requires that the purchase
method of accounting be used for all business combinations initiated after
June 30, 2001 and is applicable to all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies
that intangible assets acquired in a purchase method business combination
must meet certain criteria to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately. SFAS No. 142 will require
that goodwill and intangible assets with indefinite useful lives no longer
be amortized effective January 1, 2002; rather, these assets must be tested
for impairment at least annually in accordance with the provisions of SFAS
No. 142. SFAS No. 142 will also require that intangible assets with
definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values; and be reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of.
Beginning January 1, 2002, the Company has unamortized goodwill in the
amount of $6.8 million and unamortized identifiable intangible assets in
the amount of $3.9 million, all of which will be subject to the transition
provisions of SFAS Nos. 141 and 142. Amortization expense related to
goodwill and the assembled work force component of identifiable intangible
assets was $1.8 million and $319,000, respectively, for the year ended
December 31, 2001. The assembled workforce component of identifiable
intangible assets was fully amortized as of December 31, 2001. The Company
expects to complete its impairment review of goodwill during the first
quarter of 2002 and does not expect to record an impairment charge upon
completion of the initial review. However, there can be no assurance that
at the time the review is completed, a material impairment charge may not
be recorded.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and/or normal use of the
asset.
The Company is required and plans to adopt the provisions of SFAS No. 143
for the quarter ending March 31, 2003. To accomplish this, the Company must
identify legal obligations for asset retirement obligations, if any, and
determine the fair value of these obligations on the date of adoption.
Because of the effort necessary to comply with the adoption of SFAS No.
143, it is not practicable for management to estimate the impact of
adopting this statement as of the date of this report.
F-30 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated financial Statements
December 31, 2001, 2000 and 1999
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and the accounting and reporting provisions of
APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. SFAS No. 144 retains the fundamental provisions in
SFAS No. 121 for recognizing and measuring impairment losses on long-lived
assets held for use and long-lived assets to be disposed of by sale, while
also resolving significant implementation issues associated with SFAS No.
121. SFAS No. 144 retains the basic provisions of APB Opinion No. 30 on how
to present discontinued operations in the income statement but broadens
that presentation to include a component of an entity rather than a segment
of a business.
The Company is required and the Company plans to adopt the provisions of
SFAS No. 144 for the quarter ending March 31, 2002. The Company does not
expect the adoption of SFAS No. 144 for long-lived assets held for use to
have a material impact its consolidated financial statements because the
impairment assessment under SFAS No. 144 is largely unchanged from SFAS No.
121. The provisions of the statement for assets held for sale or other
disposal generally are required to be applied prospectively after the
adoption date to newly initiated disposal activities. The Company cannot
determine the potential effects that adoption of SFAS No. 144 will have on
its consolidated financial statements.
(13) Commitments and Contingencies
The Company is involved in various legal actions that arose in the normal
course of business. Although the final outcome of such matters cannot be
predicted, the Company believes the ultimate disposition of these matters
will not have a material adverse effect on the Company's consolidated
financial position, results of operations, or liquidity.
In June 2001, the Company entered into an agreement with a manufacturer for
the production of bulk quantities of the drug substance for PREOS for our
Phase III clinical trial activities and for early commercial launch of
PREOS. The agreement provides that the manufacturer will produce the drug
substance over a four-year period commencing in 2001. As of December 31,
2001, the Company has an outstanding commitment for future manufacturing of
the drug substance of approximately $17.6 million.
F-31