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UNITED STATES
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, 2000
[_] 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 $904,822,405 as of March 1, 2001, 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./1/
The number of shares of Common Stock outstanding as of March 1, 2001 was
29,745,199, which includes 912,098 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 24, 2001, which will be filed with the
Securities and Exchange Commission.
/1/ Excludes 1,579,521 shares of Common Stock held by directors and officers as
of March 1, 2001. The determination of affiliate status is not a conclusive
determination for other purposes.
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
NPS Pharmaceuticals, Inc. is a biopharmaceutical company with headquarters
in Salt Lake City, Utah, and additional operations in Toronto, Ontario, Canada.
We discover, develop and intend to commercialize small molecule drugs and
recombinant proteins, primarily for bone and mineral disorders and central
nervous system disorders. We have five drugs in clinical development and several
preclinical product candidates. Our two most advanced product candidates focus
on bone and mineral disorders. They are AMG 073, which has completed a series of
Phase II clinical trials for treatment of hyperparathyroidism, and ALX1-11,
which is in a pivotal Phase III clinical trial for treatment of post-menopausal
osteoporosis.
Strategy
Our objective is to build a profitable biopharmaceutical company by
developing innovative therapies that maintain human health and relieve
suffering. The key elements of our strategy to accomplish this objective are to:
. Build a diversified pipeline of products. We are developing a broad pipeline
of products that are in various stages of clinical and preclinical
development. We believe this strategy increases the likelihood that we will
successfully develop commercially viable pharmaceutical products. Our
portfolio approach will reduce our exposure to the impact of any single
product failure and will increase our flexibility to eliminate programs we
deem less promising.
. Retain greater product rights for internal development and commercialization.
We intend to participate in the development and commercialization of selected
product candidates, either independently or with collaborators. By
selectively pursuing the development and commercialization of product
candidates on our own or through collaborations, we employ a flexible
approach in an effort to optimize our products' value to us. In our future
collaborations, we will seek to retain strategic sales and marketing rights
to product candidates, or options to elect such rights, in therapeutic areas
where we think we will be able to achieve a greater return.
. In-license or acquire complementary products, technologies or companies. In
addition to our internal development efforts, we plan to expand our product
portfolio by identifying and evaluating potential products and technologies
developed by third parties that we believe fit within our overall portfolio
strategy. For example, in 1999 we acquired Allelix Biopharmaceuticals Inc.,
in part because its product candidates complemented our existing programs in
osteoporosis and central nervous system disorders.
. Leverage collaborations to reduce our risk and accelerate the
commercialization of our product candidates. We selectively enter into
collaboration agreements with large pharmaceutical companies to augment our
financial investment in our discovery and development programs. This strategy
allows us to devote greater resources to selected discovery efforts and to
develop a greater number of 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.
. Maintain our core discovery competencies. We have developed a significant
portion of our product pipeline through internal discovery efforts. We intend
to continue our focus on scientific discovery by retaining creative
scientists who we believe can make breakthrough discoveries leading to
innovative products.
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Our Product Development Programs
The following is a summary of our product development programs by
therapeutic area:
==========================================================================================================
Product or Program Indication(s) Status Collaborators
- ----------------------------------------------------------------------------------------------------------
Bone and Mineral Disorders
- --------------------------
Calcimimetics: Hyperparathyroidism
AMG 073 Primary Phase II Amgen, Kirin
Secondary Phase II Amgen, Kirin
ALX1-11 Osteoporosis Phase III
Calcilytics Osteoporosis Phase I GlaxoSmithKline
Central Nervous System Disorders
- --------------------------------
NPS 1776 Epilepsy and bipolar disorder Phase I Abbott
ALX 0646 Migraine Phase I Forest
Metabotropic glutamate receptors Psychiatric and neurological Preclinical AstraZeneca
disorders and pain
Glycine reuptake inhibitors Schizophrenia and dementia Preclinical Janssen
Excitatory amino acid receptors Psychiatric disorders and pain Preclinical Eli Lilly
Gastrointestinal Disorders
- --------------------------
ALX-0600 Short bowel syndrome Pilot Phase II
- ----------------------------------------------------------------------------------------------------------
Bone and Mineral Disorders
- --------------------------
Overview of Parathyroid Hormone and Calcium Receptors
In normal circumstances, calcium receptors on parathyroid cells control the
level of calcium in the blood. These receptors are located in four parathyroid
glands in the neck. When the level of calcium in the blood falls, the calcium
receptors detect the change and stimulate the release of parathyroid hormone,
which acts to release calcium from bone, increase calcium retention in the
kidney and stimulate the synthesis of vitamin D in the kidney. Vitamin D
increases the efficiency of calcium absorption from dietary sources. As calcium
levels in the blood rise, calcium receptors then decrease the secretion of
parathyroid hormone. Calcium receptors play the key role in maintaining calcium
balance in the blood.
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 parathyriod hormone. These compounds are called "calcimimetic
compounds," and they are the foundation of our collaborations with Amgen Inc.
and Kirin Brewery Company, Ltd. to develop small molecule, orally administered
drugs for treatment of hyperparathyroidism.
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We have also discovered compounds that block calcium receptors, and, by
this action, cause a rapid increase of parathyroid hormone. These calcium
receptor blockers, called "calcilytic compounds," have been shown to stimulate
new bone formation in animal models of osteoporosis. They form the basis of our
collaboration with GlaxoSmithKline, to develop small molecule, orally
administered drugs for treatment of osteoporosis.
AMG 073 for Hyperparathyroidism
We discovered and patented AMG 073, a small molecule calcimimetic compound
for the treatment of both primary and secondary hyperparathyroidism. We licensed
AMG 073 to Kirin in the territories of Japan, China, Taiwan and Korea, and to
Amgen for the rest of the world.
Market Opportunity. Hyperparathyroidism is characterized as either primary
or secondary. Primary hyperparathyroidism is an age-related disorder that
results from excessive secretion of parathyroid hormone and is characterized by
enlargement of one or more of the four parathyroid glands located in the neck.
Symptoms of primary hyperparathyroidism may include bone loss, muscle weakness,
depression and cognitive dysfunction.
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 treatment for primary
hyperparathyroidism is surgery to remove one or more of the parathyroid glands
in the neck. There are currently no effective pharmaceutical therapies for the
treatment of primary hyperparathyroidism.
Secondary hyperparathyroidism is a physiological response to failing
kidneys. As renal function deteriorates, the body is unable to maintain proper
levels of calcium and phosphorus in the blood, or serum. 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.
Symptoms of secondary hyperparathyroidism may include bone loss, bone pain, soft
tissue calcification and chronic, severe itching.
Parathyroid hyperplasia, which is a proliferation of cells in the
parathyroid glands, is a major component of hyperparathyroidism and occurs in
virtually all patients with chronic renal failure. More than 260,000 patients in
the United States suffer from chronic renal failure to a degree that they
require dialysis or kidney transplantation. Several million people in the United
States are thought to suffer from some degree of renal insufficiency. Secondary
hyperparathyroidism commonly develops during the early stages of chronic renal
failure before dialysis is necessary. Studies suggest that over 30% of such
patients are affected by 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. Results
from Amgen's Phase II clinical trial in patients with primary
hyperparathyroidism were presented at the American Society for Bone and Mineral
Research meeting in September 2000 and other Amgen Phase II clinical trial
results in patients with secondary hyperparathyroidism were presented at the
American Society of Nephrology meeting in October 2000. Amgen has been and is
continuing to conduct a larger Phase II clinical trial in patients with
secondary hyperparathyroidism to confirm and build upon these results. While it
is impossible to predict the timing of the start or finish of any specific
clinical trial, we expect Amgen to begin Phase III clinical trials in 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, indicated that AMG 073 normalized total serum calcium
safely and effectively.
Amgen has also completed three Phase II clinical trials of AMG 073 in
patients with secondary hyperparathroidism. Data collected from the Phase II
clinical trials indicate that AMG 073 safely and effectively reduced parathyroid
hormone, phosphorus and calcium-phosphorus product in dialysis patients with
secondary hyperparathyroidism. The data from the first clinical trial indicate
single doses of AMG 073 reduced parathyroid hormone levels in a dose dependent
manner. In the second clinical trial, daily doses of AMG 073 effectively reduced
parathyroid hormone by 25% to 40% and serum phosphorus by approximately 25%. In
the third clinical trial conducted over an eighteen-week period, mean
parathyroid hormone levels were 48% lower for the AMG 073 group compared to
placebo during the final six-week period. These reductions in parathyroid
hormone were accompanied by minimal (6%) reductions in plasma calcium. However,
serum phosphorus and calcium-phosphorus product each fell approximately 25%
relative to the placebo group during the final six-week period. Persistently
elevated calcium-phosphorus product has been implicated as a cause of soft
tissue and vascular calcification in this disorder. Generally, the drug was safe
and well tolerated in each of these trials. Amgen has paid license fees,
development support payments and made equity purchases totaling $19.5 million in
connection with its license of AMG 073, and will pay us up to an additional
$26.0 million if it achieves development milestones. Amgen will also pay
royalties on any sales of AMG 073 in its territories. Kirin has already paid us
$16.0 million in license fees, research and development support
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payments and milestone payments, and will pay us up to an additional $9.0
million upon accomplishment of development milestones. Kirin will also pay
royalties on any sales of AMG 073 in its territories.
ALX1-11 and Calcilytic Compounds for Osteoporosis
We are developing two products for the treatment of osteoporosis, ALX1-11
and calcilytic compounds. ALX1-11 is our patented recombinant, full-length
parathyroid hormone for treatment of osteoporosis. The drug will be delivered
subcutaneously on a daily basis. Although chronically high levels of parathyroid
hormone are known to cause bone loss as in hyperparathyroidism, pulsatile dosing
with ALX1-11, in which parathyroid hormone levels rise rapidly and then return
to normal levels within a few hours, actually stimulates bone growth. We are
independently developing ALX1-11 and are conducting a double blind, placebo-
controlled pivotal Phase III clinical trial in post-menopausal women for
osteoporosis. In a separate effort, we are pursuing a treatment for osteoporosis
in collaboration with GlaxoSmithKline. This collaboration focuses on small
molecule, orally administered calcilytic compounds.
Market Opportunity. Osteoporosis is an age-related disorder characterized
by a reduction in bone mass. Although bone loss is a universal consequence of
advancing age, the process is accelerated in women following menopause.
Osteoporosis is often diagnosed only after fractures in weakened bones.
Fractures of hip, spine or wrist bones can result in serious long-term
disability.
Ten million Americans have advanced osteoporosis and another 18 million are
at high risk of fractures because of low bone mass. One half of all women over
50 years of age in the United States will suffer an osteoporosis-related
fracture during their lifetime. Osteoporosis is responsible for 1.5 million
fractures annually in the United States, including 300,000 hip fractures.
Current therapies for osteoporosis, including supplementing dietary calcium
and vitamin D, help to slow the rate of bone loss. In post-menopausal women,
estrogen replacement therapy decreases the rate of bone resorption but does not
reverse the loss of bone mass. Other therapies include the use of compounds such
as bisphosphonates and raloxifene. These drugs can halt bone loss and, over
several years, can increase bone mass by amounts ranging from two to eight
percent. Fosamax, an oral bisphosphonate marketed by Merck, had sales of over
$1.0 billion in 1999. In clinical trials, Fosamax demonstrated an increase in
bone mineral density of seven to ten percent and a reduction in fractures over
three years. However, we believe there remains a need for a treatment that can
prevent fractures by more rapidly replacing lost bone.
Development Status. We are currently conducting a double blind, placebo-
controlled, pivotal Phase III clinical trial for ALX1-11. Our clinical trial
will measure increases in bone mineral density and determine the compound's
effectiveness in fracture prevention over an 18-month course of treatment in
1,800 patients. ALX1-11 also is being tested in a clinical trial coordinated by
the University of California, San Francisco, and sponsored by the NIH. This
trial will test the combination of ALX1-11 and Fosamax as a therapy for
osteoporosis.
In our Phase II clinical trial in over 200 post-menopausal women, daily
injections of ALX1-11 produced a clinically and statistically significant
average increase in bone mineral density of nearly seven percent in a one-year
course of treatment.
We believe our expectations for the safety and efficiency of ALX1-11 are
further validated by Eli Lilly's clinical experience with Forteo(TM). ALX1-11 is
our recombinant parathyroid hormone consisting of all 84 amino acids, while
Lilly's Forteo is an active fragment of parathyroid hormone comprised of the
first 34 amino acids. Eli Lilly recently announced that it has filed a U.S. New
Drug Application for Forteo for the treatment of osteoporosis. Data from Eli
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.
Calcilytic Compounds. We are collaborating with GlaxoSmithKline on the
discovery, identification and characterization of calcilytic compounds for
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. 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.
We believe that orally administered calcilytic drugs that act on the parathyroid
cell calcium receptors could provide a cost-effective treatment for
osteoporosis. Preclinical studies with GlaxoSmithKline on some of the lead
compounds identified in this program have been conducted. In December 2000,
GlaxoSmithKline began clinical testing with a calcilytic for which we earned a
$1.0 million milestone payment.
GlaxoSmithKline has paid us a total of $32.5 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 upon achievement
4
of clinical milestones and royalties on any sales by GlaxoSmithKline of products
commercialized through this collaboration. We also have a limited right to co-
promote any products we develop through our collaboration and we will receive a
share of the profits.
Central Nervous System Disorders
NPS 1776 for Epilepsy and Bipolar Disorder
We are developing NPS 1776 for epilepsy and bipolar disorder. In March
2000, we entered into a collaboration agreement with Abbott Laboratories for the
development of this drug. Prior to entering into that agreement, we completed
several Phase I clinical trials to confirm its safety and tolerability and
ability to be delivered in a sustained release formulation.
Market Opportunity. Many types of epileptic seizures have been medically
defined. They range from mild cases of nearly imperceptible behavior, such as
staring into space, to grand mal seizures where consciousness is lost and the
body convulses uncontrollably. In most cases of recurrent seizures, drugs are
the treatment of choice, although in some extreme instances, neurosurgery may be
an option. While the majority of epilepsy patients can control their seizures
with currently available drug therapies, in many cases seizure control is
achieved only at doses that cause significant side effects. Up to 30% of
patients with epilepsy do not respond adequately to any medication.
Bipolar disorder, known until recently as manic-depressive disorder, is
characterized by the occurrence of both manic and depressive states, usually in
alternation. Bipolar disorder, like other mood disorders, is a lifetime illness
with no known cure. As a result, the number of bipolar patients continues to
increase each year. In the United States, approximately 2.3 million people have
been diagnosed as having bipolar disorder. It is now generally accepted that
some drugs normally used in treating seizures may also be effective treatments
for bipolar disorder. For example, Abbott's drug, Depakote(R), has received FDA
approval for the treatment of both epilepsy and manic episodes in bipolar
disorder.
Development Status. Our studies show that NPS 1776 is effective in a number
of animal models of epilepsy. Importantly, it exhibited a high margin of safety
in the animal models compared to currently available epilepsy treatments, as
measured by a lack of motor impairment side effects following drug
administration. In addition, we have shown that NPS 1776 has the same broad
spectrum of anticonvulsant activity in animals as Depakote. We also believe NPS
1776 may have a better safety profile than other currently available
anticonvulsant drugs, particularly in terms of a reduced risk of birth defects
and liver damage. Thus, we believe that NPS 1776 may be useful for the treatment
of epilepsy and bipolar disorder.
In December 1998, we completed a Phase I clinical trial of NPS 1776 in
healthy male volunteers in the United Kingdom. Our analysis of the data
indicates that the drug was safe and well tolerated. In December 1999, we
completed other Phase I clinical trials in the United Kingdom to confirm safety
and tolerability in healthy volunteers receiving multiple doses of the drug and
to investigate sustained release formulations.
In March 2000, we entered into an agreement with Abbott in which we granted
Abbott worldwide marketing rights to NPS 1776 in return for Abbott's commitment
to fund further development of NPS 1776 and pay us milestone payments of up to
$18.0 million and royalties on any sales of NPS 1776. Abbott is currently
optimizing formulations of NPS 1776 in preparation for further clinical trial
development.
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. Our
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, 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 exclusive collaboration and license
agreement with AstraZeneca under which we will collaborate on a number of mGluR
subtypes for the identification, optimization, development, and
commercialization of mGluR subtype-selective compounds.
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Other Programs for Central Nervous System Disorders
We are developing ALX-0646, a small molecule compound, for the treatment of
migraine. We completed a Phase I clinical trial outside the United States with
ALX-0646 in healthy volunteers in 1998. In August 2000, we entered into an
agreement with Forest Laboratories, Inc. in which we granted Forest worldwide
marketing 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
and royalties on any sales of ALX-0646. Forest is conducting additional
necessary toxicology studies prior to beginning clinical trials in the United
States.
We have two additional preclinical-stage central nervous system programs.
We were working with Janssen Pharmaceutica N.V., a division of Johnson & Johnson
on glycine reuptake inhibitors to identify prospective drug candidates for
schizophrenia and dementia. The initial research phase of this collaboration
expired in October 2000. Janssen has a one-year period to select lead candidates
for further clinical development. We also worked with Eli Lilly and Company to
identify excitatory amino acid receptors as therapeutic targets for various
central nervous system disorders. The initial research phase of this
collaboration expired in November 2000. We will receive milestone payments of
up to $21.5 million from Janssen and royalties from both Janssen and Eli Lilly
from any drugs developed or sold by them under these collaboration agreements.
Gastrointestinal Disorders
ALX-0600 for Short Bowel Syndrome
We are independently developing ALX-0600 for selected gastrointestinal
disorders. We are currently conducting a pilot Phase II clinical trial in a
small number of patients receiving treatment for short bowel syndrome. We
previously completed a Phase I clinical trial of ALX-0600 that demonstrated
safety and tolerability in healthy volunteers. In July 2000, we obtained orphan
drug designation for ALX-0600 for short bowel syndrome from the FDA, which
provides, subject to some restrictions, seven years of marketing exclusivity
once a product is launched for diseases that afflict fewer than 200,000
patients.
Market Opportunity. Short bowel syndrome is a condition in which disease or
surgical removal of a large portion of the small intestine results in an
inadequate surface area for absorption of nutrients, electrolytes and fluids. It
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. Total
parenteral nutrition costs 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. Approximately 20,000 to 40,000
patients in North America are afflicted with short bowel syndrome.
Development Status. 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% increase in the weight of the
small intestine within 10 days of administration. Furthermore, the growth-
promoting properties of ALX-0600 appear to be highly tissue-specific,
predominantly affecting the small intestine, and thereby reducing the risk of
adverse side effects.
We are conducting a pilot Phase II clinical trial with ALX-0600 in a small
number of patients with short bowel syndrome. The clinical trial is designed to
measure improvement in nutrient absorption and physical changes in the small
intestine, as well as safety and tolerability. We previously completed a Phase I
clinical trial of ALX-0600 that demonstrated safety and tolerability in healthy
volunteers.
Although short bowel syndrome is a relatively small indication, we believe
that, if ALX-0600 demonstrates statistically significant benefit in patients
having short bowel syndrome, it 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, which is
caused by chemotherapy or radiation therapy. If ALX-0600 is approved for
gastrointestinal conditions other than short bowel syndrome, we may lose our
exclusive marketing rights.
In November 1999, we entered into an 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. As a result of
the funding, we will pay a 10% royalty to the Canadian government through
December 2008 on the sale or license of any product developed from the funded
research. If the payments have not reached a total of Cdn. $23.9 million by that
date, we will continue to pay royalty payments until we reach that amount or
until December 2017, whichever occurs first.
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Collaborative Research, Development, and License Agreements
We currently have collaborative research, development and/or license
agreements with several collaborators, including Amgen, Kirin, GlaxoSmithKline,
AstraZeneca, Eli Lilly, Janssen, Abbott, Forest and The Brigham and Women's
Hospital.
Amgen
In March 1996, we entered into a development and license agreement with
Amgen which grants Amgen the exclusive right to develop and commercialize AMG
073 and related compounds for the treatment of hyperparathyroidism and
indications other than osteoporosis worldwide, excluding Japan, China, Hong
Kong, North and South Korea and Taiwan. Amgen has assumed full control,
authority and responsibility for conducting, funding and pursuing all aspects of
the development, submissions for regulatory approvals, manufacture and
commercialization of the AMG 073 compound in its territories. Amgen is required
to pay us royalties on any sales of AMG 073 in its territories. Amgen may
terminate the agreement for any reason on 90 days written notice, in which case
we would reacquire at no cost the technology, patent and commercialization
rights to AMG 073.
Kirin
In June 1995, we entered into a five-year collaborative research and
license agreement with Kirin to develop and commercialize AMG 073 for treatment
of hyperparathyroidism 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. Kirin is required to pay all costs of
developing and commercializing products within its territories and is required
to pay us royalties on any sales of AMG 073 within its territories. Kirin may
terminate the agreement for any reason on 90 days written notice. If Kirin
terminates the agreement, Amgen would receive worldwide rights to develop and
commercialize AMG 073 for treatment of hyperparathyroidism and other indications
except osteoporosis.
GlaxoSmithKline
In November 1993, we entered into a research and license agreement with
GlaxoSmithKline to collaborate on the discovery, development and marketing of
drugs for treatment of osteoporosis and other bone metabolism disorders. Under
the agreement, GlaxoSmithKline has an exclusive license to the worldwide
development and marketing of any calcium receptor-active compounds developed
under the agreement that are useful for treatment of osteoporosis and other bone
metabolism disorders, excluding hyperparathyroidism. Once compounds have been
selected for development, GlaxoSmithKline has agreed to conduct and fund all
product development, including all human clinical trials and regulatory
submissions. We have the right to co-promote any resulting products in the
United States. We are entitled to royalties on any sales of products for
osteoporosis and other bone metabolism disorders developed by GlaxoSmithKline
under the agreement and a share of the profits from any co-promotion of the
products. GlaxoSmithKline may terminate the agreement on 30 days' written
notice, and we may both agree to extend the agreement for an additional period
of time. Under certain circumstances, we have the right to terminate the
GlaxoSmithKline agreement after October 2000. Termination of the GlaxoSmithKline
agreement will result in the return of our technology, commercialization and
patent rights in the licensed field of osteoporosis and other bone and mineral
disorders, as well as all additional technology developed in the course of the
collaboration. We also have the right, under certain circumstances, after
October 2000 to terminate the sponsored research portion of the agreement.
Termination of the collaborative research portion of the agreement will result
in the return to NPS of certain technology rights.
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 new small molecule therapies for the treatment of various
disorders of the central nervous system. Specifically, the collaboration will
focus on the identification of small molecules active on mGluRs. We granted
AstraZeneca an exclusive license to the worldwide development, manufacturing and
marketing of any mGluR-active compounds identified under the collaboration. The
parties will work exclusively together on the identification of mGluR-active
compounds for a period of five years. Either party may terminate the five year
research program after the second anniversary of the date of the agreement and
upon six months' written notice. Once compounds have been selected for
development, AstraZeneca has agreed to conduct and fund all product development,
including all human clinical trials and regulatory submissions. We have the
right to co-promote any resulting product in the United States and Canada.
Should we elect to co-promote products, in certain circumstances we will be
required to share in the development and regulatory costs associated with such
products. We are entitled to royalties on any sales of products developed and
marketed under the agreement and a share of the profits from any co-promotion of
the products. AstraZeneca may terminate the agreement at anytime upon 90 days'
written notice after the expiration or earlier termination of the research
program. Such termination by AstraZeneca of the agreement for reasons other than
for cause will result in the return to us of all technology, commercialization
and patent rights.
7
Eli Lilly
In December 1989, we entered into a collaborative research and license
agreement with Eli Lilly. Eli Lilly assigned the agreement to Lilly Canada in
December 1990, and the scope of the agreement was modified in December 1998 to
include only research related to excitatory amino acid receptors. Under the
agreement, Eli Lilly was granted an exclusive worldwide license to any and all
patents and technology developed under the agreement after December 1, 1989. Eli
Lilly is solely responsible for development, preclinical and clinical testing
and commercialization of any products under the collaboration, and has an
exclusive worldwide license to manufacture and market products developed under
the agreement. We are entitled to royalties on any sales of all excitatory amino
acid receptor products developed under the agreement. Eli Lilly solely owns the
right to any compounds and products developed under the agreement, and will
retain these rights if the agreement terminates. The initial research phase of
the agreement expired in November 2000. As a result, we reacquired our patent
and technology rights. Eli Lilly however, has a non-exclusive license to those
patents and technology, and has the exclusive right to develop any of the
compounds arising from Lilly's work under the agreement.
Janssen
In October 1998, we entered into a collaborative agreement with Janssen for
the research, development and marketing of new drugs for treatment of
schizophrenia and dementia. The research phase of this collaboration ended in
October 2000. We will receive royalties from any product sales resulting from
the collaboration. In addition, Janssen will assume responsibility for
development of the compounds, including all costs and expenses associated with
the development efforts. While Janssen has the right to market products
worldwide, we may co-promote any products developed under the agreement in
Canada.
Abbott
In March 2000, we entered into an exclusive license agreement with Abbott
for our compound NPS 1776 and related molecules. The agreement grants Abbott the
exclusive worldwide license to develop and commercialize NPS 1776 for all
indications. Abbott has committed to conduct and fund all preclinical
development and, if warranted, clinical development activities for NPS 1776 and
related molecules. We will receive royalties from any product sales resulting
from the collaboration. We will participate with Abbott on a joint project
review committee, where we will observe the progress of Abbott during the first
24 months of the agreement and where we will review progress on Abbott's
subsequent clinical development work plan. We will continue to prosecute all our
worldwide patent applications for NPS 1776. Abbott has the right to terminate
the agreement at any time. Upon termination, all of the data and intellectual
property covered by the agreement will be returned to us. We have the right to
institute binding alternative dispute resolution for the return of the program
and related technology in the absence of development progress.
Forest
In August 2000, we entered into an exclusive worldwide license with Forest
for the development and commercialization of ALX-0646. We are entitled to
receive licensing fees under the agreement, as well as royalties for any sales
of resulting products. If Forest does not obtain sublicense agreements in some
major markets outside of the United States within three years, we have the
option to remove those markets from Forest's territory, subject to Forest having
the right to buy our termination option. Forest may terminate the agreement upon
the occurrence of certain conditions. If the agreement is terminated, Forest's
license is terminated and the technology, commercialization and patent rights
relating to ALX-0646 will be returned to us.
The Brigham and Women's Hospital
In February 1993, we entered into a sponsored 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. 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.
Government Regulation
Research, preclinical development, clinical trials, manufacturing and
marketing activities are subject to regulation for safety, efficacy and quality
by numerous governmental authorities in the United States and other countries.
In the United States, drugs are subject to rigorous FDA regulation. The Federal
Food, Drug and Cosmetic Act and other federal and state statutes and regulations
govern, among other things, the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and
8
promotion of our products. Product development and approval within this
regulatory framework take a number of years and involve the expenditure of
substantial resources.
The steps required before a pharmaceutical agent may be marketed in the
United States include:
. preclinical laboratory tests, animal pharmacology and toxicology studies
and formulation studies
. the submission of an investigational new drug application to the FDA for
human clinical testing, which must become effective before human
clinical trials commence
. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug
. the submission of a new drug application to the FDA
. FDA approval of the new drug application before any commercial sale or
shipment of the drug. In addition to obtaining FDA approval for each
product, each domestic drug manufacturing establishment must be
registered with, and approved by, the FDA
Domestic drug manufacturing establishments are subject to regular
inspections by the FDA and must comply with FDA regulations. To supply products
for use in the United States, foreign manufacturing establishments must comply
with FDA regulations and are subject to periodic inspection by the FDA, or by
corresponding regulatory agencies in their home countries under reciprocal
agreements with the FDA.
Preclinical studies include the laboratory evaluation of in vitro
pharmacology, product chemistry and formulation, as well as animal studies to
assess the potential safety and efficacy of a product. Compounds must be
formulated according to cGMP regulations, and preclinical safety tests must be
conducted by laboratories that comply with FDA regulations regarding good
laboratory practices. The results of the preclinical tests are submitted to the
FDA as part of an investigational new drug application and are reviewed by the
FDA before human clinical trials can begin. Unless the FDA objects to an
investigational new drug application, the investigational new drug application
usually becomes effective 30 days following its receipt by the FDA.
Clinical trials must be sponsored and conducted in accordance with good
clinical practice under protocols and methodologies that: ensure receipt of
signed consents from participants that inform them of risks; detail the
objectives of the study; detail the parameters to be used to monitor safety; and
detail the efficacy criteria to be evaluated. Accurate documentation and
analyses must be submitted to the FDA as part of an investigational new drug
application. Furthermore, each clinical study must be conducted under the
supervision of a principal investigator operating under the auspices of an
Institutional Review Board, or IRB, at the institution where the study is
conducted. The IRB will consider, among other things, ethical factors, the
safety of human subjects and the possible liability of the institution.
Sponsors, investigators and IRB members must avoid conflicts of interests and
ensure compliance with all legal requirements.
Clinical trials typically are conducted in three sequential phases. In
Phase I, the initial introduction of the drug into a small number of healthy
volunteers is undertaken. The drug is evaluated for safety (adverse effects),
dosage tolerance, metabolism, distribution, excretion and pharmacodynamics
(clinical pharmacology). The Phase I trial must provide pharmacological data
that is sufficient to devise the Phase II trials.
Phase II trials involve studies in a larger, but still limited, patient
population in order to:
. determine the efficacy of the drug for specific, targeted indications
. determine dosage tolerance and optimal dosage
. identify possible adverse affects and safety risks
When a compound is determined to be effective and to have an acceptable
safety profile in Phase II evaluation, Phase III trials can be undertaken to
evaluate further safety and efficacy in expanded patient populations at
geographically diverse clinical trial sites.
The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of a new drug application,
which must be complete and accurate. The approval of a new drug application
permits the commercial-scale manufacturing, marketing, distribution, and
exportation from the United States and sale of the drug in the United States.
The testing and approval process typically requires substantial time, effort and
expense. The FDA may deny a new drug application if the applicable scientific
and regulatory criteria are not satisfied. Moreover, the FDA may require
additional testing or information, or may require post-approval testing,
surveillance and reporting to monitor the products. Notwithstanding any of the
foregoing, the FDA may ultimately decide that a new drug application does not
meet the applicable agency standards, and even if approval is granted, it can be
limited or revoked if the sponsor who received the approval does not comply with
regulatory standards. Finally, an approval may
9
entail limitations on the uses, labeling, dosage forms, distribution and
packaging of the product. An approval may also require that additional clinical
studies be conducted while the product is being marketed and sold.
Among the conditions for new drug approval is the requirement that the
prospective manufacturer's quality control, record keeping, notifications and
reporting and manufacturing systems conform to cGMP. In complying with the
standards contained in these regulations, manufacturers must continue to expend
time, money, resources and effort in order to ensure compliance.
Outside the United States, our ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authority. This foreign regulatory approval process includes many of the same
steps associated with FDA approval described above.
In addition to regulations enforced by the FDA, we are subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and future federal, state or local regulations.
Our research and development activities involve the controlled use of hazardous
materials, chemicals and various radioactive compounds. Although we believe that
our safety procedures for handling and disposing of these materials comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of an accident, we could be liable for any damages that
result.
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 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 in our own name, 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 U.S.
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 U.S. 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 therein. Any resulting license would be
expected to require us to pay royalties on net sales of licensed products.
Competition
We and our 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
10
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
the research and development of products in areas similar to the areas in which
we are developing products, including the fields of hyperparathyroidism,
osteoporosis, neuroprotection and neurological disorders. In particular, Eli
Lilly has been developing Forteo, an active fragment of human parathyroid
hormone comprising the first 34 amino acids of the parathyroid hormone, as a
potential treatment for osteoporosis. Eli Lilly has announced that it has filed
a U.S. New Drug Application for Forteo administered by sub-coetaneous injection.
We believe that our ALX1-11will compete with Forteo. ALX1-11 is also an
injectably administered while being the full length recombinant parathyroid
hormone consisting of all 84 amino acids. We believe that at least one other
company is developing a parathyroid hormone-based treatment that is not
delivered through injection. Additionally, Bone Care International is presently
marketing Hectoral, a vitamin D pro-hormone to relieve some symptoms of
secondary hyperparathyroidism. Also, GelTex is currently marketing RenaGel for
the treatment of secondary hyperparathyroidism. Lilly has announced that it is
creating a method of oral delivery of Forteo. NPS is also evaluating various
methods of alternative delivery of ALX1-11.
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:
. establish collaborations for the development of our products
. identify new product candidates
. develop products that reach the market first
. develop products that are technologically superior to other products
in the market
. obtain and enforce patents covering our technology
Manufacturing
We have no small molecule manufacturing facilities. Under our existing
collaborative agreements, each licensee is responsible for the manufacture of
the applicable product.
We currently produce some biological material at our Toronto, Ontario
site. We use those materials in connection with our preclinical and early
clinical testing activities for our ALX1-11 and ALX-0600 product candidates. We
obtain other biological material from contract production firms. For certain
tests, this material, including clinical grade ALX1-11 and ALX-0600, must be
manufactured under the cGMP of the FDA. We are currently reviewing alternatives
to meet our current and planned manufacturing needs of these materials and
expect from time to time to sign agreements with one or more suppliers.
Employees
As of March 1, 2001, we employed 136 individuals full-time, of which 34
hold Ph.D. degrees and 31 hold other advanced degrees. A total of 83 full-time
employees are engaged in research, development and support activities. A total
of 53 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.
Risk Factors
You should carefully consider the following risk factors and other
information included or incorporated by reference in this prospectus before
deciding to invest in the shares.
We have a history of operating losses and may never reach profitability.
With the exception of 1996, we have not been profitable since our inception
in 1986. As of December 31, we had an accumulated deficit of approximately
$111.0 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. We
expect to continue to incur losses for the next several years.
11
We are dependent on the successful outcome of the clinical trials for our two
most advanced product candidates, AMG 073 and ALX1-11.
Amgen, our collaborator, has conducted Phase II clinical trials for AMG
073, and we are currently conducting a pivotal Phase III clinical trial for
ALX1-11. Our success will depend, to a great degree, on the success of these and
subsequent clinical trials. Prior to receiving approval for commercialization,
we must demonstrate to the satisfaction of the FDA and comparable foreign
regulatory authorities that each of the product candidates are 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 candidates, we will
still need to demonstrate their efficacy for the treatment of the specific
indication as well as the product candidates' continued safety through the
conduct of Phase III clinical trials. The successful outcome of the Phase III
clinical trials will depend in part on our and Amgen's ability to successfully
complete enrollment in the clinical 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. If either or both of these products do not continue to
prove to be safe and are not shown to be efficacious to the satisfaction of the
FDA and comparable foreign regulatory authorities, our business would be
materially harmed and our stock price would be adversely affected.
The FDA has not approved any of our product candidates and we cannot assure you
that data collected from 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 impact our stock price.
Many of our research and development programs are at an early stage.
Clinical trials are long, expensive and uncertain processes. We cannot assure
you that the clinical trials will be commenced or completed on schedule, or that
the FDA will ultimately approve our product candidates for commercial sale.
Furthermore, 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. Drugs in late stages of clinical
development may fail to show the desired safety and efficacy traits despite
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 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 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, NPS
1776, ALX-0646, metabotropic glutamate receptors, glycine reuptake inhibitors
and excitatory amino acid receptors. Except in the case of AstraZeneca, our
collaborators have full control over those efforts in their territories, the
resources they commit to the program, and the success of the development and
commercialization of products in those programs depends on their efforts. Under
our collaboration with AstraZeneca for metabotropic glutamate receptor research,
we are required to co-direct the research and to pay for an equal share of the
research through a minimum of thirty months and perhaps for the full term of
sixty months. This commitment of personnel and capital may limit or restrict our
ability to initiate or pursue other research efforts. For us to receive any
significant royalty payments from our collaborators, they must establish the
safety and efficacy of our drug candidates, obtain regulatory approvals and
achieve market acceptance of those products.
We continue to evaluate whether to seek collaborators for ALX1-11 and ALX-
0600. We may not be able to negotiate further collaborative arrangements for
those or our other programs on acceptable terms, if at all. If we are not able
to establish additional collaborative arrangements, we will either have to delay
further development of these or other programs or increase our capital
expenditures and undertake the development activities at our own expense.
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 them
. 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
12
. 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 products
. 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
. our collaborators could independently develop, or develop with third
parties, drugs that compete with our products
. we may be unable to meet our financial obligations under the
agreement.
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.
We may need additional financing, but our access to capital funding is
uncertain.
Our current and anticipated development projects, particularly our clinical
trial programs for ALX1-11and ALX-0600 require substantial additional capital.
We also have a contractual commitment to maintain our current level of funding
in our metabotropic glutamate receptor program for at least thirty months from
March 2001. We expect that our existing assets will sufficiently fund our
operations for at least the next 24 months. However, our future capital needs
will depend on many factors, including receiving milestone payments from our
collaborators and making progress in our research and development activities.
Our capital requirements will also depend on the magnitude and scope of these
activities, the progress and level of unreimbursed costs associated with
preclinical studies and clinical trials, the costs associated with acquisitions,
the cost of preparing, filing, prosecuting, maintaining and enforcing patent
claims and other intellectual property rights, competing technological and
market developments, changes in or terminations of existing collaboration and
licensing arrangements, and the establishment of additional collaboration and
licensing arrangements, particularly for ALX1-11 and ALX-0600. 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:
. 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
. 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.
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 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 or invalidated. Generally, patent
applications in the United States are maintained in secrecy until the patents
issue, and publication of discoveries in scientific or patent literature often
lags behind actual discoveries. In addition, 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 U.S. Patent and Trademark Office to determine priority of invention,
which could result in substantial cost, even if the eventual outcome is
favorable to us. We cannot assure you that our pending patent applications, if
issued, would be held valid. 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 patent applications 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
13
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.
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.
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 investigation, manufacture,
distribution and marketing of drug products are subject to extensive regulation
by governmental authorities in the United States, Canada 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, show the FDA that
the product is both safe and effective. 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. Other countries, including Canada, 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 U.S. 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 useful,
as demonstrated through clinical trials. Furthermore, governmental approval may
subject us to ongoing requirements for post-marketing studies. Even if we obtain
governmental approval, a marketed product, its U.S. manufacturer and its
manufacturing facilities are subject to biannual inspections by the FDA and must
comply with the FDA's current Good Manufacturing Practices, or cGMP, and other
regulations. These regulations govern all areas of production, record keeping,
personnel and quality control, and are designed to insure full technical
compliance. 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. We may discover previously unknown problems
with a product, manufacturer or facility that may result in restrictions on that
product or manufacturer, including costly recalls or withdrawals of the product
from the market.
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, Hectoral(TM), a product of Bone Care
International, Inc. is being marketed as a treatment to relieve some symptoms of
secondary hyperthyroidism and may compete directly with AMG 073 if it is
approved. Also, GelTex Pharmaceuticals, Inc. is currently marketing RenaGel(TM),
which is a treatment for secondary hyperparathyroidism. Eli Lilly & Co. is
currently developing Forteo(TM), a fragment of the full-length parathyroid
hormone for the treatment of osteoporosis that will compete with our product
candidate, ALX1-11, if it is approved. In addition, many of our competitors have
greater financial resources, more effective marketing and sales, superior
intellectual property positions and substantially greater management resources
than we do. Existing and future products, therapies and technological approaches
will compete directly with our products. Competing products may provide greater
therapeutic benefits for a specific problem or may offer comparable performance
at a lower cost. 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.
Because we do not have internal manufacturing facilities and rely on third-party
manufacturers, we are unable to control the availability of our products.
We rely on third-party manufacturers for the manufacture of most of the
products we use in our clinical trials and intend to rely on third-party
manufacturers to manufacture any products we sell. If we are unable to contract
for a sufficient supply of our products on acceptable terms, or if we encounter
delays and difficulties in our relationships with manufacturers, we may not have
sufficient product to conduct or complete our clinical trials, particularly in
the case of our Phase III clinical trials for ALX1-11, which could delay those
trials. A delay would set back our timetable for the submission of our products
for regulatory approval, market introduction and subsequent sales, and would
postpone revenues and profitability. Because we do not have or intend to develop
the capacity to manufacture ALX1-11, we intend to establish agreements with
third-party manufacturers for pre-launch supplies and for
14
commercial scale manufacturing of ALX1-11. Our third-party manufacturers may be
unable to manufacture ALX1-11 or any other products we develop in commercial
quantities on a cost-effective basis. We will need to expand our existing
relationships or establish new relationships with additional third-party
manufacturers for products that we commercialize or develop in the future. We
may be unable to establish or maintain relationships with third-party
manufacturers on acceptable terms. Our dependence on third parties may reduce
our profit margins and delay our ability to develop and commercialize our
products on a timely and competitive basis. Furthermore, third-party
manufacturers may encounter manufacturing or quality control problems in
connection with the manufacture of our products and may be unable to maintain
the necessary governmental licenses and approvals to continue manufacturing our
products.
Because we do not have sales, marketing or distribution capabilities, we may be
unable to market and sell our products and generate revenues.
We do not have any sales, marketing or distribution capabilities. We will
have to develop a sales force or rely on third parties to perform these
functions for any products we decide to commercialize. To market products
directly, we would have to develop a marketing and sales force with technical
expertise and supporting distribution capability. Our inability to establish in-
house sales and distribution capabilities or relationships with third parties
may limit our ability to generate revenues.
For example, if we are successful in our Phase III clinical trials with
ALX1-11, and the FDA grants approval for the commercialization of ALX1-11, we
will be unable to introduce the product to market without developing these
channels.
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 hyperparathyroidism and
osteoporosis. In addition, third-party payors are increasingly challenging the
price and cost-effectiveness of medical products and services. Significant
uncertainty exists with respect to the reimbursement status of newly approved
healthcare products. We might not be able to sell our products profitably if
reimbursement is unavailable or limited in scope.
If we fail to attract and retain key employees and consultants, 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 testing and commercial use of pharmaceutical products involves
significant exposure to product liability claims. The use of our product
candidates in clinical trials and the sale of our products following regulatory
approval may expose us to product liability claims. We have obtained limited
product liability insurance coverage for our clinical trials on humans.
Currently, we are conducting clinical trials with humans for a number of our
product candidates. 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 products.
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 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.
15
Our stock price has been and may continue to be volatile and your investment
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 we and our
competitors develop
. 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 in control
of NPS. For example, our board of directors, without further stockholder
approval, may issue preferred stock that could delay or prevent a change in our
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 in 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 University of Utah's
Research Park. That lease expires in September 2004, but may be extended for
three additional three-year terms. In Toronto, we own a building consisting of
approximately 90,000 square feet of laboratory, support, and administrative
space. We anticipate that we will not need to acquire additional space in order
to meet our needs over the next three 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
2000.
Executive Officers of the Registrant.
The executive officers of the Company and their ages are as follows:
Name Age Position
- ---- --- --------
Hunter Jackson, Ph.D. 50 Chief Executive Officer, President and Chairman of the Board
David L. Clark 47 Vice President, Operations
N. Patricia Freston, Ph.D. 61 Vice President, Human Resources
James U. Jensen, J.D. 56 Vice President, Corporate Development and Legal Affairs,
16
Secretary and Director
Thomas B. Marriott, Ph.D. 53 Vice President, Development Research
Robert K. Merrell 45 Vice President, Finance, Chief Financial Officer and Treasurer
Alan L. Mueller, Ph.D 46 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 public 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.
James U. Jensen, J.D. has been Vice President, Corporate Development and
Legal Affairs and Secretary since August 1991. He has been Secretary and a
director of NPS since 1987. 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 of Interwest Home Medical, Inc., a public home use
medical equipment distributor. Mr. Jensen received a J.D. and an M.B.A. 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 until 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 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 as Director,
Discovery Research for the Company 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.
17
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is quoted on The Nasdaq Stock Market under "NPSP." The
exchangeable shares are traded on the Toronto Stock Exchange under the symbol
"NX." The following table sets forth the quarterly high and low closing sales
prices for NPS common stock for each quarter in the two most recent fiscal years
as reported by The Nasdaq Stock Market:
High Low
1999 First Quarter $ 7.500 $ 6.563
Second Quarter $ 8.625 $ 5.875
Third Quarter $ 8.000 $ 5.500
Fourth Quarter $12.500 $ 3.813
2000 First Quarter $29.750 $10.750
Second Quarter $26.750 $ 9.500
Third Quarter $56.563 $26.750
Fourth Quarter $52.375 $35.063
On March 1, 2001, there were approximately 365 holders of record of our
common stock, which includes 162 holders of exchangeable shares.
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.
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, 2000, and for the period
from October 22, 1986 (inception) through December 31, 2000. This is derived
from, and qualified by reference to, NPS's audited consolidated financial
statements and notes thereto. NPS is considered a development stage enterprise
as described in note 1 of notes to consolidated financial statements.
Year Ended December 31, October 22, 1986
---------------------- (inception) through
2000 1999 1998 1997 1996 December 31, 2000
---- ---- ---- ---- ---- -----------------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues from research and
license agreements $ 7,596 $ 3,445 $ 3,568 $ 5,842 $20,342 $ 63,109
Operating expenses:
Research and development 27,888 16,935 17,856 15,090 11,326 119,456
General and administrative 12,036 5,983 5,546 5,587 5,111 47,052
Amortization of goodwill
and acquired intangibles 3,561 -- -- -- -- 3,561
In process research and
development acquired -- 17,760 -- -- -- 17,760
-------- -------- -------- -------- ------- ---------
Total operating expenses 43,485 40,678 23,402 20,677 16,437 187,829
Operating income (loss) (35,889) (37,233) (19,834) (14,835) 3,905 (124,720)
18
Other income, net 4,277 1,579 2,672 3,308 2,550 15,203
-------- -------- -------- -------- ------- ---------
Income (loss) before income
tax expense (31,612) (35,654) (17,162) (11,527) 6,455 (109,517)
Income tax expense -- -- -- 167 350 1,018
-------- -------- -------- -------- ------- ---------
Income (loss) before cumulative
effect of change in
accounting principle (31,612) (35,654) (17,162) (11,694) 6,105 (110,535)
Cumulative effect on prior years
(to December 31, 1999) of
changing to a different revenue
recognition method(1) (500) -- -- -- -- (500)
-------- -------- -------- -------- ------- ---------
Net income (loss) $(32,112) $(35,654) $(17,162) $(11,694) $ 6,105 $(111,035)
======== ======== ======== ======== ======= =========
Diluted income (loss) per share:
Income before cumulative effect
of change in accounting
principle $ (1.32) $ (2.77) $ (1.39) $ (0.98) $ 0.55
Cumulative effect on prior
years (to December 31, 1999) of
changing to a different revenue
recognition method (1) (0.02) -- -- -- --
-------- -------- -------- -------- -------
Net income (loss)
per share (2) $ (1.34) $ (2.77) $ (1.39) $ (0.98) $ 0.55
======== ======== ======== ======== =======
Diluted weighted average
shares outstanding (2) 24,007 12,863 12,337 11,956 11,086
Proforma amounts assuming
revenue recognition method
is applied retroactively:
Net income (loss) $(34,654) $(16,162) $(10,694) $ 7,105 $(111,035)
Diluted net income (loss)
per share $ (2.69) $ (1.31) $ (0.89) $ 0.64
___________________
(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 of notes to financial statements for information concerning the
computation of net income (loss) per share.
19
Year Ended December 31,
----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheets Data:
Cash, cash equivalents, and
marketable investment
securities $ 246,936 $ 35,679 $ 43,444 $ 57,942 $ 68,962
Working capital 244,712 32,532 40,767 56,365 67,413
Total assets 269,270 64,966 48,111 62,634 72,160
Long-term portion of capital
leases and long-term debt 54 1,940 32 65 327
Deficit accumulated during
development stage (111,035) (78,923) (43,269) (26,107) (14,413)
Stockholders' equity 265,340 56,079 45,146 60,319 69,870
Quarterly Financial Data (Unaudited)
Quarter Ended
December 31 September 30 June 30 (1) March 31 (1)
----------- ------------ ------- --------
2000
- ----
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)
1999
- ----
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Revenue from research and license
agreements $ 700 $ 915 $ 915 $ 915
Operating loss (20,536) (5,024) (5,500) (6,173)
Net loss (20,219) (4,671) (5,006) (5,758)
Basic and diluted loss per common and
common share equivalent: (2)
Net loss $ (1.50) $ (0.37) $ (0.40) $ (0.46)
Proforma amounts assuming the new
revenue recognition method is applied
retroactively:
Net loss $(19,969) $(4,421) $(4,756) $ (5,508)
Basic and diluted loss per common and
common equivalent share $ (1.48) $ (0.35) $ (0.38) $ (0.44)
___________________
(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.
20
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
We discover, develop and intend to commercialize small molecule drugs and
recombinant proteins, primarily for bone and mineral disorders and central
nervous system disorders. We have five drugs in clinical development and several
preclinical product candidates. Our two most advanced product candidates focus
on bone and mineral disorders. They are AMG 073, which has completed a series of
Phase II clinical trials for treatment of hyperparathyroidism, and ALX1-11,
which is in a pivotal Phase III clinical trial for treatment of post-menopausal
osteoporosis.
On December 23, 1999 we acquired all of the outstanding common stock of
Allelix, 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.
Substantially all of our resources are devoted to our research and
development programs. To date, we have not completed the development of any
pharmaceutical product for sale. We have incurred cumulative losses through
December 31, 2000 of approximately $111.0 million, net of cumulative revenues
from research and license agreements of approximately $63.1 million. We expect
to incur significant operating losses over at least the next several years as we
continue to expand our clinical trials and research activities. In particular,
we recently initiated an 1,800 to 2,000 patient Phase III clinical trial for
ALX1-11, and expect to expend a significant portion of our resources on the
development of this product.
Results of Operations
Revenues
Substantially all our revenues have come from license fees, milestone
payments, and research and development support payments from our licensees and
collaborators. These revenues fluctuate from year to year. All of the research
and development support payments under our existing license or collaborative
agreements expired in 2000. Our revenues were $7.6 million in 2000, $3.4 million
in 1999, and $3.6 million in 1998. We recognized revenue from our agreements as
follows:
. Under our agreement with GlaxoSmithKline we recognized $1.8 million in
2000, $2.0 million in 1999, and $2.2 million in 1998;
. Under our agreement with Kirin, we recognized $1.0 million in each of
2000, 1999, and 1998;
. Under our agreement with Amgen we recognized $400,000 in each of 2000,
1999, and 1998;
. Under our agreement with Forest, we recognized $200,000 in 2000 and
nothing in each of 1999 and 1998;
. Under our agreement with Lilly Canada, we recognized $1.7 million in
2000, and nothing in each of 1999 and 1998;
. Under our agreement with Janssen Parmaceutica, N.V., we recognized $1.9
million in 2000, and nothing in each of 1999 and 1998; and
. Under our agreement with Technology Partnership Canada, we recognized
$404,000 in 2000 and nothing in each of 1999 and 1998.
The increases in revenues in 2000 were primarily due to revenues from
license agreements we acquired as a result of our purchase of Allelix. In
addition, we received a $1.0 million one-time milestone payment from
GlaxoSmithKline. See "Liquidity and Capital Resources" below for further
discussion of payments that we may earn in the future under these agreements.
Operating Expenses
Research and Development Expenses. Our research and development expenses
arise primarily from the compensation and other related costs of our personnel
who are dedicated to research and development activities and from the fees paid
to outside professionals to conduct clinical studies and trials. Our research
and development expenses increased to $27.9 million in 2000 from $16.9 million
in 1999 after a decrease from $17.9 million in 1998. The decrease in research
and development expenses from 1998 to 1999 was principally due to the completion
of Phase 1 clinical trials for NPS 1776 in mid-1999. The increase in research
and development expenses from 1999 to 2000 is principally due to the
commencement of a pivotal Phase III clinical trial for ALX1-11 and
21
a pilot Phase II clinical trial from ALX-0600, two product candidates that we
acquired as a result of our acquisition of Allelix. We have the right to be
reimbursed under our agreement with Technology Partnerships Canada, or TCP, for
a portion of our research and development expenses for ALX-0600. We expect
research and development expenses to increase as these clinical trials progress
and as we begin to manufacture ALX1-11 for market launch. We may incur
additional research and development expenses if we start other clinical trials,
or if we acquire new technologies, product candidates, or companies.
General and Administrative Expenses. Our general and administrative
expenses consist primarily of the costs of our executive management, finance and
administrative staff, business insurance, taxes and professional fees. Our
general and administrative expenses increased to $12.0 million in 2000 from $6.0
million in 1999 and $5.5 million in 1998. The increase in general and
administrative expenses was primarily the result of increased costs of our
operations including our recently acquired subsidiary, NPS Allelix, 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. We expect that general and
administrative expenses in the future will equal or exceed the amount for 2000
in order to support operations in Canada and the U.S. and pre-launch
commercialization costs for product candidates.
Amortization of Goodwill and Acquired Intangibles. We are required to
amortize goodwill and other acquired intangibles as a result of our December 23,
1999 acquisition of Allelix. The remaining intangible assets at December 31,
2000 total approximately $14.9 million. We are amortizing these assets over
their expected lives, which range from two to six years. We recorded
amortization expense of $3.6 million in 2000. We did not record any amortization
of goodwill and acquired intangibles in 1999 and 1998, since the effective date
of the Allelix acquisition for accounting purposes was December 31, 1999.
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. The two most advanced
product candidates, ALX1-11, for osteoporosis, and ALX-0600, for
gastrointestinal disorders, accounted for 83% of the total value of the acquired
in-process research and development.
We 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). We 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, we revised our plans for the next series
of clinical trials for ALX1-11 and ALX-0600. We started a pivotal Phase III
clinical trial with ALX1-11, which we expect will include an 18-month course of
treatment in 1,800 to 2,000 patients with osteoporosis. We also started
enrolling a small number of patients with short bowel syndrome in a pilot Phase
II clinical trial with ALX-0600. Since the date of acquisition and through
December 31, 2000, we have incurred development costs of approximately $13.7
million for ALX1-11 and $1.3 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 any additional testing 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.
Other Income (Expense)
Interest Income. Interest income was $4.8 million in 2000, $1.8 million in
1999, and $2.4 million in 1998. The increase from 1999 to 2000 is the result of
higher average balances of cash, cash equivalents, and marketable investment
securities. These balances increased primarily due to cash received from a
private placement offering of 3.9 million common shares of the Company which was
completed in February 2000 and closed in April 2000, and from a follow-on
offering of 4.6 million shares of the Company which was completed in November
2000. We expect that interest income will be higher in 2001 due to higher
average cash, cash equivalents, and marketable investment security balances for
the year resulting from these offerings. However, we anticipate that interest
income will decrease in the future as cash is utilized for operations.
Loss on Disposition of Equipment, Leasehold Improvements, and Leases. Loss
on the disposition of equipment, leasehold improvements, and leases was $1.1
million in 2000, $131,000 in 1999, and zero in 1998. The increase in the loss
from 1999 to 2000 is primarily due to a non-cash loss of approximately $1.2
million in 2000 associated with closing a facility in New Jersey that we
acquired as part of the acquisition of Allelix in December 1999. 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
22
furniture and equipment which had a net book value of approximately $1.2
million. We expect that the loss on disposition of equipment, leasehold
improvements, and leases in the future to be immaterial.
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 $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.
Taxes. As of December 31, 2000 we had a U.S. federal income tax net
operating loss carryforward of approximately $77.5 million and a U.S. federal
income tax research credit carryforward of approximately $4.8 million. We also
had a Canadian federal and provincial income tax net operating loss carryforward
of approximately $7.1 million and $10.9 million, respectively, a Canadian
research pool carryforward of approximately $86.0 million and a Canadian
investment tax credit carryforward of approximately $3.8 million. Our ability to
utilize the U.S. 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.
Liquidity and Capital Resources
We have financed our operations since inception primarily through
collaborative research and license agreements and the private and public
placement of our equity securities. As of December 31, 2000, we had recognized
$63.1 million of cumulative revenues from payments for research support and
license fees and $325.7 million from the sale of equity securities for cash. The
sale of equity securities includes $7.1 million received from the exercise of
options during 2000, $43.3 million, net, from the sale of 3.9 million shares of
common stock we closed in April 2000, $180.7 million net, from the sale of 4.6
million shares of common stock we completed in November 2000, $2.0 million from
the sale of 168,492 shares of common stock under the terms of an agreement with
an existing corporate licensee during May 2000, $136,000 from the sale of common
stock under the terms of our Employee Stock Purchase Plan, and $4.2 million from
the exercise of warrants to acquire 264,650 shares of exchangeable shares of the
Company's wholly-owned subsidiary, NPS Allelix Inc. The exchangeable shares may
be exchanged into the Company's common shares at any time. Our principal sources
of liquidity are cash, cash equivalents, and marketable investment securities,
which totaled $246.9 million at December 31, 2000.
Net cash used in operating activities was $24.4 million for the year ended
December 31, 2000 compared to $18.1 million and $14.9 million for the years
ended 1999 and 1998, respectively. Net cash used in investing activities was
$93.2 million for the year ended December 31, 2000 compared to $5.8 million and
$900,000 provided by investing activities for the years ended December 31, 1999
and 1998, respectively. Net cash provided by financing activities was $235.4
million for the year ended December 31, 2000 compared to $1.8 million and $1.4
million for the years ended December 31, 1999 and 1998, respectively. The
decrease in cash flows from operating activities in 2000 was due primarily to
the first full year of operations for NPS Allelix Corp., our Canadian
subsidiary, which was acquired in late December 1999. The Allelix transaction
was accounted for as a purchase and the subsidiary's operations were therefore
not included in the years ended December 31, 1999 and 1998. Net cash used in
investing activities in 2000 was almost entirely the result of investing the
proceeds from our private placement, follow-on offering, and option and warrant
exercises in marketable investment securities. Net cash provided by financing
activities in 2000 resulted primarily from the proceeds from the private
placement which closed in April 2000, the follow-on offering which closed in
November 2000, and from the exercise of outstanding options and warrants.
During the past, we have received research and/or development support
payments under our agreements with Amgen, Kirin, GlaxoSmithKline, and under NPS
Allelix's agreements with Janssen and Lilly Canada. With the exception of
GlaxoSmithKline, all of the research and development support payments under
these agreements expired in 2000. Funded research with GlaxoSmithKline continues
on a month-to-month basis. We do not receive any research and development
support payments under our agreements with Abbott Laboratories, Forest
Laboratories, or AstraZeneca. However, we could receive future payments of up to
$142.5 million in the aggregate if we accomplish specified research and/or
development milestones under our agreements with all of those parties. Some of
the late-stage development milestone payments will not be due from AstraZeneca
if we elect a co-promotion option. Each of these agreements also require the
licensees to make royalty payments to us if they sell products derived from the
license rights. However, we do not control the subject matter, timing, or
resources applied by our licensees to their development programs. Thus,
potential receipt of milestone payments from these licensees is largely beyond
our control. Each of these agreements may be terminated before its scheduled
expiration date by the respective licensee under certain conditions.
We have an agreement with Technology Partnerships Canada, or TPC, a
Canadian government program, under which TPC will reimburse us for our research
expenses for treatments for various intestinal disorders using our ALX-0600
product. TPC will
23
reimburse us for 30% of the qualified costs we incur through December 2002, to a
maximum of Cdn. $8.4 million. We will pay a 10% royalty to TPC on revenues
received from the sale or license of any product we develop from the funded
research. Those payments terminate in December 2008 if we have paid TPC a total
of at least Cdn. $23.9 million through that date, or if we have paid TPC less
than that amount through that date, the payments continue until the earlier of
when we have paid TPC a total of Cdn. $23.9 million or December 2017. As of
December 31, 2000, we have invoiced TPC for a total of Cdn. $2.7 million for
reimbursement.
We have entered into sponsored research and license agreements that
obligate us to make research support payments to academic and/or commercial
research institutions. We may be required to make additional payments if the
research institutions reach milestones, or for license fees or royalties to
maintain the licenses. We expect to enter into additional sponsored research and
license agreements in the future.
We expect that our existing capital resources, including interest earned
thereon, will be sufficient to allow us to maintain our current and planned
operations for at least the next 24 months. However, our actual needs will
depend on numerous factors, especially with regard to the clinical trials and
pre-launch marketing and production costs for ALX1-11. Furthermore, if we
advance current propriety programs or if we in-license or otherwise acquire
other technologies, product candidates or companies, we may need to make
substantial additional expenditures.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, in 1998. SFAS No. 133, as amended by SFAS
Nos. 137 and 138, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. For a derivative not designated as a hedging instrument, changes
in the fair value of the derivative are recognized in earnings in the period of
change. Because we do not currently hold any derivative instruments and do not
engage in hedging activities, our adoption of SFAS No. 133, on January 1, 2001,
did not have a material impact on our consolidated financial position, results
of operations, or cash flows.
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. 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 fixed rate financial instruments. 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 a
separate component in stockholders' equity. At any time, sharp changes in
interest rates can affect the fair value of the investment portfolio and its
interest earnings. Currently, we do not hedge these interest rate exposures.
After a review of our marketable securities, we believe that in the event of a
hypothetical 10% increase in interest rates, the resulting decrease in fair
market value of our marketable investment securities would be insignificant to
the financial statements.
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 U.S. dollar and
the Canadian dollar, or by weak economic conditions in Canada. When the U.S.
dollar strengthens against the Canadian Dollar, the cost of expenses in Canada
decreases. When the U.S. dollar weakens against the Canadian dollar, the cost of
expenses in Canada increases. The monetary assets and liabilities in our foreign
subsidiary which are impacted by the foreign currency fluctuations are cash,
marketable investment securities, accounts receivable, accounts payable, and
certain accrued liabilities. A hypothetical 10% increase or decrease in the
exchange rate between the U.S. dollar and the Canadian dollar from the December
31, 2000 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, although we may engage in those types
of activities in the future.
ITEM 8. Financial Statements and Supplementary Data.
Financial statements and notes thereto appear on pages F-1 to F-33 of this
Form 10-K Annual Report.
24
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 24, 2001, under the captions "Election of Directors," and
"Compliance with 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 24, 2001, 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 24, 2001, 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 24, 2001, 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
-----------
Index 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-11
Notes to Consolidated Financial Statements................................... F-12
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.
25
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)
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)
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, 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)
26
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 Beecham Corporation 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)
27.1 Financial Data Schedule (attached to EDGAR filing of the Form 10-K)
____________________
* Confidential treatment has been granted.
(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).
(b) Reports on Form 8-K:
. On October 16, 2000, the Company filed a report on Form 8-K in
connection with Amgen's announcement of results from three Phase II
clinical trials with AMG 073.
. On November 7, 2000, the Company filed a report on Form 8-K
announcing its third quarter and nine month operating results for
its fiscal year 2000.
(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).
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
2nd day of April, 2001.
NPS Pharmaceuticals, Inc.
By: _____________________________________
James U. Jensen
Vice President, Corporate Development
and Legal Affairs
27
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
- ---- ----- ----
__________________________________________ President, Chief Executive Officer, April 2, 2001
Hunter Jackson, Ph.D. and Chairman of the Board
__________________________________________ Vice President, Finance, Chief Financial April 2, 2001
Robert K. Merrell Officer, and Treasurer (Principal Financial
and Accounting Officer)
__________________________________________ Vice President, Corporate Development April 2, 2001
James U. Jensen and Legal Affairs, Secretary, and Director
__________________________________________ Director April 2, 2001
Santo J. Costa
__________________________________________ Director April 2, 2001
John R. Evans
__________________________________________ Director April 2, 2001
James G. Groninger
__________________________________________ Director April 2, 2001
Tamar Howson
__________________________________________ Director April 2, 2001
Joseph Klein, III
28
__________________________________________ Director April 2, 2001
Donald E. Kuhla, Ph.D.
__________________________________________ Director April 2, 2001
Thomas N. Parks, Ph.D.
__________________________________________ Director April 2, 2001
Edward Rygiel
__________________________________________ Director April 2, 2001
Calvin Stiller, M.D.
__________________________________________ Director April 2, 2001
Peter G. Tombros
29
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of KPMG LLP, Independent Auditors......................................... 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-11
Notes to Consolidated Financial Statements....................................... F-12
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, 2000 and 1999, 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, 2000, and for
the period from October 22, 1986 (inception) through December 31, 2000. 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, 2000
and 1999, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2000, and for the period
from October 22, 1986 (inception) through December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, the Company changed its
method of recognizing revenue on nonrefundable licensing fees in 2000.
Salt Lake City, Utah
February 16, 2001
F-2
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Balance Sheets
(in thousands, except share data)
December 31,
---------------------------
Assets 2000 1999
------------- -----------
Current assets:
Cash and cash equivalents $ 131,083 13,116
Marketable investment securities (note 4) 115,853 22,563
Due from related parties -- 68
Accounts receivable 523 815
Other current assets 1,129 417
----------- --------
Total current assets 248,588 36,979
----------- --------
Restricted marketable investment securities (notes 4 and 5) 754 778
Plant and equipment (note 5):
Land 434 447
Building 1,164 1,201
Equipment 7,532 8,238
Leasehold improvements 2,767 3,732
----------- --------
11,897 13,618
Less accumulated depreciation and amortization 6,922 5,541
----------- --------
Net plant and equipment 4,975 8,077
Goodwill, net of accumulated amortization of $1,814 and
$-0- at December 31, 2000 and 1999 9,072 11,230
Purchased intangible assets, net of accumulated
amortization of $1,714 and $-0- at December 31, 2000 and 1999 5,867 7,820
Other assets 14 82
----------- --------
$ 269,270 64,966
=========== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of obligations under capital leases (note 5) $ 305 371
Accounts payable 813 669
Accrued expenses 2,604 687
Accrued severance (note 12) 154 1,455
Deferred income -- 1,265
----------- --------
Total current liabilities 3,876 4,447
Obligations under capital leases, excluding current installments (note 5) 54 373
Long-term debt (note 6) -- 1,567
----------- --------
Total liabilities 3,930 6,387
----------- --------
Minority interest (note 7) -- 2,500
Stockholders' equity (notes 7 and 8):
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 29,691,472 shares at December 31, 2000,
and 19,529,720 shares at December 31, 1999 30 20
Additional paid-in capital 377,802 135,036
Deferred compensation (800) --
Accumulated other comprehensive loss (657) (54)
Deficit accumulated during development stage (111,035) (78,923)
----------- --------
Net stockholders' equity 265,340 56,079
Commitments and contingencies (notes 3, 5, 6, 8, and 14)
----------- --------
$ 269,270 64,966
=========== ========
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)
through
Years ended December 31, December 31,
----------------------------------------
2000 1999 1998 2000
------------ ---------- ---------- ------------
Revenues from research and license agreements $ 7,596 3,445 3,568 63,109
Operating expenses:
Research and development 27,888 16,935 17,856 119,456
General and administrative 12,036 5,983 5,546 47,052
Amortization of goodwill and purchased intangibles 3,561 -- -- 3,561
In-process research and development acquired (note 2) -- 17,760 -- 17,760
--------- --------- -------- ---------
Total operating expenses 43,485 40,678 23,402 187,829
--------- --------- -------- ---------
Operating loss (35,889) (37,233) (19,834) (124,720)
Other income (expense):
Interest income 4,836 1,812 2,365 16,542
Gain (loss) on sale of marketable investment securities 181 (102) 323 198
Loss on disposition of equipment, leasehold improvements,
and leases (1,096) (131) -- (1,197)
Interest expense (96) (4) (16) (802)
Foreign currency transaction gain 137 -- -- 137
Other 315 4 -- 325
--------- --------- -------- ---------
Total other income 4,277 1,579 2,672 15,203
--------- --------- -------- ---------
Loss before income tax expense (31,612) (35,654) (17,162) (109,517)
Income tax expense (note 9) -- -- -- 1,018
--------- --------- -------- ---------
Loss before cumulative effect of change in
accounting principle (31,612) (35,654) (17,162) (110,535)
Cumulative effect on prior years (to December 31, 1999) of
changing to a different revenue recognition method (500) -- -- (500)
--------- --------- -------- ---------
Net loss $ (32,112) (35,654) (17,162) (111,035)
========= ========= ======== =========
Basic and diluted loss per common and common-equivalent share:
Loss before cumulative effect of change in accounting principle ($1.32) ($2.77) ($1.39)
Cumulative effect on prior years (to December 31, 1999) of
changing to a different revenue recognition method (0.02) -- --
--------- --------- --------
Net loss ($1.34) ($2.77) ($1.39)
========= ========= ========
Pro forma amounts assuming the new revenue recognition method
is applied retroactively:
Net loss $ (34,654) (16,162)
========= ========
Basic and diluted loss per common and common equivalent share ($2.69) ($1.31)
========= ========
Weighted average common and common-equivalent shares outstanding
during the year:
Basic and diluted 24,007 12,863 12,337
========= ========= ========
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, 2000
(in thousands, except share data)
Accumulated
Deficit other
accumulated Compre- compre- Net
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) -- --
--------- ------ ---------- -------- ----------- ======= ----------- --------
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 (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, 2000
(in thousands, except share data)
Accumulated
Deficit other
accumulated Compre- compre- Net
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 (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, 2000
(in thousands, except share data)
Accumulated
Deficit other
accumulated Compre- compre- Net
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
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, 2000
(in thousands, except share data)
Accumulated
Deficit other
accumulated Compre- compre- Net
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 (note 6) -- -- 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
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, 2000
(in thousands, except share data)
Accumulated
Deficit other
accumulated Compre- compre- Net
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, 2000
(in thousands, except share data)
Accumulated
Deficit other
accumulated Compre- compre- Net
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 7) $ -- 4 43,314 -- -- -- -- 43,318
Issuance of 210,526 common
shares in exchange for
minority interest (note 7) -- -- 2,500 -- -- -- -- 2,500
Issuance of 168,492 shares of
common stock for cash (note 7) -- -- 2,000 -- -- -- -- 2,000
Issuance of 4,600,000 shares of
common stock for cash (note 7) -- 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 7) -- 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 losses 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
========= ====== ========== ======== =========== =========== ========
See accompanying notes to consolidated financial statements.
F-10
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,
2000 1999 1998 2000
---------- ----------- ---------- -----------
Cash flows from operating activities:
Net loss $ (32,112) (35,654) (17,162) (111,035)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,428 1,196 1,116 12,138
Loss on disposition of equipment, leasehold improvements and leases 1,096 131 -- 1,197
Realized loss (gain) on sale of marketable investment securities (181) 102 (323) (198)
Issuance of common and preferred stock in lieu of cash for services 241 105 121 1,275
Compensation expense on stock options 1,758 96 -- 2,621
Write-off of in-process research and development -- 17,760 -- 17,760
Decrease (increase) in operating assets:
Accounts receivable 270 (325) 292 (156)
Other current assets, due from related parties, and other assets (461) 125 125 (499)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and accrued severance 838 (1,703) 884 1,358
Deferred income (1,255) 94 92 (486)
--------- --------- --------- ---------
Net cash used in operating activities (24,378) (18,073) (14,855) (76,025)
--------- --------- --------- ---------
Cash flows from investing activities:
Net sale (purchase) of marketable investment securities (93,118) 7,129 2,443 (105,589)
Acquisitions of equipment and leasehold improvements (273) (641) (1,507) (10,201)
Proceeds from sale of equipment 199 -- -- 1,275
Cash paid for acquisition, net of cash received -- (676) -- (676)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (93,192) 5,812 936 (115,191)
--------- --------- --------- ---------
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 237,284 1,797 1,757 308,409
Proceeds from long-term debt -- -- -- 1,166
Principal payments on note payable to bank -- -- -- (124)
Principal payments under capital lease obligations (367) (26) (35) (1,813)
Principal payments on long-term debt (1,490) (9) (291) (2,854)
Repurchase of preferred stock -- -- -- (300)
--------- --------- --------- ---------
Net cash provided by financing activities 235,427 1,762 1,431 322,189
--------- --------- --------- ---------
Effect of exchange rate changes on cash 110 -- -- 110
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 117,967 (10,499) (12,488) 131,083
Cash and cash equivalents at beginning of period 13,116 23,615 36,103 --
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 131,083 13,116 23,615 131,083
========= ========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 96 4 16 802
Cash paid for taxes -- -- -- 1,018
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 193 -- -- 4,193
Accrual of deferred offering costs -- -- -- 150
Unrealized (loss) gain on marketable investment securities 245 (164) 110 191
See accompanying notes to consolidated financial statements.
F-11
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(1) Organization and Summary of Significant Accounting Policies
The consolidated financial statements include the financial statements of
NPS Pharmaceuticals, Inc. (NPS) and its operating subsidiary NPS Allelix
Corp. (NPS Allelix), 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 $125.8 million and $10.3 million at
December 31, 2000 and 1999, respectively. At December 31, 2000 and
1999, 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 APB opinion No. 20 Accounting Changes, and SFAS No. 3
Reporting Accounting Changes in Interim Financial Statements, results
of operations for the first, second, and third quarter for 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 non-refundable licensing fees.
F-12 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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, but did not change 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.
The Company's unaudited interim results of operations have been
presented as follows (in thousands, except per share amounts):
Three Months Ended
---------------------------------------------------------
September 30, June 30, March 31,
2000 2000 2000
------------ -------------- ------------
Revenue as originally reported $ 1,654 1,707 1,946
Effect of change in revenue recognition - 250 250
------------- -------------- ------------
Revenue as restated $ 1,654 1,957 2,196
============= ============== ============
Net loss as originally reported (7,383) (7,684) (10,835)
Effect of change in revenue recognition - 250 250
------------- -------------- ------------
Loss before cumulative effect of change in accounting
principle (7,383) (7,434) (10,585)
Cumulative effect on prior years
(to December 31, 1999) of changing to a different
revenue recognition method - - (500)
------------- -------------- ------------
Net loss as restated $ (7,383) (7,434) (11,085)
============= ============== ============
Basic and diluted loss per common and common
equivalent share:
Net loss as originally reported $ (0.30) (0.33) (0.54)
============= ============== ============
Net loss as restated $ (0.30) (0.32) (0.56)
============= ============== ============
(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.
Depreciation and amortization of equipment (including equipment held under
capital lease) are calculated on the straight-line method over their
estimated useful lives of three to five 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.
F-13 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(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 2.5 million, 3.1 million, and 2.3
million during the years ended December 31, 2000, 1999, and 1998,
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 Statement of
Financial Accounting Standards (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 Accounting Principles Board (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.
F-14 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(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 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.
F-15 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(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 foreign
subsidiary in Canada had net assets of approximately $20.4 million and
$28.5 million as of December 31, 2000 and 1999, 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.
(n) Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) Business Acquisition
On December 23, 1999, the Company, by and through its acquisition
subsidiary, NPS Allelix Inc., 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 7(b), which
was valued at approximately $42.8 million using the average closing price
of the Company's common stock for three days before and three days after
the announcement of the acquisition of Allelix. 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. The acquisition was accounted for by the
purchase method. The Company owns 100 percent of the outstanding voting
common shares (100,000 shares) of NPS Allelix Inc. Additionally, NPS
Allelix Inc. has 991,441 nonvoting exchangeable shares outstanding that are
exchangeable solely into shares of the Company's common stock on a one-for-
one basis. NPS Allelix Inc. also has 100 nonvoting preference shares
outstanding. NPS Allelix Inc. owns 100 percent of the outstanding stock of
NPS Allelix. 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.
F-16 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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
==========
Amortiza-
tion 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
==========
The following unaudited pro forma financial information presents the combined
results of operations of NPS and Allelix as if the acquisition had occurred as
of the beginning of 1998 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 $17.76 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.
Years ended December 31,
1999 1998
------------- -------------
(Unaudited, in thousands
except per share data)
------------------------
Net revenue $ 10,162 12,156
Net loss (36,836) (31,524)
Basic and diluted net loss per share (1.90) (1.66)
F-17 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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. The two most advanced product
candidates, ALX1-11, for osteoporosis, and ALX-0600, for gastrointestinal
disorders, accounted for 83 percent of the total value of the acquired in-
process research and development.
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 ALX1-11 and ALX-0600. The Company
started a pivotal Phase III clinical trial with ALX1-11, which it expects
will include an 18-month course of treatment in 1,800 to 2,000 patients
with osteoporosis. The Company also started enrolling a small number of
patients with short bowl syndrome 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 $13.7 million for
ALX1-11 and $1.3 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 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 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:
F-18 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(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 revenue of $400,000 in
2000, 1999, and 1998 as development support revenue under the contract.
(b) Kirin Brewery Company, Limited
Effective June 30, 1995, the Company entered into a five-year agreement
with the pharmaceutical division of Kirin Brewery Company, Limited (Kirin),
a Japanese company, 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. Kirin received exclusive rights to develop and sell products
within its territory. The parties participate in a collaborative research
program utilizing NPS's parathyroid calcium receptor technology.
The Company recognized $500,000, $1.0 million, and $1.0 million in research
support as revenue in 2000, 1999, and 1998, 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.
(c) 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 2000. 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.
F-19 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
Under the GSK agreement, the Company has recognized research support,
milestone and licensing revenue of $1.8 million, $2.0 million, and $2.2
million in 2000, 1999, and 1998, 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.
(d) Abbott Laboratories
In March 2000, the Company entered into an exclusive license agreement with
Abbott Laboratories (Abbott) for the Company's compound NPS 1776 and
related molecules. The agreement grants Abbott the exclusive worldwide
license to develop and commercialize NPS 1776 for all indications. Abbott
has committed to conduct and fund all preclinical development and, if
warranted, clinical development activities for NPS 1776 and related
molecules. Under the terms of the agreement, the Company may receive
milestone payments of up to $18.0 million and will receive royalties from
any product sales under the license.
(e) 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 terms of the agreement, Forest paid the Company an
initial licensing fee of approximately $200,000, which was recognized as
revenue in 2000 and agreed to pay potential milestone payments of up to
$25.0 million and royalties from any product sales under the license. The
Company is not involved in the future development of the compound.
(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 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. The Company recognized $1.9 million in research support revenue in
2000. The funded research period expired in November 2000.
Johnson and Johnson Development Corporation, an affiliate of Janssen, is
an equity investor in the Company.
F-20 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(g) 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 received $1.7 million
for research support in 2000. The funded research period expired in
November 2000.
(h) Technology Partnership Canada
On November 9, 1999, Allelix entered into an agreement with Technology
Partnership Canada (TPC), a program of the Canadian government, which
provides for TPC to reimburse the Company for research expenses incurred
pursuing treatments for various intestinal disorders utilizing the ALX 0600
technology. TPC 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, 2000, the Company has invoiced TPC for a total of Cdn.
$2.7 million for reimbursement. The Company will pay a 10 percent royalty
to TPC 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 TPC declares an event of default under the
agreement, the Company could be required to repay all amounts received from
TPC, plus interest and other damages. The Company recognized Cdn. $600,000
research support revenue in 2000. As of December 31, 2000, no event of
default had been declared.
(i) In-license Agreements
The Company has entered into certain sponsored research and license
agreements that require the Company 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. During 2000, 1999, and 1998, the Company paid to these
institutions $1.0 million, $1.4 million, and $1.5 million, respectively, in
sponsored research payments and license fees. As of December 31, 2000, the
Company had a total commitment of approximately $393,000 for future
research support payments.
F-21 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(4) Marketable Investment Securities
Investment securities available for sale as of December 31, 2000, are
summarized as follows (in thousands):
Gross Gross
unrealized unrealized
Amortized holding holding Fair
cost gains losses value
-------------- -------------- -------------- ------------
Equity securities:
Common stock $ 1 1 - 2
Preferred stock 2,500 - - 2,500
Debt securities:
Treasury 18,021 52 - 18,073
Corporate 82,346 142 (7) 82,481
Commercial paper 13,548 3 - 13,551
-------------- -------------- -------------- ------------
116,416 198 (7) 116,607
Less marketable investment securities classified
as restricted (754) - - (754)
============== ============== ============== ============
$ 115,662 198 (7) 115,853
============== ============== ============== ============
Investment securities available for sale as of December 31, 1999, are
summarized as follows (in thousands):
Gross Gross
unrealized unrealized
Amortized holding holding Fair
cost gains losses value
-------------- -------------- -------------- ------------
Debt securities:
Treasury $ 2,828 - (6) 2,822
Corporate 15,302 - (42) 15,260
Commercial paper 5,265 - (6) 5,259
-------------- -------------- -------------- ------------
23,395 - (54) 23,341
Less marketable investment securities classified
as restricted (778) - - (77)
============== ============== ============== ============
$ 22,617 - (54) 22,563
============== ============== ============== ============
F-22 (Continued)
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
Maturities of investment securities available for sale are as follows at
December 31, 2000 (in thousands):
Amortized Fair
cost value
---------- ---------
Due within one year 50,179 50,191
Due after one year through five years 63,176 63,351
Due between five and ten years 560 563
---------- --------
Total debt securities 113,915 114,105
Equity securities 2,501 2,502
--------- ----------
116,416 116,607
========= ==========
For the years ended December 31, 2000, 1999, and 1998, purchases of
marketable investment securities were $314.1 million, $73.6 million, and
$203.0 million, respectively. For the years ended December 31, 2000, 1999,
and 1998, sales and maturities of marketable investment securities were
$221.0 million, $80.8 million, and $205.4 million, respectively.
(5) Leases
The Company is obligated under various capital leases for certain equipment
that expire at various dates during the next two years. The Company also
has a noncancelable operating lease for office and laboratory space that
expires in 2004 and noncancelable operating leases for certain equipment
that expire in 2001. Rental expense for these operating leases was
approximately $1.1 million, $895,000, and $672,000 for 2000, 1999, and
1998, respectively. The present value of future minimum lease payments on
capital leases and future lease payments under noncancelable operating
leases as of December 31, 2000 are as follows (in thousands):
Capital Operating
leases leases
-------------- --------------
Year ending December 31:
2001 $ 322 671
2002 55 673
2003 - 675
2004 - 515
------------- --------------
Total minimum lease payments 377 $ 2,534
==============
Less: Amounts representing interest (18)
-------------
Present value of minimum capital lease payments 359
Less: Current installments of obligations under capital leases (305)
-------------
Obligations under capital leases, excluding current
installments 54
=============
(Continued)
F-23
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
At December 31, 2000 and 1999, the gross amount of equipment and related
accumulated amortization recorded under capital leases were as follows (in
thousands):
2000 1999
--------- ---------
Equipment $ 1,649 1,672
Less accumulated amortization (1,489) (1,279)
--------- ---------
Net equipment $ 160 393
========= =========
As required by the Company's capital lease agreement, deposits of
marketable investment securities totaling $754,000 at December 31, 2000 are
being held in order to meet future payment obligations.
(6) Long-term Debt
The Company has a loan facility for up to approximately Cdn. $4.5 million,
secured by essentially all real and personal property of NPS Allelix, which
is for various borrowing purposes. No amounts are outstanding on the loan
facility at December 31, 2000. Long-term debt at December 31, 1999 consists
of an installment loan payable to a financial institution at an interest
rate based on the Canadian prime rate plus 1 percent (6.2 percent at
December 31, 1999).
(7) Capital Stock
(a) Shareholder Rights Plan
In December 1996, the Board of Directors approved the adoption of a
Shareholders Rights Plan (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 $50 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, 2001. 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, 2000, the
Rights were not exercisable.
(Continued)
F-24
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(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 shareholders 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 shareholders 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. At December 31, 2000, of the original 3,476,007
exchangeable shares issued, 2,484,566 shares have been exchanged into
the Company's common stock leaving 991,441 outstanding.
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 sheet, 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 sheet.
(Continued)
F-25
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(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 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.
Subsequent to year-end, the Company collected the $193,000 receivable
for stock options issued.
(8) Stock-Based Compensation Plans
As of December 31, 2000, 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
4,496,309 shares are authorized for issuance under the four plans.
As of December 31, 2000, there are no shares reserved for future grant
under the 1987 Plan, there are 304,744 shares reserved for future grant
under the 1994 Plan, there are 22,330 shares reserved for future grant
under the Directors' Plan, and there are 1,684,490 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.
(Continued)
F-26
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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.
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 17,243 and
38,034 shares under the Purchase Plan in the years ended December 31, 2000
and 1999, respectively, and 94,794 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,
-------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- --------------------------- --------------------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
------------ ----------- ----------- ------------ ----------- -----------
Options outstanding
at beginning of year 2,821 $ 7.19 2,306 $ 7.01 2,058 $ 7.04
Options granted 709 13.33 418 5.07 531 6.71
Options assumed in
acquisition - - 407 9.24 - -
------------ ----------- -----------
3,530 3,131 2,589
------------ ----------- -----------
Options exercised 973 7.34 145 2.70 140 2.81
Options canceled 72 12.10 165 8.31 143 10.17
------------ ----------- -----------
1,045 310 283
------------ ----------- -----------
Options outstanding
at end of year 2,485 $ 8.74 2,821 $ 7.19 2,306 $ 7.01
============ =========== ===========
Options exercisable
at end of year 1,362 $ 7.65 1,995 $ 7.54 1,363 $ 6.20
Weighted-average
fair value of options
granted during the
year $ 8.66 $ 3.62 $ 3.95
(Continued)
F-27
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
The following table summarizes information about stock options outstanding
at December 31, 2000 (shares in thousands):
Options outstanding Options exercisable
------------------------------------------------------------ -------------------------------------
Weighted-
average Weighted- Weighted-
Range of Outstanding remaining average Exercisable average
exercise as of contractual exercise as of exercise
prices 12/31/00 life price 12/31/00 price
------------------ --------------- ------------------ ------------------ --------------- ------------------
$ 0.00 - 5.63 692 6.0 $ 3.42 447 $ 2.81
5.64 - 11.26 1,583 7.5 9.27 797 8.79
11.27 - 16.88 90 6.1 13.22 62 12.93
16.89 - 22.52 39 5.6 20.43 29 20.49
22.53 - 28.15 26 7.0 25.35 11 23.38
28.16 - 33.78 24 9.5 28.50 10 28.50
33.79 - 39.41 13 7.8 36.21 4 35.12
39.42 - 45.05 4 9.7 41.50 - -
45.06 - 50.68 8 7.8 47.95 2 46.93
50.69 - 56.31 6 9.7 54.02 - -
--------------- ------------------ ------------------ --------------- ------------------
2,485 7.0 $ 8.74 1,362 $ 7.65
=============== ================== ================== =============== ==================
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. 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):
2000 1999 1998
---------- ---------- ----------
Net loss:
As reported $ (32,112) $ (35,654) $ (17,162)
Pro forma (35,984) (38,338) (19,948)
Net loss per share
As reported:
Basic and diluted $ (1.34) $ (2.77) $ (1.39)
Pro forma:
Basic and diluted $ (1.50) $ (2.98) $ (1.62)
(Continued)
F-28
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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
2000, 1999, and 1998, respectively: risk free interest rates of 6.7 percent,
7.0 percent, and 5.0 percent; expected dividend yields of -0- percent;
expected lives of 5 years; and expected volatility of 73 percent, 85 percent,
and 65 percent. The weighted-average fair value of employee stock purchase
rights granted under the Employee Stock Purchase Plan (the Purchase Plan) in
2000, 1999, and 1998 was $12.74, $2.87, and $3.02, 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 2000, 1999, and 1998, respectively: risk free interest rates of 6.1
percent, 4.7 percent, and 5.3 percent; expected dividend yields of -0-
percent; expected lives of .5 years; and expected volatility of 134 percent,
85 percent, and 65 percent. The Company has granted options in 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 was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions: risk free interest rate 6.1 percent,
expected dividend yield of -0- percent, expected life of 2.8 years, and
expected volatility of 84 percent.
In connection with the acquisition of Allelix, the Company assumed warrants
that entitle the holder to purchase one common share of the Company for each
warrant outstanding. At December 31, 2000, there are 3,434 warrants
outstanding at $20.94, which expire June 2, 2005.
(9) Income Taxes
The Company has no income tax expense for the years ended December 31, 2000,
1999, and 1998.
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):
2000 1999 1998
---------------- ------------- --------------
Computed expected tax benefit $ (10,748) (12,122) (5,835)
Goodwill amortization 809 - -
Foreign tax rate differential (2,616) - -
Change in the beginning-of-the-year balance of the valuation
allowance for deferred tax assets attributable to operations 14,448 7,400 7,131
U.S. and foreign tax credits (1,384) (652) (684)
State income taxes, net of federal tax effect (226) (575) (566)
In-process research and development - 6,038 -
Other (283) (89) (46)
---------------- ------------- --------------
$ - - -
================ ============= ==============
(Continued)
F-29
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
Domestic and foreign components of loss before taxes are as follows (in
thousands):
2000 1999 1998
---------------- ------------- --------------
Domestic $ (8,578) (17,894) (17,162)
Foreign (23,034) (17,760) -
---------------- ------------- --------------
Total loss before taxes $ (31,612) (35,654) (17,162)
================ ============= ==============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 2000 and 1999 are
presented below (in thousands):
2000 1999
---------------------------------- ----------------------------------
Domestic Foreign Domestic Foreign
--------------- --------------- --------------- ---------------
Deferred tax assets:
Stock compensation expense $ 656 - - -
Deferred income - - 352 138
Equipment and leasehold improvements,
principally due to differences in depreciation 211 98 135 -
Intangible assets - 4,741 - 3,870
Financing charges - 73 - 410
Severance costs - - 70 82
Research and development pool carryforward - 38,482 - 31,471
Net operating loss carryforward 28,647 3,747 24,035 452
Research credit carryforward 4,839 - 4,095 -
Investment tax credit carryforward - 3,788 - 4,220
Minimum tax credit carryforward 112 - 112 -
--------------- --------------- --------------- ---------------
Total gross deferred tax assets 34,465 50,929 28,799 40,643
Less valuation allowance (34,465) (50,929) (28,799) (40,582)
--------------- --------------- --------------- ---------------
Deferred tax assets - - - 61
Deferred tax liabilities:
Equipment and leasehold improvements,
principally due to differences in depreciation - - - (61)
--------------- --------------- --------------- ---------------
Net deferred tax asset/(liability) $ - - - -
=============== =============== =============== ===============
(Continued)
F-30
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 2000 will be allocated as follows: 1)
To the extent that the Allelix acquired net deferred tax assets of $40.6
million 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, 2000,
the remaining unamortized goodwill and other intangible assets equaled $14.9
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 $30.6 million to operations and $3.9 million to
paid-in capital.
The valuation allowance for deferred tax assets as of January 1, 2000 and
1999 was $69.4 million and $18.4 million, respectively. The net change in the
Company's total valuation allowance for the years ended December 31, 2000,
1999 and 1998, was an increase of $16.0 million, $51.0 million and $7.2
million, respectively.
At December 31, 2000, 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 Canadian net Canadian Canadian
carry-forward Domestic operating loss research investment
for regular research carryforward for pool tax credit
income tax credit regular income tax carry- carry-
purposes carryforward purposes forward forward
----------------- ------------- -------------------------- ------------ --------------
Federal Provincial
------- ----------
Expiring:
2005 $ 247 - - 814 - -
2006 244 - 441 619 - 648
2007 - 49 6,651 9,421 - 1,155
2008 2,452 334 - - - 1,007
2009 6,342 317 - - - 86
2010 2,928 166 - - - 892
2011 2,358 360 - - - -
2012 10,890 846 - - - -
2018 20,340 1,035 - - - -
2019 18,637 988 - - - -
2020 13,110 744 - - - -
----------------- ------------- --------- ----------- ------------ --------------
Total $ 77,548 4,839 7,092 10,854 86,000 3,788
================= ============= ========= =========== ============ ==============
(Continued)
F-31
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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 $86.0 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 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.
(10) 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 2000 up to a maximum contribution from the
Company of the lesser of three percent of employee compensation or $5,100.
Total contributions for the years ended December 31, 2000, 1999, and 1998,
were $152,000, $160,000, and $-0-, 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.
(11) 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.
(12) Plan of Termination
As of December 31, 1999, the Company had a balance of $1.5 million for
accrued severance for salaries and benefits payable to former employees
under formal plans of termination. Approximately $1.3 million was paid in
severance benefits during 2000, leaving an accrued balance of approximately
$154,000 as of December 31, 2000 which is expected to be paid in early
2001.
(Continued)
F-32
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(13) Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, in 1998. SFAS No. 133, as amended by
SFAS Nos. 137 and 138, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. For a derivative not designated as
a hedging instrument, changes in the fair value of the derivative are
recognized in earnings in the period of change. Because the Company does
not currently hold any derivative instruments and does not engage in
hedging activities, the Company's adoption of SFAS No. 133, on January 1,
2001, did not have a material impact on its consolidated financial
position, results of operations, or cash flows.
(14) 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.
F-33