Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the quarterly period ended April 2, 2003

Commission File Number 0-24320

NAPRO BIOTHERAPEUTICS, INC.

(Exact name of Registrant as specified in its charter)

6304 Spine Road, Unit A

Boulder, Colorado 80301

(303) 516-8500

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

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

As of May 2, 2003, the registrant had 29,939,486 shares of common stock, $0.0075 par value, outstanding.

Table of Contents

NaPro BioTherapeutics, Inc. and Subsidiaries

Table of Contents

2

Table of Contents

NaPro BioTherapeutics, Inc. and Subsidiaries

Consolidated Condensed Balance Sheets

(In thousands, except per share data)

See accompanying notes to Consolidated Condensed Financial Statements.

3

Table of Contents

NaPro BioTherapeutics, Inc. and Subsidiaries

Consolidated Condensed Statements of Operations

(In thousands, except per share data)

(Unaudited)

See accompanying notes to Consolidated Condensed Financial Statements.

4

Table of Contents

NaPro BioTherapeutics, Inc. and Subsidiaries

Consolidated Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to Consolidated Condensed Financial Statements.

5

Table of Contents

NaPro BioTherapeutics, Inc. and Subsidiaries

Consolidated Condensed Statements of Cash Flows (continued)

(In thousands)

(Unaudited)

See accompanying notes to Consolidated Condensed Financial Statements.

6

Table of Contents

NaPro BioTherapeutics, Inc.

Notes to Consolidated Condensed Financial Statements

April 2, 2003

(Unaudited)

Note 1. Basis of Presentation

The accompanying financial statements are unaudited. However, in the opinion of management, the financial statements reflect all adjustments, consisting of only normal recurring adjustments, necessary for fair presentation. Interim results of operations are not indicative of results for the full year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Effective January 1, 2003, the Company changed its fiscal year, from a calendar year ending on December 31 to a 52-53 week fiscal year ending on the Wednesday closest to December 31. As a result of this change, the Company’s three fiscal quarters in 2003 end on April 2, July 2, and October 1, 2003, and its fiscal year will end on December 31, 2003. Thereafter, the Company will maintain a 52-53 week cycle ending on a Wednesday and the Company will add a 53^rd week to every fifth or sixth fiscal year.

Note 2. Reclassifications

Certain data in the consolidated condensed financial statements of the prior year has been reclassified to conform to the current year presentation.

Note 3. Revenue Recognition

Product sales: NaPro recognizes revenue from product sales at the time of shipment, as the title passes to the customer, and the customer assumes the risks and rewards of ownership. Payments received in advance against future sales are recorded as deferred revenue until earned.

License fees: NaPro capitalizes license fees and amortizes them to income over the estimated economic life of the license. The amortization period consists of amortizing 80% of fees to income over the first five years of the license, and the remaining 20% of the fees to income over the remaining period of the license.

The Company recognizes income from development milestones when the milestone is achieved and the Company has no future obligation to perform additional work associated with the given milestone.

Note 4. Inventory

Inventory consists of the following (in thousands):

7

Table of Contents

Long-term inventory consists of raw materials which are not expected to be utilized during the next twelve months, due to the timing of biomass harvests and anticipated future changes to our production process.

Note 5. Property, Plant and Equipment

Property, plant and equipment consists of the following (in thousands):

Note 6. Stock Options

NaPro accounts for its stock options to employees and directors in accordance with Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations. Pursuant to APB No. 25, compensation expense is recorded over the vesting period only if the fair value of the underlying stock exceeds the exercise price. Stock options granted to consultants are accounted for under the fair value method, in accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation.

Pro forma information regarding net income and earnings per share is required by SFAS 123 and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, which requires that the information be determined as if the Company had accounted for employee stock options granted subsequent to December 31, 1994 under the fair value method of that statement. NaPro estimated the fair value for these options at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the quarters ended April 2, 2003 and March 31, 2002, respectively: risk-free interest rates of 2.49% to 3.18% and 4.12% to 4.72%; no expected dividend; volatility factors of 1.187 and 1.167, and an estimated expected life range of three to six years.

For purposes of pro forma disclosures, the Company amortizes to expense the estimated fair value of the options over the options’ vesting period. NaPro’s pro forma information is as follows (in thousands, except per share amounts):

8

Table of Contents

Note 7. Lease Amendment

In March 2003, the Company entered into an agreement to terminate its lease comprising 54,000 square feet of office, research and development and manufacturing space in Boulder, Colorado in two phases through the end of 2003. In conjunction with terminating the lease, NaPro paid to the lessor fees totaling $249,000 during the quarter ended April 2, 2003. The Company expects to enter into a new agreement to lease approximately 10,000 square feet of administrative space by June 2003. In accordance with Statement of Financial Accounting Standard No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets, the depreciable lives of long-lived assets to be abandoned will be accounted for prospectively as a change in estimate in accordance with Accounting Principles Board Opinion No. 20 (APB 20), Accounting Changes. Therefore, the remaining useful lives of assets affected by this lease termination have been revised through the remaining lease period. The effect of this change in estimate was not material to the Company’s consolidated condensed financial statements for the quarter ended April 2, 2003. In addition to the leasehold improvements that will be abandoned, the Company may move, sell or abandon certain pieces of equipment as a result of this lease termination. However, NaPro is unable to estimate the financial impact of any potential charges at this time.

In connection with the termination of this lease, the Company expects to incur additional costs of approximately $400,000 to ready the facility for new tenants. These additional costs are expected to be incurred during the remainder of 2003.

Note 8. Restructuring Plan

During the first quarter of 2003, the Company incurred severance costs of $377,000 associated with the termination of two executive officers. The Company anticipates further personnel changes as a result of the lease termination and expected production process changes during the remainder of 2003. However, NaPro is unable to estimate the financial impact of these potential charges at this time.

Note 9. Subsequent Events

In April 2003, the Company announced that it is offering to sell its worldwide generic cremaphor injectable paclitaxel business, its first product approved for commercial sale. Proceeds from the sale would be used to accelerate the development and commercialization of therapeutic products based on NaPro’s proprietary Gene Editing and Targeted Oncology platforms, to advance the Company’s reagent and services business, and to retire $20.0 million of debt owed to Abbott Laboratories. The assets which may be sold include the Company’s domestic and international issued and pending patents associated with the cremaphor injectable paclitaxel business, development and supply agreements, inventories and manufacturing property, plant and equipment.

In April 2003, the Company sold its technical and analytical services group to privately held ChromaDex, Inc. in exchange for approximately 18% of the outstanding common stock of ChromaDex, Inc. In total, approximately 20 NaPro employees will transfer to ChromaDex in April and September 2003 as part of this transaction. In exchange for the common stock received, the Company is selling property and equipment valued at approximately $1.0 million, as well as providing occupancy cost subsidies of approximately $500,000. ChromaDex assumed the lease for NaPro’s research facility in Boulder, Colorado as part of this transaction. ChromaDex is a supplier of phytochemical reference standards for the nutraceutical, dietary supplement and functional food industries.

9

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the results of operations of NaPro BioTherapeutics, Inc. You should read this discussion in conjunction with the Financial Statements and Notes included elsewhere in this report. Certain statements set forth below constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, referred to as the “Reform Act.” See “Special Note Regarding Forward Looking Statements.”

General

We are a pharmaceutical company focused in three distinct areas: the production and sale of paclitaxel, an approved cancer drug; the development of Targeted Oncology products, and the development of novel genomic technologies, primarily in the area of Gene Editing for applications in human therapeutics, diagnostics, agribiotechnology and pharmacogenomics. Our first commercialized product is paclitaxel, a naturally occurring chemotherapeutic anti-cancer agent found in certain species of yew, or Taxus trees. We are also actively engaged in evaluating the in-licensing or purchase of potential new products and/or technologies, whether or not those products or technologies are derived from natural products. Our evaluation of new products and technologies may involve the examination of individual molecules, classes of compounds, or platform technologies, in both cancer and other therapeutic areas. Acquisitions of new products or technologies may involve the purchase of such products or technologies, or the acquisition of, or merger with, other companies.

In April 2003, we announced that we are actively seeking to sell our worldwide generic cremaphor injectable paclitaxel business. The contemplated sale would transfer all of our assets related to the manufacture and sale of paclitaxel, which comprises a significant portion of our total assets and our current operations. The assets to be sold include our bulk paclitaxel manufacturing facilities and related production equipment; plantations; our contracts with Abbott Laboratories (Abbott), Mayne Pharma, Tzamal Pharma (Tzamal), and JCR Pharmaceuticals Co., Ltd. (JCR); regulatory filings; and patents and intellectual property relating to the manufacture and formulation of paclitaxel. We expect to retain a non-exclusive right under transferred patents and intellectual property for formulations other than the polyethoxylated castor oil and ethanol formulation currently approved by the FDA and other international regulatory agencies. We have retained Wells Fargo Securities, LLC to act as our agent in this sale transaction. The timing and terms of sale of the paclitaxel business are uncertain at this time, and we can give no assurance that any transaction will occur. If the sale of our paclitaxel business is successful, we will exit that business and we intend to utilize the proceeds of the sale to fund further development of our novel Gene Editing and Targeted Oncology agents, as well as retire $20.0 million of debt owed to Abbott. If the transaction does not occur, we would expect to remain in the paclitaxel business for the foreseeable future.

We continue to incur substantial research and development expense related to the development of novel, targeted anti-cancer agents, and the development of novel genomic technologies, primarily in the area of Gene Editing, for applications in human therapeutics, diagnostics, agribiotechnology and pharmacogenomics, as well as the improvement of our paclitaxel yield, the reduction of our long-term cost of product and the development of our semisynthesis process. Accordingly, we have incurred significant losses, including losses of $8.7 million, $25.8 million and $16.6 million for the years ended December 31, 2002, 2001 and 2000, respectively. We incurred a loss of $2.8 million for the three months ended April 2, 2003, resulting in an accumulated deficit of $106.4 million as of April 2, 2003. We anticipate that losses may continue until such time, if ever, as we are able to generate sufficient sales to support our development operations, including the research and development activity mentioned above.

10

Table of Contents

Our ability to generate sufficient sales to support our operations currently depends primarily upon the successful commercialization of our worldwide paclitaxel program or, if our paclitaxel business is sold, upon our successful development of Gene Editing and Targeted Oncology products. Our strategy for the paclitaxel program has been to form strategic alliances through long-term exclusive agreements with established pharmaceutical companies. In 1999, we entered into an exclusive collaborative agreement of up to 20 years covering the U.S. and Canada with Abbott to develop and commercialize one or more formulations of paclitaxel for the treatment of a variety of cancers. Under our agreement with Abbott, we are responsible for supply of bulk drug; development activity is conducted jointly. Abbott is responsible for finishing, regulatory filings, marketing, and sale of the finished drug product. Most primary decisions related to the paclitaxel development program are made by a joint Abbott-NaPro Development Committee. In March 2001, we and Abbott filed an Abbreviated New Drug Application (ANDA) with the United States Food and Drug Administration (FDA) for paclitaxel. The FDA granted approval of this ANDA on May 8, 2002. We received an approval for a second ANDA on August 1, 2002, which provides for greater manufacturing flexibility for the generic paclitaxel product.

In connection with the Abbott agreement, we could have received total funding of up to $118.0 million in the form of up to $30.0 million in development milestones, up to $57.0 million in marketing milestones, $20.0 million in secured debt, and $11.0 million in equity investments. Marketing milestones are based upon certain annual sales levels, the majority of which are unlikely to be achieved given the current pricing of paclitaxel. Through April 2, 2003, and excluding product sales, we received $40.0 million under the agreement, including $11.0 million in equity investments in exchange for 2,000,000 shares of our common stock, $9.0 million in development milestones, and $20.0 million in secured debt.

Of the $30.0 million of potential development-related milestone payments, we received $1.0 million upon execution of our agreement with Abbott in July 1999. With the approval of our ANDA, and upon commencement of commercial sales, we received an $8.0 million payment in May 2002. Additional development milestones will only be available should NaPro or Abbott undertake and successfully complete new development work, which is not currently anticipated. Therefore, it is highly unlikely that we will receive any further development milestone payments. If we were to sell our paclitaxel operations, we would no longer be entitled to any future milestone payments from Abbott.

We have received $20.0 million of secured debt from Abbott. The debt bears a primary interest rate of 6.5% and is due in full on the earlier of: (i) the second anniversary of the first sale of finished product by Abbott to a wholesaler or end-user customer following approval of finished product by the FDA (May 8, 2004); (ii) the termination of the Abbott agreement; or (iii) January 1, 2007. The debt is limited to a borrowing base of collateralized assets, recomputed monthly. The majority of our paclitaxel inventories, and specific assets which relate to the manufacture and related sale of paclitaxel, are collateralized as security for the debt. Abbott’s only recourse in the event of our default on the debt is to these specific assets. We anticipate that we will use a portion of the proceeds from the sale of the paclitaxel business to retire the debt to Abbott.

Contingent upon achieving certain commercial sales thresholds for all approved formulations of paclitaxel over several years, we could have received marketing milestone payments from Abbott of up to $57.0 million. Given the current pricing of paclitaxel, we believe that the majority, if not all, of these annual sales thresholds are unlikely to be achieved.

Under terms of the agreement, Abbott purchases bulk drug from us. Abbott may terminate the agreement at any time with or without cause. Should Abbott terminate without cause, it is obligated to make certain payments to us and to give us twelve months prior written notice. Since the approval of generic paclitaxel in mid-2001, the selling price of paclitaxel has fallen significantly, and may continue to do so. We receive a fixed price payment of $500 per gram, upon delivery of paclitaxel to Abbott, plus a quarterly royalty payment, if any. The royalty payment is a percentage of sales recorded by Abbott less any product payment already paid to us. The percentage of sales varies

11

Table of Contents

each year based upon total sales in that year recorded by Abbott. We do not anticipate receiving significant royalty payments given the current price of the drug.

In 1992, we entered into a 20-year exclusive agreement with F.H. Faulding & Co., Ltd. (Faulding), a large Australian pharmaceutical company, for the clinical development, finishing, sale, marketing and distribution of paclitaxel. In October 2001, Faulding was acquired by Mayne-Nickless Limited, an Australian based health care provider and logistics operator. As a result, Faulding is now known as Mayne Pharma. Mayne Pharma actively markets anti-cancer pharmaceuticals and other health care products in Europe, Australia, Asia, South America, and other regions throughout the world. In 2000, we amended the Mayne Pharma agreement to, among other things, add additional countries to Mayne Pharma’s exclusive territory. In 2001, we entered into a separate agreement with Mayne Pharma covering development and sale of paclitaxel in Europe. We cannot assure that we will receive regulatory approval in any of the major markets in Europe. Should we receive approval, Mayne Pharma will then market and sell our paclitaxel in Europe. We and Mayne Pharma will share equally the net sales of the product in Europe. Including the new agreement for Europe, the Mayne Pharma territory includes substantially all of the world other than the U.S., Canada, Japan, Israel, the former Soviet Union and parts of Africa. Mayne Pharma has received marketing approval for, and is selling paclitaxel as ANZATAX^™ in more than 25 countries.

In July 2002, the European Patent Office, Opposition Division, ruled that NaPro’s currently issued paclitaxel formulation patent in the European Patent Convention is invalid. We have appealed this ruling and expect the appeal to be heard within the next 36 months. We do not believe this decision will have any effect outside of the jurisdiction of the European Patent Office; nor will it affect our ability to enter the market in Europe as regulatory approvals are received. We also do not believe this patent decision will affect our revenues or earnings through calendar year 2003.

In January 2001, we received approval in Israel to sell paclitaxel under the trade name Biotax^™. We have established an exclusive supply and distribution agreement with Tzamal for the development and distribution of paclitaxel in Israel. Tzamal is an Israeli pharmaceutical company, active and well established in the Israeli pharmaceutical market and specializing, among other areas, in ethical products for the treatment of cancer, metabolic diseases, neurological disorders and gynecology/fertility. The Israeli Ministry of Health has approved Biotax for use in treating a variety of cancers.

In June 2001, we and JCR entered into a mutually exclusive development, supply and distribution agreement for paclitaxel in Japan. JCR, headquartered in Ashiya, Japan, is a research and development oriented pharmaceutical manufacturer, focusing on the research of bioactive substances such as enzymes, hormones, enzyme inhibitors, growth factors and stimulating factors. Under the agreement, we will be responsible for manufacturing and supplying the finished drug. We and JCR will jointly be responsible for the clinical and regulatory program necessary for seeking approval to market paclitaxel in Japan. JCR will be responsible for the sales and distribution of the product in Japan upon its approval. We cannot assure, however, that we will receive regulatory approval of paclitaxel in Japan, or that we and our strategic partner will successfully market it.

Research and Development

Research and development are major activities for us. We discussed the nature and status of our research and development in depth in our Annual Report on Form 10-K for the year ended December 31, 2002, and in the General section of this Management’s Discussion and Analysis. If the paclitaxel business is sold, we would expect to fund our near-term research and development efforts with a portion of the proceeds from the sale.

12

Table of Contents

We have incurred the following expense on research and development projects, including process improvements in our paclitaxel business (in thousands):

Research and development is expected to remain a significant expense of our business. Our research and development activity is subject to change as we develop a better understanding of our projects and their prospects. We currently expect to concentrate on the development of novel, targeted anti-cancer agents, and the development of novel genomic technologies, primarily in the area of Gene Editing, for applications in human therapeutics, diagnostics, agribiotechnology and pharmacogenomics. We anticipate bringing our Targeted Oncology program to the clinic during the first half of 2004. Our Sickle Cell Disease and Huntington’s Disease programs are expected to go into the clinic during 2004 or the beginning of 2005. However, there can be no assurance that we will be able to achieve the timing of these programs. We also cannot estimate the cost of the effort necessary to complete the programs or the timing of commencement of material net cash inflows from these programs. Continued development of these programs is dependent upon additional capital. We cannot assure that we will be able to obtain such capital on terms, which are acceptable to us. We have included a number of the risks and uncertainties associated with completing development on schedule in the Special Note Regarding Forward-looking Statements, below.

Quarter Ended April 2, 2003 Compared to Quarter Ended March 31, 2002

Product Sales. Product sales for the quarter ended April 2, 2003 were $6.9 million, an increase of approximately $200,000 from the prior year period. The increase during this quarter was primarily attributable to shipments to Abbott and Mayne Pharma offset by a decrease in sales to Tzamal. Sales to Abbott for the quarter were $4.1 million, an increase of $100,000 from the same period in 2002. Sales to Mayne Pharma for the quarter were $2.7 million, an increase of $500,000 from the prior year quarter. There were no sales to Tzamal for the current year period, which resulted in a decrease of $500,000 from the prior year period. Other sales of reagents and standards were approximately $100,000 in the current year period. There were no significant comparable sales during the prior year period. Future sales are difficult to predict and are expected to vary from year to year depending upon numerous demand and competitive factors. Among these factors are: the relationship of competitors with their customers, the relationship of Abbott, Mayne Pharma and Tzamal with its customers and the amount of competitor product in the distribution channel.

Cost of Sales. Cost of sales for the current year quarter were $3.3 million, a decrease of $3.8 million from the prior year quarter. The decrease was primarily attributable to favorable yields resulting from the utilization of biomass with higher taxane content, more effective utilization of our production facilities, a reduction in manufacturing operating expenses and improvements in our manufacturing processes. As a result, the gross margin increased to 51.6% in the first quarter of 2003 compared with a negative 5.4% in the prior year quarter. Gross margins may fluctuate in future periods depending on a number of factors, including biomass taxane content, production volumes and developments in our manufacturing process.

Research and Development Expense. Research and development expense for the current year quarter was $2.6 million, a decrease of $1.1 million from the prior year quarter. Genomics research and development increased $100,000 from the 2002 quarter, while pharmaceutical research and development decreased $1.2 million from the prior year quarter. The decrease was primarily attributable to reductions in our contract services ($1.0 million) and supplies ($400,000) expenses. These reductions were partially offset by severance costs associated with an executive officer ($200,000). In the prior year period, a significant portion of our research and development expenditures were related to our semisynthesis paclitaxel program. During the current year period, we incurred costs

13

Table of Contents

associated with our Targeted Oncology program for which there were no comparable costs during the prior year period.

General and Administrative Expense. General and administrative expense for the current year quarter was $3.4 million, an increase of approximately $800,000 from the prior year quarter. The increase was primarily due to increased staffing at our genomics division ($300,000), lease termination costs associated with our corporate facilities in Boulder, Colorado ($200,000) and increased depreciation ($100,000).

License Fee Income. License fee income for the current year quarter was $280,000, a decrease of $70,000 from the prior year quarter. The decrease was attributable to a change in accounting estimate made during the second quarter of 2002.

Interest Expense. Interest expense for the first quarter of 2003 was $554,000, an increase of $173,000 from the prior year quarter. The increase was primarily attributable to the convertible debenture interest and amortization of the discount attributable to the conversion feature of the $8.0 million in convertible debt issued in February 2002.

Liquidity and Capital Resources

Our capital requirements have been, and will continue to be, significant. As of April 2, 2003, we had a working capital balance of $14.1 million compared to a working capital balance of $18.8 million as of December 31, 2002. To date, we have funded our capital requirements primarily with the net proceeds of public offerings of common stock of approximately $21.1 million, with private placements of equity securities of approximately $62.6 million, with the exercise of warrants and options of $8.0 million and with net borrowing of $27.8 million.

In February 2002, we sold privately $8.0 million of common stock issued at $9 per share and $8.0 million principal of five-year 4% debentures convertible into common stock at $15 per share to TL Ventures V, L.P. and one of its affiliated funds. No placement agent was involved in the transaction. The net proceeds were $15.6 million. As part of this transaction, we recorded a discount attributable to the conversion feature of the convertible debentures in the amount of $3.1 million, which is being amortized over the term of the debentures. During the first quarter of 2002, we filed a registration statement with the Securities and Exchange Commission to register the resale of the common stock, common stock issuable upon conversion of the debentures and common stock issuable in lieu of cash interest on the debentures under the Securities Act of 1933. In July 2002, the registration statement was declared effective by the SEC. NaPro may pay the debenture interest in cash or common stock at its option. The debentures automatically convert into common stock during the first two years if the average price of the common stock for 15 trading days exceeds $22, and during the last three years if the average price for 30 trading days exceeds $16. If we have insufficient funds to repay the debentures in full at maturity or upon acceleration, the holders of the debentures may elect to convert the outstanding principal balance and any unpaid accrued interest on the debentures into shares of common stock at a conversion price equal to the then current 20 day average trading price of the common stock. The conversion price of the common stock in such a circumstance could be materially below the price at which we otherwise would be willing to issue our common stock. Issuance of common stock at such a price could result in substantial dilution to our other stockholders and could have a material adverse effect on the market price of our common stock.

In December 2002, we acquired the genomics business of Pangene Corporation for $1.3 million in cash and assumption of debt obligations totaling approximately $65,000. The acquisition consisted primarily of patents and intellectual property relating to Pangene’s homologous recombination technology and gene isolation and service business, physical assets, instrumentation, software, customer relationships and third-party licenses. The purchase price was allocated to intangible assets totaling $987,000, fixed assets and software of $183,000, and other current assets of $44,000. In process research and development of $151,000 was expensed at the time of the acquisition. We are amortizing the intangible assets over 5 to 15 years, and fixed assets and software over 3 years. In connection with this agreement, we acquired additional patents in January 2003 in the amount of $400,000.

14

Table of Contents

In November 2000, we entered into a 20-year Gene Editing technology license with the University of Delaware and Thomas Jefferson University relating to the use of proprietary oligonucleotides (small, synthetic DNA polymers) designed to precisely alter genes in humans, animals, plants, viruses and microbes. The license provides for research and patent funding commitments and payments in common stock. To date, we have issued 300,000 shares under the license agreement. Assuming we do not cancel the license, we will issue an additional 900,000 shares in 100,000 share-per-year increments on the license anniversaries. We may, at our option, accelerate the issuance dates. Certain milestones may also accelerate the issuance dates. The license is terminable at NaPro’s option. If terminated, no further shares would be issued. We have committed to fund at least $300,000 in research under this agreement during 2003.

We believe existing capital and projected sales, as well as the reduction of current inventory and collection of accounts receivable, will provide adequate capital to fund our operations and capital expenditures for the next twelve months. However, pharmaceutical development is a costly and time-consuming process. We may in-license or purchase new products or technologies. The cost of acquiring and developing such resources, and related capital expenditures, may be very large. As a result, we may seek additional capital. We cannot assure that we will be able to obtain such capital on terms, which are acceptable to us.

Working Capital and Cash Flow. Cash and cash equivalents decreased $168,000 to $6.6 million for the quarter ended April 2, 2003 from $6.8 million as of December 31, 2002. During the current quarter, net cash provided by operating activities was $255,000, net cash used in investing activities was $724,000 and financing activities provided net cash of $301,000.

Inventory was $13.6 million at April 2, 2003, of which $5.9 million was classified as non-current. Non-current inventory consists of raw materials which are not expected to be utilized during the next twelve months, due to the timing of biomass harvests and anticipated future changes to our production process. The amount of inventory is dependent on a number of factors, including the shipping requirements of our strategic partners, our production planning for meeting those needs, and the timing of seasonal biomass harvests. Inventory balances may vary significantly during product development, launch periods and during seasonal harvests.

Accounts receivable was $7.0 million at April 2, 2003 and $9.3 million at December 31, 2002. We anticipate that the level of our accounts receivable will continue to decrease throughout the remainder of 2003. If we sell the paclitaxel business, we expect that our accounts receivable will be significantly reduced from our current levels for the foreseeable future.

Capital Expenditures. We spent $324,000 for capital projects during the first quarter of 2003 and $400,000 for patents acquired in connection with the prior year acquisition of assets from Pangene Corporation. These capital project expenditures primarily consisted of manufacturing and laboratory equipment purchases, and plantation costs.

The amount and timing of future capital expenditures will depend upon numerous factors, including:

We anticipate capital expenditures of approximately $2.0 million during 2003, which will be significantly reduced from the prior year. The primary focus of capital spending during the remainder of 2003 is expected to be in our

15

Table of Contents

research and development areas. Although we may seek additional long-term financing to fund capital expenditures, we cannot assure that we can obtain such financing on terms, which are acceptable to us.

Net Operating Loss Carryforwards. As of December 31, 2002, we had approximately $87.0 million of net operating loss carryforwards to offset future taxable income. Tax law provides limits on the utilization of net operating loss carryforwards if there has been a “change of ownership” as described in Section 382 of the Internal Revenue Code. Such a change of ownership may limit our utilization of our net operating loss carryforwards, and could be triggered by sales of securities by us or our stockholders.

Business Development Activities. In the normal course of our business, we investigate, evaluate, and discuss licensing relationships, acquisitions, and other business combination opportunities in the pharmaceutical and genomics businesses. In the event we enter into any such relationships or transactions, we may consider using available cash, issuing equity securities or increasing our debt. Such transactions could materially affect our capital structure.

Critical Accounting Policies

The Company’s critical accounting policies are presented in its Annual Report on Form 10-K for the year ended December 31, 2002. There were no changes to these critical accounting policies during the quarter ended April 2, 2003.

Special Note Regarding Forward-looking Statements

The statements in this report that are not historical facts are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. Forward-looking statements can be identified by the use of words such as “believes”, “intends”, “estimates”, “may”, “will”, “should”, “anticipated”, “expected” or comparable terminology or by discussions of strategy. Such forward-looking statements may include, among others:

Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following:

16

Table of Contents

If we fail to meet all applicable Nasdaq SmallCap requirements and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease.

Our common stock is listed on the Nasdaq SmallCap Market. In order to maintain our listing, we must meet minimum financial and other requirements. This includes a minimum stockholders’ equity requirement of at least $2.5 million or a minimum market value of listed securities of $35.0 million. As of April 2, 2003, our stockholders’ equity was $4.1 million and the market value of our common stock outstanding was $21.6 million. In addition, on January 28, 2003, the Nasdaq Staff notified us that the bid price of our common stock had closed below the required $1.00 per share for 30 consecutive trading days, and, accordingly, that we did not comply with Marketplace Rule 4450(a)(5). We have been provided 180 calendar days, or until July 28, 2003, to regain compliance with this requirement. To demonstrate compliance with the bid price requirement, we must maintain a bid price of greater than $1.00 for a minimum of 10 consecutive business days, although in certain circumstances Nasdaq may require a longer compliance period.

If we are unable to comply with Nasdaq’s listing standards, Nasdaq may determine to delist our common stock from the Nasdaq SmallCap Market. If Nasdaq made a determination to delist our common stock, the delisting procedure would involve a process beginning with Nasdaq’s notification and would include a hearing and the possibility of appeal. There is no assurance that at the end of this process our common stock would continue to be listed on the

17

Table of Contents

SmallCap Market. If our common stock were delisted for any reason, it could reduce the value of our common stock and its liquidity. Delisting could also adversely affect our ability to obtain financing for the continuation of our operations and/or result in the loss of confidence by suppliers, customers and employees.

Should one or more of the risks mentioned above materialize (or the consequences of such a development worsen), or should the assumptions underlying our forward-looking statements prove incorrect, actual results could differ materially from those forecasted or expected. These factors are not intended to be an all-inclusive enumeration of the business risks we face. Reference is also made to the risk factors discussed in Amendment No. 4 to our Registration Statement (No. 333-82810) filed with the Securities and Exchange Commission on July 1, 2002. The forward-looking statements included in this report represent our view as of the date of this report. The reader should not assume that the statements made herein remain accurate at any future date. We do not intend to update these statements whether as a result of new information, future events or otherwise and undertake no duty to any person to make any update under any circumstance.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Under the Mayne Pharma agreement, Mayne Pharma pays us a fixed percentage of their sales price for paclitaxel. Each year, Mayne Pharma estimates the sales price it will receive in the upcoming year, and based upon that estimate, we determine the price we will charge Mayne Pharma. We recognize the corresponding sales at the time of shipment to Mayne Pharma. However, Mayne Pharma’s actual selling price may differ from that estimated. Pursuant to the agreement, Mayne Pharma is obligated to provide us with their calculation of the actual sales price for sales made during the preceding year, and an adjustment is calculated that may increase or decrease our sales of products to Mayne Pharma during that year.

Mayne Pharma’s sales are made in the currencies of each of the countries in which it sells paclitaxel. As a result, our sales are affected by fluctuations in the value of these various foreign currencies relative to the U.S. dollar. In the past, currency fluctuations were a significant factor in reductions in the price we charged Mayne Pharma. If changes in foreign currency markets continue to cause a decrease in the price per gram we receive from Mayne Pharma, there could be a material adverse effect on our earnings and cash flow. We currently record a reserve for potential Mayne Pharma pricing adjustments based upon historical experience and periodic reporting provided by Mayne Pharma. Our sales to JCR, if and when they occur, will be subject to the same risk.

Certain statements set forth in this Item 3 may constitute “forward-looking statements.” See “Special Note Regarding Forward-looking Statements.”

Item 4. Controls and Procedures

(a) The Company maintains a system of disclosure controls and procedures. The term “disclosure controls and procedures,” as defined by regulations of the SEC, means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits to the SEC under the Act is accumulated and communicated to the Company’s management, including its principal executive officer and its principal financial officer, as appropriate to allow timely decisions to be made regarding required disclosure. Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings.

18

Table of Contents

(b) The Company also maintains a system of internal controls. The term “internal controls,” as defined by the American Institute of Certified Public Accountants’ Codification of Statement on Auditing Standards, AU Section 319, means controls and other procedures designed to provide reasonable assurance regarding the achievement of objectives in the reliability of the Company’s financial reporting, the effectiveness and efficiency of the Company’s operations and the Company’s compliance with applicable laws and regulations. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our internal controls and procedures subsequent to the date of such evaluation.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Part II—Other Information

Item 1. Legal Proceedings. None

Item 6. Exhibits and Reports on Form 8-K.

*Filed herewith. This certification shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to liability pursuant to that section. Such certification shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

We filed a Current Report on Form 8-K dated January 23, 2003 reporting on Item 8 the change in our fiscal year.

We filed a Current Report on Form 8-K dated February 13, 2003 reporting on Item 5 the application for the transfer of our common stock to the Nasdaq SmallCap Market.

We filed a Current Report on Form 8-K dated March 26, 2003 reporting on Item 9, Regulation FD Disclosure certifying the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

We filed a Current Report on Form 8-K dated April 9, 2003 reporting on Item 5 and attaching as an exhibit to the report a press release that relates to the offering for sale of the Company’s worldwide generic cremaphor injectable paclitaxel business.

19

Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, NaPro caused this report on Form 10-Q to be signed on its behalf.

20

Table of Contents

CERTIFICATION

I, Leonard P. Shaykin, certify that:

Date: May 15, 2003

/s/ Leonard P. Shaykin

Leonard P. Shaykin

Chairman of the Board of Directors

Chief Executive Officer

21

Table of Contents

CERTIFICATION

I, Gordon Link, certify that:

Date: May 15, 2003

/s/ Gordon Link

Gordon Link

Senior Vice President and Chief Financial Officer

22