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Table of Contents
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
x
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2002
 
¨
 
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
(State or other jurisdiction
of incorporation or organization)
   
87-0439579
(I.R.S. Employer
Identification No.)
420 Chipeta Way, Salt Lake City, Utah
(Address of principal executive offices)
   
84108-1256
(Zip Code)
 
(801) 583-4939
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
   
Outstanding at October 16, 2002
Common Stock $.001 par value
   
30,453,282*
 
*
 
Includes 323,320 shares of exchangeable stock which are exchangeable at any time into common stock on a one-for-one basis. Holders of shares of exchangeable stock are entitled to dividends and other rights economically equivalent to those of the common stock, and, through a voting trust, holders are entitled to vote at all meetings of stockholders of the Registrant, also on a one-for-one basis.
 

Table of Contents
TABLE OF CONTENTS
 
          
Page No.
PART I
  
FINANCIAL INFORMATION
       
Item 1.
  
Condensed Consolidated Financial Statements.
       
        
3
        
4
        
5
        
6
Item 2.
       
10
Item 3.
       
16
Item 4.
       
17
PART II
  
OTHER INFORMATION
       
Item 5.
       
17
Item 6.
       
18
    
19
    
20

2

Table of Contents
PART I    FINANCIAL INFORMATION
 
Item 1.    Consolidated Financial Statements.
 
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a Development Stage Enterprise)
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
 
    
September 30, 2002
     
December 31, 2001
  
Assets
                  
Current assets:
                  
Cash and cash equivalents
   
$
33,478
 
   
$
39,142
 
Marketable investment securities
   
 
124,123
 
   
 
168,376
 
Accounts receivable
   
 
1,601
 
   
 
8,609
 
Other current assets
   
 
2,385
 
   
 
3,228
 
    
  
Total current assets
   
 
161,587
 
   
 
219,355
 
Plant and equipment:
                  
Land
   
 
412
 
   
 
409
 
Building
   
 
1,122
 
   
 
1,097
 
Equipment
   
 
9,460
 
   
 
8,892
 
Leasehold improvements
   
 
3,007
 
   
 
2,988
 
    
  
    
 
14,001
 
   
 
13,386
 
Less accumulated depreciation and amortization
   
 
9,679
 
   
 
8,518
 
    
  
Net plant and equipment
   
 
4,322
 
   
 
4,868
 
Goodwill, net of accumulated amortization
   
 
6,892
 
   
 
6,838
 
Purchased intangible assets, net of accumulated amortization
   
 
2,958
 
   
 
3,913
 
Other assets
   
 
2
 
   
 
2
 
    
  
    
$
175,761
 
   
$
234,976
 
    
  
Liabilities and Stockholders’ Equity
                  
Current liabilities:
                  
Current installments of obligations under capital leases
   
$
—
 
   
$
4
 
Accounts payable
   
 
5,942
 
   
 
10,737
 
Accrued expenses
   
 
5,099
 
   
 
2,060
 
Accrued severance
   
 
—  
 
   
 
240
 
Deferred revenue
   
 
119
 
   
 
—  
 
    
  
Total current liabilities
   
 
11,160
 
   
 
13,041
 
Stockholders’ equity:
                  
Common stock
   
 
30
 
   
 
30
 
Additional paid-in capital
   
 
385,692
 
   
 
382,681
 
Deferred compensation
   
 
(5
)
   
 
(34
)
Accumulated other comprehensive income
   
 
1,320
 
   
 
261
 
Deficit accumulated during development stage
   
 
(222,436
)
   
 
(161,003
)
    
  
Net stockholders’ equity
   
 
164,601
 
   
 
221,935
 
    
  
    
$
175,761
 
   
$
234,976
 
    
  
 
See accompanying notes to condensed consolidated financial statements.

3

Table of Contents
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a Development Stage Enterprise)
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
       
October 22, 1986,
(inception) through
September 30, 2002
  
    
2002
     
2001
     
2002
     
2001
       
Revenues from research and license agreements
   
$
140
 
   
$
395
 
   
$
2,021
 
   
$
1,377
 
     
$
75,540
 
Operating expenses:
                                               
Research and development
   
 
16,874
 
   
 
14,041
 
   
 
58,217
 
   
 
38,238
 
     
 
237,763
 
General and administrative
   
 
3,206
 
   
 
2,512
 
   
 
10,365
 
   
 
8,988
 
     
 
69,516
 
Amortization of goodwill and acquired intangibles
   
 
334
 
   
 
856
 
   
 
991
 
   
 
2,580
 
     
 
7,963
 
In-process research and development acquired
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
     
 
17,760
 
    
  
  
  
    
Total operating expenses
   
 
20,414
 
   
 
17,409
 
   
 
69,573
 
   
 
49,806
 
     
 
333,002
 
    
  
  
  
    
Operating loss
   
 
(20,274
)
   
 
(17,014
)
   
 
(67,552
)
   
 
(48,429
)
     
 
(257,462
)
Other income (expense):
                                               
Interest income
   
 
1,563
 
   
 
2,688
 
   
 
5,396
 
   
 
9,666
 
     
 
33,948
 
Interest expense
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(5
)
     
 
(806
)
Gain on sale of marketable investment securities
   
 
375
 
   
 
137
 
   
 
471
 
   
 
961
 
     
 
2,311
 
Gain (loss) on disposition of equipment, leasehold improvements and leases
   
 
—  
 
   
 
—  
 
   
 
13
 
   
 
11
 
     
 
(1,174
)
Foreign currency transaction gain (loss)
   
 
(71
)
   
 
17
 
   
 
(15
)
   
 
38
 
     
 
173
 
Other
   
 
123
 
   
 
47
 
   
 
264
 
   
 
1,398
 
     
 
2,402
 
    
  
  
  
    
Total other income
   
 
1,990
 
   
 
2,889
 
   
 
6,129
 
   
 
12,069
 
     
 
36,854
 
    
  
  
  
    
Loss before tax expense
   
 
(18,284
)
   
 
(14,125
)
   
 
(61,423
)
   
 
(36,360
)
     
 
(220,608
)
Income tax expense
   
 
—  
 
   
 
—  
 
   
 
10
 
   
 
—  
 
     
 
1,328
 
    
  
  
  
    
Loss before cumulative effect of change in accounting principle
   
 
(18,284
)
   
 
(14,125
)
   
 
(61,433
)
   
 
(36,360
)
     
 
(221,936
)
Cumulative effect on prior years (to December 31, 1999) of changing to a different revenue recognition method
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
     
 
(500
)
    
  
  
  
    
Net loss
   
$
(18,284
)
   
$
(14,125
)
   
$
(61,433
)
   
$
(36,360
)
     
$
(222,436
)
    
  
  
  
    
Basic and diluted net loss per common and common equivalent share
   
$
(0.60
)
   
$
(0.47
)
   
$
(2.02
)
   
$
(1.22
)
           
    
  
  
  
          
Weighted average common and common-equivalent shares outstanding—basic and diluted
   
 
30,435
 
   
 
29,993
 
   
 
30,338
 
   
 
29,859
 
           
    
  
  
  
          
 
See accompanying notes to condensed consolidated financial statements.

4

Table of Contents
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a Development Stage Enterprise)
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
    
Nine Months Ended
September 30,
       
October 22, 1986
(inception) through
September 30, 2002
  
    
2002
     
2001
       
Cash flows from operating activities:
                             
Net loss
   
$
(61,433
)
   
$
(36,360
)
     
$
(222,436
)
Adjustments to reconcile net loss to net cash used in operating activities:
                             
Depreciation and amortization
   
 
2,148
 
   
 
3,812
 
     
 
19,352
 
Loss (gain) on disposition of equipment, leasehold improvements and leases
   
 
(13
)
   
 
(11
)
     
 
1,174
 
Realized gain on sale of marketable investment securities
   
 
(471
)
   
 
(961
)
     
 
(2,311
)
Issuance of common and preferred stock in lieu of cash for services
   
 
588
 
   
 
394
 
     
 
2,266
 
Compensation expense on stock options
   
 
77
 
   
 
1,853
 
     
 
4,592
 
Write off of in-process research and development
   
 
—  
 
   
 
—  
 
     
 
17,760
 
Decrease (increase) in operating assets:
                             
Accounts receivable
   
 
7,024
 
   
 
(845
)
     
 
(1,315
)
Other current assets and other assets
   
 
620
 
   
 
(3,500
)
     
 
(1,534
)
Increase (decrease) in operating liabilities:
                             
Accounts payable, accrued expenses and accrued severance
   
 
(2,098
)
   
 
3,914
 
     
 
8,810
 
Deferred revenue
   
 
119
 
   
 
—  
 
     
 
(367
)
    
  
    
Net cash used in operating activities
   
 
(53,439
)
   
 
(31,704
)
     
 
(174,009
)
Cash flows from investing activities:
                             
Net sale (purchase) of marketable investment securities
   
 
45,463
 
   
 
(51,234
)
     
 
(108,532
)
Acquisition of equipment and leasehold improvements
   
 
(592
)
   
 
(1,430
)
     
 
(12,475
)
Proceeds from sale of equipment
   
 
13
 
   
 
11
 
     
 
1,299
 
Cash paid for acquisition, net of cash received
   
 
—  
 
   
 
—  
 
     
 
(676
)
    
  
    
Net cash provided by (used in) investing activities
   
 
44,884
 
   
 
(52,653
)
     
 
(120,384
)
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
   
 
2,606
 
   
 
2,071
 
     
 
314,286
 
Proceeds from long-term debt
   
 
—  
 
   
 
—  
 
     
 
1,166
 
Principal payments on note payable to bank
   
 
—  
 
   
 
—  
 
     
 
(124
)
Principal payments under capital lease obligations
   
 
(4
)
   
 
(344
)
     
 
(2,161
)
Principal payments on long-term debt
   
 
—  
 
   
 
—  
 
     
 
(2,854
)
Repurchase of preferred stock
   
 
—  
 
   
 
—  
 
     
 
(300
)
    
  
    
Net cash provided by financing activities
   
 
2,602
 
   
 
1,727
 
     
 
327,718
 
Effect of exchange rate changes on cash
   
 
289
 
   
 
(105
)
     
 
153
 
    
  
    
Net increase (decrease) in cash and cash equivalents
   
 
(5,664
)
   
 
(82,735
)
     
 
33,478
 
Cash and cash equivalents at beginning of period
   
 
39,142
 
   
 
131,083
 
     
 
—  
 
    
  
    
Cash and cash equivalents at end of period
   
$
33,478
 
   
$
48,348
 
     
$
33,478
 
    
  
    
Supplemental Disclosure of Cash Flow Information:
                             
Cash paid for interest
   
$
—  
 
   
$
5
 
     
$
806
 
Cash paid for taxes
   
 
10
 
   
 
—  
 
     
 
1,328
 
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
   
 
3
 
   
 
35
 
     
 
4,003
 
Unrealized gain on marketable investment securities
   
 
739
 
   
 
3,255
 
     
 
2,768
 
 
See accompanying notes to condensed consolidated financial statements.

5

Table of Contents
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a Development Stage Enterprise)
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
(1)    Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements included herein have been prepared by NPS Pharmaceuticals, Inc. (NPS) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The condensed consolidated financial statements include the financial statements of NPS and its subsidiaries, collectively referred to as the Company. Investments in a limited liability partnership and in non-public 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 all other investments in non-public corporations at cost. In management’s opinion, the interim financial data presented includes all adjustments (consisting solely of normal recurring items) necessary for fair presentation. All intercompany accounts and transactions have been eliminated. All monetary amounts are reported in U.S. dollars unless specified otherwise. Certain information required by generally accepted accounting principles has been condensed or omitted pursuant to rules and regulations of the SEC. Operating results for the three and nine months ended September 30, 2002, are not necessarily indicative of the results that may be expected for any future period or the year ending December 31, 2002.
 
This report should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2001, included in the Company’s Annual Report on Form 10-K filed with the SEC.
 
The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
 
(2)    Loss Per Common Share
 
Basic loss per common share is the amount of loss for the period available to each common and exchangeable share outstanding during the reporting period. Diluted loss per common share is the amount of loss for the period available to each common and exchangeable share 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 3.1 million and 2.6 million during the three and nine months ended September 30, 2002 and 2001, 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 anti-dilutive for the periods presented.
 
(3)    Operating Segment
 
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 condensed consolidated financial statements. The Company’s only non-United States revenues relate to the Company’s Canadian subsidiary and represent zero percent and 78 percent of the Company’s total revenues for the three months ended September 30, 2002 and 2001, respectively, and represent 78 percent and 65 percent of the Company’s total revenues for the nine months ended September 30, 2002 and 2001, respectively.

6

Table of Contents

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a Development Stage Enterprise)
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
 

 
(4)    Comprehensive Loss
 
The components of the Company’s comprehensive loss are as follows, in thousands:
 
    
Three months
ended
September 30,
2002
     
Three months
ended
September 30,
2001
     
Nine months
ended
September 30,
2002
     
Nine months
ended
September 30,
2001
  
Other comprehensive income (loss):
                                    
Gross unrealized gain on marketable investment securities
   
$
1,445
 
   
$
3,171
 
   
$
1,211
 
   
$
4,216
 
Reclassification for realized gain on marketable investment securities
   
 
(375
)
   
 
(137
)
   
 
(471
)
   
 
(961
)
    
  
  
  
Net unrealized gain on marketable investment securities
   
 
1,070
 
   
 
3,034
 
   
 
740
 
   
 
3,255
 
Foreign currency translation gain (loss)
   
 
(91
)
   
 
(716
)
   
 
319
 
   
 
(820
)
Net loss
   
 
(18,284
)
   
 
(14,125
)
   
 
(61,433
)
   
 
(36,360
)
    
  
  
  
Comprehensive loss
   
$
(17,305
)
   
$
(11,807
)
   
$
(60,374
)
   
$
(33,925
)
    
  
  
  
 
(5)    Plan of Termination
 
As of December 31, 2001, the Company had a balance of approximately $240,000 for accrued severance for salaries and benefits payable to former employees under formal plans of termination, which was paid during the nine months ended September 30, 2002.
 
(6)    Goodwill and Identifiable Intangible Assets
 
In July 2001, the Financial Accounting Standards Board (FASB), issued Statement on Financial Accounting Standard (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 prohibits the use of the pooling-of-interests method of accounting and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and is applicable to all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies that intangible assets acquired in a purchase method business combination must meet certain criteria to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized effective January 1, 2002; rather, these assets must be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
 
Beginning January 1, 2002, the Company adopted the provisions of SFAS No. 142. The Company completed its impairment review of goodwill during the first quarter of 2002 and determined that no impairment charge was required upon adoption.
 
Goodwill.    The cost of acquired companies in excess of the fair value of the net assets and purchased intangible assets at acquisition date was recorded as goodwill. As of September 30, 2002, the Company had

7

Table of Contents

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a Development Stage Enterprise)
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
 

goodwill, net, of $6.9 million from the acquisition of Allelix Biopharmaceuticals Inc. (Allelix) in December 1999. Through December 31, 2001, goodwill was amortized over a period of six years on a straight-line basis. The following table sets forth reported net loss and basic and diluted net loss per share, as adjusted, to exclude amortization of goodwill and the assembled workforce component of purchased intangibles, which would not have been recorded under SFAS No. 142:
 
      
Three months ended
September 30, 2001
       
Nine months ended
September 30, 2001
  
      
(in thousands, except per share data)
  
Net loss, as reported
     
$
(14,125
)
     
$
(36,360
)
Amortization expense of goodwill and assembled workforce
     
 
520
 
     
 
1,566
 
      
    
Net loss, as adjusted
     
$
(13,605
)
     
$
(34,794
)
Basic and diluted net loss per share, as reported
     
 
(0.47
)
     
 
(1.22
)
Amortization expense of goodwill and assembled workforce per basic and diluted share
     
 
0.02
 
     
 
0.05
 
      
    
Basic and diluted net loss per share, as adjusted
     
$
(0.45
)
     
$
(1.17
)
 
    
Year ended December 31,
  
    
2001
     
2000
     
1999
  
    
(in thousands, except per share data)
  
Net loss, as reported
   
$
(49,968
)
   
$
(32,112
)
   
$
(35,654
)
Amortization expense of goodwill and assembled workforce
   
 
2,074
 
   
 
2,164
 
   
 
—  
 
    
  
  
Net loss, as adjusted
   
$
(47,894
)
   
$
(29,948
)
   
$
(35,654
)
Basic and diluted net loss per share, as reported
   
 
(1.67
)
   
 
(1.34
)
   
 
(2.77
)
Amortization expense of goodwill and assembled workforce per basic and diluted share
   
 
.07
 
   
 
.09
 
   
 
—  
 
    
  
  
Basic and diluted net loss per share, as adjusted
   
$
(1.60
)
   
$
(1.25
)
   
$
(2.77
)
 
Purchased Intangible Assets.    Purchased intangible assets consist of patents acquired in our December 1999 acquisition of Allelix and are amortized over a period of five years on a straight-line basis. The following table sets forth the gross carrying amount, accumulated amortization and net carrying amount of purchased intangible assets:
 
      
As of
September 30, 2002
       
As of
December 31, 2001
  
      
(in thousands)
  
Gross carrying amount
     
$
6,573
 
     
$
6,522
 
Accumulated amortization
     
 
(3,615
)
     
 
(2,609
)
Net carrying amount
     
$
2,958
 
     
$
3,913
 
 
Amortization expense associated with purchased intangible assets was $332,000 and $336,000 for the three months ended September 30, 2002 and 2001 respectively, and $991,000 and $1.0 million for the nine months ended September 30, 2002 and 2001, respectively. Estimated amortization expense for existing purchased intangible assets is expected to be $1.3 million for each of the fiscal years ending December 31, 2002 through December 31, 2004.

8

Table of Contents

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a Development Stage Enterprise)
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
 

 
(7)    Recent Accounting Pronouncements
 
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset.
 
The Company is required and plans to adopt the provisions of SFAS No. 143 for the quarter ending March 31, 2003. To accomplish this, the Company must identify legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. Because of the effort necessary to comply with the adoption of SFAS No. 143, it is not practicable for management to estimate the impact of adopting this Statement as of the date of this report on Form 10-Q.
 
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. SFAS No. 144 retains the basic provisions of APB Opinion No. 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity rather than a segment of a business.
 
On January 1, 2002, the Company adopted the provisions of SFAS No. 144. The adoption of SFAS No. 144 for long-lived assets held for use did not have a material impact on the condensed consolidated financial statements.
 
(8)    Legal Proceedings
 
On or about October 15, 2002, the Company initiated a commercial arbitration proceeding against Forest Laboratories, Inc. (Forest) with the American Arbitration Association. The arbitration arises out of a license agreement between Forest and the Company entered into in August 2000. Under the terms of the agreement, Forest agreed to pay to the Company milestone payments of up to $25.0 million. In January 2002, Forest notified the Company that it had earned a $2.0 million milestone payment for the achievement of certain clinical and preclinical developments related to Forest’s work with ALX-0646 for treating migraine. Forest read and approved a press release issued by the Company announcing that it had earned the milestone payment. In March 2002, the Company received notice from Forest that it was terminating the agreement and returning all rights to ALX-0646 to the Company. Forest has asserted that it has no obligation to pay the $2.0 million milestone payment as a result of its termination. The Company has initiated arbitration in accordance with the terms of the agreement claiming its right to receive this milestone payment. Absent resolution of this issue, the Company will not recognize revenue for the $2.0 million milestone.
 
The Company is not involved in any other legal actions. From time to time, additional actions may arise in the normal course of business.

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(9)    Subsequent Events
 
Financing.    On October 18, 2002, the Company announced that it intends to offer approximately 4,000,000 shares of common stock in a public offering. The Company also intends to grant an option to the underwriters to acquire up to an additional 600,000 shares to cover over-allotments. The shares are offered under a shelf registration statement filed by the Company with the Securities and Exchange Commission on January 10, 2002, and declared effective March 25, 2002.
 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Cautionary Statement Regarding Forward-Looking Statements
 
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes included elsewhere in this report. In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These statements include those concerning our expectations, beliefs and/or intentions regarding the following: our proposed public offering of up to 4,600,000 shares of common stock; the discovery, development and commercialization of small molecule drugs and recombinant proteins; our research funding agreement, royalty obligations thereunder and ongoing discussions related thereto with the Government of Canada; research and development expenses; our clinical trials; manufacturing capabilities and collaborations; and adequacy of our capital resources to fund operations and growth.
 
These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. Such risks include, but are not limited to, general economic and market conditions; demand for securities of biotechnology companies in general and our common stock in particular; risks inherent in our research and development activities, including the successful continuation of our strategic collaborations, the successful completion of our and our collaborator's clinical trials and commercialization of products, the length, time and cost of obtaining regulatory approvals, expensive and uncertain process of seeking regulatory government reforms and of product pricing and reimbursement levels; technological change and competition; manufacturing uncertainties and dependence on third parties; our ability to comply with the terms of our research funding agreement with the Government of Canada; our ability to enter into and maintain agreements with current and future collaborators on commercially reasonable terms; our ability to maintain the level of our expenses consistent with our internal budgets and forecasts; and, such other risks described in other documents that we file from time to time with the Securities and Exchange Commission, including but not limited to our Annual Report on Form 10-K for the fiscal year ended December 31, 2001, our ‘‘shelf’’ registration statement on Form S-3 declared effective by the Securities and Exchange Commission on March 25, 2002, and any prospectus supplement thereto.
 
Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We will not update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or changes in our expectations, except as required by law. You should not place undue reliance on these statements, which apply only as of the date of this Quarterly Report on Form 10-Q.
 
Overview
 
Our objective is to build a profitable biopharmaceutical company by discovering, developing and commercializing small molecule drugs and recombinant proteins. Our current product candidates are primarily

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for the treatment of bone and mineral disorders, gastrointestinal disorders and central nervous system disorders. We have three product candidates in clinical development and several preclinical product candidates. Two of these product candidates, PREOS and AMG 073, are in Phase III clinical trials. Our third product candidate, ALX-0600, has completed a pilot Phase II clinical trial. PREOS and ALX-0600 are proprietary to, and are being developed by, us. PREOS is our recombinant, full-length parathyroid hormone for the treatment of osteoporosis, and ALX-0600 is our analog of glucagon-like peptide 2 for the treatment of gastrointestinal disorders. AMG 073, our orally active, small molecule compound for the treatment of hyperparathyroidism is being developed by our licensees, Amgen Inc. and Kirin Brewery Company, Ltd. We collaborate on three preclinical programs, each separately with AstraZeneca AB, GlaxoSmithKline plc and Janssen Pharmaceutica N.V., a subsidiary of Johnson & Johnson.
 
We have incurred cumulative losses from inception through September 30, 2002 of approximately $222.4 million, net of cumulative revenues from research and license agreements of approximately $75.5 million. We expect to continue to incur significant operating losses over at least the next several years as we continue our current and anticipated development projects, particularly our clinical trial programs for PREOS, and ALX-0600, as we maintain our contractual commitment to fund research activities in our metabotropic glutamate receptor program, and as we develop marketing, sales and manufacturing capabilities.
 
Results of Operations
 
Revenues.    Substantially all our revenues have come from license fees, research and development support or milestone payments from our licensees and collaborators. These revenues fluctuate from quarter to quarter. Our revenues were $140,000 for the quarter ended September 30, 2002, compared to $395,000 for the quarter ended September 30, 2001. Revenues for the nine months ended September 30, 2002 were $2.0 million compared to $1.4 million for the nine months in the prior year. The increase in revenues for the nine months ended September 30, 2002 as compared to the same period in 2001 is primarily related to amounts earned under our research funding agreement with the Government of Canada pursuant to the Technology Partnership Canada program. As a result of our ongoing negotiations with the Government of Canada to amend certain provisions of our research funding agreement and beginning with the third quarter of 2002, we did not and will not recognize revenue under the terms of this agreement until we finalize our discussions with the Government of Canada. See “Liquidity and Capital Resources” below for further discussion of payments that we may earn in the future under these agreements.
 
Research and Development.    Our research and development expenses arise primarily from compensation and other related costs of our personnel who are dedicated to research and development activities and from the fees paid and costs reimbursed to outside professionals to conduct research, clinical studies and trials, and to manufacture drug compounds and related supplies prior to FDA approval. Our research and development expenses increased to $16.9 million for the quarter ended September 30, 2002, from $14.0 million for the comparable period of 2001, and to $58.2 million for the nine months ended September 30, 2002 from $38.2 million in the comparable period in 2001. The increase in research and development expenses for the three and nine months ended September 30, 2002 was due primarily to the costs of conducting our clinical trials for PREOS, including the costs of our pivotal Phase III trial for which enrollment was completed in March 2002, increased activities in the development of ALX-0600 and costs to arrange for manufacturing and to manufacture clinical supplies of PREOS and ALX-0600. During the three months ended September 30, 2002, we incurred approximately $900,000 in research and development expense related to technology transfer pursuant to our binding Letter of Intent with Boehringer Ingelheim Austria GmbH (BI). We anticipate research and development payments to increase in the fourth quarter of 2002 by approximately $4.0 million if a definitive agreement with

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BI to manufacture long-term commercial-scale bulk drug supplies of PREOS is reached. Further, if an agreement with BI is reached, we anticipate research and development expense to increase in future periods as a result of continued technology transfer services, including start-up and validation production runs, costs associated with the purchase of raw material inventory and manufacturing reservation fees.
 
General and Administrative.    Our general and administrative expenses consist primarily of the costs of our management and administrative staff, business insurance, taxes, professional fees and market research and promotion activities for our product candidates. Our general and administrative expenses increased to $3.2 million for the quarter ended September 30, 2002 from $2.5 million for the quarter ended September 30, 2001. Additionally, general and administrative expenses increased to $10.4 million for the nine months ended September 30, 2002 from $9.0 million for the same period in the prior year. The increases in general and administrative expenses for the three and nine months ended September 30, 2002 as compared to the same periods in the prior year are due primarily to increased marketing activities associated with PREOS and the hiring of additional marketing personnel.
 
Amortization of Goodwill and Purchased Intangibles.    Goodwill and purchased intangibles originated with our December 1999 acquisition of Allelix Biopharmaceuticals, Inc. (Allelix). The remaining intangible assets, net of accumulated amortization, at September 30, 2002 totaled approximately $9.9 million. Amortization of goodwill and acquired intangibles decreased from $856,000 to $334,000 for the three months ended September 30, 2002 as compared to the same period in the prior year and from $2.6 million to $1.0 million for the nine months ended September 30, 2002 as compared to the same period in the prior year. The decrease is the result of our adoption of the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. SFAS No. 142 eliminated the amortization of goodwill. During the three and nine months ended September 30, 2001, we recorded amortization expense of $520,000 and $1.6 million, respectively, or $0.02 and $0.05, respectively, per basic and diluted share, that would not have been recorded under SFAS No. 142.
 
In-Process Research and Development Acquired.    We recorded an expense of $17.8 million in 1999 for in-process research and development that we acquired as part of our purchase of Allelix. The acquired in-process research and development consisted of five drug development programs, of which PREOS, for osteoporosis, and ALX-0600, for gastrointestinal disorders, accounted for 83 percent of the total value.
 
Since the date of the acquisition, we revised our plans for the next series of clinical trials for PREOS and ALX-0600. We started a pivotal Phase III clinical trial with PREOS. We have also completed a pilot Phase II clinical trial with ALX-0600 in adults with short bowel syndrome. Since the date of acquisition and through September 30, 2002, we have incurred development costs of approximately $91.4 million for PREOS and $16.7 million for ALX-0600. Total development costs and time-to-completion for each of these product candidates will depend on the costs we incur to conduct current clinical trials and to perform any additional work we find necessary to obtain FDA approval.
 
We believe the assumptions we used in the valuation of the in-process research and development we acquired from Allelix were reasonable at the time of the acquisition. However, we have modified our development plans as new data have become available regarding each product candidate. Accordingly, actual results may vary from the projected results in the valuation.
 
Total Other Income, Net.    Our total other income, net, decreased from $2.9 million to $2.0 million for the three months ended September 30, 2002, as compared with the same period in the prior year and from $12.1 million to $6.1 million for the nine months ended September 30, 2002 as compared with the same period in

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the prior year. The decreases for the three and nine months ended September 30, 2002 are mainly the result of decreased interest income of $1.1 million and $4.3 million, respectively, net of an increased gain on sale of marketable investment securities of $238,000 for the three month period ended September 30, 2002 and a decreased gain on sale of marketable investment securities of $490,000 for the nine month period ended September 30, 2002, both resulting from lower interest rates and decreased cash, cash equivalent, and marketable investment securities balances. Balances of cash, cash equivalent, and marketable investment securities decreased as a result of the need to fund current operations and will continue to decrease as we operate our business. Additionally, during the nine months ended September 30, 2001, we recognized income of $1.3 million from an equity method investment. A similar income amount was not recorded during the nine months ended September 30, 2002.
 
Liquidity and Capital Resources
 
We have financed operations since inception primarily through payments received under collaborative research and license agreements and the private and public issuance and sale of equity securities. As of September 30, 2002, we had recognized $75.5 million of cumulative revenues from payments for research support, license fees and milestone payments and $331.6 million from the sale of equity securities for cash. Our principal sources of liquidity are cash, cash equivalents, and marketable investment securities, which totaled $157.6 million at September 30, 2002. The primary objectives for our marketable investment securities portfolio are liquidity and safety of principal. Investments are intended to achieve the highest rate of return to us, consistent with these two objectives. Our investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.
 
We could receive future milestone payments of up to $92.5 million in the aggregate if each of our current licensees accomplishes the specified research and/or development milestones provided in the respective agreements. In addition, all of the agreements require the licensees to make royalty payments to us if they sell products covered by the terms of our license agreements. However, we do not control the subject matter, timing or resources applied by our licensees to their development programs. Thus, potential receipt of milestone and royalty payments from these licensees is largely beyond our control. Some of the late-stage development milestone payments from AstraZeneca will not be due if we elect a co-promotion option under which we may commercialize products. Further, each of these agreements may be terminated before its scheduled expiration date by the respective licensee either for any reason or under certain conditions.
 
Prior to the time that we acquired Allelix in December 1999, Allelix had entered into a research funding agreement with the Government of Canada pursuant to the Technology Partnership Canada program. Under this agreement, the Government of Canada is obligated to reimburse us for up to 30 percent of eligible research and development costs we incur for our ALX-0600 product candidate through December 2002 up to a maximum of Cdn. $8.4 million. As of September 30, 2002, we had invoiced the Government of Canada for a total of Cdn. $7.5 million for reimbursement of which Cdn. $2.5 million has not been paid. The agreement provides the Government of Canada with a 10 percent royalty on revenues we receive from the sale or license of ALX-0600. Our royalty obligation terminates on December 31, 2008, if we have paid at least Cdn. $23.9 million. If we have not paid that amount of royalties by that date, our royalty obligation continues until the earlier of the date we have paid Cdn. $23.9 million, or December 31, 2017. The agreement imposes a number of obligations on us to conduct certain development activities within Canada and use Canadian based companies to provide certain services in connection with the development of ALX-0600. For example, the agreement requires us to produce in Canada clinical and commercial supplies of ALX-0600. In addition, the agreement requires us to enter into

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a licensing agreement with a pharmaceutical company operating in Canada for the conduct of Phase III clinical trials and commercialization of ALX-0600.
 
The agreement also prohibits us from entering into any licensing agreement for the further development, production and marketing of ALX-0600 without the prior written consent of the Government of Canada. In general, the agreement includes on-going commitments to create manufacturing, marketing and sales jobs in Canada.
 
If we were to fail to meet our obligations under the agreement, or obtain a waiver of the obligation, the Government of Canada would have the right to declare us in default. If we were unable to cure the default, we would suffer adverse consequences, including the payment of liquidated damages, repaying all amounts received from the Government of Canada, or surrendering all intellectual property rights associated with ALX-0600, in some circumstances.
 
We have used and currently use non-Canadian based companies for some of these services. For example, we arranged for a non-Canadian contract manufacturer to manufacture bulk supplies of ALX-0600 for our Phase II clinical trials. We notified the Government of Canada of our arrangements and received their authorization to proceed. We are now engaged in ongoing discussions with the Government of Canada to amend certain provisions of the agreement. If we cannot reach an agreement with the Government of Canada, we may be required to abandon our development of ALX-0600. If we do reach an agreement, we could be required to make payments that are material in amount. Beginning with the third quarter of 2002, we will no longer recognize revenue under the terms of the agreement until we finalize our discussions with the Government of Canada.
 
We have entered into certain research and license agreements that require us to make research support payments to academic or research institutions when the research is performed. Additional payments may be required upon the accomplishment of research milestones by the institutions or as license fees or royalties to maintain the licenses. As of September 30, 2002, we have a total commitment of up to $3.9 million for future research support and milestone payments. Further, depending on the commercial success of certain of our products, we may be required to pay license fees or royalties. We expect to enter into additional sponsored research and license agreements in the future.
 
Under our agreement with AstraZeneca, we are required to co-direct the research and pay for an equal share of the preclinical research costs, including capital and a minimum number of personnel, through at least September 2003 and, under certain circumstances, through March 2006. Additionally, as of September 30, 2002, we have a non-cancelable commitment for future manufacturing of PREOS of approximately $16.4 million. We expect to enter into additional collaborative research agreements and manufacturing agreements in the future, which may require up-front payments and long-term commitments of cash.
 
We expect that our existing capital resources including interest earned thereon, will be sufficient to allow us to maintain our current and planned operations through 2003. However, our actual needs will depend on numerous factors, including the progress and scope of our internally funded research, development and commercialization activities; our ability to comply with the terms of our research funding agreements; our ability to maintain existing collaborations; our decision to seek additional collaboration; the success of our collaborators in developing and marketing products under their respective collaborations with us; competing technological and market developments; the time and cost of obtaining regulatory approvals; the extent to which we choose to commercialize our future products through our own sales and marketing capabilities; our success in producing clinical supplies of our product candidates on a timely basis sufficient to meet the needs of our clinical trials; the

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costs we incur in obtaining and enforcing patent and other proprietary rights or gaining the freedom to operate under the patents of others; and our success in acquiring and integrating complementary products, technologies or businesses. Our clinical trials may be modified or terminated for several reasons including the risk that our product candidates will demonstrate safety concerns, the risk that regulatory authorities may not approve our product candidates for further development or may require additional or expanded clinical trials to be performed, and the risk that our manufacturers may not be able to supply sufficient quantities of our drug candidates to support our clinical trials, which could lead to a disruption or cessation of the clinical trials. We do not have on hand sufficient supplies of our product candidates to meet our clinical trial requirements and we are dependent on outside manufacturers to provide these supplies on a timely basis. We have sufficient clinical supplies of PREOS to meet our clinical needs into the first quarter of 2003. If any of the events that pose these risks comes to fruition, we may have to substantially modify or terminate current and planned clinical trials, our business may be materially harmed, our stock price may be adversely affected, and our ability to raise additional capital may be impaired.
 
We need to raise substantial additional funds to support our long-term research, product development, and commercialization programs. The Company regularly considers various fund raising alternatives, including, for example, partnering of existing programs, monitizing of potential revenue streams, debt or equity financing and merger and acquisition alternatives. To provide for financial flexibility and increased liquidity, we filed a shelf registration statement in January 2002. Under the shelf registration statement, we may offer up to $250.0 million of debt securities, common stock, preferred stock, depository shares, and/or warrants, with terms to be determined by market conditions. On October 18, 2002, we announced our intention to offer approximately 4,000,000 shares of common stock in a public offering with up to an additional 600,000 shares to cover over- allotments. We may also seek additional funding through strategic alliances, collaborations, or license agreements and other financing mechanisms. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research and development programs, or to obtain funds through arrangements with licensees or others that may require us to relinquish rights to certain of our technologies or product candidates that we may otherwise seek to develop or commercialize on our own.
 
Critical Accounting Policies
 
Our critical accounting policies are as follows:
 
 
•
 
revenue recognition; and
 
 
•
 
valuation of long-lived and intangible assets and goodwill.
 
Revenue Recognition.    We earn our revenue from research and development support payments, license fees and milestone payments. As described below, significant management judgment and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.
 
We apply the provisions of Staff Accounting Bulletin No. 101, Revenue Recognition (SAB No. 101), to all of our revenue transactions. We recognize revenue from our research and development support agreements as related research and development costs are incurred and from milestone payments as agreed upon events representing the achievement of substantive steps in the development process are achieved and where the amount of the milestone payment, approximates the value of achieving the milestone. We recognize nonrefundable

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license fees over the period we have continuing involvement. Cash received in advance of the performance of the related research and development support and for nonrefundable license fees when we have continuing involvement is recorded as deferred revenue and recognized as income over the period of our continuing involvement. Where questions arise about contract interpretation, contract performance, or possible breach, we continue to recognize revenue unless we determine that such circumstances are material and/or that payment is not probable.
 
Valuation of Long-lived and Intangible Assets and Goodwill.    We assess the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:
 
 
•
 
significant underperformance relative to expected historical or projected future operating results;
 
 
•
 
significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
 
 
•
 
significant negative industry or economic trends;
 
 
•
 
significant decline in our stock price for a sustained period; and
 
 
•
 
our market capitalization relative to net book value.
 
Our balance sheet reflects net intangible assets, long-lived assets, and goodwill of $14.2 million as of September 30, 2002.
 
When we determine that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. To date, we have not determined the existence of any indication of impairment sufficient to require us to adjust our historical measure of value of such assets.
 
In 2002, SFAS No. 142, Goodwill and Other Intangible Assets, became effective and as a result, we have ceased amortizing goodwill. In lieu of amortization, we performed an initial impairment review of our goodwill in 2002 and we will perform an annual impairment review thereafter. As of January 1, 2002, we had unamortized goodwill in the amount of $6.8 million and unamortized identifiable intangible assets in the amount of $3.9 million, all of which were subject to the transition provisions of SFAS No. 142. During the three and nine months ended September 30, 2001, we recorded amortization expense of $520,000 and $1.6 million, respectively, or $0.02 and $0.05, respectively, per basic and diluted share, that would not have been recorded under SFAS No. 142. The assembled workforce component of identifiable intangible assets was fully amortized as of December 31, 2001. We did not record an impairment charge upon completion of the initial impairment review in the first quarter of 2002.
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk.
 
Interest Rate Risk.    Our primary objectives in managing our investment portfolio are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. The securities we hold in our investment portfolio are subject to interest rate risk. At any time, sharp changes in interest rates can affect the fair value of

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the investment portfolio and its interest earnings. After a review of our marketable investment securities, we believe that in the event of a hypothetical 10 percent increase in interest rates, the resulting decrease in fair market value of our marketable investment securities would be insignificant to the financial statements. Currently, we do not hedge these interest rate exposures. We have established policies and procedures to manage exposure to fluctuations in interest rates. We place our investments with high quality issuers and limit the amount of credit exposure to any one issuer and do not use derivative financial instruments in our investment portfolio. We invest in highly liquid, investment-grade securities and money market funds of various issues, types and maturities. These securities are classified as available-for-sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as accumulated other comprehensive income as a separate component in stockholders’ equity.
 
Foreign Currency Risk.    Some of our research and development operations are in Canada. As a result, our financial results could be affected by factors such as a change in the foreign currency exchange rate between the 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 September 30, 2002 rate would cause the fair value of such monetary assets and liabilities in Canada to change by an insignificant amount. We are not currently engaged in any foreign currency hedging activities.
 
Item 4.    Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures.    Our Chief Executive Officer and Principal Accounting Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of a date within 90 days before the filing date of this quarterly report. Based on that evaluation, the Chief Executive Officer and Principal Accounting Officer have concluded that our current disclosure controls and procedures are effective in time providing them with material information relating to us required to be disclosed in the reports we file or submit under the Exchange Act.
 
Changes in Internal Controls.    There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation.
 
PART II    OTHER INFORMATION
 
Item 5.    Other.
 
Financing.    On October 18, 2002, we announced that we intend to offer approximately 4,000,000 shares of common stock in a public offering. We also intend to grant an option to the underwriters to acquire an additional 600,000 shares to cover over-allotments. The shares are offered under a shelf registration statement filed by us with the Securities and Exchange Commission on January 10, 2002, and declared effective March 25, 2002.
 
Forest Laboratories Arbitration.    On or about October 15, 2002, we initiated a commercial arbitration proceeding against Forest Laboratories, Inc. (Forest) with the American Arbitration Association. The arbitration arises out of a license agreement between Forest and NPS entered into in August 2000. Under the terms of the

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agreement, Forest agreed to pay to us milestone payments up to $25.0 million. In January 2002, Forest notified us that we had earned a $2.0 million milestone payment for the achievement of certain clinical and preclinical developments related to Forest’s work with ALX-0646 for treating migraine. Forest read and approved a press release issued by us announcing that we had earned the milestone payment. In March 2002, we received notice from Forest that it was terminating the agreement and returning all rights to ALX-0646 to us. Forest has asserted that it has no obligation to pay the $2.0 million milestone payment as a result of its termination. We have initiated arbitration in accordance with the terms of the agreement claiming our right to receive this milestone payment. Absent resolution of this issue, we will not recognize revenue for the $2.0 million milestone.
 
Item 6.    Exhibits and Report on Form 8-K.
 
(a)  Exhibit
 
99.1    Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
(b)  Reports on Form 8-K.    None.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
       
NPS PHARMACEUTICALS, INC.
Date:  October 21, 2002
      
By:
  
    /s/    Hunter Jackson    
                
Hunter Jackson,
President and Chief Executive Officer
Date:  October 21, 2002
      
By:
  
    /s/    Morgan Brown
                
Morgan R. Brown,
Chief Accounting Officer

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SARBANES-OXLEY SECTION 302(a) CERTIFICATION
 
I, Hunter Jackson, certify that:
 
1.
 
I have reviewed this quarterly report on Form 10-Q of NPS Pharmaceuticals, Inc.;
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.
 
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.
 
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.
 
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date:  October 21, 2002
      
/s/    Hunter Jackson    
Hunter Jackson,
CEO, President and Chairman of the Board
                 

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SARBANES-OXLEY SECTION 302(a) CERTIFICATION
 
I, Morgan R. Brown, certify that:
 
1.
 
I have reviewed this quarterly report on Form 10-Q of NPS Pharmaceuticals, Inc.;
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.
 
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.
 
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.
 
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date:  October 21, 2002
      
/s/    Morgan Brown    
Morgan R. Brown,
Chief Accounting Officer
                 

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EXHIBIT INDEX
 
Exhibit Number
   
Description of Document
99.1
   
Certification of Chief Executive Officer and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.