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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004

For the Transition Period from              to             .

Commission File Number 0-23272

NPS PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

(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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    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.

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

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NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

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NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

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NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

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NPS PHARMACEUTICALS, INC.

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) in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The condensed consolidated financial statements are comprised of the financial statements of NPS and its subsidiaries, collectively referred to as the Company. The Company carries one investment in a non-public corporation 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. Through December 31, 2003, the Company had been considered a development stage enterprise. During the first quarter of 2004, the Company commenced its principal operations when Sensipar^®, the Company’s first commercial product, received marketing approval by the U.S. Food and Drug Administration for the treatment of secondary hyperparathyroidism in chronic kidney disease patients on dialysis and for the treatment of elevated calcium levels in patients with parathyroid carcinoma and is no longer considered a development stage enterprise. Certain information required by accounting principles generally accepted in the United States of America has been condensed or omitted in accordance with rules and regulations of the SEC. Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for any future period or the year ending December 31, 2004.

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, 2003, included in the Company’s 2003 Annual Report on Form 10-K/A 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.

The Company employs the footnote disclosure provisions of Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of SFAS Statement No. 123. SFAS No. 123 encourages entities to adopt a fair-value based method of accounting for stock options or similar equity instruments. However, it also allows an entity to continue measuring compensation cost for stock-based compensation using the intrinsic-value method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). The Company has elected to continue to apply the provisions of APB No. 25, under which no compensation cost has been recognized when the exercise price of the option equals the market price of the stock on the date of grant. The Company generally uses the straight-line method of amortization for stock-based compensation. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company’s net loss and net loss per share for the three and nine months ended September 30, 2004 and 2003 would have been increased to the following pro forma amounts (in thousands, except per share amounts):

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Net loss, as reported, also included compensation cost of zero and $4,000 for stock-based compensation awards for non-employees for the three months ended September 30, 2004 and 2003, respectively, and $23,000 and $12,000 for stock-based compensation awards for non-employees for the nine months ended September 30, 2004 and 2003, respectively.

(2) Net Loss Per Common Share

Basic loss per common share is the amount of loss for the period applicable to each share of common stock outstanding during the reporting period. Diluted loss per common share is the amount of loss for the period applicable to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares and Company securities outstanding during the period.

Potential common shares of approximately 10.4 million and 9.2 million during the nine months ended September 30, 2004 and 2003, 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. Potential dilutive common shares for the nine months ended September 30, 2004 and 2003 include approximately 5.3 million common shares related to convertible debentures and 5.1 million and 3.9 million common shares, respectively, related to stock options.

(3) Operating Segment

The Company is engaged in the discovery, development, and commercialization of pharmaceutical products and considers its operations to be a single reportable segment. Financial results of this reportable segment are presented in the accompanying condensed consolidated financial statements. No non-United States revenue was recognized during the three months ended September 30, 2004. Non-United States revenue of $149,000 was recognized during the three months ended September 30, 2003. The Company recognized non-United States revenue of $2.0 million and $149,000, respectively, during the nine months ended September 30, 2004 and 2003. Substantially all of the Company’s revenues for the three and nine months ended September 30, 2004 were from two licensees of the Company and the majority of the company’s revenue for the three and nine months ended September 30, 2003 was from one licensee in addition to revenue recorded upon arbitration settlement.

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(4) Comprehensive Loss

The components of the Company’s comprehensive loss are as follows, in thousands:

(5) Convertible Notes Payable

In July 2003, the Company completed a private placement of $192.0 million of its 3.0 percent Convertible Notes due June 15, 2008 (Notes). The Company received net proceeds from this private placement of approximately $185.9 million, after deducting costs associated with the offering. The Notes bear interest at an annual rate of 3.0 percent. Interest is payable semiannually in arrears on June 15 and December 15 of each year. Accrued interest on the Notes was approximately $1.7 million as of September 30, 2004. The holders may convert all or a portion of the Notes into common stock at any time on or before June 15, 2008. The Notes are convertible into common stock at a conversion rate equal to approximately $36.59 per share, subject to adjustment in certain events. The Notes are unsecured senior debt obligations and rank equally in right of payment with all existing and future unsecured senior indebtedness. On or after June 20, 2006, the Company may redeem any or all of the Notes at redemption prices of one hundred percent of their principal amount, plus accrued and unpaid interest to the day preceding the redemption date. Upon the occurrence of a “fundamental change,” as defined in the indenture governing the Notes, holders of the Notes may require the Company to redeem all or a part of the Notes at a price equal to one hundred percent of the principal amount, plus accrued and unpaid interest and liquidated damages, if any. The Company has filed a registration statement with the United States Securities and Exchange Commission covering the resale of the Notes and common stock issuable upon conversion of the Notes. The Company incurred debt issuance costs of $6.1 million, which are being amortized over a five-year period. The effective interest rate on the Notes, including debt issuance costs, is 3.6 percent.

(6) Income Taxes

The income tax benefit is the net effect of the Company’s estimate of refundable income tax credits from the Canadian province of Quebec relating to research and development activities performed, offset, in 2004, by an income tax payment to a foreign jurisdiction upon receipt of certain milestone payments. Estimated income tax expense (benefit) recorded during interim periods may be periodically revised, if necessary, to reflect current estimates.

(7) Contingencies

The Company has agreed to indemnify, under certain circumstances, certain manufacturers and service providers from and against any and all losses, claims, damages or liabilities incurred by them that arise from services provided by such manufacturers and service providers or from any use, including in clinical trials, or sale by the Company or any Company agent of any product supplied by the manufacturers.

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(8) Legal Proceedings

In September 2004, the Company, PharmData Inc. and Data Capture International, Inc. (DCI), entered into a formal written settlement agreement in which each of them released all claims and causes of action they had or may have had against each other arising out of certain agreements between the Company and PharmData and DCI, and to dismiss with prejudice all lawsuits pending between the parties. In connection with the settlement agreement, the Company paid PharmData and DCI a total of $2.4 million and PharmData and DCI returned to the Company certain data, case report forms and study reports forwarded to them by the Company or generated by them in the performance of services under their respective agreements with the Company.

(9) Licensing Agreement and Stock Issuance

In April 2004, the Company signed a distribution and license agreement with Nycomed Danmark ApS (Nycomed) in which the Company granted rights to develop and market PREOS^® in Europe. Nycomed also agreed to make an equity investment in the Company of $40.0 million through the purchase of 1.33 million shares of the Company’s common stock. The Company recorded net proceeds of $39.9 million as an increase to common stock and additional paid-in-capital. On July 7, 2004, the Company closed on the equity investment in the form of a private placement. The resale of the shares by Nycomed has been registered with the Securities and Exchange Commission on a shelf registration statement on Form S-3. The agreement also requires Nycomed to pay the Company up to $25.0 million in milestone payments upon regulatory approvals and achievement of certain sales targets and pay the Company royalties on product sales. Nycomed has also committed to participate in fifty percent of the costs incurred in the conduct of certain Phase 3b clinical trials up to a maximum contribution of $12.5 million and to expend at least $12.5 million in the conduct of certain Phase 4 clinical studies.

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 unaudited 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 Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include those concerning our expectations, beliefs and/or intentions regarding the following: the discovery, development and commercialization of small molecule drugs and recombinant proteins; research and development expenses; our clinical trials; manufacturing capabilities and collaborations; and the adequacy of our capital resources to fund operations and growth.

These forward-looking 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 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/A for the fiscal year ended December 31, 2003.

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.

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Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to all such reports are available, free of charge, on our Internet website under “Investor Relations—SEC Filings,” as soon as reasonably practicable after we file electronically such reports with, or furnish such reports to, the Securities and Exchange Commission. Our Internet website address is http://www.npsp.com. Information on our website does not constitute a part 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 for the treatment of bone and mineral disorders, gastrointestinal disorders and central nervous system disorders.

Our product portfolio consists of a U.S. Food and Drug Administration approved product as well as product candidates in various stages of clinical development and preclinical development. Our FDA approved product, cinacalcet HCl, has received marketing approval in the U.S., the European Union and Canada, for the treatment of secondary hyperparathyroidism in chronic kidney disease patients on dialysis and for the treatment of elevated calcium levels in patients with parathyroid carcinoma. We have licensed to Amgen worldwide rights to cinacalcet HCl, with the exception of Japan, Korea, China, Hong Kong and Taiwan, where we have licensed such rights to Kirin Brewery, Ltd. Amgen is marketing cinacalcet HCl in the U.S. under the brand name Sensipar^® and will market cinacalcet HCl in Europe under the brand name Mimpara^®. Kirin is presently in Phase 3 clinical trials with cinacalcet HCl. Both Amgen and Kirin have contractually committed to pay us royalties on their sales of cinacalcet HCl. PREOS is our most advanced product candidate. PREOS is our brand name for recombinant, full-length human parathyroid hormone which we are developing for the treatment of osteoporosis. We have successfully completed a pivotal Phase 3 clinical trial with PREOS. We are preparing a new drug application, or NDA, to be filed with the FDA for approval to market PREOS in the U.S. We anticipate filing the NDA by the end of 2004. We have granted to Nycomed Danmark ApS the exclusive right to market and sell PREOS in Europe. We are conducting a pivotal Phase 3 clinical trial with teduglutide, our analog of glucagon-like peptide 2, in patients with short bowel syndrome and are also conducting a proof-of-concept Phase 2 clinical trial in patients with Crohn’s disease. Our corporate licensee, GlaxoSmithKline, is engaged in Phase 1 clinical development activities with calcilytic compounds licensed from us for the potential use in osteoporosis. We are also evaluating the potential use of isovaleramide and declucemine in a variety of central nervous system disorders. In August 2004, we entered into an agreement with Amgen to promote Amgen’s proprietary drug, Kineret^®, a biologic therapy for the treatment of moderate to severe rheumatoid arthritis. The agreement accelerates our creation of a sales and marketing organization in preparation for the commercial launch of PREOS. We have entered into collaborative research, development and license agreements with AstraZeneca AB and Janssen Pharmaceutical N.V., a subsidiary of Johnson & Johnson, with respect to certain other of our product development programs.

We have incurred cumulative losses from inception through September 30, 2004 of approximately $534.4 million, net of cumulative revenues from research and license agreements of approximately $98.8 million. We expect to continue to incur significant operating losses over at least the next few years as we continue our current and anticipated development projects. The preparation of the PREOS NDA, commercial manufacturing activities, the build-up of the infrastructure necessary for the commercial launch of PREOS and the conduct of post-FDA approval clinical trials with PREOS will substantially contribute to the operating losses. Other activities that will increase our operating losses include: the conduct of clinical trials with teduglutide, isovaleramide and delucemine and contractual commitments to fund research activities in our metabotropic glutamate receptor program.

Major Research and Development Projects

Our major research and development projects involve PREOS and teduglutide. We also have other research and development efforts in central nervous system disorders.

PREOS. PREOS is our brand name for recombinant, full length, human parathyroid hormone which we are developing for the treatment of osteoporosis. We have successfully completed a pivotal Phase 3 clinical trial designed to demonstrate both safety and efficacy of this product candidate. During the three months ended September 30, 2004 and 2003, we incurred $17.3 million and $23.0 million, respectively, in the research and development of this product candidate and we incurred $57.5 million and $58.2 million, respectively, during the nine

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months ended September 30, 2004 and 2003, in the research and development of this product candidate, including costs associated with the manufacture of clinical and commercial supplies of PREOS. We have incurred costs of approximately $258.2 million since we acquired this product candidate with our acquisition of Allelix Biopharmaceuticals Inc. (Allelix) in December 1999.

Our development administration overhead costs are included in total research and development expense for each period, but are not allocated among our various projects.

The goal of our PREOS development program is to obtain marketing approval from the FDA and analogous international agencies. We will consider the project substantially complete if we obtain those approvals even though subsequent to that time we might incur additional expenses in conducting additional clinical trials and follow-up studies. To obtain the first of such approvals, we anticipate filing an NDA with the FDA by the end of 2004 seeking approval to market PREOS for the treatment of osteoporosis in the U.S. We have successfully completed a pivotal Phase 3 clinical trial. We have granted to Nycomed Danmark ApS the exclusive right to market and sell PREOS in Europe. Because of the ongoing work with respect to the PREOS program, the preparation and filing of the NDA, the FDA review process, the initiation of commercial manufacturing activities, the creation of a sales and marketing organization, and the risks associated with the clinical trial process, including the risk that we may have to repeat, revise or expand the scope of trials or conduct additional clinical trials not presently planned to secure marketing approvals and the additional risks identified herein, we are unable to estimate the costs to completion or the completion date for the PREOS program. Material cash inflows relating to our PREOS development program will not commence until after marketing approvals are obtained, and then only if PREOS finds acceptance in the marketplace. Because of the many risks and uncertainties relating to the completion of clinicals trials, receipt of marketing approval from the applicable regulatory agency and acceptance in the marketplace, the availability of sufficient funds to complete development of the product, we cannot predict when material cash inflows from our PREOS program will commence, if ever. To date, we have not received any revenues from product sales of PREOS. The risks and uncertainties associated with completing the development of PREOS on schedule, or at all, include the following:

A failure to obtain marketing approval for PREOS, to secure adequate clinical and commercial supplies of PREOS, to timely prepare and file an NDA, or to secure adequate funds to complete development and prepare for commercial launch would likely have the following results on our operations, financial position and liquidity:

Teduglutide. Teduglutide is an analog of glucagon-like peptide 2, a naturally occurring hormone that regulates proliferation of the cells lining the small intestine. We are independently developing teduglutide for the treatment of short bowel syndrome and Crohn’s disease. We initiated a pivotal Phase 3 trial in adults with short bowel syndrome in the first quarter of 2004. A proof-of concept clinical study to evaluate the possible utility of teduglutide in the treatment of patients with Crohn’s disease was commenced in October 2003.

Our development administration overhead costs are included in total research and development expense for each period, but are not allocated among our various projects.

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During the three months ended September 30, 2004 and 2003, we incurred $5.6 million and $3.3 million, respectively, in the research and development of this product candidate and we incurred $22.1 million and $10.2 million, respectively, during the nine months ended September 30, 2004 and 2003 in the research and development of this product candidate, including costs associated with the manufacture of clinical and commercial supplies of teduglutide. We have incurred costs of approximately $58.4 million since we acquired this product candidate with our acquisition of Allelix in December 1999.

The goal of our teduglutide development program is to obtain marketing approval from the FDA, and analogous international agencies. We will consider the project substantially complete if we obtain those approvals even though subsequent to that time we might incur additional expenses in conducting additional clinical trials and follow-up studies. Before we can obtain such marketing approvals we will need to complete pivotal clinical trials with satisfactory results and submit a NDA to the FDA. Because of the ongoing work with respect to the Phase 3 trial in adults with short bowel syndrome, the early stage of the clinical trials in Crohn’s disease, and the risks associated with the clinical trial process, including the risk that patient enrollment in the clinical trials may be slow, we may repeat, revise or expand the scope of future trials or conduct additional clinical trials not presently planned to secure marketing approvals and the additional risks identified herein, we are unable to estimate the costs to completion or the completion date for the teduglutide program. Because of the many risks and uncertainties relating to the completion of clinical trials, receipt of marketing approval from the applicable regulatory agency and acceptance in the marketplace, the availability of sufficient funds to complete development of the product, we cannot predict when material cash inflows from our teduglutide program will commence, if ever. To date, we have not received any revenues from product sales of teduglutide. The risks and uncertainties associated with completing the development of teduglutide on schedule, or at all, include the following:

A failure to obtain marketing approval for teduglutide or to timely complete development and obtain regulatory approval would likely have the following results on our operations, financial position and liquidity:

Central Nervous System Disorders

Most of the remaining research and development expenses for the three and nine months ended September 30, 2004 and 2003 were generated by various early clinical stage programs, pre-clinical studies and drug discovery programs, including those described below.

Isovaleramide. Isovaleramide is a proprietary small organic molecule which we are evaluating as a potential treatment for various central nervous system disorders. We recently completed a proof-of-concept study with isovaleramide to evaluate the compound’s potential as an acute therapy for migraine headaches. The results of the trial were inconclusive due to a higher than expected placebo response. Additional efforts are underway to evaluate the drug’s utility in other central nervous system disorders. Preclinical studies have shown that

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isovaleramide is effective in a number of animal models of epilepsy and spasticity. We have completed several Phase 1 clinical trials with isovaleramide to evaluate its safety and tolerability. Our analysis of the data indicates that the drug was safe and well tolerated.

Our development administration overhead costs are included in total research and development expenses for each period, but are not allocated among our various projects.

During the three months ended September 30, 2004 and 2003, we incurred $3.8 million and $1.3 million, respectively, in research and development of this product candidate and we incurred $8.0 million and $1.6 million, respectively, during the nine months ended September 30, 2004 and 2003 in research and development of this product candidate, including costs associated with the manufacture of clinical supplies of isovaleramide. To date, we have incurred costs of approximately $12.1 million on this project candidate.

The goal of our isovaleramide development program is to obtain marketing approval from the FDA, and analogous international agencies. We will consider the project substantially complete if we obtain those approvals even though subsequent to that time we might incur additional expenses in conducting additional clinical trials and follow-up studies. Material cash inflows will not commence until after marketing approvals are obtained, and then only if the product finds acceptance in the marketplace. In order to obtain marketing approval, we will need to identify potential indications for this product candidate and to complete Phase 1, 2 and 3 clinical trials with satisfactory results and submit an NDA to the FDA. Because of this, and the substantial risks and uncertainties relating to the completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict when material cash inflows will commence, if ever.

Metabotropic Glutamate Receptor Program. Since 1996, we have been working to find compounds that act on targets in the central nervous system called metabotropic glutamate receptors, or mGluRs. We have discovered a number of compounds that activate or inhibit mGluRs and that are highly selective for specific subtypes of mGluRs. Our animal studies with a number of these compounds have demonstrated their potential as drug candidates for the treatment of central nervous system disorders such as chronic pain.

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In March 2001, we entered into an agreement with AstraZeneca under which we collaborate exclusively in an extensive program around a number of mGluR subtypes. We granted AstraZeneca exclusive rights to commercialize mGluR subtype-selective compounds. Under our agreement, 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 March 2006 unless earlier terminated by AstraZeneca or us upon six months advance written notice. If certain milestones are met, AstraZeneca is required to pay us up to $30.0 million. AstraZeneca is also required to pay us royalties on sales of products that include those compounds. We have the right to co-promote any resulting product in the United States and Canada and to receive co-promotion revenue, if any. Should we elect to co-promote products, in some circumstances we will be required to share in the development and regulatory costs associated with those products, and we may not receive some late-stage milestone payments.

During the three months ended September 30, 2004 and 2003, we incurred $1.0 million and $1.1 million, respectively, in research and development expenses under our collaboration with AstraZeneca and we incurred $3.2 million and $2.9 million, respectively, during the nine months ended September 30, 2004 and 2003 in research and development expenses under our collaboration with AstraZeneca.

Material cash inflows in the form of royalties relating to this collaboration will not commence until after marketing approvals are obtained, and then only if the product finds acceptance in the marketplace. No product candidates have yet entered clinical trials. In order to obtain marketing approval, we will need to complete Phase 1, 2 and 3 clinical trials with satisfactory results and submit an NDA to the FDA. Because of this, and the substantial risks and uncertainties relating to the completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict when material cash inflows from our collaboration with AstraZeneca will commence, if ever.

Delucemine. Delucemine is a novel compound for which we originally pursued development for the treatment of stroke. This compound targets NMDA receptor-operated calcium channels that are activated by the neurotransmitter glutamate. The compound also has appreciable activity as a serotonin reuptake inhibitor. Published research has suggested that glutamate may play a role in the development of depression. We believe delucemine may produce a rapid antidepressant effect in patients suffering from major depressive order. Delucemine does not appear to cause the side effects that have plagued other NMDA receptor antagonists. Delucemine, at neuroprotective or antidepressant doses in preclinical animal models, caused no PCP-like behavioral effects, no learning or memory impairment, no neuronal vacuolization, and no significant sedation or cardiovascular side effects. We are evaluating alternatives for future development of this compound.

During the three months ended September 30, 2004 and 2003, we incurred $360,000 and $170,000, respectively, in research and development of this product candidate and we incurred $1.1 million and $267,000, respectively, during the nine months ended September 30, 2004 and 2003 in research and development of this product candidate.

Glycine Reuptake Inhibitors. We collaborated with Janssen on glycine reuptake inhibitors to identify prospective drug candidates for schizophrenia and dementia. Janssen has now assumed full responsibility for the development of product candidates identified under the collaboration. We are not expending any significant resources in the program. In November 2001 we received a milestone payment from Janssen as a result of the selection of a preclinical compound for further development as a potential treatment for schizophrenia. We will receive additional milestone payments of up to $20.5 million from Janssen, if certain milestones are met, and royalties on sales of any drugs developed or sold by Janssen under this collaboration agreement.

The goal of this central nervous system program is to discover, synthesize and obtain marketing approval for product candidates. Material cash inflows will not commence until after marketing approvals are obtained, and then only if the product finds acceptance in the marketplace. Currently all compounds are in pre-clinical stages. In order to obtain marketing approval, Janssen will need to initiate and complete Phase 1, 2 and 3 clinical trials with satisfactory results and submit a NDA to the FDA. Because of this, and the many risks and uncertainties relating to the completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict when material cash inflows from this project will commence, if ever.

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Results of Operations

Three months ended September 30, 2004 and 2003

Revenues. Substantially all our revenues have come from license fees, research and development support payments, milestone payments or royalty payments from our licensees and collaborators. These revenues fluctuate from quarter to quarter. Our revenues were $710,000 for the quarter ended September 30, 2003 compared to $7.7 million for the quarter ended September 30, 2003. The decrease in revenues for the three months ended September 30, 2004 as compared with the same period in the prior year is primarily the result of a $6.0 million milestone payment we received from Amgen during the three months ended September 30, 2004 for the submission of their NDA to the FDA for Sensipar. Additionally we recognized $1.5 million in revenue as a result of our settled arbitration with Forest Laboratories, Inc. during the third quarter of 2003. Revenues during the third quarter of 2004 are a result of royalty revenue earned from Amgen on Sensipar sales.

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 of $32.2 million for the quarter ended September 30, 2004 were comparable to research and development expenses of $31.3 million for the same period of 2003. Research and development expenses fluctuated among projects from the third quarter of 2003 to the third quarter of 2004 with a $1.2 million increase in the costs associated with the manufacture of clinical and commercial supplies of PREOS and teduglutide, including amounts paid and due to a contract manufacturer for reservation fees in accordance with an agreement we signed for “fill and finish” production of clinical and commercial supplies of PREOS; a $2.5 million increase in the costs related to advancing our central nervous system programs and a $2.2 million increase in the development costs of our teduglutide program, including personnel-related costs. These increases in costs were offset by a $5.1 million decrease in the development costs of our PREOS program.

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 educational activities for our product candidates. Our general and administrative expenses increased to $7.1 million for the quarter ended September 30, 2004 from $4.9 million for the quarter ended September 30, 2003. The increase in general and administrative expenses from the three months ended September 30, 2003 to the three months ended September 30, 2004 is due primarily to the overall growth of the Company, the establishment of a commercial headquarters in New Jersey, and increased legal expenses ($384,000), finance and accounting costs ($364,000), including costs associated with compliance with the Sarbanes-Oxley Act, human resource expenses ($416,000), and information technology costs ($295,000).

Amortization of Purchased Intangibles. Purchased intangibles originated with our December 1999 acquisition of Allelix Biopharmaceuticals, Inc. (Allelix). The remaining purchased intangible assets, net of accumulated amortization, at September 30, 2004 total approximately $409,000. Our amortization of purchased intangibles for the quarter ended September 30, 2004 of $396,000 was comparable to $376,000 for the same period in the prior year.

Merger Costs and Termination Fees. Merger costs and termination fees were zero for the quarter ended September 30, 2004. We recorded an expense of $351,000 during the three months ended September 30, 2003 as a result of the termination of our merger with Enzon Pharmaceuticals, Inc. (Enzon). On February 19, 2003 we entered into an Agreement and Plan of Reorganization (Merger Agreement) with Enzon, which set forth the terms and conditions of the proposed merger of NPS and Enzon. On June 4, 2003, we announced that NPS and Enzon had mutually agreed to terminate the Merger Agreement and other ancillary documents entered into in connection with the Merger Agreement. As part of the agreements to terminate the merger, we paid Enzon a termination fee in the form of a private placement of 1.5 million shares of our common stock valued at $35.6 million based upon the $23.747 per share closing price of our common stock on the Nasdaq National Market on June 4, 2003. A Shelf Registration Statement on Form S-3, providing for the resale of these shares by Enzon was filed with the Securities and Exchange Commission on July 2, 2003. The resale of these shares by Enzon has been registered with the SEC on a Form S-3 Registration Statement.

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Total Other Income (Expense), Net. Our total other expense, net, for the quarter ended September 30, 2004 of $172,000 was comparable to total other expense, net, of $170,000 for the same period in the prior year.

Income Taxes. Our income tax was $71,000 for the three months ended September 30, 2004 as compared to $395,000 for the three months ended September 30, 2003. The income tax benefit is the Company’s estimate of refundable income tax credits from the Canadian province of Quebec relating to research and development activities performed.

Nine months ended September 30, 2004 and 2003

Revenues. Our revenues were $13.2 million for the nine months ended September 30, 2004 compared to $7.9 million for the nine months ended September 30, 2003. The increase in revenues for the nine months ended September 30, 2004 as compared with the same period in the prior year is primarily the result of a $10.0 million milestone payment we received from Amgen Inc. for the approval of their NDA by the FDA for Sensipar in March 2004 and a $2.0 million milestone payment we received from Kirin Brewery Company, Ltd. for the commencement of Phase 3 clinical trials with cinacalcet HCl in Japan. During the nine months ended September 30, 2003, we received a $6.0 million milestone payment from Amgen for the submission of their NDA to the FDA for Sensipar. Additionally, we recognized $1.5 million in revenue as a result of our settled arbitration with Forest during the nine months ended September 30, 2003.

Research and Development. Our research and development expenses increased to $104.1 million for the nine months ended September 30, 2004 from $79.5 million for the comparable period of 2003. The increase in research and development expenses from the nine months ended September 30, 2003 to the nine months ended September 30, 2004 was principally due to a $16.8 million increase in the costs associated with the manufacture of clinical and commercial supplies of PREOS and teduglutide, including amounts paid and due to a contract manufacturer for reservation fees in accordance with an agreement we signed for “fill and finish” production of clinical and commercial supplies of PREOS; a $7.6 million increase in the development costs of our central nervous system programs and a $6.7 million increase in the development costs of our teduglutide clinical program, including personnel-related costs. The increases in costs were offset by a $9.0 million decrease in the development costs of our PREOS program.

General and Administrative. Our general and administrative expenses increased to $23.5 million for the nine months ended September 30, 2004 from $14.2 million for the nine months ended September 30, 2003. The increase in general and administrative expenses from the nine months ended September 30, 2003 to the nine months ended September 30, 2004 is due primarily to a $2.1 million increase in costs related to market research, educational, and various other pre-launch marketing activities associated with PREOS and teduglutide, $2.0 million in costs related to the internal investigation of the events leading to the execution of the PharmData and DCI contracts and other legal expenses regarding that matter, $850,000 in severance and retirement benefits, and increases in other costs associated the overall growth of the Company, the establishment of commercial headquarters in Parsippany, New Jersey, and increased finance and accounting costs ($1.0 million), human resource expenses ($609,000), and information technology costs ($785,000).

Amortization of Purchased Intangibles. Our amortization of purchased intangibles of $1.2 million for the nine months ended September 30, 2004 was comparable to $1.1 million for the same period in the prior year.

Merger Costs and Termination Fees. Merger costs and termination fees were zero for the nine months ended September 30, 2004. Merger costs and termination fees for the same period of 2003 were $40.2 million as a result of the termination of our merger with Enzon.

Total Other Income (Expense), Net. Our total other income, net, decreased from $3.1 million to total other expense, net, of $522,000 for the nine months ended September 30, 2004 as compared with the same period in the prior year. The decrease in total other income, net, is primarily the result of recording interest expense of $5.2 million for the nine months ended September 30, 2004, compared with $2.0 for the nine months ended September 30, 2003 on our $192.0 million 3.0 percent convertible notes. The nine months ended September 30, 2003 only included one quarter of interest expense on our convertible notes as these notes where issued in June 2003.

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Income Taxes. Our income tax benefit was $118,000 for the nine months ended September 30, 2004 as compared to $2.1 million for the nine months ended September 30, 2003. The income tax benefit is the net effect of the Company’s estimate of refundable income tax credits from the Canadian province of Quebec relating to research and development activities performed offset, in 2004, by an income tax payment to a foreign jurisdiction upon receipt of certain milestone payments.

Liquidity and Capital Resources

We have financed operations since inception primarily through payments received under collaborative research and license agreements, the private and public issuance and sale of equity securities, and the issuance and sale of convertible debentures. As of September 30, 2004, we had recognized $98.8 million of cumulative revenues from payments for research support, license fees and milestone payments, $480.5 million from the sale of equity securities for cash, and $192.0 million from the sale of convertible debentures for cash. Our principal sources of liquidity are cash, cash equivalents, and marketable investment securities, which totaled $224.0 million at September 30, 2004. The primary objectives for our marketable investment security portfolio are liquidity and safety of principal. Investments are made 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.

During 2003, we sold $192.0 million of 3.0 percent convertible notes due June 15, 2008. We received net proceeds of $185.9 million from this private placement after deducting debt issuance costs. The notes bear interest at an annual rate of 3.0 percent. Interest is payable on June 15 and December 15 of each year beginning December 15, 2003. Accrued interest on the notes was approximately $1.7 million as of September 30, 2004 and September 30, 2003. The holders may convert all or a portion of the notes into common stock at any time on or before June 15, 2008. The notes are convertible into our common stock at a conversion rate equal to approximately $36.59 per share, subject to adjustment in certain events. The notes are unsecured senior debt obligations and rank equally in right of payment with all existing and future unsecured senior indebtedness. On or after June 20, 2006, we may redeem any or all of the notes at a redemption price of 100 percent of their principal amount, plus accrued and unpaid interest to the day preceding the redemption date. The notes will mature on June 15, 2008 unless earlier converted, redeemed at our option or redeemed at the option of the noteholder upon a fundamental change, as described in the note indenture. Neither we, nor any of our subsidiaries, are subject to any financial covenants under the indenture. In addition, neither we, nor any of our subsidiaries, are restricted under the indenture from paying dividends, incurring debt, or issuing or repurchasing our securities.

In April 2004, we signed a distribution and license agreement with Nycomed Danmark ApS (Nycomed) in which we granted Nycomed the exclusive right to develop and market PREOS in Europe. Nycomed also agreed to make an equity investment in NPS of $40.0 million through the purchase of 1.33 million shares of NPS common stock in the form of a private placement. We closed on the equity investment on July 7, 2004. The agreement also requires Nycomed to pay us up to $25.0 million in milestone payments upon regulatory approvals and achievement of certain sales targets and to pay us royalties on product sales. Nycomed has also committed to participate in fifty percent of the costs incurred in the conduct of certain Phase 3b clinical trials up to a maximum contribution of $12.5 million and to expend at least $12.5 million in the conduct of certain Phase 4 clinical studies.

Net cash used in operating activities was $108.6 million for the nine months ended September 30, 2004 compared to $75.1 million for the nine months ended September 30, 2003. The increase in cash used by operating activities is primarily a result of increased research and development expenses and general and administrative expenses associated with advancing our various scientific programs.

Net cash provided by investing activities was $59.4 million for the nine months ended September 30, 2004 compared to cash used in investing activities of $83.4 million for the nine months ended September 30, 2003. Net cash provided by investing activities for the nine months ended September 30, 2004 was primarily the result of selling marketable investment securities to fund current operations. Additionally, capital expenditures totaled $12.6 million during the nine months ended September 30, 2004 compared with $1.4 million during the same time period in the prior year. The increase in capital expenditures during the nine months ended September 30, 2004 resulted primarily from the construction of a new administrative office and scientific laboratory building located in Research Park of the University of Utah in Salt Lake City, Utah.

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Net cash provided by financing activities was $42.9 million for the nine months ended September 30, 2004 compared to $188.6 million for the nine months ended September 30, 2003. Cash provided by financing activities for the nine months ended September 30, 2004, was primarily the result of net proceeds received from the sale of 1.33 million shares of NPS common stock to Nycomed of $39.9 million in July 2004. Cash provided by financing activities for the nine months ended September 30, 2003 is primarily the result of investing net proceeds of $186.1 million from the private placement of convertible notes due June 15, 2008. We also received cash from the exercise of employee stock options and proceeds from the sale of stock by us pursuant to the employee stock purchase plan. Employee stock option exercises and proceeds from the sale of stock by us pursuant to the employee stock purchase plan provided $3.0 million and $1.3 million, respectively, of cash during the nine months ended September 30, 2004 and 2003. Proceeds from the exercise of employee stock options will vary from period to period based upon, among other factors, fluctuations in the market value of NPS’s stock relative to the exercise price of such options.

We could receive future milestone payments of up to $97.5 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.

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, 2004, we have a total commitment of up to $2.0 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. For example, we are required to make royalty payments on cinacalcet HCl and teduglutide net sales. 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 March 2006 unless earlier terminated by AstraZeneca or us upon six months advance written notice. Additionally, we have entered into long-term agreements with certain manufacturers, contract research organizations, and suppliers that require us to make contractual payment to these organizations. We expect to enter into additional collaborative research, contract research, manufacturing, and supplier agreements in the future, which may require up-front payments and long-term commitments of cash.

In December 2003, we executed a ground lease for land in Research Park of the University of Utah in Salt Lake City, Utah and have commenced construction of a 93,000 square foot building consisting of scientific laboratory and administrative office space. We expect project costs to be approximately $16.0 million with completion by the end of December 2004. Additionally, in April 2004, we signed a long-term operating lease agreement with the MaRs Discovery District in downtown Toronto, Ontario concerning the lease of approximately 60,000 square feet of scientific laboratory and administrative office space. Leasehold improvement costs are expected to be approximately $8.5 million, commencing in late 2004 and being complete in 2005.

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 the third quarter of 2005. 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 collaborators; the success of our collaborators in developing and marketing products under their respective collaborations with us; our success in producing clinical supplies of our product candidates on a timely basis sufficient to meet the needs of our clinical trials; the 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

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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 all of our clinical trial requirements and we are dependent on outside manufacturers to provide these supplies on a timely basis. If any of the events that pose these risks comes to fruition, we may have to substantially 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. We regularly consider various fund raising alternatives, including, for example, partnering of existing programs, monetizing of potential revenue streams, debt or equity financing and merger and acquisition alternatives. 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. We earn our revenue from research and development support payments, license fees milestone payments and royalty 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. 104, Revenue Recognition (SAB No. 104), to all of our revenue transactions and Emerging Issues Task Force No (EITF) Issue No. 00-21 Revenue Arrangements with Multiple Deliverables to all revenue transactions entered into in fiscal periods beginning after June 15, 2003. We recognize revenue from our research and development support agreements as related research and development costs are incurred and the services are performed. The terms and conditions of our research and development support agreements are such that revenues are earned as the related costs are incurred. The principal costs under these agreements are for personnel employed to conduct research and development under these agreements. We recognize revenue 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 revenue from up-front nonrefundable license fees on a straight-line basis over the period we have continuing involvement in the research and development project. Royalties from licensees are based on third-party sales of licensed products and are recorded in accordance with contract terms when third-party results are reliably measurable and collectability is reasonably assured. 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 income. 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.

We analyze our arrangements entered into after June 15, 2003 to determine whether the elements can be separated and accounted for individually or as a single unit of accounting in accordance with EITF No. 00-21. Allocation of revenue to individual elements which qualify for separate accounting is based on the estimated fair value of the respective elements.

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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:

Our balance sheet reflects net intangible assets of $409,000, long-lived assets of $16.8 million, and goodwill of $8.6 million as of September 30, 2004.

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. As of September 30, 2004, 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, we ceased amortizing goodwill. In lieu of amortization, we perform an annual impairment review of goodwill. We have not determined the existence of any indication of impairment sufficient to require us to adjust our historical measure of the value of such assets.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk. Our interest rate risk exposure results from our investment portfolio and our convertible notes. Our primary objectives in managing our investment portfolio are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. The securities we hold in our investment portfolio are subject to interest rate risk. At any time, sharp changes in interest rates can affect the fair value of the investment portfolio and its interest earnings. After a review of our marketable investment securities, we believe that in the event of a hypothetical ten 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. Our 3.0 percent convertible notes in the principal amount of $192.0 million due June 15, 2008 have a fixed rate. The fair value of the convertible notes is affected by changes in interest rates and by changes in the price of our common stock.

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 ten percent increase or decrease in the exchange rate between the U.S. dollar and the Canadian dollar from the September 30, 2004 rate would not cause the fair value of such monetary assets and liabilities in Canada to change by a significant amount. We are not currently engaged in any foreign currency hedging activities.

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Item 4. Controls and Procedures.

We maintain “disclosure controls and procedures” within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures, or Disclosure Controls, are designed to ensure that information required to be disclosed by the Company in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Our Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our Disclosure Controls, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, we evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, which was done under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Immediately following the Signatures section of this Quarterly Report of Form 10-Q are certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented. Based on the controls evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the date of their evaluation, our Disclosure Controls and Procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act is made known to management, including our Chief Executive Officer and Chief Financial Officer, and that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Change in Internal Control over Financial Reporting. No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to material affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

In September 2004, we entered into a formal written settlement agreement with PharmData Inc. and Data Capture International, Inc. (DCI) in which each of us agreed to release all claims and causes of action any of us had or may have had against each other arising out of certain agreements between us and PharmData and DCI, and to dismiss with prejudice all lawsuits pending between us. In connection with the settlement agreement, we paid PharmData and DCI a total of $2.4 million and PharmData and DCI returned to us certain data, case report forms and study reports forwarded to them by us or generated by them in the performance of services under their respective agreements with us.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In April 2004, we signed a distribution and license agreement with Nycomed Danmark ApS (Nycomed) in which we granted rights to develop and market PREOS in Europe. Nycomed also agreed to make an equity investment of $40.0 million through the purchase of 1.33 million shares of the Company’s common stock. On July 7, 2004, the Company closed on the $40.0 million equity investment in the form of a private placement exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4 (2) thereof. The resale of the shares by Nycomed has been registered with the SEC on a shelf registration statement on Form S-3.

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

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.

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EXHIBIT INDEX

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