ITEM 1 BUSINESS.
GENERAL
NPS Pharmaceuticals is engaged in the discovery and development of orally-active, small molecule drugs that target selected biological targets, including cell surface receptors and ion channels. The Company's most advanced development program involves the development of a small molecule drug for the treatment of hyperparathyroidism ("HPT"). The HPT program arose from the Company's pioneering work on a new class of cell surface receptors which detect levels of extracellular calcium involved in numerous bodily functions. The Company is also applying its calcium receptor technology to the development of therapies for osteoporosis. The Company's other main programs involve the development of orally-active, small molecule drugs which have neuroprotectant properties and target certain calcium channels in order to provide treatments for stroke and head trauma. Additionally, the Company is pursuing several discovery programs which are extensions of its discoveries in calcium receptors and ion channels.
NPS has established in the field of HPT a research collaboration and license arrangement with the Pharmaceutical Division of Kirin Brewery Company, Limited ("Kirin") and a development and license arrangement with Amgen Inc. ("Amgen"). With regards to the field of osteoporosis, the Company has established a research collaboration and license arrangement with SmithKline Beecham Corporation ("SmithKline Beecham"). Kirin, SmithKline Beecham and Amgen are referred to herein as the "Licensees." The Licensees are responsible for all costs of product development in their respective territories and fields. As part of these arrangements, the Licensees have paid to NPS an aggregate of $21.0 million in non-refundable license fees and Amgen and an affiliate of SmithKline Beecham have also purchased $14.5 million of the Company's Common Stock. In addition, the Licensees have made or have agreed to make up to an aggregate of $56.0 million in milestone payments, of which $2.0 million has been paid to the Company through December 31, 1996 under the Kirin agreement and $3.0 million has been paid to the Company through December 31, 1996 under the SmithKline Beecham agreement. SmithKline Beecham and Kirin are also obligated to pay research and development support payments to the Company. Approximately $7.9 million has been paid to the Company through December 31, 1996. Each of the Licensees is obligated to pay royalties to NPS on any product sales. See "Risk Factors--Dependence on Collaborative Research and License Relationships" and "Business--Collaborative Research and License Agreements."
HPT is a growing medical concern and is typically characterized as being either primary or secondary. Primary HPT is an age-related disorder that results from excessive secretion of parathyroid hormone ("PTH"), leading to elevated levels of calcium in the blood. Symptoms may include bone loss, muscle weakness, depression and cognitive dysfunction. There are currently no pharmaceutical therapies for the treatment of primary HPT, with surgery being the only effective treatment. Secondary HPT results from other disease states and is most often associated with renal dysfunction. Symptoms of secondary HPT include excessive bone loss, bone pain, and chronic, severe itching. The Company believes that current
drug therapy treatments for secondary HPT, such as phosphate binders and calcitriol have certain disadvantages.
Prior to entering into the arrangements with Kirin and Amgen, the Company had initiated and conducted four clinical trials of the Company's lead drug candidate NPS R-568 in the United States. Under the Amgen agreement, Amgen acquired full authority and assumed full responsibility for the further development and commercialization of a drug for HPT. Amgen has informed the Company that it has commenced a Phase II clinical trial in the United States on NPS R-568 and is continuing to develop its clinical strategy for the development of a drug to treat HPT. Effective June 30, 1995, Kirin acquired full authority and assumed full responsibility for the development of a drug for HPT in Japan, China (including Hong Kong), North and South Korea and Taiwan. Kirin commenced a Phase I clinical trial of NPS R-568 in Japan in October 1996. NPS is working with Amgen and Kirin to discover, identify and characterize back-up and second generation compounds for the treatment of HPT. There can be no assurance that the clinical trials will proceed as indicated or that NPS R-568 will prove safe and effective, meet applicable regulatory standards or be successfully marketed or that suitable back-ups or later generation compounds will be identified or that if identified any such back-up or later generation compound will prove safe and effective, meet applicable regulatory standards, or be successfully marketed. See "Risk Factors--Early Stage of Product Development;" and - --"Dependence on Collaborative Research and License Relationships."
In conjunction with SmithKline Beecham, NPS is also applying its calcium receptor technology to the development of orally-active therapeutics for the treatment of osteoporosis. Osteoporosis is an age-related disorder affecting more than 200 million people worldwide and is characterized by reduced bone density and an increased susceptibility to fractures. Among the elderly in particular, osteoporosis is a major cause of morbidity and mortality. The Company is pursuing two approaches for the treatment of osteoporosis, stimulation of bone formation and suppression of bone resorption. Most osteoporosis patients are first diagnosed only after they have already lost significant bone mass. As a result, the Company believes that a therapy that not only halts further bone loss, but that also builds new bone, would constitute a significant advancement in the treatment of osteoporosis. Under its collaboration with SmithKline Beecham, research efforts are being conducted by NPS concurrently on both approaches to osteoporosis. In January 1996, the Company received a milestone payment of $3.0 million from SmithKline Beecham for progress made in its osteoporosis program. In October 1996, the term of research support obligation of SmithKline Beecham was extended for an additional year.
The Company is developing a new class of orally-active compounds which modulate certain calcium channels for neuroprotection in stroke and head trauma. The influx of calcium through glutamate receptor-operated calcium channels has been linked to a number of neurological disorders, including nerve cell death following stroke and head trauma. The Company's proprietary compounds antagonize the NMDA (N-methyl-D-aspartate) subtype of glutamate receptor-operated calcium channels ("NMDA receptor-operated calcium channels"), thereby reducing the influx of calcium. The Company believes that these compounds work through a novel mechanism and exhibit potentially advantageous pharmacological properties. These compounds demonstrated neuroprotectant activity in preclinical animal models of stroke and head trauma. The Company has designated one of these compounds, NPS 1506, for preclinical development and expects to file an Investigational New Drug Application ("IND") and begin clinical trials in the United States by June 30, 1997.
The Company is actively engaged in several discovery programs which seek to identify molecular targets for the development of new drugs. Among these, the Company believes it has made significant discoveries with regard to novel forms of metabotropic glutamate receptors ("mGluRs"), and has identified small molecules active at these receptors. The Company believes that drugs acting at specific mGluRs may provide relevant therapies for a number of neurological disorders.
PRODUCT DEVELOPMENT PROGRAMS
The Company's primary product development programs are centered around its calcium receptor technology. Clinical development of orally-active compounds that target calcium receptors as drug therapies for HPT is being advanced by Kirin, NPS's collaborator and licensee for Japan, China (including Hong Kong), Taiwan, North Korea, and South Korea and by Amgen for the rest-of-the world. Together with SmithKline Beecham, the Company is pursuing orally-active compounds targeting calcium receptors as drug therapies for osteoporosis. The Company is also pursuing orally-active compounds that target NMDA receptor-operated calcium channels as neuroprotectants to reduce neurological damage associated with stroke or head trauma.
Calcium levels in the blood are tightly regulated. The Company's calcium receptor technology represents a novel method of regulating circulating calcium levels. Calcium receptors are the basis of a newly discovered mechanism by which certain cells detect and respond to small changes in the level of extracellular calcium. One key role of calcium receptors is to regulate secretion of PTH and calcitonin, two hormones which play opposing roles in bone and mineral metabolism. The Company believes that manipulation of PTH and calcitonin levels could be beneficial in the treatment of various disorders, such as HPT and osteoporosis. The Company has utilized its expertise in certain functional screening technologies and its proprietary recombinant cell lines to discover and develop orally-active compounds which can directly manipulate the circulating levels of PTH and calcitonin by modulating the activities of calcium receptors. Compounds which mimic or potentiate the effect of extracellular calcium at calcium receptors are referred to as "calcimimetics" (agonists) while those which block the effect of calcium at such receptors are referred to as "calcilytics" (antagonists).
NMDA receptor-operated calcium channels play critical roles in normal excitatory neurotransmission and are also recognized for their major role in events which lead to much of the neurological damage associated with stroke and with head trauma. Several pharmaceutical companies have recognized the potential of NMDA receptor-operated calcium channels as molecular targets for the development of drugs to treat neurological disorders and have identified various lead compounds. Such work is all the more challenging because NMDA receptor-operated calcium channels are also the site of action of phencyclidine ("PCP"; angel dust), and most compounds which target NMDA receptor-operated calcium channels exhibit undesirable PCP-like side effects such as inducing symptoms of psychosis. The Company has utilized its expertise in certain functional screening technologies to discover and develop orally-active compounds which antagonize NMDA receptor-channels by binding to a novel site, distinct from the PCP binding site. The Company's compounds have not exhibited PCP-like effects in a variety of IN VITRO and IN VIVO studies in animals intended to identify PCP-like effects.
The following chart summarizes the Company's product development programs:
- ------------------------
(1) Amgen and Kirin have assumed full authority and responsibility for development and commercialization of NPS R-568, back-ups and later generation compounds. The Company continues to work with Amgen and Kirin on identification of back-ups and later generation compounds.
(2) See "Business--Hyperparathyroidism Program--Status of Clinical Trials."
(3) "Preclinical Research" refers to one or more active compounds or series of related active compounds which have met predetermined activity criteria in various IN VITRO and/or IN VIVO models. More extensive evaluation of the lead compounds is undertaken to determine if they have the requisite properties to enter preclinical development.
(4) NPS has certain co-promotion rights in the United States. See "Business--Collaborative Research and License Agreements--SmithKline Beecham Corporation."
HYPERPARATHYROIDISM PROGRAM
OVERVIEW. HPT is a growing medical concern. It is typically characterized as being either primary or secondary. Primary HPT is an age-related disorder that results from excessive secretion of PTH. PTH acts in the kidney and on bone to elevate the levels of calcium in the blood. Symptoms may include bone loss, muscle weakness, depression and cognitive dysfunction. Approximately 100,000 new patients are diagnosed with primary HPT in the United States each year. There are currently no pharmaceutical therapies for the treatment of primary HPT. Surgical removal of the affected parathyroid gland(s) from the neck region is presently the only effective treatment.
Secondary HPT results from other disease states and is most often associated with renal dysfunction. Symptoms of secondary HPT include excessive bone loss, bone pain, and chronic, severe itching. Studies have also shown that secondary HPT develops early in the course of renal failure, before patients start dialysis. Current treatments for secondary HPT involve drug therapy with phosphate binders and/or
calcitriol. The Company believes that these therapies have certain disadvantages. For example, phosphate binders are not well tolerated by many people and calcitriol often leads to hypercalcemia and hyperphosphatemia which can exacerbate the underlying disease. In severe cases, surgery may be required to remove all or some of the parathyroid glands.
The results of the Company's research and preclinical and clinical trials have led the Company to believe that calcimimetic compounds (calcium receptor agonists) could prove to be effective in treating both types of HPT. NPS is no longer conducting clinical trials in this field. Amgen and Kirin are now conducting further clinical trials to confirm this conclusion. PTH secretion is normally regulated by changes in the circulating level of calcium. Increased levels of circulating calcium activate the parathyroid cell calcium receptor, which then suppresses the secretion of PTH. In HPT, however, PTH levels remain elevated. NPS R-568 is a calcimimetic compound which activates the calcium receptor on parathyroid cells, thereby reducing the secretion of PTH. The Company has entered into agreements with Amgen and Kirin relating to the development and commercialization of calcimimetic compounds for HPT. See "Business-- Collaborative Research and License Agreements."
[PICTURE]
IN HPT, EXCESS PTH TRIGGERS CHANGES IN BONE AND IN THE KIDNEY, THEREBY INCREASING THE LEVEL OF CALCIUM IN THE BLOOD.
CALCIMIMETIC DRUGS, SUCH AS NPS R-568, ACTIVATE CALCIUM RECEPTORS LEADING TO SUPPRESSION OF PTH SECRETION. IN PATIENTS WITH HPT, CALCIMIMETIC DRUGS ARE EXPECTED TO AMELIORATE SYMPTOMS CAUSED BY EXCESS PTH AND HIGH CALCIUM LEVELS.
DEVELOPMENT STATUS. Prior to entering into the respective agreements with Amgen and Kirin, the Company had commenced clinical trials of NPS R-568 in the United States. These included two Phase I safety and tolerance studies, a multi-site, Phase I/II study in women with mild, primary HPT and a pilot Phase I/II study in kidney dialysis patients with secondary HPT. Kirin has initiated (beginning in October 1996) clinical trials for NPS R-568 in Japan. Amgen informed the Company that it began a Phase II trial for NPS R-568 in dialysis patients in 1996. NPS is actively working with Amgen and Kirin, to discover, identify and characterize back-up and second generation compounds. Each compound which might be considered by Amgen and Kirin is subject to the same contractual provisions governing development and is subject to the same royalty and milestone obligations as NPS R-568. There can be no assurance that clinical trials will proceed as indicated or that NPS R-568 or any other compound will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors--Early Stage of Product Development" and --"Dependence on Collaborative Research and License Relationships."
OSTEOPOROSIS PROGRAM
OVERVIEW. Osteoporosis is an age-related disorder which affects more than 200 million people worldwide and is characterized by reduced bone density and an increased susceptibility to fractures. Osteoporosis is a major cause of morbidity and mortality among the elderly.
Throughout life, bone undergoes constant remodeling involving anabolic processes leading to bone formation and catabolic processes leading to bone resorption. The balance between these two processes determines whether there is net bone loss, net bone formation or no net change. In osteoporosis, this balance has shifted in favor of bone resorption, resulting in net bone loss.
Current drugs approved for the treatment of osteoporosis include estrogen, injectable calcitonin, and alendronate (a bisphosphonate). These drugs are anti-resorptives and act to suppress bone resorption. The Company believes that each of these therapies presents one or more disadvantages. For example, use of estrogen is believed to be associated with increased risk of breast cancer, calcitonin is expensive and cannot currently be administered orally and bisphosphonates have been associated with side effects such as gastrointestinal distress. In contrast, anabolic agents stimulate new bone formation. While no anabolic agents are currently available for the treatment of osteoporosis, the FDA's Endocrinologic and Metabolic Drugs Advisory Committee has recently recommended that slow- release fluoride, an anabolic agent, be approved for the treatment of osteoporosis in postmenopausal patients who have suffered a fracture.
Most osteoporosis patients are first diagnosed after they have already lost significant bone mass. As a result, the Company believes that a therapy that not only halts further bone resorption but also builds new bone would constitute a significant advancement in the treatment of osteoporosis. Under its collaboration with SmithKline Beecham, research efforts are being conducted by NPS concurrently on both stimulation of bone formation and suppression of bone resorption. Both of these approaches are focused on the development of orally-active molecules that are particularly suitable for long-term therapy.
BONE FORMATION. NPS's primary approach to the treatment of osteoporosis is currently focused on calcilytic compounds (calcium receptor antagonists) which, in contrast to calcimimetic compounds, stimulate secretion of PTH. The Company believes that this novel approach, which is intended to manipulate the body's own PTH reserves, could provide an effective anabolic therapy for osteoporosis, stimulating new bone formation to replace bone which has already been lost to the disease.
While chronically high levels of PTH are known to cause bone loss as in HPT, PTH levels fluctuate daily and this is thought to play a key role in regulating the normal balance between bone resorption and bone formation. Recent studies in animals and in humans have shown that frequent (usually daily) injections of exogenous PTH sufficient to cause a transient increase in circulating PTH levels result in significant stimulation of new bone formation. Several published animal studies have evaluated the structural integrity of the newly formed bone and have found that the increases in bone mass achieved with
PTH injections are accompanied by improvements in biomechanical strength and in certain indices of bone structure thought to be related to biomechanical strength.
Although the anabolic effects of PTH on bone were first noted over 60 years ago, evaluation of the therapeutic potential of PTH treatment has only recently begun. Because of its potential as an effective anabolic therapy for osteoporosis, certain other companies are currently conducting clinical trials of injectable PTH or PTH analogs for osteoporosis. However, PTH is currently expensive to manufacture and cannot be administered orally. The Company believes that orally-administered, calcilytic drugs acting on the parathyroid cell calcium receptor to increase PTH release from the body's own PTH reserves could provide a cost-effective means of intermittently increasing PTH levels and could lead to greater patient compliance and therefore greater acceptance.
[PICTURE]
THE COMPANY IS WORKING IN COLLABORATION WITH SMITHKLINE BEECHAM TO DEVELOP CALCILYTIC DRUGS THAT, BY BLOCKING THE PARATHYROID CELL CALCIUM RECEPTOR, WOULD STIMULATE LOW-LEVEL, INTERMITTENT SECRETION OF PARATHYROID HORMONE, THEREBY STIMULATING NEW BONE FORMATION.
The Company has demonstrated in IN VIVO animal studies that intermittent increases in circulating levels of PTH can be obtained by regulating the activity of calcium receptors on the parathyroid cells. Increased levels of PTH achieved by this mechanism are equivalent to levels of PTH achieved by an injection of PTH sufficient to cause bone growth.
SUPPRESSION OF BONE RESORPTION. Bone resorption is the function of specialized bone cells called osteoclasts. NPS is pursuing new anti-resorptive therapies which involve calcimimetic drugs acting indirectly on osteoclasts via C-cells of the thyroid. The Company believes that orally-active calcimimetic drugs could provide cost-effective alternatives to current anti-resorptive drugs and could potentially lead to greater patient compliance.
C-cells of the thyroid secrete the hormone, calcitonin. Osteoclasts are known to possess cell membrane receptors for calcitonin. Activation of these receptors by calcitonin suppresses osteoclastic bone resorption. Studies in animals and in humans have shown that repetitive injections of calcitonin (usually daily) are effective at inhibiting bone resorption, and injectable calcitonin is currently used in some countries as a therapy for osteoporosis. The Company's novel approach is to develop orally-active drugs
which can be used to manipulate the body's own internal reserves of calcitonin in order to achieve a similar effect.
NPS and its collaborators at The Brigham and Women's Hospital, Inc. ("Brigham and Women's") have confirmed that calcium receptors are present on C-cells of the thyroid and that activation of C-cell calcium receptors induces calcitonin secretion. In animal studies, the Company has demonstrated that oral administration of calcimimetic compounds stimulates secretion of calcitonin and can lead to increased circulating calcitonin levels. Further IN VIVO studies are necessary to determine if this approach will result in a significant decrease in bone resorption.
[PICTURE]
CALCIMIMETIC DRUGS THAT ACTIVATE C-CELL CALCIUM RECEPTORS INCREASE CALCITONIN LEVELS IN THE BLOOD. CALCITONIN ACTS DIRECTLY ON OSTEOCLAST CALCITONIN RECEPTORS TO SUPPRESS BONE RESORPTION ACTIVITY. CALCIMIMETIC DRUGS ACTING ON A DISTINCT OSTEOCLAST CALCIUM RECEPTOR THAT NPS IS WORKING TO IDENTIFY WOULD MIMIC THE EFFECT OF EXTRACELLULAR CALCIUM, DIRECTLY SUPPRESSING BONE RESORPTION ACTIVITY.
PRECLINICAL RESEARCH STATUS. In January 1996, the Company received the first milestone payment of $3.0 million from SmithKline Beecham for progress made in its osteoporosis program. Medicinal chemistry efforts are being applied at NPS and SmithKline Beecham to various lead compounds with the goal of identifying clinical development candidates. NPS has produced a cell line that expresses the human parathyroid and C-cell calcium receptor and serves as a proprietary tool for the high-throughput screening of compounds to identify new drug candidates. The Company continues to screen SmithKline Beecham and NPS compound libraries and to discover, identify and characterize additional compounds with calcilytic or calcimimetic activity. There can be no assurance that lead compounds will be identified as proprietary clinical development candidates, that preclinical and clinical trials will proceed as indicated or that such candidates will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors--Early Stage of Product Development."
NEUROPROTECTION PROGRAM--NPS 1506
OVERVIEW. Stroke is the third leading cause of death in the United States, with over 500,000 cases reported each year. In stroke, a blood vessel becomes blocked, leading to inadequate blood supply (ischemia) to the brain. While many stroke victims survive, approximately 100,000 to 150,000 per year are left severely and permanently disabled by nerve damage resulting from stroke. Much of this damage occurs within the first 24 to 48 hours after the incident and is caused in part by the excessive release of glutamate and the resultant influx of calcium into nerve cells. Published research in animals has shown that much of this damage can be prevented by blocking the influx of calcium into cells, especially the influx which results from the activation of NMDA receptor-channels. Calcium influx resulting from the activation of NMDA receptor-channels also appears to cause neuronal damage associated with head trauma. Approximately two million traumatic brain injuries occur each year in the United States, with 25% of such injuries requiring hospitalization and about one percent resulting in death.
Certain medical procedures are associated with an increased risk of stroke. For example, strokes occur in three to seven percent of coronary artery bypass, carotid endarterectomy and heart valve replacement surgeries. Mild to severe central nervous system dysfunction occurs in up to 80% of such procedures. This is thought to result from multiple micro-strokes caused by the release into the circulation of numerous tiny blood clots. The Company believes that it might be possible to lessen the severity of neuronal damage and cognitive impairment occurring as a result of such procedures by prophylactic treatment with certain of the Company's neuroprotective compounds.
Because of the importance of glutamate receptor-operated calcium influx in various neurological disorders, a number of companies are attempting to develop antagonists of NMDA receptor-channels as therapeutics. Most of these compounds have been associated with significant adverse side effects such as symptoms of psychosis. There are currently no effective neuroprotective therapeutics available that act to slow or stop the progression of brain damage once a stroke or head trauma has occurred.
PRECLINICAL DEVELOPMENT STATUS. Systemic administration of the Company's proprietary class of lead compounds, particularly NPS 1506, has demonstrated significant neuroprotectant activity in certain animal models of ischemic stroke and head trauma. In these animal studies, significant neuroprotectant activity was still observed when administration of the compound was delayed for two hours following the ischemic event. In addition, the Company's compounds have not exhibited PCP-like effects in a variety of in vitro and in vivo animal studies intended to identify PCP-like effects. The Company plans to file an IND and begin human clinical Phase I trials before June 30, 1997. There can be no assurance that NPS 1506 or any of the other lead compounds will enter clinical development, will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors--Early Stage of Product Development."
DISCOVERY PROGRAMS
The Company is actively engaged in several other discovery programs which seek to identify new molecular targets for the development of new drugs. These discovery programs are extensions of the Company's discoveries in calcium receptors and ion channels.
METABOTROPIC GLUTAMATE RECEPTORS
Metabotropic glutamate receptors ("mGluRs") are structurally distinct from glutamate receptor-operated calcium channels like the NMDA receptor-operated calcium channel and are related in structure to the parathyroid cell calcium receptor. The Company believes that its experience in the discovery and development of drug candidates which act at calcium receptors provides the Company with certain advantages in the mGluR field. mGluRs are involved in the regulation of a number of important brain functions, and the Company believes that drugs which target specific mGluRs may be useful in treating
various neurological disorders, including neurodegenerative disorders such as Alzheimer's disease, cognitive dysfunction, anxiety and certain psychiatric disorders.
NPS scientists have discovered proprietary small molecules which are active at mGluRs. In addition, NPS scientists have cloned a novel mGluR and have developed proprietary assays and cell lines for use in the Company's mGluR program. The Company's compounds have substantially different structures than existing compounds active at mGluRs which the Company believes could allow them to reach the brain more efficiently. Medicinal chemistry efforts with these lead compounds are ongoing at the Company.
ADDITIONAL CALCIUM RECEPTOR THERAPEUTICS
The Company is actively pursuing drug candidates which target calcium receptors in distinct tissues for the treatment of several disorders. In the kidney, for example, NPS and its collaborators have shown that calcium receptors are abundantly expressed in certain cells which regulate the excretion and reabsorption of calcium, magnesium and certain electrolytes. Calcium receptors are also expressed in cells that regulate excretion and reabsorption of water in the kidney. The Company believes that these calcium receptors participate in the regulation of mineral, electrolyte and fluid balance in the body and that drugs which target calcium receptors in the kidney may provide therapies for abnormal states of ion and water retention. Such abnormal states occur in congestive heart failure, for example, and in nephrolithiasis (kidney stone formation).
INORGANIC ION RECEPTORS
The Company believes that calcium receptors are representative of a new and important class of cell surface receptors, receptors that are able to detect and respond to changes in the concentration of inorganic ions such as sodium, chloride, potassium and phosphate. It has been known for some time that many different tissues respond to changes in the level of such ions. For example, Vitamin D synthesis and certain critical kidney functions are regulated in part by changes in circulating phosphate ion concentrations. Similarly, certain functions of the adrenal gland are affected by changes in potassium levels, and the maintenance of fluid concentrations by the brain may depend on the activation of sodium receptors. Therapeutic agents that act directly on receptors for other ions could provide effective treatments for many disease states. As a result, inorganic ion receptors are attractive targets for the development of novel therapeutic agents. The Company's scientists and its collaborators are actively engaged in research to clone new inorganic ion receptors, to determine their roles in human physiology and disease, and to discover new drug candidates which act selectively on such inorganic ion receptors.
NEURONAL ION CHANNELS
The Company has isolated, from its unique library of arthropod venoms, various peptides that target neuronal ion channels, in particular, certain calcium channels and certain potassium channels. The Company believes that its discoveries of such peptide leads provide the Company with opportunities for the discovery of drugs to treat various neurological disorders. For example, one such peptide modulates a particular neuronal potassium channel by binding at a previously unknown site on this channel. Blocking this potassium channel in nerve cells is known to enhance specific neural activities, especially the prolongation of neuronal signals that may have a potential palliative effect in disorders such as Parkinson's disease, Alzheimer's disease and multiple sclerosis.
DRUG DISCOVERY TECHNOLOGIES
The Company's approach to the discovery of novel drugs is to identify new drug targets and to identify small molecules which modulate the activities of these targets (or of previously identified targets) in ways that provide unique and effective therapies. NPS has pioneered the use of various whole cell and tissue functional screens in its drug discovery programs. The Company believes that its functional screens
substantially enhance its abilities to discover new receptors and ion channels and new drug candidates which modulate the activities of specific receptors or ion channels through novel mechanisms. Functional screens were of critical importance, for example, in the Company's discovery of calcimimetic compounds that modulate calcium receptor function.
The Company also utilizes a unique library of invertebrate venoms. These venoms are isolated from a wide variety of species of spiders, scorpions, centipedes, parasitic wasps and other invertebrates collected from around the world. Lead molecules from this library have been useful in the discovery phases of many of the Company's programs. Examples include the first-generation, small molecule Araxin ("arachnid toxin") compounds which identified a novel site on NMDA receptor-channels, peptide leads being used in the Company's ion channel discovery efforts, and early calcium receptor agonist leads.
COLLABORATIVE RESEARCH AND LICENSE AGREEMENTS
NPS is pursuing research and product development both on an independent basis and in collaboration with others. NPS currently has collaborative research and/or license agreements with Amgen, Kirin, SmithKline Beecham, Brigham and Women's, the State University of New York at Buffalo, the University of Texas in Galveston and several other academic institutions. See "Risk Factors--Dependence on Collaborative Relationships."
AMGEN INC.
In March 1996, the Company entered into a development and license agreement with Amgen effective December 1995 (the "Amgen Agreement") which grants Amgen the exclusive right to develop and commercialize a drug for the treatment of HPT (and other indications other than osteoporosis) worldwide excluding Japan, China, North and South Korea and Taiwan (the "Kirin Territory"). The license includes NPS R-568 and certain other compounds. Under the terms of the Amgen Agreement, NPS may receive from Amgen up to an aggregate of $43.5 million in license fee, equity purchases and milestone payments plus royalties from any future product sales in exchange for exclusive rights to develop, manufacture and sell compounds for the treatment of HPT worldwide, excluding the Kirin Territory. Amgen has assumed full control, authority and responsibility for conducting, funding and pursuing all aspects of the development, submissions for regulatory approvals, manufacture and commercialization of NPS R-568 and certain related compounds worldwide, other than in the Kirin Territory ("Amgen Territory") including conducting clinical trials and making regulatory submissions. Amgen has paid NPS an initial non-refundable license fee of $10.0 million and purchased one million shares of Common Stock at the price of the Company's Common Stock in November 1995 when the Amgen Agreement was negotiated for an aggregate purchase price of $7.5 million. The balance of the $43.5 million includes up to $26.0 million payable to NPS upon the achievement of specific development milestones. NPS has the option to participate with Amgen, under the direction of Amgen, in the clinical development of a drug for primary HPT. Amgen is required to reimburse NPS for such participation which is limited to a total cost of $400,000 per year for a maximum time period of five years. Amgen may terminate the Amgen Agreement for any reason upon 90 days written notice. Termination of the Amgen Agreement will result in the reversion to NPS of its technology, patent and commercialization rights in the Amgen Territory. There can be no assurance that Amgen will not terminate the Amgen Agreement. In the event of termination of the license agreement with Kirin, Amgen would receive worldwide rights to develop and commercialize NPS R-568 and other HPT compounds. NPS is actively working with Amgen and Kirin to discover, identify and characterize back-up and second generation compounds. See "Risk Factors--Dependence on Collaborative Research and License Relationships."
KIRIN BREWERY COMPANY, LIMITED
In June 1995, the Company entered into a five-year collaborative research and license agreement with Kirin (the "Kirin Agreement") to develop and commercialize the Company's NPS R-568 and other
compounds for the treatment of HPT in the Kirin Territory. Under the terms of the Kirin Agreement, NPS may receive from Kirin up to an aggregate of $25.0 million in license fee, research support and milestone payments plus royalties from any future product sales in exchange for exclusive rights to develop, manufacture and sell NPS R-568 and certain other compounds for the treatment of HPT in the Kirin Territory. Kirin is responsible for conducting clinical trials and obtaining regulatory approvals in the Kirin Territory. Kirin has paid NPS an initial, non-refundable license fee of $5.0 million and committed to make $7.0 million in research payments for research concerning NPS R-568 and back-up and second generation compounds over five years. The Kirin research support payments are $500,000 per quarter through June 1997 and $250,000 per quarter over the remaining three years. The remaining $13.0 million is payable to NPS upon achievement of specific development milestones in the United States and the Kirin Territory. In October 1996, the Company received its first milestone payment from Kirin in the amount of $2.0 million for the start of clinical trials in Japan. Kirin is required to pay all costs of developing and commercializing products within the Kirin Territory and will pay royalties to NPS on any product sales. NPS is actively working with Kirin and Amgen to discover, identify and characterize back-up and second generation compounds. Kirin may terminate the Kirin Agreement for any reason upon 90 days written notice. Termination of the Kirin Agreement will result in Amgen receiving worldwide rights to develop and commercialize NPS R-568 and other HPT compounds. There can be no assurance that Kirin will not terminate the Kirin Agreement. See "Risk Factors--Dependence on Collaborative Research and License Relationships."
SMITHKLINE BEECHAM CORPORATION
In November 1993, NPS entered into a three-year collaborative research and license agreement with SmithKline Beecham (the "SmithKline Agreement") to collaborate on the discovery, development and marketing of drugs to treat osteoporosis and other bone metabolism disorders. Under the SmithKline Agreement, SmithKline Beecham has the exclusive license to develop and market worldwide any calcium receptor-active compounds developed under the SmithKline Agreement that are useful for treating osteoporosis and other bone metabolism disorders, excluding HPT. In addition, SmithKline Beecham has a six-month right of first negotiation of a research and license agreement with NPS with respect to any compounds relating to osteoporosis not covered under the SmithKline Agreement. Once compounds have been selected for development, SmithKline Beecham has agreed to conduct and fund all development of such products, including all human clinical trials and regulatory submissions. NPS has the right to co- promote with SmithKline Beecham any resulting products in the United States. In 1992, S.R. One, an affiliate of SmithKline Beecham, purchased $2.0 million of the Company's Preferred Stock. In 1993, at the time NPS entered into the SmithKline Agreement, S.R. One purchased an additional $7.0 million in equity of the Company and it acquired $495,000 of Common Stock in the Company's initial public offering. All of the Preferred Stock was converted into Common Stock upon the closing of the Company's initial public offering.
Under the terms of the SmithKline Agreement, in addition to the $7.0 million equity purchase, SmithKline Beecham paid the Company a $6.0 million non-refundable license fee and agreed to make additional payments to the Company upon the achievement of specific milestones. A $3.0 million milestone payment was made in January 1996. In July 1995 the Company began receiving payments from SmithKline Beecham to support the Company's research efforts and has recognized $4.3 million through 1996. In October 1996, the research term of the SmithKline Agreement was extended for an additional one year period through October 1997. Research support payments are expected to be approximately $475,000 per quarter through October 1997. NPS is entitled to royalties on sales of products for osteoporosis and other bone metabolism disorders developed by SmithKline Beecham under the SmithKline Agreement and a share of the profits from any co-promotion of such products. The SmithKline Agreement may be terminated by SmithKline Beecham upon 30 days written notice, with NPS having the right to extend the SmithKline Agreement for an additional period of time, provided that drug marketing has commenced. Funded research under the SmithKline Agreement will terminate in October 1997. Under certain
circumstances, NPS has the right to terminate the SmithKline Agreement after October 1997. Termination of the SmithKline Agreement will result in reversion to NPS of its technology, commercialization and patent rights in the licensed field of osteoporosis and other bone and mineral disorders as well as all additional technology developed in the course of the collaboration. There can be no assurance that SmithKline Beecham will not terminate the SmithKline Agreement or that funded research will be extended upon its termination in October 1997. See "Risk Factors--Dependence on Collaborative Research and License Relationships."
THE BRIGHAM AND WOMEN'S HOSPITAL, INC.
In February 1993, NPS entered into two agreements with Brigham and Women's, a sponsored collaborative research agreement (the "Brigham Research Agreement") and a patent license agreement (the "Brigham License Agreement"). Brigham and Women's, an affiliate of Harvard University Medical School, is a leading research group in the area of calcium receptors. During the three-year period from February 1993 through January 1996, NPS paid license fees and made research support and milestone payments to Brigham and Women's totaling approximately $1.0 million. In February 1996, the Company reached an agreement with Brigham and Women's to extend the Brigham Research Agreement. This agreement was further amended effective March 1, 1997, to update the amount of research support payments to be made by NPS for the final year of the agreement. Under the terms of the extension, NPS has agreed to continue funding research on calcium receptors and other inorganic ion receptors at Brigham and Women's through February 1998. The extended Brigham Research Agreement, as amended, calls for NPS to make research support and advance royalty payments of $645,000 to Brigham and Women's during the period from February 1996 through February 1998. Of this, $430,000 has been paid through 1996. The Brigham License Agreement grants NPS an exclusive license to calcium receptor and inorganic ion receptor technology arising under the Brigham Research Agreement. The Brigham Research Agreement also grants NPS a right of first negotiation for exclusive license rights to any other patentable subject matter arising out of the sponsored research. NPS also has agreed to pay Brigham and Women's a royalty on sales of any products covered by an issued patent under the Brigham License Agreement and to promote sales of any licensed products for HPT for which the Company receives regulatory approval.
PATENTS AND PROPRIETARY TECHNOLOGY
Periodically the Company files patent applications to protect technology, inventions and improvements which the Company believes are important to the development of its business. The Company also relies on trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position.
The Company files patent applications in its own name, and when appropriate, it has filed, and expects to continue to file, applications jointly with its collaborators. These patent applications cover compositions of matter, methods of treatment, methods of discovery, use of novel compounds and novel modes of action, and recombinantly expressed receptors and gene sequences which are believed by the Company to be important in its research and development activities. None of the Company's principal proprietary rights, including rights related to process, compounds, use and technique related to its calcium receptor science and NMDA receptor-channel technology, are protected by issued patents in the Company's principal markets. The Company believes that its pending patent applications in the fields of calcium receptors, inorganic ion receptors, mGluRs and NMDA receptor-channels and compounds active at the same give the Company a competitive advantage. The Company intends to file additional patent applications as appropriate relating to its technology and to specific products of the Company.
The patent positions of pharmaceutical and biotechnology firms, including the Company, are uncertain and involve complex legal and factual questions. In addition, the scope of the claims in a patent application can be significantly modified during prosecution before the patent is issued. Consequently, the Company does not know whether any of its applications will result in the issuance of patents or, if any
patents are issued, whether they will provide significant proprietary protection or will be circumvented or invalidated. Generally, patent applications in the United States are maintained in secrecy until patents issue and publication of discoveries in the scientific or patent literature often lag behind actual discoveries. In addition, no assurance can be given that, even if published, the Company is aware of all such literature. Accordingly, the Company cannot be certain that the named inventors were the first to invent or that the Company is the first to pursue patent coverage for such inventions. Moreover, the Company may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial cost to the Company, even if the eventual outcome is favorable to the Company. There can be no assurance that the Company's pending patent applications, if issued, would be held valid. An adverse outcome could subject the Company to significant liabilities to third parties, could require disputed rights to be licensed from third parties or require the Company to cease or modify its use of such technology. Additionally, many of the Company's foreign patent applications have been published as part of the patent prosecution process in such countries. Protection of the rights revealed in such published patent applications can be complex, costly and uncertain. See "Risk Factors--Uncertainty of Protection of Patents and Proprietary Technology."
The development of therapeutic products for applications in the Company's product fields is intensely competitive. A number of pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents in these and related fields. Some of these applications or patents may limit or preclude the Company's applications and could result in a significant reduction of the coverage of the Company's patents, if issued.
NPS also relies on trade secrets and contractual arrangements to protect its trade secrets. There can be no assurance that these agreements will be adequate, that they will not be breached, that the Company would have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors.
Much of the know-how important to the Company's technology and many of its processes are dependent upon the knowledge, experience and skills of key scientific and technical personnel and are not the subject of pending patent applications or issued patents. To protect its rights to its know-how and technology, the Company requires all employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit the unauthorized use and restrict the disclosure of confidential information, and require disclosure and assignment to the Company of ideas, developments, discoveries and inventions made by them. There can be no assurance that these agreements will effectively prevent disclosure of the Company's confidential information or will provide meaningful protection for the Company's confidential information if there is unauthorized use or disclosure. It must also be recognized that competitors may develop substantially equivalent know-how and technology.
In connection with certain research in the field of calcium and other ion receptors, NPS has sponsored research by various university and government laboratories. For example, the Company has executed a license agreement and a research agreement regarding research in the area of calcium and other ion receptors with Brigham and Women's. See "Collaborative Research and Licensing Agreements--The Brigham and Women's Hospital, Inc."
The Company has also sponsored work at other government and academic laboratories for various evaluations, assays, screenings and tests of its natural products library and lead compounds in the central nervous system field. Generally, under these agreements the Company funds the work of investigators in exchange for the results of the specified works and the right or option to a license to any patentable inventions that may result in designated areas. Generally, if the sponsored work produces patentable subject matter, the Company has the first right to negotiate for license rights therein. Any resulting license would be expected to require the Company to pay royalties on net sales of licensed products. There can be no assurance that any such inventions will arise, that any patent applications thereon will be filed or, if filed, that any patents will issue, that any license thereon can be negotiated, or that any license agreement would give the Company valuable rights.
MANUFACTURING
NPS anticipates that all of its products will be made by synthetic chemical manufacturing techniques. As such, the Company believes the compounds can be precisely defined and characterized and should generally have relatively low manufacturing costs compared to recombinant proteins produced by the fermentation methods common to currently available biotechnology products.
NPS has no manufacturing facilities. Under the Amgen, Kirin and SmithKline Agreements, each of such Licensee's is responsible for the manufacture of the applicable product. The Company relies on other manufacturers to produce its proprietary compounds for research and development activities and in sufficient quantities for preclinical and clinical purposes. The proposed pharmaceutical products under development by the Company have never been manufactured on a commercial scale, and there can be no assurance that such products can be manufactured at a cost or in quantities to make them commercially viable. If the Company were unable to contract for sufficient supply of its compounds on acceptable terms, or if it should encounter delays or difficulties in its relationships with manufacturers, the Company's preclinical and clinical testing schedule would be delayed. Such delay might postpone the submission of products for regulatory approval or the market introduction and subsequent sales of such products, which would have a materially adverse effect on the Company. Moreover, contract manufacturers that the Company may use must adhere to Good Manufacturing Practices (cGMP) regulations enforced by the FDA through its facilities inspection program.
GOVERNMENT REGULATION
The production and marketing of the Company's product candidates and its research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. In the United States, drugs are subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act, as amended, and the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. Product development and approval within this regulatory framework take a number of years and involve the expenditure of substantial resources.
The steps required before a pharmaceutical agent may be marketed in the United States include: (i) preclinical laboratory tests, animal pharmacology and toxicology studies and formulation studies; (ii) the submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials commence; (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug; (iv) the submission of a New Drug Application ("NDA") to the FDA; and (v) FDA approval of the NDA prior to any commercial sale or shipment of the drug. In addition to obtaining FDA approval for each product, each domestic drug manufacturing establishment must be registered with, and approved by, the FDA under cGMP regulations. Domestic drug manufacturing establishments are subject to regular inspections by the FDA and must comply with cGMP regulations. To supply products for use in the United States, foreign manufacturing establishments must comply with cGMP regulations and are subject to periodic inspection by the FDA or by corresponding regulatory agencies in their home countries under reciprocal agreements with the FDA.
Preclinical studies include the laboratory evaluation of IN VITRO pharmacology, product chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of the product. Compounds must be formulated according to cGMP, and preclinical safety tests must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices. The results of the preclinical tests are submitted to the FDA as part of an IND and are reviewed by the FDA prior to the commencement of human clinical trials. Unless the FDA objects to an IND, the IND will usually become effective 30 days following its receipt by the FDA. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials.
Clinical trials involve the administration of the investigational new drug to healthy volunteers and to patients under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with Good Clinical Practices under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical study must be conducted under the auspices of an Institutional Review Board ("IRB") at the institution at which the study will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution.
Clinical trials typically are conducted in three sequential phases, which may overlap. In Phase I, the initial introduction of the drug into healthy subjects, the drug is tested for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited patient population to: (i) determine the efficacy of the drug for specific, targeted indications; (ii) determine dosage tolerance and optimal dosage; and (iii) identify possible adverse effects and safety risks. When a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to evaluate further clinical efficacy and to test further for safety within an expanded patient population at geographically dispersed clinical study sites. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specific time period, if at all, with respect to any of the Company's products subject to such testing, including NPS R-568. Furthermore, the Company, its collaborators, Licensees or the FDA may suspend clinical trials at any time if they feel that the subjects or patients are being exposed to an unacceptable health risk. See "Risk Factors--Government Regulation; No Assurance of Regulatory Approval."
The results of the pharmaceutical development, preclinical studies and clinical studies are submitted to the FDA in the form of an NDA for approval of the marketing and commercial shipment of the drug. The testing and approval process is likely to require substantial time and effort, and there can be no assurance that any approval will be granted on a timely basis, if at all. The FDA may deny an NDA if applicable regulatory criteria are not satisfied, require additional testing or information, or require post-marketing testing and surveillance to monitor the safety of the Company's products if the FDA does not view the NDA as containing adequate evidence of the safety and efficacy of the drug. Notwithstanding the submission of such data, the FDA may ultimately decide that the application does not satisfy its regulatory criteria for approval. Moreover, if regulatory approval of a drug is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing.
Among the conditions for NDA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform to cGMP, which must be followed at all times. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance. See "Risk Factors--Government Regulation; No Assurance of Regulatory Approval."
In addition to regulations enforced by the FDA, the Company is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and future federal, state or local regulations. The Company's research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company. See "Risk Factors--Risk of Product Liability; Use of Hazardous Materials."
Outside the United States, the Company's ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authority. This foreign regulatory approval process includes all of the risks associated with FDA approval set forth above.
COMPETITION
NPS and its Licensees are pursuing areas of product development in which the Company believes there is a potential for extensive technological innovation in relatively short periods of time. The Company operates in a field in which new discoveries occur and are expected to occur at a rapid pace. The Company's competitors may succeed in developing technologies or products that are more effective than those of the Company or in obtaining regulatory approvals of their drugs more rapidly than the Company and its collaborative partners, and could render the Company's products obsolete or noncompetitive. Competition in the pharmaceutical industry is intense and is expected to continue to increase. Many of the Company's competitors, including biotechnology and pharmaceutical companies, are actively engaged in the research and development of products in the Company's targeted areas, including the fields of HPT, osteoporosis, neuroprotection and neurological disorders. Many of the Company's competitors have substantially greater financial, technical, marketing and personnel resources than the Company. In addition, some of them have considerable experience in preclinical testing, human clinical trials and other regulatory approval procedures. Moreover, certain academic institutions, governmental agencies and other research organizations are conducting research in areas in which the Company is working. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed. These institutions may also market competitive commercial products on their own or through joint ventures and will compete with the Company in recruiting highly qualified scientific personnel. There can be no assurance that a pharmacological method of treatment for certain diseases, such as HPT, will prove to be superior to existing or newly discovered approaches to the treatment of those diseases. See "Risk Factors--Rapid Technological Change; Intense Competition."
ENVIRONMENTAL LIABILITY
On November 29, 1995, the Company received a letter from the EPA notifying the Company that it may have incurred liability under section 107(a) of the Comprehensive Environmental Response, Compensation and Liability Act, as amended, for two barrels of radioactive waste taken by a third party contractor to a hazardous and radioactive waste storage, treatment and disposal facility in Denver, Colorado. Upon the EPA's request, the Company has identified the waste and has verified that the barrels containing the waste have been removed from the Denver, Colorado facility. Removal of wastes from the facility and remediation of soil and groundwater at this site is currently underway. The ultimate cost of removal and remediation actions and the length of time for such actions are difficult to estimate. Based upon its inspection of the site, the Company is of the belief that the barrels containing the waste disposed of by the Company were neither leaking nor damaged. Although the Company was a small contributor to the site and the Company believes that there are a number of other financially responsible contributors, there can be no assurance that the Company will not be held liable for all or a portion of the cleanup cost or any other costs or damages associated with this disposal site. See "Risk Factors--Risk of Product Liability; Use of Hazardous Materials."
EMPLOYEES
As of December 31, 1996, NPS employed 90 individuals full-time, 21 of whom hold Ph.D. or M.D. degrees and 19 of whom hold other advanced degrees. Approximately 62 full-time employees are engaged in research and development activities, including a variety of disciplines within the areas of molecular biology, pharmacology, medicinal chemistry, computer sciences and clinical development. Approximately 28 full-time employees are employed in finance, legal and regulatory affairs, market research, corporate
development and general administrative activities. None of the Company's employees is covered by collective bargaining agreements, and management considers relations with its employees to be good. Additionally, NPS augments its full-time staff through consulting arrangements with experienced scientists and managers. The Company's anticipated growth and expansion will require the hiring of additional management, research and development, and administrative personnel.
RISK FACTORS
EARLY STAGE OF PRODUCT DEVELOPMENT. The Company was founded in 1986, and has not completed development of any drugs and does not expect that any drugs resulting from its or its Licensees' research and development efforts will be commercially available for several years, if at all. NPS R-568 is the only product candidate currently in clinical development by the Company and its Licensees. Clinical trials in humans are necessary to determine whether or not a compound will be a safe, commercially attractive or effective drug. Results obtained in preclinical trials are not necessarily indicative of results that will be obtained in later stages of preclinical development or in human clinical testing. All product candidates developed by the Company or its Licensees, including NPS R-568, will require extensive research, development and preclinical and clinical testing prior to submission of any regulatory application, as well as a lengthy regulatory approval process. Preclinical and clinical testing of safety and efficacy takes several years and the time required to commercialize new drugs cannot be predicted with accuracy. Product development of new pharmaceuticals is highly uncertain, and unanticipated developments, clinical or regulatory delays, unexpected adverse side effects or inadequate therapeutic efficacy could slow or prevent the product development efforts of the Company and its Licensees, and have a materially adverse effect on the Company's operations. There can be no assurance that the Company's current product candidates, including NPS R-568, or any future product candidates, will advance to clinical trials, prove safe and effective, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable cost or be successfully marketed. Also, there can be no assurance that a pharmacological method for the treatment of diseases targeted by the Company, including HPT, will prove to be superior to non-pharmacological treatments.
DEPENDENCE ON COLLABORATIVE RESEARCH AND LICENSE RELATIONSHIPS. The Company's strategy for the development, clinical testing and manufacturing and commercialization of certain of its product candidates and the research and development of new product candidates includes entering into various research, development and license agreements with corporate partners, licensees and others. The Company has entered into a license agreement with Amgen pursuant to which Amgen has assumed full control of the development and commercialization of a compound for the treatment of HPT in its territory, a collaborative research and license agreement with Kirin for the development of a compound for the treatment of HPT in Kirin's Territory and a collaborative research and license agreement with SmithKline Beecham for research and development in osteoporosis. The Licensees each have received from NPS certain exclusive rights to commercialize products developed under their respective agreements, have paid license fees to NPS and have committed to make milestone payments to NPS upon achievement of specified goals. The Licensees have agreed to fund the research or development efforts in HPT and osteoporosis, conduct human clinical testing of lead compounds, prepare and file submissions for regulatory approval and pay royalties on any resulting products. Because the Company has granted exclusive development, commercialization and marketing rights to the Licensees in the fields of HPT and osteoporosis, the success of its existing HPT and osteoporosis programs is dependent upon the efforts of the Licensees. There can be no assurance that the Licensees will perform their obligations under their respective agreements, that they will successfully develop or proceed to market any products under these agreements, or that the Company will ever receive any royalties or milestone or research support payments under these agreements, any of which could have a material adverse effect on the business of the Company. Furthermore, there can be no assurance that business conflicts will not arise between the Licensees over rights to existing compounds or future compounds with respect to certain indications. The Company's collaborative research and license agreements, including the agreements with the Licensees, generally provide that they may be terminated
under a variety of circumstances upon prior written notice. If any of the Licensees terminates or breaches its agreement, such termination or breach may have a material adverse effect on the Company's operations. Furthermore, there can be no assurance that present or future collaborators will not pursue existing or alternative technologies in preference to treatments being developed in collaboration with the Company.
NPS also intends to seek additional collaborative or license arrangements to develop and commercialize other product candidates. Many of the Company's competitors are similarly seeking to develop or expand their collaborative and license arrangements with pharmaceutical companies. The success of these efforts by the Company's competitors could have an adverse impact on the Company's ability to form future collaborative arrangements and maintain existing ones. There can be no assurance that the Company will be able to negotiate acceptable collaborative agreements in the future or that efforts under any such collaborative agreements will be successful. To the extent that the Company chooses not to or is unable to enter into future collaborative agreements, it would experience increased capital requirements to undertake research, development and marketing of its product candidates at its own expense. In addition, the Company may encounter significant delays in introducing its product candidates into certain markets or find that the development, manufacture or sale of its product candidates in such markets is adversely affected by the absence of such collaborative agreements.
LACK OF PRODUCT SALES; HISTORY OF OPERATING LOSSES. Substantially all of the Company's revenues to date have come from collaborative research and license agreements with the Licensees. Aside from the incidental revenues from the sale of research chemicals, no revenues have been generated from product sales. Other working capital has come from equity and debt financings. NPS has incurred cumulative losses through December 31, 1996 of $14.4 million, net of cumulative revenues from research and license agreements of $42.7 million. The Company expects to incur significant operating losses over at least the next several years as the Company continues and expands its research and development and preclinical and clinical testing activities. The Company expects that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. The Company's ability to achieve profitability depends in part upon its Licensees' ability to complete development of NPS R-568 and identify and develop back-up and later generation compounds, the Company's ability to develop, alone or with others, other product candidates, obtain required regulatory approvals and manufacture and successfully market such products, of which there can be no assurance. As such, there can be no assurance that the Company will be able to achieve profitability on a sustained basis, if at all.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL. The research and development activities of the Company, as well as the investigation, manufacture, distribution and marketing of therapeutic products, are subject to extensive regulation by numerous governmental authorities in the United States and other countries. Prior to marketing in the United States, a drug must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process implemented by the FDA under federal law, including the Federal Food, Drug and Cosmetic Act, as amended. Receipt of such regulatory approval involves, among other things, satisfying the FDA that the product is both safe and effective. Typically, this process takes several years or more depending upon the type, complexity and novelty of the product and the nature of the disease or other indication to be treated and requires the expenditure of substantial resources. Preclinical studies must be conducted in conformance with the FDA's Good Laboratory Practice regulations. Clinical testing must meet requirements for Institutional Review Board oversight and informed consent by clinical trial subjects and patients, as well as FDA prior review, oversight and the FDA's Good Clinical Practice requirements. Clinical trials may require large numbers of test subjects. Furthermore, the Company or the FDA may suspend clinical trials at any time if either believes that the subjects participating in such trials are being exposed to unacceptable health risks, including undesirable or unintended side effects. While certain of the Company's employees have some experience in conducting and managing the clinical testing necessary to obtain regulatory approval, the Company has conducted only limited clinical trials of one of its product candidates to date and anticipates that it will need to either
rely on its collaborative partners, licensees and outside consultants or attract and retain additional employees with expertise in this area.
Before receiving FDA approval to market a product, NPS may have to demonstrate that such product represents an improved form of treatment compared to existing therapies. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approvals. In addition, delays or rejections may be encountered based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. If regulatory approval of a product is granted, such approval will be limited to those disease states and conditions for which the product is useful, as demonstrated through clinical studies. Furthermore, approval may entail ongoing requirements for post-marketing studies. Even if such regulatory approval is obtained, a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections. The regulatory standards for current Good Manufacturing Practices ("cGMP") are currently being applied stringently by the FDA. Discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on such product or manufacturer, including costly recalls or even withdrawal of the product from the market. There can be no assurance that any compound developed by the Company alone or in conjunction with others will prove to be safe and effective in clinical trials and will meet all of the applicable regulatory requirements needed to receive marketing approval.
RAPID TECHNOLOGICAL CHANGE; INTENSE COMPETITION. NPS is pursuing areas of product development in which the Company believes there is a potential for extensive technological innovation in relatively short periods of time. The Company operates in a field in which new discoveries occur and are expected to occur at a rapid pace. The Company's competitors may succeed in developing technologies or products that are more effective than those of the Company or in obtaining regulatory approvals of their drugs more rapidly than the Company and its collaborative partners and licensees. Such success could render the Company's products obsolete or non-competitive and have a material adverse effect on the Company. Competition in the pharmaceutical and biotechnology industry is intense and is expected to continue to increase. Many of the Company's competitors, including biotechnology and pharmaceutical companies, are actively engaged in the research and development of products in the Company's targeted areas, including the fields of HPT, osteoporosis, neuroprotection and neurological disorders. Many of the Company's competitors have substantially greater financial, technical, marketing and personnel resources than the Company as well as considerable experience in preclinical testing, human clinical trials and other regulatory approval procedures. Moreover, certain academic institutions, governmental agencies and other research organizations are conducting research in areas in which the Company is working. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed. These institutions may also market competitive commercial products on their own or through joint ventures and will compete with the Company in recruiting highly qualified scientific personnel.
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success depends, in part, on its ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. Because the patent positions of biotechnology and pharmaceutical companies can be highly uncertain and frequently involve complex legal and factual questions, the breadth of claims allowed in biotechnology and pharmaceutical patents or their enforceability cannot be predicted.
None of the Company's principal proprietary rights, including rights related to process, compounds, use and technique related to its calcium receptor science and NMDA receptor-channel technology, are protected by issued patents in the Company's principal potential markets. No assurance can be given that patents will issue from any of the Company's current or anticipated patent applications or that such patent applications will allow the Company to preclude others from practicing some or all of the art described in the publicly available versions of these pending patent applications either before such patent applications issue as patents or after such patent applications issue as patents. Generally, patent applications in the
United States are maintained in secrecy until patents issue and publication of discoveries in scientific or patent literature often lag behind actual discoveries. No assurance can be given that, even if published, the Company is aware of all such literature. Accordingly, the Company cannot be certain that the named inventors in its patent applications were the first to invent, or that the Company is the first to pursue patent coverage for such inventions. If patents do issue, there can be no assurance that the claims allowed will be sufficiently broad to protect the Company's technology or to prevent competition. No assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented or that rights granted thereunder will provide competitive advantages to NPS. Moreover, the Company may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial cost to the Company, even if the eventual outcome is favorable to the Company. If certain of the Company's patent applications fail to issue or are successfully challenged, particularly those related to its calcium receptor science and NMDA receptor-channel technology, it may have a material adverse effect on the Company's operations or its ability to maintain or establish collaborations. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate any of the Company's products or design around the patented products or technology developed by NPS. There can also be no assurance that any products developed by NPS will not be found to infringe patents held by third parties, or that, in such cases, licenses from such third parties would be available on commercially attractive terms, if at all. If NPS does not obtain such licenses, it could encounter delays in product market introductions or could find that it is unable to develop, manufacture or sell its products requiring such licenses. In addition, the Company could incur substantial costs in defending lawsuits brought against NPS on such patents or in prosecuting lawsuits by NPS against another party. Additionally, many of the Company's foreign patent applications have been published as part of the patent prosecution process in such countries. Protection of the rights revealed in such published patent applications can be complex, costly and uncertain.
The development of therapeutic products for applications in the Company's product fields is intensely competitive. A number of pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents in these and related fields. Some of these applications or patents may limit or preclude the Company's applications and could result in a significant reduction of the coverage of the Company's patents, if issued.
NPS also relies on trade secrets and proprietary know-how, which it seeks to protect, in part, by confidentiality agreements with its corporate collaborators, licensees, employees and consultants. NPS expects to continue to rely on trade secrets and know-how to protect certain aspects of its technologies. The Company believes it has, and can maintain, a competitive advantage through its use of written confidential disclosure agreements and invention assignment provisions with its employees, consultants, advisors and potential and actual collaborators and licensees. Nonetheless, no assurance can be given that these agreements will provide meaningful protection for the Company's trade secrets or proprietary know-how as a result of an unauthorized use or disclosure in the public domain. There can be no assurance that these agreements will not be breached, that NPS would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING. To be successful, the Company's products, if successfully developed, must be manufactured in commercial quantities in accordance with regulations prescribed by the FDA and at acceptable costs. NPS does not have the capability to manufacture products under cGMP regulations prescribed by the FDA and does not intend to develop such a capability in the near future. Accordingly, the Company anticipates that, for the foreseeable future, it will pursue a strategy of seeking production capability from corporate collaborators, licensees or contract manufacturers. There can be no assurance that the Company's current or prospective corporate collaborators, licensees or contract manufacturers will be able to manufacture any developed compounds on a commercial scale or that any collaborator, licensee or manufacturer will be able to manufacture products in quantities or at prices which will be commercially viable or beneficial for the Company. The Licensees are responsible for manufacturing any products developed under their respective agreements with the Company. If the Company or its
collaborators and licensees encounter difficulty in obtaining third-party manufacturing on commercially acceptable terms, their ability to commercialize products may be delayed or foreclosed. Moreover, any manufacturer of the Company's products must adhere to cGMP regulations enforced by the FDA through its facilities inspection program. If these facilities cannot pass a pre-approval or periodic plant inspection, FDA approval of the product will not be granted or sale of the product may be barred.
Presently, the Company relies on contract manufacturers to produce its proprietary compounds for development activities and in sufficient quantities for preclinical and clinical purposes. If the Company were unable to contract for sufficient supply of its compounds on acceptable terms, or if it should encounter delays or difficulties in its relationships with manufacturers, the Company's preclinical and human clinical testing schedule would be delayed. Such delay would adversely affect the schedule for submission of products for regulatory approval and the market introduction and subsequent sales of such products, which would have a materially adverse effect on the Company.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company has incurred negative cash flows from operations since its inception. Substantial expenditures will be required to enable NPS to conduct existing and planned preclinical studies and clinical trials, to manufacture or to have manufactured and to market products from current research and development efforts, and to continue research and development activities. The Company anticipates that its existing capital resources, including research and development support payments from existing collaborations will be sufficient to enable it to maintain its current and planned operations through at least 1999. However, the Company's future capital needs will be dependent upon many factors, including progress in its research and development activities, the magnitude and scope of these activities, progress with preclinical and clinical trials, the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in or terminations of existing collaborative arrangements and license arrangements, the establishment of additional collaborative and license arrangements, and the cost of manufacturing scale-up and development of marketing activities, if undertaken by the Company. If Amgen terminates its agreement to develop NPS R-568 or other calcimimetic compounds in the Amgen Territory, the Company may not have the resources necessary to complete the development and commercialization of NPS R-568 in the Amgen Territory.
Depending on the factors described above, NPS may need to raise substantial additional funds to support its long-term product development and commercialization programs. The Company intends to seek additional funding through corporate collaborations and license agreements. There can be no assurance the Company will be able to negotiate such agreements in the future on acceptable terms, or at all. The Company may also seek additional funding through public or private financings. If additional funds are raised by issuing equity securities, further dilution to stockholders will result. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its research and development programs or to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company may otherwise seek to develop or commercialize on its own, any one of which could have a material adverse effect on the Company's operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
LACK OF MARKETING CAPABILITIES. The Licensees currently have marketing and distribution rights with respect to products under development for the treatment of HPT and osteoporosis; however, such commercialization rights may revert to NPS, under certain circumstances, including upon termination of any of the related agreements. NPS may retain commercialization rights to other products developed in the future. The Company currently lacks sales, marketing and distribution capability. In order to market any of its products directly, the Company would have to develop a marketing and sales force with technical expertise and with supporting distribution capability. There can be no assurance that the Company will be able to establish in-house sales and distribution capabilities or relationships with third parties, or that it will be successful in gaining market acceptance for its products.
Outside the United States, the Company's ability to market a product is contingent upon receiving marketing authorization from the appropriate foreign regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. This foreign regulatory approval process includes all of the risks associated with FDA approval set forth above.
HEALTH CARE LEGISLATION/UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. There is significant national concern today about the availability and rising cost of health care in the United States. It is anticipated that new federal and/or state legislation will be passed and regulations adopted to attempt to provide broader and better health care and to manage and contain its cost. While NPS cannot predict whether any such legislative or regulatory proposals will be adopted or the effect such proposals may have on its business, the pendency of such proposals could have a material adverse effect on the Company's ability to raise capital, and the adoption of such proposals could have a material adverse effect on the Company in general.
In both domestic and foreign markets, sales of the Company's product candidates will depend in part on the availability of reimbursement from third-party payors such as government health administration authorities, private health insurers and other organizations. Under current guidelines, Medicare does not reimburse patients for self-administered drugs. Such policy may adversely affect the market for products designed to treat patients with age-related disorders, such as HPT and osteoporosis. In addition, third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products. There can be no assurance that the Company's product candidates will be considered cost-effective or that adequate third-party reimbursement will be available to enable NPS to maintain price levels sufficient to realize an appropriate return on its investment in product development. Failure to achieve sufficient price levels for its drugs could adversely affect the Company's business. Legislation and regulations affecting the pricing of pharmaceuticals may change before any of the Company's product candidates are approved for marketing. Adoption of such legislation or regulations could further limit reimbursement for medical products and services. Furthermore, the Company's ability to commercialize its potential product portfolio may be adversely affected to the extent that such legislation has a material adverse effect on the business, financial condition and profitability of other companies that are current or future collaborators for certain of the Company's product candidates.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO MANAGE GROWTH. The Company is highly dependent on the principal members of its scientific and management staff. Loss of any of these persons could adversely affect the Company's business. The Company does not have employment contracts. The Company's future success will also depend in large part upon its continued ability to attract and retain other highly qualified scientific and management personnel. The Company faces competition for personnel from other companies, academic institutions, government entities and other organizations. There can be no assurance that NPS will be successful in hiring or retaining personnel. In addition, the Company's anticipated growth and expansion into areas and activities requiring additional expertise, such as clinical trials, government approvals, production and marketing and general pharmaceutical company management are expected to place increased demands on the Company's resources. These demands are expected to require the addition of new management, research and development and administrative personnel, and the development of additional expertise by existing management personnel. The failure to acquire such services or to develop such expertise could materially adversely affect prospects for the Company's success. Certain of these anticipated future needs are expected to be met through the agreements with the Licensees and potential additional corporate collaborations, but there can be no assurance that any services provided by the Licensees or other potential corporate collaborators will be sufficient to meet the Company's personnel or management needs.
RISK OF PRODUCT LIABILITY. The testing, marketing and sale of human therapeutic products entail significant risks. If the Company succeeds in developing products under its product development programs,
use of such products in clinical trials and the sale of such products following regulatory approval may expose the Company to liability claims allegedly resulting from use of such products. These claims might be made directly by consumers or others. NPS has obtained limited product liability insurance coverage for its human clinical trials. There can be no assurance that NPS will be able to maintain such insurance or obtain similar insurance for any of its future clinical trials or that coverage will be in sufficient amount to protect against damages for liability that could have a material adverse effect on NPS. There can also be no assurance that NPS will be able to obtain or maintain product liability insurance in the future on acceptable terms or in sufficient amounts to protect the Company against damages for liability that could have a material adverse effect on the Company. The agreements with the Licensees each provide for certain indemnification against such claims, but there can be no assurance that any claim arising from products sold by a collaborative partner or licensee would not also include claims directly against NPS or that any such claim would be indemnifiable under such agreement.
USE OF HAZARDOUS MATERIALS. The Company's research and development activities involve the controlled use of hazardous materials, radioactive compounds and other chemicals. The Company is required to comply with complex local, state and federal regulations involving the use, storage and handling of these materials and may incur certain costs in complying therewith. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by local, state and federal regulations, the possibility of unintended non-compliance with such regulations or the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company. The Company may incur substantial costs to comply with environmental regulations.
The Company contracts with third parties to remove biohazardous waste generated by the Company. The disposal of such waste, third-party waste disposal companies contracted by the Company, and their disposal sites are regulated by the Environmental Protection Agency ("EPA"). The EPA has initiated cleanup of a site where a waste disposal firm contracted by the Company disposed of certain waste generated by the Company. The Company has not accrued any liability with respect to this matter. Although the Company was a small contributor to the site and the Company believes that there are a number of other financially responsible contributors, there can be no assurance that the Company will not be held liable for all or a portion of the cleanup cost or any other costs or damages associated with this disposal site.
VOLATILE STOCK PRICE. The market price of the shares of Common Stock, like that of the common stock of many other biotechnology and biopharmaceutical companies, has been and is likely to continue to be highly volatile. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new commercial products by the Company or its competitors, progress with clinical trials, governmental regulation, changes in reimbursement policies, developments in patent or other proprietary rights, developments in the Company's relationships with current or future collaborative partners, public concern as to the safety and efficacy of drugs developed by the Company and its competitors, and general market conditions for biotechnology or pharmaceutical stocks could have a significant adverse effect on the future price of the Common Stock.
ANTITAKEOVER EFFECTS OF SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BYLAW PROVISIONS. Certain provisions of the Company's Certificate of Incorporation and Bylaws and Section 203 of the Delaware General Corporation Law could also discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions could diminish the opportunities for a stockholder to participate in tender offers, including tender offers at a price above the then current market value of the Common Stock. Such provisions may also inhibit fluctuations in the market price of the Common Stock that could result from takeover attempts. In addition, the Board of Directors, without further stockholder approval, may issue Preferred Stock that could have the effect of delaying or preventing a change in
control of the Company as well as adversely affecting the voting power of the holders of Common Stock, including the loss of voting control to others. In addition, the Board of Directors has adopted a Rights Agreement (commonly known as a "poison pill") which may have the effect of delaying or preventing a change in control.
ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends and does not anticipate paying cash dividends in the foreseeable future.
ITEM 2

ITEM 2 PROPERTIES.
NPS currently occupies approximately 45,000 square feet of leased laboratory, support and administrative space in the University of Utah Research Park. The Company pays approximately $700,000 annually under its facilities lease. The lease on these facilities expires in September 1999. The Company anticipates that it will need to acquire additional space in order to meet its needs over the next three years. The Company believes that it will be able to acquire additional space on commercially reasonable terms.
ITEM 3

ITEM 3 LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to the stockholders during the fourth quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company and their ages are as follows as of December 31, 1996:
- ------------------------
(1) Dr. Freston joined the Company in March 1997.
HUNTER JACKSON, PH.D., has been Chief Executive Officer and Chairman of the Board since founding the Company in 1986. He was appointed to the additional position of President in January 1994. Prior to founding the Company, he was an Associate Professor in the Department of Anatomy at the University of Utah School of Medicine. Dr. Jackson received a B.A. in English from the University of Illinois and a Ph.D. in Psychobiology from Yale University. He received postdoctoral training in the Department of Neurosurgery, University of Virginia Medical School.
N. PATRICIA FRESTON, PH.D., has been Vice President, Human Resources since March 1997. From 1980 to February 1997, she served as Manager of Personnel Services, Questar Corporation, a public integrated energy company. From 1977 to 1980, Dr. Freston was Assistant Director of Training for Mountain Fuel Supply, a subsidiary of Questar. From 1971 to 1977, she was Director of Academic Programming for the Division of Continuing Education, University of Utah. Dr. Freston received a B.A. in English from Weber State University, a M.A. in English from Utah State University, an M.S. in Education from the University of Texas and a Ph.D. in Industrial Psychology from the University of Utah.
JAMES U. JENSEN, J.D., has been Vice President, Corporate Development and Legal Affairs and Secretary since August 1991. He has been Secretary and a director of the Company since 1987. From 1986 to July 1991, he was a partner in the law firm of Woodbury, Jensen, Kesler & Swinton, P.C. (or its predecessor firm) concentrating on technology transfer and licensing and corporate finance. From July 1985 until October 1986, he served as chief financial officer of Cericor, a software company, and from 1983 to July 1985, as its outside general counsel. From 1980 to 1983, he served as General Counsel and Secretary of Dictaphone Corporation, a subsidiary of Pitney Bowes Inc. He serves as a director of Wasatch Funds, Inc., a registered investment company, and of Interwest Home Medical, Inc., a public home use medical equipment distributor. Mr. Jensen received a B.A. in English/Linguistics from the University of Utah and a J.D. and an M.B.A. from Columbia University.
THOMAS B. MARRIOTT, PH.D., has been Vice President, Development Research since August 1993. From February 1990 to July 1993, he served as Director, Clinical Investigations for McNeil Pharmaceutical, a subsidiary of Johnson & Johnson with responsibility for developing and implementing clinical trial strategies for a number of products. From 1986 until 1990, Dr. Marriott was Director, Drug Metabolism for McNeil Pharmaceutical with responsibility for planning, initiating and completing bioanalytical drug disposition and clinical biopharmaceutics and pharmacokinetics research required for INDs and NDAs. In this position, he participated in the preparation of several INDs and NDAs with responsibility for preparing or supervising the preparation of the IND preclinical drug metabolism section and the NDA preclinical and clinical metabolism and biopharmaceutics sections, and was responsible for integrating the pharmacology, toxicology and clinical sections of INDs and NDAs. He received a B.S. in Chemistry from Carleton College and a Ph.D. in Chemistry from the Institute of Molecular Biology at the University of Oregon.
ROBERT K. MERRELL has been Vice President, Finance, Chief Financial Officer and Treasurer since January 1995 and previously was Director of Finance and Administration and Treasurer from December 1993 to December 1994. He joined the Company as Controller/Treasurer in September 1988. Prior to that time, he was a Senior Manager at KPMG Peat Marwick LLP. Mr. Merrell has been a licensed C.P.A. since 1980. He received a B.A. in Accounting from the University of Utah and an M.M. from Kellogg Graduate School of Management at Northwestern University.
EDWARD F. NEMETH, PH.D., has been Vice President, Research since January 1994. He joined the Company as Director of Pharmacology in March 1990. From 1986 until joining the Company, Dr. Nemeth was an Assistant Professor in the Department of Physiology and Biophysics at Case Western Reserve University School of Medicine. He holds a B.A. in Chemistry and Psychology from Lawrence University and a Ph.D. in Pharmacology from Yale University.
DOUGLAS REED, M.D., has been Vice President, Business Development since April 1996. He also served on the Board of Directors of the Company from 1992 to 1996. From May 1989 to 1996, Dr. Reed was a Vice President of S.R. One, a venture capital firm. From 1985 to 1987, he was Assistant Professor at Yale University School of Medicine. Dr. Reed received an M.D. from the University of Missouri and an M.B.A. from the Wharton school at the University of Pennsylvania.
PART II
ITEM 5

ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company completed its initial public offering on May 26, 1994. The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "NPSP." The following table sets forth the quarterly high and low closing sales prices for the Company's Common Stock for each quarter in the two most recent fiscal years as reported by the Nasdaq National Market:
On December 31, 1996, there were approximately 1,200 beneficial holders of record of the Company's Common Stock.
The Company has never declared or paid dividends on its capital stock. The Company currently intends to retain any future earnings to finance the growth and development of its business and therefore does not anticipate paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On March 18, 1996, the Company sold 1 million shares of Common Stock, par value $.001 to Amgen for an aggregate purchase price of $7.5 million in reliance on Section 4(2) of the Securities Act of 1933. The offer of such shares was made solely to Amgen, a sophisticated investor, and was made as part of the terms of a development and license agreement between the parties.
ITEM 6

ITEM 6 SELECTED FINANCIAL DATA.
The selected financial data presented below for each fiscal year in the five-year period ended December 31, 1996 and the period from October 22, 1986 (inception) through December 31, 1996 have been derived from the Company's financial statements, which have been audited by KPMG Peat Marwick LLP, independent certified public accountants, and are qualified by reference to such Financial Statements and Notes thereto. The Company is considered a development stage company as described in Note 1 of Notes to Financial Statements.
- ------------------------
(1) See Note 1 of Notes to Financial Statements for information concerning the computation of net income (loss) per share.
ITEM 7

ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of the results of operations and financial condition of NPS should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this report.
OVERVIEW
Since its inception in 1986, NPS has devoted substantially all of its resources to its research and development programs. To date, the Company has not completed development of any pharmaceutical products for sale and has incurred substantial losses. NPS has incurred cumulative losses through December 31, 1996 of $14.4 million, net of cumulative revenues from collaborative research and license agreements of $42.7 million. The Company expects to incur significant operating losses over at least the next several years as the Company continues and expands its research and development and preclinical and clinical testing activities. Substantially all of the Company's revenues are derived from license fees, milestone payments and research and development support payments from its Licensees and these revenues fluctuate from quarter to quarter. Accordingly, the Company expects that income or loss will fluctuate from quarter to quarter, that such fluctuations may be substantial, and that results from prior quarters may not be indicative of future operating results. The Company's ability to achieve profitability depends in part on its ability, alone and/or with others and the efforts of its Licensees, to complete development of its products, to obtain required regulatory approvals and to manufacture and market such products, of which matters there can be no assurance.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Substantially all of the Company's revenues of $3.9 million, $9.6 million and $20.3 million in 1994, 1995 and 1996, respectively, were derived from research and license agreements. The Company recognized $3.6 million in 1994, $3.4 million in 1995 and $5.7 million in 1996 under the terms of the SmithKline Agreement, $6.0 million in 1995 and $4.0 million in 1996 under the terms of the Kirin Agreement and $10.6 million in 1996 under the terms of the Amgen Agreement. These revenues were derived from a combination of one-time license fees, milestone payments and research and development support payments and are not indicative of future revenue under these agreements. See "Liquidity and Capital Resources" below for further discussion of payments that may be received by the Company in the future under these agreements.
Research and development expenses increased from $7.8 million in 1994 to $8.7 million in 1995 and to $11.0 million in 1996. The increases in research and development expenses were principally due to the conduct of increasingly expensive clinical trials for NPS R-568 in 1994, 1995 and early 1996, preclinical development of NPS 1506 in 1996 and the hiring of additional personnel. Research and development expenses are expected to increase significantly in the future as NPS conducts discovery, preclinical development and clinical trials for non-licensed product candidates, sponsors research or obtains licenses for technology from academic or research institutions and hires more research and development personnel.
General and administrative expenses increased from $3.1 million in 1994 to $4.0 million in 1995 and to $5.5 million in 1996. The increase in 1995 was primarily due to costs incurred for advisory services in connection with the consummation of the Amgen and Kirin agreements, and the increased costs associated with operating a public company for a full year. The increase in 1996 was primarily due to hiring of additional personnel in the areas of business development, investor relations and legal affairs and costs associated with a follow-on offering of the Company's stock which was completed in May 1996. The Company expects that general and administrative expenses will continue to increase in the future as more personnel and facilities are needed to support research and development activities.
Interest income increased from $398,000 in 1994 and $480,000 in 1995 to $2.7 million in 1996 primarily due to higher average cash balances resulting from the net proceeds of the follow-on offering of stock in May 1996. The Company anticipates that interest income will decrease in the future as the Company's cash is utilized for operations.
Income tax expense of $500,000 in 1995 and $200,000 in 1996 resulted from a 10% Japanese tax withheld on the license fee and milestone payment by Kirin. Future license, milestone and royalty payments from Kirin will be subject to the same 10% tax. In addition, U.S. alternative minimum tax of $150,000 was incurred on net income in 1996.
As of December 31, 1996, the Company had a federal income tax net operating loss carryforward of approximately $11.0 million and a federal income tax research credit carryforward of approximately $1.2 million. The Company's ability to utilize these operating loss and research credit carryforwards against future taxable income will be subject to annual limitations in future periods pursuant to the "change in ownership rules" under Section 382 of the Internal Revenue Code of 1986, as amended. See Note 7 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through collaborative research and license agreements and the private and public placement of equity securities. As of December 31, 1996, the Company had recognized approximately $42.7 million of cumulative revenues from research and license agreements and approximately $84.3 million in consideration for the sale of equity securities for cash and services. The Company's principal sources of liquidity are its cash and cash equivalents which totaled approximately $69.0 million at December 31, 1996.
The Company receives quarterly payments under its agreements with Kirin and SmithKline Beecham to support the Company's research efforts in HPT and osteoporosis, respectively. The Kirin payments are $500,000 per quarter through June 30, 1997 and $250,000 per quarter thereafter through the remaining three years of the research term of the Kirin Agreement. The scheduled expiration date of the SmithKline Beecham agreement is October 31, 1997 and NPS expects to receive approximately $475,000 per quarter in 1997 through that date from SmithKline Beecham. Amgen will reimburse the Company up to $400,000 per year for a period not to exceed five years for costs incurred by the Company for designation of NPS personnel to be available to participate in the development of a compound for primary HPT in the Amgen Territory, with such participation occurring under the direction of Amgen.
The Company could receive additional payments of up to $51.0 million in the aggregate from Amgen, Kirin and SmithKline Beecham upon the accomplishment of specified research and/or development milestones under the respective agreements. NPS does not control the subject matter, timing or resources applied by its Licensees under their respective development programs. Thus, the Company's potential receipt of milestone payments from these Licensees is largely beyond the control of NPS. Progress under these agreements is subject to risk and each of these agreements may be terminated before the scheduled expiration date by the respective Licensee. Therefore, no assurance can be given that any future milestone or research or development support payments will be received thereunder.
The Company has entered into certain sponsored research and license agreements which obligate the Company to make research support payments to academic or research institutions. 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 December 31, 1996, the Company had a total commitment of approximately $1.1 million for future research support payments. The Company expects to enter into additional sponsored research and license agreements in the future.
As of December 31, 1996, the Company's net investment in leasehold improvements, equipment and furnishings was approximately $2.2 million. The Company has financed a portion of such expenditures through capital leases and long-term debt with a total principal obligation of approximately $1.5 million as of December 31, 1996. Additional equipment and facilities will be needed as the Company increases its research and development activities, a portion of which may be financed with debt. Equipment and leasehold improvements subject to the capital leases and the long-term debt have been pledged in support of such obligations.
The Company anticipates that its existing capital resources, including interest earned thereon and expected research development support payments from its Licensees will be sufficient to enable it to maintain its current and planned operations through at least 1999. However, actual needs are dependent on numerous factors, including the progress of the Company's research and development programs, the magnitude and scope of these activities, progress with preclinical and clinical trials, the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in or terminations of existing research and license arrangements, the establishment of additional license arrangements and the cost of manufacturing scale-up and development of marketing activities, if undertaken by the Company. Substantial expenditures will be required to conduct preclinical studies and clinical trials, manufacture or have manufactured and market any proprietary products of NPS which may be derived from current research and development efforts and perform research and development activities in additional areas. In addition, if Amgen terminates its agreement, the Company may not have sufficient capital to complete the development and commercialization of a drug for HPT in Amgen Territory.
NPS may need to raise substantial additional funds to support its long-term product development and commercialization programs. The Company intends to seek additional funding through collaborations and licensing agreements and the Company may seek additional funding through public or private financing. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its research and development programs or to obtain funds through arrangements with licensees or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company may otherwise seek to develop or commercialize on its own.
ITEM 8

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Financial Statements and notes thereto appear on pages to of this Form 10-K Annual Report.
ITEM 9

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in and disagreements with accountants on accounting and financial disclosure.
PART III
ITEM 10

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain of the information required by this item will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to be held on May 20, 1997, under the caption "Election of Directors," and is incorporated by reference herein. For information regarding executive officers, See Part I of this Form 10-K under the caption "Executive Officers of the Registrant."
ITEM 11

ITEM 11 EXECUTIVE COMPENSATION.
Certain of the information required by this item will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to be held on May 20, 1997, under the caption "Executive Compensation," and, except for the information appearing under the captions "Report of the Compensation Committee of the Board of Directors" and "Performance Measurement Comparison," is incorporated by reference herein.
ITEM 12

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information required by this item will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to be held May 20, 1997, under the caption "Security Ownership of Certain Beneficial Owners and Management," and is incorporated by reference herein.
ITEM 13

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information required by this item will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to be held May 20, 1997, under the caption "Certain Transactions," and is incorporated by reference herein.
PART IV
ITEM 14

ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. INDEX TO FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT AUDITORS. The Financial Statements required by this item are submitted in a separate section beginning on page of this report.
2. INDEX TO FINANCIAL STATEMENTS SCHEDULES. There are no Financial Statements Schedules included because they are either not applicable or the required information is shown in the Financial Statements or the notes thereto.
3. EXHIBITS.
- ------------------------
* Incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1995.
** Incorporated herein by reference to the Registrant's registration statement on Form S-1 filed January 21, 1994 (File No. 33-74318).
*** Incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1994.
**** Incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1994.
***** Incorporated herein by reference to the Registrant's Form 8-K dated February 29, 1996.
****** Incorporated hereby by reference to the Registrant's Form S-8 dated December 3, 1996.
+ Confidential treatment has been granted with respect to these exhibits.
++ Incorporated herein by reference to the Registrant's Form 8-K dated December 19, 1996.
(b) Reports on Form 8-K.
The Registrant filed a report on Form 8-K with the Securities and Exchange Commission on December 19, 1996, reporting developments in its hyperparathyroidism and osteoporosis programs and reporting the adoption of a Shareholder Rights Agreement.
(c) See Exhibits listed under Item 14(a)(3).
(d) The financial statement schedules required by this Item are listed under Item 14(a)(2).
SIGNATURES
Pursuant to the requirements of the Securities 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on the 28th day of March, 1997.
NPS PHARMACEUTICALS, INC.
By /s/ HUNTER JACKSON, PH.D. ----------------------------------------- Hunter Jackson, Ph.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER, AND CHAIRMAN OF THE BOARD
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Hunter Jackson and James U. Jensen, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement and any registration statement related to this Registration Statement and filed pursuant to Rule 462 under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys- in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NPS Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of NPS Pharmaceuticals, Inc. (a development stage enterprise) as of December 31, 1995 and 1996, and the related statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, and for the period from October 22, 1986 (inception) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NPS Pharmaceuticals, Inc. (a development stage enterprise) as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, and for the period from October 22, 1986 (inception) to December 31, 1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Salt Lake City, Utah February 21, 1997
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
ASSETS
See accompanying notes to financial statements.
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
See accompanying notes to financial statements.
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS' EQUITY OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
See accompanying notes to financial statements.
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (CONTINUED)
See accompanying notes to financial statements.
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NPS Pharmaceuticals, Inc. (the "Company"), a development stage enterprise, is engaged in the discovery and development of orally-active, small molecule drugs that target selected biological targets, including cell surface receptors and ion channels. Since inception, the Company's principal activities have been performing research and development, raising capital, and establishing research and license agreements. The following significant accounting policies are followed by the Company in preparing its financial statements:
(a) CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents consist of commercial paper, money market funds, and debt securities of $5,731,206, $5,120,124 and $67,517,875 at December 31, 1994, 1995, and 1996, respectively. At December 31, 1994, 1995, and 1996, the book value of cash equivalents approximates fair value.
(b) REVENUE RECOGNITION
The Company recognizes revenue from its research agreements as related research costs are incurred and from its license fees and milestone payments as earned. Cash received in advance of the performance of the related research is recorded as deferred income.
(c) PLANT AND EQUIPMENT
Plant and equipment are stated at cost. Equipment under capital lease is stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value of the equipment at the inception of the lease.
Depreciation and amortization of equipment (including equipment held under capital lease) are calculated on the straight-line method over their estimated useful lives of five years. Leasehold improvements are amortized using the straight-line method over the shorter of the life of the asset or remainder of the lease term. Amortization of assets held under capital lease is included with depreciation and amortization expense.
(d) INCOME (LOSS) PER COMMON AND COMMON-EQUIVALENT SHARE
Income (loss) per common and common-equivalent share have been computed based on the weighted average number of shares outstanding during the year, after giving effect, if necessary, to the assumption that all dilutive stock options were exercised at the beginning of the year or date of grant with the proceeds therefrom being used to acquire treasury shares. For periods prior to May 26, 1994, the date of the Company's initial public offering, upon which all outstanding shares of preferred stock were converted to shares of common stock, the loss presented is pro forma after giving retroactive effect to the conversion of Series C, D, and E preferred stock and the inclusion of common stock options issued for consideration below the initial public offering price during the twelve-month period prior to the date of the initial filing of the Registration Statement, even when antidilutive, pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, using the treasury-stock method.
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (e) INCOME TAXES
The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating loss, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(f) STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted the footnote disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 123 encourages entities to adopt a fair-value based method of accounting for stock options or similar equity instruments. However, it also allows an entity to continue measuring compensation cost for stock-based compensation using the intrinsic-value method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25). The Company has elected to continue to apply the provisions of APB 25 and provide pro forma footnote disclosures required by SFAS No. 123.
(g) USE OF ESTIMATES
Management of the Company has made estimates and assumptions relating to reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
(h) RECLASSIFICATIONS
Certain amounts in 1994 and 1995 have been reclassified to conform with the 1996 presentation.
(2) COLLABORATIVE RESEARCH AND LICENSE AGREEMENTS
The Company is pursuing product development both on an independent basis and in collaboration with others. Following is a description of significant current collaborations and license agreements:
(a) AMGEN INC.
In March 1996 (effective as of December 1995), the Company entered into a development and license agreement with Amgen under which Amgen assumed full responsibility and control to develop and commercialize NPS R-568 and other compounds for the treatment of hyperparathyroidism and indications other than osteoporosis. Amgen agreed to pay to the Company a $10.0 million nonrefundable license fee, potential additional development milestone payments totaling $26.0 million, up to $400,000 per year for development support under the direction of Amgen and royalties on any future product sales. Amgen also agreed to purchase one million shares of the Company's common stock for
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) COLLABORATIVE RESEARCH AND LICENSE AGREEMENTS (CONTINUED) $7.5 million. Amgen is required to pay all costs of developing and commercializing products. Amgen received exclusive worldwide rights (excluding Japan, China, Korea, and Taiwan).
(b) KIRIN BREWERY COMPANY, LIMITED
Effective June 30, 1995, NPS entered into a five year agreement with Kirin for exclusive rights to develop and commercialize NPS R-568 in Japan, China, Korea, and Taiwan. Kirin paid to NPS a $5.0 million license fee and has agreed to pay up to $7.0 million in research support, potential additional milestone payments totaling $13.0 million, and royalties on product sales. The Kirin research support payments are $500,000 per quarter through June 1997 and $250,000 per quarter over the remaining three years. Both parties will participate in a collaborative research program around NPS's parathyroid calcium receptor technology.
The Company recognized the $5.0 million nonrefundable license fee in 1995. The Company recognized $1.0 million and $2.0 million in research support as revenue in 1995 and 1996, respectively. Additionally, the Company recognized as revenue a $2.0 million milestone payment related to this agreement during 1996.
(c) SMITHKLINE BEECHAM CORPORATION
Effective November 1, 1993, the Company entered into an agreement with SmithKline Beecham to collaborate on the discovery, development and marketing of drugs to treat osteoporosis and other bone metabolism disorders, excluding hyperparathyroidism. The agreement establishes a four year research collaboration between the parties and may be extended on mutual agreement. The Company granted SmithKline Beecham the exclusive license to develop and market worldwide compounds described under the agreement, subject to the Company's right to co-promote in the United States. Once compounds have been selected for development, SmithKline Beecham has agreed to conduct and fund all development of such products, including all human clinical trials and regulatory submissions. The Company will receive royalties on sales of such compounds by SmithKline Beecham and a share of the profits from co-promoted products.
Under the agreement with SmithKline Beecham, the Company has recognized research and licensing revenue of $3.6 million, $3.4 million, and $2.7 million in 1994, 1995, and 1996, respectively. During 1996, the Company achieved its first milestone under the agreement and received a corresponding $3.0 million milestone payment which was recognized as revenue. The Company is also entitled to receive research support payments of approximately $475,000 per quarter through October 1997 and additional payments upon the achievement of specific development and regulatory milestones.
S.R. One, Limited, an affiliate of SmithKline Beecham, is an equity investor in the Company.
(d) IN-LICENSE AGREEMENTS
The Company has entered into certain sponsored research and license agreements which obligate the Company to make research support payments to academic or research institutions. Additional payments may be required upon the accomplishment of research milestones by the institutions or as license fees or royalties to maintain the licenses. During 1994, 1995, and 1996, the Company paid to
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) COLLABORATIVE RESEARCH AND LICENSE AGREEMENTS (CONTINUED) these institutions $321,121, $306,777, and $779,417, respectively, in sponsored research payments and license fees. As of December 31, 1996, the Company had a total commitment of approximately $1.0 million for future research support payments.
(e) SMALL BUSINESS INNOVATION RESEARCH GRANTS
The Company recognized revenue of $260,706, $126,444, and $15,768 during 1994, 1995, and 1996, respectively, under the terms of Small Business Innovation Research grants from three government agencies.
Because the Company has granted exclusive development, commercialization, and marketing rights to Amgen, Kirin and SmithKline Beecham (Licensees) under the above described collaborative research and license agreements, the success of the programs is dependent upon the efforts of the Licensees. The Company has no control over the rate of progress or amount of effort the Licensees will dedicate to the programs. In addition, each of the programs may be terminated by the Licensee at any time. If any of the Licensees breaches or terminates its respective agreement, such breach or termination may have a material adverse effect on the Company's operations.
(3) LEASES
The Company is obligated under capital leases for equipment that expire at various dates during the next three years. The Company also has a noncancelable operating lease for office space that expires in September 1999. Rental expense for this operating lease was $413,552, $493,667, and $525,919 for 1994, 1995, and 1996, respectively. The present value of future minimum lease payments on capital leases and future lease payments under the noncancelable operating lease as of December 31, 1996 are:
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(3) LEASES (CONTINUED)
At December 31, 1995 and 1996, the gross amount of equipment and related accumulated amortization recorded under capital leases was as follows:
(4) LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1996, consists of the following notes payable to a financial institution:
The aggregate maturities of long-term debt for each of the years subsequent to December 31, 1996 are as follows: 1997, $369,467; 1998, $281,903; and 1999, $17,631.
In connection with these notes payable, the Company granted the financial institution in 1995 a warrant to purchase 32,542 shares of common stock at $3.69 per share. The warrant expires in June 2002.
(5) CAPITAL STOCK
The Company is incorporated under the laws of the State of Delaware with authorized capital of 5,000,000 shares of preferred stock and 20,000,000 shares of common stock, all with a par value of $.001. No shares of preferred stock were issued or outstanding at December 31, 1995 and 1996.
In December 1996, the Board of Directors approved the adoption of a Shareholders Rights Plan (the "Rights Plan"). The Rights Plan provides for the distribution of a preferred stock purchase right ("Right") as a dividend for each outstanding share of the Company's common stock. This Right entitles stockholders to acquire stock in the Company or in an acquirer of the Company at a discounted price in the event that a person or group acquires 20 percent or more of the Company's outstanding voting stock or announces a tender or exchange offer that would result in ownership of 20 percent or more of the Company's stock. Each right entitles the registered holder to purchase from the Company 1/100th of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share at a price of $50.00 per 1/100th of a preferred share, subject to adjustment. The Rights may only be exercised on the occurrence of certain events related to a hostile takeover of the Company as described above. The Rights will expire on December 31, 2001. The Rights may be redeemed by the Company at $0.01 per right at any time prior to
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) CAPITAL STOCK (CONTINUED) expiration or the occurrence of an event triggering exercise. At December 31, 1996, the Rights were not exercisable
(6) STOCK-BASED COMPENSATION PLANS
The Company has three fixed stock option plans: the 1987 Stock Option Plan (the "1987 Plan"), the 1994 Equity Incentive Plan (the "1994 Plan"), and the 1994 NonEmployee Directors' Stock Option Plan (the "Directors' Plan"). An aggregate of 3,220,000 shares have been authorized for issuance under the three plans.
As of December 31, 1996, there are no shares reserved for future grant under the 1987 Plan, there are 522,913 shares reserved for future grant under the 1994 Plan, and there are 91,000 shares reserved for future grant under the Directors' Plan. Under the Company's 1994 Plan, the exercise price of options granted is not less than the fair market value on the date of grant. The number of shares, terms, and exercise period are determined by the Board of Directors on an option-by-option basis, and the exercise period does not extend beyond ten years from the date of the grant.
Under the Directors' Plan, each new director who is not an employee of the Company is initially granted options to purchase 15,000 shares of common stock. Additional options for 3,000 shares are granted on December 1 of each year of service. The exercise price of options granted is the fair market value on the date of grant.
A summary of activity related to aggregate options under all three plans is indicated in the following table:
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) STOCK-BASED COMPENSATION PLANS (CONTINUED) The following table summarizes information about fixed stock options outstanding at December 31, 1996:
The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with FASB Statement No. 123, the Company's net income (loss) and income (loss) per share would have been reduced or increased, respectively, to the following pro forma amounts:
Pro forma net income (loss) reflects only options granted in 1995 and 1996. The effect that calculating compensation cost for stock-based compensation under SFAS No. 123 has on the pro forma net income (loss) as presented above may not be representative of the effects on reported net income or losses for future years.
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1995 and 1996, respectively: risk free interest rates of 5.9 percent and 6.2 percent; expected dividend yields of 0 percent; expected lives of 5 years; and expected volatility of 80 percent.
In 1996, the Company granted options to purchase 20,000 shares of common stock to nonemployees. These options have been recorded as a general and administrative expense at their estimated fair value of $130,000, as determined by SFAS No. 123.
In November and December 1993, the Company issued options to purchase 378,750 and 4,500 shares of common stock, respectively, at an exercise price of $2.00 and $4.00 per share, respectively, to employees, officers, and directors of the Company. For financial statement presentation purposes, the Company has
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) STOCK-BASED COMPENSATION PLANS (CONTINUED) recorded as deferred compensation expense the excess of the deemed value of the common stock at the date of grant over the exercise price. The compensation expense was amortized ratably over the three-year vesting period of the options totaling $766,500 for the three-year period.
The Company also has an Employee Stock Purchase Plan (the "Purchase Plan") whereby qualified employees are allowed to purchase limited amounts of the Company's common stock at 85 percent of the current market price on the date of purchase. The Company has authorized 160,000 shares for purchase by employees. Employees purchased 39,771 and 18,147 shares under the Purchase Plan in the years ended December 31, 1995 and 1996, respectively, and 102,082 shares remain available for future purchase. Because the discount allowed to employees under the purchase plan approximates the Company's cost to issue equity instruments, the plan is not deemed to be compensatory and, therefore is excluded from the pro forma income (loss) shown above.
(7) INCOME TAXES
The Company has income tax expense of $500,000 and $350,000 for the years ended December 31, 1995 and 1996, respectively, consisting of current foreign taxes and alternative minimum taxes.
Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to net income (loss) before income taxes as a result of the following:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 1995 and 1996 are presented below:
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED) Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 1996 will be allocated as an income tax benefit to be reported in the statement of operations.
The valuation allowance for deferred tax assets as of January 1, 1995 was $6.8 million. The net change in the Company's total valuation allowance for the years ended December 31, 1995 and 1996, was an increase of $1.4 million and a decrease of $2.4 million, respectively.
At December 31, 1996, the Company had net operating loss and research credit carryforwards to offset future income for federal income tax purposes approximately as follows:
Under the rules of the Tax Reform Act of 1986, the Company has undergone a greater than 50 percent change of ownership since 1986. Consequently, use of the Company's net operating loss carryforward and research credit carryforward against future taxable income in any one year may be limited. The maximum amount of carryforwards available in a given year is limited to the product of the Company's fair market value on the date of ownership change and the federal long-term tax-exempt rate, plus any limited carryforward not utilized in prior years. Management does not believe that these rules will adversely impact the Company's ability to utilize the above losses and credit in the aggregate.
(8) EMPLOYEE BENEFIT PLAN
In October 1990, the Company adopted a tax-qualified employee savings and retirement plan (the "401(k) Plan") covering all of the Company's employees. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by the lesser of 15 percent of eligible compensation or the prescribed annual limit ($9,500 in 1996) and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, additional matching contributions to the 401(k) Plan by the Company on behalf of all participants. The Company has not made any such contributions to date.
NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A director of the Company is Vice President of Plexus Ventures, Inc. ("Plexus"). The Company had a consulting agreement with Plexus through December 31, 1995, whereunder Plexus assisted the Company with its effort to establish a collaboration for NPS R-568. During the years ended December 31, 1995, and 1996, the Company paid fees to Plexus totaling $84,500 and $400,000, respectively. Plexus may earn an additional $400,000 in fees as payments are received from Amgen. As described in note 6, the Company also granted Plexus options to purchase 20,000 shares of common stock.
INDEX TO EXHIBITS
- ------------------------