NAPRO BIOTHERAPEUTICS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

Annual Report Pursuant to Section 13 of the Securities Exchange Act of 1934

Year Ended December 31, 1997

Commission File Number 0-24320

NAPRO BIOTHERAPEUTICS, INC.

Incorporated in Delaware IRS ID No. 84-1187753

6304 Spine Road, Unit A
Boulder, Colorado 80301
(303) 530-3891

Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0075 par value;
Preferred Stock Purchase Rights

The registrant (1) has filed all reports required to be filed by Section 13 or
15(b) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days.

Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K will be
contained, to the best of registrant's knowledge, in a definitive proxy
statement incorporated by reference in Part III of an amendment to this Form
10-K.

The aggregate market value of the voting stock held by non-affiliates of the
registrant was $19,395,896 as of March 25, 1998.

The number of shares outstanding of each of the registrant's classes of common
stock, as of March 25, 1998:

Common Stock 14,129,122
Nonvoting Common Stock 395,000

Incorporated by reference in Part III of this report is certain information
contained in the NaPro Proxy Statement for its 1998 Annual Meeting of
Stockholders.

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Table of Contents

Item Page
Part I 1 Business 3
2 Properties 18
3 Legal Proceedings 19
4 Matters Submitted to Stockholders' Vote 19
Part II 5 Market Information and Related Stockholder Matters 19
6 Selected Financial Data 21
7 Management's Discussion and Analysis of Financial 22
Condition and Results of Operations
8 Financial Statements and Supplementary Data 28, F-1
9 Changes in and Disagreements with Accountants 28
Part III 10 Directors and Executive Officers 28
11 Executive Compensation 28
12 Security Ownership of Certain Beneficial Owners and 28
Management
13 Certain Relationships and Related Transactions 28
Part IV 14 Exhibits, Financial Statement Schedules, and Reports on 29
Form 8-K

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Part I

Item 1

Business

General

NaPro BioTherapeutics, Inc. (together with its subsidiaries, "NaPro" or "the
Company") is a natural product pharmaceutical company which is focusing
primarily on the development, manufacture and commercialization of paclitaxel, a
naturally-occurring anti-cancer agent found in certain species of yew (Taxus)
trees. NaPro's paclitaxel is referred to herein as "NBT Paclitaxel."

The market for paclitaxel is dominated by Bristol-Myers Squibb Company ("BMS").
BMS has publicly announced that worldwide sales of their formulation of
paclitaxel were approximately $813 million in 1996 and $941 million in 1997.
BMS's paclitaxel is the only United States Food and Drug Administration ("FDA")
approved formulation of paclitaxel, which approval is for the treatment of
breast and ovarian cancers, and Kaposi's Sarcoma. NaPro believes that by
combining its proprietary extraction, isolation and purification ("EIP(TM)")
manufacturing technology, the renewable sources of Taxus biomass being developed
by NaPro, and current as well as future long-term, exclusive agreements with
major international pharmaceutical companies, NaPro will be positioned to
participate significantly in the worldwide paclitaxel market. NaPro terminated
its development and marketing agreement with Baker Norton Pharmaceuticals, a
wholly owned subsidiary of IVAX Corporation, a diversified international health
care company with 1997 sales of approximately $602.1 million (together with its
subsidiaries, "IVAX") on March 20, 1998, and is actively seeking pharmaceutical
alliances for marketing and development of NBT Paclitaxel in much of the world.
There can be no assurance, however, that NBT Paclitaxel will prove safe and
effective, meet applicable standards necessary for regulatory approvals, or be
successfully marketed or that NaPro will succeed in forming new strategic
development and marketing agreements necessary for its success.

NaPro's strategy for advancing the development and commercialization of NBT
Paclitaxel has been to form strategic alliances through long-term exclusive
agreements with major pharmaceutical distributors. In 1992 NaPro entered into a
20-year exclusive agreement with F.H. Faulding & Co., Ltd., Australia's largest
domestic pharmaceutical company with 1997 sales of approximately $1.1 billion,
("Faulding") for the clinical development, sales, marketing and distribution of
NBT Paclitaxel in Australia, New Zealand and much of southeast Asia.

NaPro supplies NBT Paclitaxel to Faulding which formulates it into a commercial
drug product named ANZATAX(TM). Faulding has agreed to fund and, with the
Company's input, perform clinical trials and file for regulatory approvals of
ANZATAX(TM) in its territory. NaPro is responsible for supplying Faulding with
NBT Paclitaxel for clinical and commercial purposes. NaPro is currently
receiving payments from Faulding based on clinical sales and commercial sales in
territories where sales of ANZATAX(TM) have been approved.

Faulding obtained regulatory approval and began marketing ANZATAX(TM) as a
pharmaceutical for the treatment of refractory breast and ovarian cancers in
Australia in January 1995, subsequently obtained regulatory approval and began
marketing ANZATAX(TM) in several countries in the Middle East and southeast
Asia, and is seeking approvals to market ANZATAX(TM) in other countries in its
defined territory. See "Clinical Status of NBT Paclitaxel, Faulding."

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In 1993 NaPro entered into a 20-year exclusive agreement with IVAX Corporation
for the clinical development, sales, marketing and distribution of NBT
Paclitaxel in much of the world not covered by the Faulding territory, including
North America, Western Europe, and Japan.

Under this agreement, IVAX obtained regulatory approval for and began marketing
Paxene(R), its commercial formulation of NBT Paclitaxel, in two South American
countries. IVAX filed an Investigational New Drug ("IND") application for
Paxene(R) with the United States Food and Drug Administration (the "FDA") in
1994, subsequently completed pivotal clinical trials of Paxene(R) for three
therapeutic indications, including refractory breast and ovarian cancers and
Kaposi's sarcoma, and on March 31, 1997, submitted a New Drug Application
("NDA") for Kaposi's sarcoma. On December 24, 1997 the FDA responded,
determining that Paxene(R) was safe and effective in the treatment of Kaposi's
sarcoma but under the Orphan Drug Act of 1983 (the "Orphan Drug Act") could not
be marketed due to BMS's prior approval for the use of paclitaxel in the
treatment of Kaposi's sarcoma. See "Clinical Status of NBT Paclitaxel, IVAX."

Paclitaxel Overview

Cancer is the second leading cause of death in the United States with over one
million new cases diagnosed each year. Cancer is generally treated by surgery,
radiation or chemotherapy or a combination of these therapies. Since gaining
approval in December 1992, paclitaxel has become the largest selling of the
class of cancer chemotherapy drugs known as cytotoxic agents.

Paclitaxel is a natural product that was recognized by the National Cancer
Institute (the "NCI") in 1963 as showing cytotoxic activity against leukemia
cells and inhibitory activity against a variety of tumors. Over the next two
decades, researchers working under grants from the NCI conducted studies to
determine paclitaxel's structure and its mechanism of action. The NCI studies
indicated that paclitaxel inhibits the normal action of microtubules in cancer
cell division. Microtubules, located in the cytoplasm of cells, play a vital
role in cellular division. Paclitaxel promotes microtubule assembly and blocks
normal microtubule disassembly in cells, thereby inhibiting cell division and
inducing death of cancer cells. This cytoplasmic mechanism of action contrasts
with the nuclear mechanism of action of the majority of cytotoxic drugs which
kill the cell by attacking nuclear components such as DNA or RNA.

In June 1991, the NCI formalized a Collaborative Research and Development
Agreement ("CRADA") for development of paclitaxel with BMS, the world's largest
oncology company. BMS assumed development of paclitaxel which included
completion of the necessary clinical trials and manufacturing scale-up. In June
1992, BMS submitted an NDA to the FDA. BMS received approval for the sale of
paclitaxel as a treatment for refractory ovarian cancer in December 1992 and
approval for the sale of paclitaxel as a treatment for refractory breast cancer
in April 1994.

Paclitaxel is one of a family of compounds, commonly referred to as taxanes,
which share a hydrocarbon ring (diterpene) structure. Taxanes are found
naturally in many parts of various species of yew trees and bushes. The
concentration of taxanes in yew trees and bushes is very small, generally less
than 500 parts per million, and accordingly, the process of extracting taxanes
from yew biomass is complicated and challenging. To arrive at a final stage
paclitaxel product for use in clinical trials and for commercialization, several
production approaches can be utilized. NaPro believes the two most prevalent
processes used today are conventional extraction and semi-synthesis.

In extraction, the manufacturing process must be designed to extract, isolate
and purify paclitaxel from yew biomass leaving behind other components,
including non-paclitaxel taxanes. The extraction, isolation and purification
processes, however, are complicated since there are over 100 different taxanes
present in

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yew biomass. In a semi-synthesis process, the initial extraction, isolation and
purification is similar to that of the conventional extraction process, except
that the process not only isolates paclitaxel, but also isolates and
subsequently converts through chemical synthesis certain other taxanes (which
are otherwise considered waste byproducts) into paclitaxel, thereby increasing
the yield of paclitaxel from the same quantity of biomass source. The final
product of either method must have levels of impurity at or below acceptable
regulatory standards.

Historically, the wild Pacific yew tree has been the primary source of yew
biomass. Most species of Taxus, including the wild Pacific yew, grow slowly,
requiring a number of years to reach harvestable size. As a result of its slow
growing pattern, wild Taxus is generally found in old growth forests, frequently
the habitat of endangered species, including the spotted owl. Biomass from the
wild Pacific yew tree has historically been obtained from the bark, which
generally requires destroying the tree. As a result, there has been a
considerable amount of public debate and controversy in the United States and
other countries by environmental groups and others regarding the harvesting of
bark from the wild tree. NaPro halted harvesting bark from wild Pacific yew
trees in 1994. See "Corporate Strategy" and "Biomass; Manufacturing."

Other companies have developed taxane analogues which are similar, but not
chemically identical, to paclitaxel. For example, Rhone-Poulenc Rorer, Inc.,
("RPR"), a large international pharmaceutical company, has developed docetaxel,
one such taxane analog, which is being marketed in various parts of the world
under the trademark Taxotere(R) . Taxotere(R) has a different toxicity profile
from paclitaxel and has side effects not observed with paclitaxel. In May 1996,
the FDA approved Taxotere(R) for treatment of anthracycline-resistant breast
cancer in patients without impaired liver function.

Clinical Status of NBT Paclitaxel

Pursuant to the Faulding Agreement, Faulding has the primary responsibility for
designing and conducting clinical trials and for pursuing regulatory approval of
NBT Paclitaxel within the Faulding territory. NaPro has primary responsibility
for carrying out the procedures for regulatory approval relating to NaPro's
manufacturing processes. NaPro has filed confidential Drug Master Files ("DMF")
and other information containing certain of NaPro's proprietary manufacturing
processes relating to the manufacture of NBT Paclitaxel with regulatory agencies
in the United States, Australia, Canada and Europe. In addition, NaPro performed
toxicological and preclinical characterization necessary for filing an IND for
extracted paclitaxel.

Existing regulatory approvals have a direct impact on the clinical and marketing
strategy being pursued by NaPro and Faulding. In December 1992, BMS obtained NDA
approval in the United States for its paclitaxel compound. Under the
Waxman-Hatch Act, a non-patented drug such as paclitaxel which gains approval
through an NDA process is granted a five-year period of marketing exclusivity
which prevents submission by another party of an Abbreviated New Drug
Application ("ANDA") for generic substitutes until such period of exclusivity
expires. The exclusivity period in the United Stated expired in December 1997.
There are also provisions under the Waxman-Hatch Act that may result in an
additional 30 month delay in the review of an ANDA if the sponsor (in this case
BMS) has published a patent related to the product. The Company believes this
limitation to apply in the case of Taxol(R). A comparable statute to the
Waxman-Hatch Act exists in Europe, although the related period of exclusivity is
ten years. See "Government Regulation and Product Approvals."

Faulding In January 1995, Faulding received generic regulatory approval from the
Australian Therapeutic Goods Administration ("TGA") to market ANZATAX(TM)
(Faulding's brand name for NBT Paclitaxel) in Australia. Under Australian law
there is no exclusivity period comparable to that provided by the

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Waxman- Hatch Act, and , therefore, approval of a generic substitute was
possible without the need for additional clinical trials. Faulding did, however,
conduct clinical investigations with ANZATAX(TM) in order to support marketing
in Australia and to support applications for regulatory approval in other
countries. NaPro and Faulding have obtained regulatory approval from the TGA for
NaPro to supply NBT Paclitaxel to Faulding from either its Canadian or its
United States manufacturing facilities. In addition to their Australian
approval, Faulding markets ANZATAX(TM) in Cyprus, Egypt, Kuwait, Hong Kong,
Lebanon, Turkey, Vietnam, China and Singapore and Faulding has marketing
applications pending in five other territories. There can be no assurance,
however, that Faulding will receive approval in any of these five territories or
will successfully market NBT Paclitaxel, even if such approvals are received.

IVAX Prior to termination of the agreement between IVAX and NaPro, IVAX had
pursued a strategy to obtain NDA approval of NBT Paclitaxel in the United States
for the treatment of refractory breast and ovarian cancers and Kaposi's sarcoma.
IVAX filed an IND with the FDA in June 1994, initiated Phase I clinical trials
of NBT Paclitaxel in October 1994, and initiated Phase II/III clinical trials in
May 1995. IVAX has substantially completed Phase II/III studies using NBT
Paclitaxel in three indications, including refractory breast and ovarian cancers
and Kaposi's sarcoma. IVAX submitted an NDA for the treatment of Kaposi's
sarcoma with NBT Paclitaxel on March 31, 1997 (the "IVAX NDA").

In August 1997 BMS received approval, with orphan drug designation, for use of
their paclitaxel compound in the treatment of Kaposi's sarcoma. Under the Orphan
Drug Act, a drug that receives orphan drug designation by the FDA and is the
first product to receive FDA marketing approval for its product claim is
entitled to a seven-year exclusive marketing period in the United States.
Despite the period of exclusivity held by BMS under the Orphan Drug Act, IVAX
could have also obtained FDA approval as an orphan drug if Paxene(R) were
demonstrated to have "clinical superiority" or if effectiveness were
demonstrated as to a definable subset of the disease. On December 24, 1997 the
FDA responded to the IVAX NDA, determining NBT Paclitaxel was safe and effective
in the treatment of Kaposi's sarcoma but could not be marketed for that
indication during BMS's period of exclusivity under the Orphan Drug Act.

On March 20, 1998, NaPro and IVAX entered into an agreement terminating the IVAX
Agreement (the "Termination Agreement"). Termination of the IVAX Agreement
leaves NaPro free to seek regulatory approvals and market NBT Paclitaxel itself
or to seek a new partner or partners with which to pursue regulatory approvals
and marketing of NBT Paclitaxel, in either such case in areas outside the
Faulding territory. However, the termination of this agreement currently leaves
NaPro without such a partner, and there can be no assurance that NaPro will be
able to secure such approvals or form new long-term relationships for the
approval, marketing, and distribution of NBT paclitaxel in these areas, or that
NaPro or such a partner, if found, will be able to secure regulatory approval or
effectively market NBT Paclitaxel. See "Strategic Partners, IVAX."

Biomass; Manufacturing

Biomass Paclitaxel and other taxanes necessary for the production of NBT
Paclitaxel are present in many parts of various species of yew trees and bushes.
NaPro's EIP(TM) technology is designed to allow extraction and purification of
paclitaxel and other taxanes, which can be synthesized into paclitaxel, from
renewable sources of biomass such as needles and limbstock harvested from
ornamental yew trees and bushes.

In order to have access to a stable long-term supply of biomass for use in the
production of NBT Paclitaxel, NaPro entered into agreements with Pacific
BioTechnologies Inc. in 1993 and Zelenka Nursery, Inc. in 1996 (the "PBI
Agreement" and "Zelenka Agreement," respectively) and may enter into additional
agreements to purchase biomass and mature yew bushes from commercial growers.
NaPro believes that the plantations being developed under these agreements can
produce adequate biomass to

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support the commercial requirements of Faulding, and any future strategic
partner, for the foreseeable future. By planting and propagating a reliable and
renewable homogeneous biomass source, NaPro believes that it may be able to
reduce its raw material cost, while at the same time allowing it to increase the
yield of NBT Paclitaxel. NaPro made its first small-scale harvest pursuant to
the PBI Agreement in the first quarter of 1996 and pursuant to the Zelenka
Agreement in the second quarter of 1996. During 1997 NaPro completed its initial
harvest under the Zelenka Agreement, and made spot orders with other vendors to
obtain sufficient biomass to support manufacturing demands. There can be no
assurance that the use of the ornamental yew bushes and the use of needles and
limbstock of such bushes will be approved by the FDA for use in manufacturing
NBT Paclitaxel or that current sources of biomass will be sufficient to meet
NaPro's needs.

Manufacturing Crude paclitaxel is extracted from cultivated yew bushes by third
party extractors and delivered to one of NaPro's manufacturing facilities. At
these facilities, the impure paclitaxel is isolated and purified and the
resulting active drug substance is delivered to Faulding's final fill and finish
facility in Australia where NBT Paclitaxel is formulated by Faulding for final
packaging. NaPro currently operates a pilot-scale manufacturing facility in
Boulder, Colorado and, until April 1998, will operate another small-scale
manufacturing facility in British Columbia, Canada. The FDA's refusal to allow
marketing of NBT Paclitaxel in the United States under the IVAX NDA resulted in
a decrease in the projected demand for NBT Paclitaxel. As a result, the Company
decided to cease manufacturing in British Columbia and close that facility in
April 1998. Both NaPro's Colorado pilot-scale manufacturing facility and its
British Columbia manufacturing facility have been inspected by the TGA and
approved for the commercial production of NBT Paclitaxel for sale in Australia.
NaPro believes that the Boulder, Colorado facility has adequate capacity to meet
Faulding's clinical and commercial demand for the foreseeable future and the
amounts NaPro is required to supply under the Termination Agreement with IVAX.
See "Strategic Alliances, IVAX"

With the possibility of NBT Paclitaxel entering the United States market under
the IVAX NDA, NaPro pursued construction of a large-scale commercial
manufacturing facility in Boulder, Colorado. During 1997, NaPro completed
necessary structural modifications to the facility and began equipment
installation. As a result of the FDA's refusal to allow marketing under the IVAX
NDA, equipment installation was stopped in December 1997. NaPro believes that
construction of this large-scale facility can be resumed and completed at such
time, if ever, as the demand for NBT Paclitaxel requires an increase in
production beyond the capacity of its pilot- scale facility. There can be no
assurance, however, that NaPro will succeed in adapting its EIP(TM) technology
for large scale commercial manufacturing, or that such facility and
manufacturing processes will receive necessary regulatory approvals.

In order to increase its manufacturing capacity, NaPro is also developing, and
has applied for patent protection for, a semi-synthesis process for
manufacturing NBT Paclitaxel from certain other taxanes contained in renewable
biomass sources. NaPro owns three issued patents relating to this process and
has applied for others. Semi-synthesis manufacturing initially involves
extraction of paclitaxel and other taxanes from yew sources. Unlike extraction,
however, which attempts to isolate and purify only paclitaxel, semi-synthesis
isolates and purifies certain additional taxanes. Through a chemical synthesis
process, these other taxanes are converted into paclitaxel. Accordingly, since
both paclitaxel and other taxanes are used in semi-synthesis, NaPro expects to
be able to increase the paclitaxel yield from its biomass sources using a
semi-synthesis process. The use of semi-synthesis will require receipt of
additional regulatory approvals, of which there can be no assurance.

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Strategic Alliances

NaPro's strategy has been to pursue and enter into strategic alliances with
large international pharmaceutical companies that take responsibility for
performing clinical trials, filing for regulatory approvals, and selling,
marketing and distributing commercial formulations of NBT Paclitaxel. NaPro
formed such a strategic alliance with Faulding through a long-term exclusive
agreement. Pursuant to this agreement, Faulding agreed to fund and, with NaPro's
input, undertake the clinical trials required to obtain regulatory approvals for
commercializing NBT Paclitaxel in its territory. NaPro is responsible for
supplying Faulding with NBT Paclitaxel for clinical trials and commercial
purposes and Faulding is required to purchase all of its paclitaxel requirements
from NaPro. Faulding pays a fixed price for non-commercial sales and a
substantial share of gross revenue for NBT Paclitaxel sold commercially. NaPro
believes that through its agreement with Faulding it will be able to take
advantage of Faulding's resources, including expertise in clinical testing and
sales, marketing and distribution. NaPro believes that this alliance enables it
to compete more effectively, within the Faulding territory, with BMS, RPR,
generic drug manufacturers and other companies, research organizations and
academic institutions that are developing paclitaxel and are attempting to
develop new and advanced forms of anti-cancer drugs. There can be no assurance,
however, that Faulding will succeed in obtaining further regulatory approvals to
market NBT Paclitaxel within its territory or that Faulding will market NBT
Paclitaxel successfully in these additional countries.

Until March 20, 1998 NaPro and IVAX were parties to a similar long-term,
exclusive agreement, under which IVAX was responsible for performing clinical
trials, filing for regulatory approvals, and selling, marketing, and
distributing commercial formulations of NBT Paclitaxel. In March 1998 NaPro and
IVAX severed this strategic partnership by terminating the long-term, exclusive
agreement. The termination of this agreement leaves NaPro free to pursue and
enter into a strategic partnership or partnerships in the territories not
covered by the agreement with Faulding, and NaPro is currently in negotiations
toward this end. However, the termination of this agreement currently leaves
NaPro without a strategic partner to assist with regulatory approval and
marketing in countries outside the Faulding territory, and there can be no
assurance that NaPro will be able to find a partner for these markets on terms
acceptable to NaPro, or at all. In addition, even if such a partnership is
secured, there can be no assurance that such a partner will be successful in
gaining the necessary regulatory approvals to market NBT Paclitaxel in the
territories not covered by the Faulding Agreement or that the partner will be
able to market NBT Paclitaxel successfully.

Faulding Faulding, Australia's largest domestic pharmaceutical company with 1997
sales of approximately $1.1 billion, actively markets anti-cancer
pharmaceuticals and other health care products in Australia, Southeast Asia and
other countries throughout the world. In 1992, NaPro originally entered into a
development and marketing agreement (the "Faulding Agreement") with Faulding.
The Faulding Agreement, as amended and restated, has an initial term of 20 years
and will continue thereafter from year to year unless terminated in writing by
either party.

The Faulding Agreement grants Faulding the exclusive right to develop and market
NBT Paclitaxel in ten countries, including Australia, New Zealand and much of
Southeast Asia (the "Faulding Territory"). The Faulding Agreement also grants
Faulding the non-exclusive right to sell NBT Paclitaxel in certain countries in
the Middle East. Pursuant to the Faulding Agreement, Faulding is required to
purchase all of its requirements of paclitaxel from NaPro, except in certain
circumstances where NaPro is unable to supply Faulding's requirements.

In a March 1995 amendment to the Faulding Agreement, Faulding agreed to convert
certain prepaid product sales and deferred revenue aggregating $1.1 million,
which would have become due in 1995 and 1997, into a note in the aggregate
principal amount of $1.2 million, which matured in 1997. The terms

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of the note provided that NaPro would pay interest quarterly on amounts which
would have been payable to Faulding had the conversion not occurred, at an
annual rate of 9%. NaPro retired this note with a payment of $1.2 million plus
accrued interest in September 1997.

Faulding may terminate the Faulding Agreement: (i) upon the reorganization or
insolvency of NaPro; (ii) if Faulding becomes controlled by a pharmaceutical
company that sells paclitaxel in the Faulding territory; (iii) if NaPro becomes
controlled by IVAX or BMS; (iv) if NaPro is purchased by a pharmaceutical
company which sells paclitaxel in the Faulding territory and that company
refuses to be bound by the terms of the Faulding Agreement; or (v) if NaPro is
unable to meet the paclitaxel supply requirements of Faulding. NaPro may
terminate the Faulding Agreement: (i) upon the reorganization or insolvency of
Faulding; or (ii) in certain circumstances, upon a change in control of
Faulding.

NaPro is required to indemnify Faulding pursuant to the Faulding Agreement for
any defect in the NBT Paclitaxel that is shipped to Faulding and for uncured
breaches of NaPro's warranties or obligations under the Faulding Agreement.
Faulding is required to indemnify NaPro against all losses (i) resulting from a
defect in a product containing NBT Paclitaxel manufactured by Faulding except
where such defect is the fault of NaPro, (ii) resulting from a product
containing NBT Paclitaxel formulated, stored, handled, promoted, distributed,
registered or sold by Faulding and (iii) for uncured breaches of Faulding's
representations and warranties under the Faulding Agreement.

In connection with NaPro's initial public offering, completed August 1, 1994,
Faulding purchased 400,000 shares of NaPro's Nonvoting Common Stock and 400,000
warrants to purchase Nonvoting Common Stock.

In 1996 Faulding exercised 200,000 of the warrants. The remaining 200,000
warrants were sold by Faulding in 1997.

IVAX IVAX, a diversified international health care company with 1997 sales of
approximately $602.1 million, is engaged in the research, development,
manufacture and sale of branded and generic pharmaceuticals and other related
health care and personal products and specialty chemicals. In 1993, NaPro
entered into a development and marketing agreement (the "IVAX Agreement") with
IVAX through IVAX's subsidiary, Baker Norton Pharmaceuticals ("BNP"). On March
20, 1998, NaPro and IVAX entered into the Termination Agreement.

The IVAX Agreement granted IVAX the exclusive right to develop and market NBT
Paclitaxel in the United States and in every country outside the Faulding
Territory except for the Vatican City, China, the former Soviet Union and the
Middle East where such right was non-exclusive. Pursuant to the IVAX Agreement,
IVAX had been required to purchase all of its requirements of paclitaxel from
NaPro except in certain circumstances, if NaPro was unable to supply IVAX's
requirements. In addition, under certain circumstances, IVAX could have obtained
NaPro manufacturing information from NaPro and given such information to third
parties so they could manufacture NBT Paclitaxel for IVAX.

Under the Termination Agreement, NaPro is obligated to deliver to IVAX, and IVAX
is required to purchase at a price fixed in the Termination Agreement, a fixed
quantity of NBT Paclitaxel in installments with the final installment due in the
first quarter of 1999. In addition, the Termination Agreement grants IVAX a
royalty-free, limited, non-exclusive license, for one of NaPro's pending patents
(the "Pending Patent") in the United States, Europe, and certain other world
markets. As consideration for this licence, NaPro has received $6,070,000,
$2,000,000 of which was placed in escrow to be released in installments
corresponding to delivery of NBT Paclitaxel to IVAX. In addition, IVAX will
transfer to the Company 1,126,398 shares of Common Stock within 5 days of NaPro
filing its 1997 Annual Report on Form 10-K. In addition, upon issuance of the
Pending Patent in various countries, IVAX is to make the following additional
payments to NaPro, subject to

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certain limitations: $3,750,000 upon issuance of the Pending Patent in the
United States, and $2,610,000 upon issuance of the Pending Patent in the
European Union. On the same day the Termination Agreement was executed, Leonard
P. Shaykin, the Company's Chairman of the Board of Directors, entered into an
agreement with IVAX relating to a warrant for 111,111 shares of Common Stock
(the "Warrant Agreement") that Mr. Shaykin acquired from IVAX in 1996. In
exchange for remission of the Warrant to the Company by Mr. Shaykin, the Company
agreed to indemnify IVAX for any loss associated with such transaction. In
connection with the Termination Agreement, Richard C. Pfenniger, Jr. resigned
from the NaPro Board of Directors. Mr. Pfenniger had originally been elected to
the Board at the request of IVAX.

NaPro is required to indemnify IVAX pursuant to the Termination Agreement for
any defect in the NBT Paclitaxel supplied to IVAX under either the Termination
Agreement or the IVAX Agreement, for certain claims of patent or trade secret
infringement relating to the manufacture, composition, or sale of NBT Paclitaxel
supplied to IVAX and for uncured breaches of certain of NaPro's representations
and warranties under the Termination Agreement. IVAX is required to indemnify
NaPro against all losses (i) resulting from a defect in a product containing NBT
Paclitaxel manufactured by IVAX, (ii) resulting from the formulation, storage,
handling, promotion, distribution, registration, or sale of a product containing
NBT Paclitaxel by IVAX, and (iii) for uncured breaches of IVAX's representations
and warranties under the Termination Agreement.

Termination of the IVAX Agreement leaves NaPro free to seek regulatory approvals
and market NBT Paclitaxel itself or to seek a new partner or partners with which
to pursue regulatory approvals and marketing of NBT Paclitaxel, in either such
case in areas outside the Faulding territory. However, the termination of this
agreement currently leaves NaPro without such a partner, and there can be no
assurance that NaPro will be able to secure such approvals or form new long-term
relationships for the approval, marketing, and distribution of NBT paclitaxel in
these areas, or that NaPro or such a partner, if found, will be able to secure
regulatory approval or effectively market NBT Paclitaxel.

Marketing and Sales

Marketing and sales of NBT Paclitaxel in the Faulding Territory will be
conducted by Faulding. Currently, NaPro does not have a strategic partner to
conduct marketing and sales activities outside the Faulding Territory. NaPro has
no sales force, has only limited marketing capabilities and has no present
intention to establish a sales or marketing force. NaPro expects that sales to
Faulding and, until the first quarter of 1999, sales to IVAX under the
Termination Agreement will account for substantially all of NaPro's revenue for
the foreseeable future. As a result, the loss of Faulding as a customer, in the
absence of a comparable alternative strategic alliance arrangement, or failure
on the part of NaPro to obtain a partner to conduct marketing and sales
activities outside the Faulding Territory could have a material adverse effect
on NaPro. See "Strategic Alliances."

Competition

The biopharmaceutical industry is an expanding and rapidly changing industry
characterized by intense competition for financing, executive talent,
intellectual property and product sales. NaPro competes with all entities
developing and producing therapeutic agents for cancer treatment. The success of
competitors in entering the market for paclitaxel may reduce NaPro's potential
market share and reduce the price of NBT Paclitaxel, each of which could have a
material adverse effect on NaPro. In addition, regulatory approval and marketing
are being handled exclusively by Faulding within the Faulding Territory, and,
outside the Faulding Territory, NaPro has no partner to handle regulatory
approval and marketing.

- 10 -

Although NaPro believes the Faulding has capable clinical and marketing
abilities, there can be no assurance that the Faulding will be capable or
effective in gaining additional regulatory approval on a timely basis, if at all
or be able to compete effectively with existing or new competitors within the
Faulding Territory. In addition, while the Company is currently pursuing a new
strategic alliance for the development and marketing of NBT Paclitaxel in the
countries not covered by the Faulding Agreement, there can be no assurance that
NaPro will be able to find such a partner or, if such a partner is found, there
can be no assurance that such a partner will be able to secure regulatory
approval or effectively market NBT Paclitaxel if approval is secured.

BMS, the world's largest oncology company, is already marketing paclitaxel
commercially in the United States, Australia, Canada, Europe and certain other
territories. In addition, RPR has developed a proprietary analog of paclitaxel,
docetaxel, which is marketed under the trademark Taxotere(R). Taxotere(R) has a
microtubule binding mechanism of action similar to that of paclitaxel.
Taxotere(R) is approved in the United States, European Community, Australia,
Canada and a number of other countries. Taxotere(R) is approved in the United
States for treatment of anthracycline-resistant breast cancer in patients
without impaired liver function. While treatment with Taxotere(R) may cause
certain side effects not observed with paclitaxel, it is anticipated that
Taxotere(R) may compete with paclitaxel, and thereby reduce overall paclitaxel
sales. In addition, with the termination of the IVAX Agreement, NaPro
anticipates that IVAX will continue to seek entry to the global paclitaxel
market independently of NaPro and will compete with NaPro in the future.
Furthermore, upon expiration in December 1997 of the five-year marketing
protection from generic competition which was provided to BMS's formulation of
paclitaxel by the Waxman-Hatch Act, NaPro may be subject to competition from
generic paclitaxel manufacturers. In Europe, a similar exclusivity period will
end in most cases 10 years after BMS' initial approval. In addition, NaPro is
aware of several pharmaceutical companies which have stated that they are in the
process of developing generic paclitaxel in the United States, Canada, Mexico
and Europe. Finally, academic and research organizations and pharmaceutical and
biotechnology companies are pursuing, among other things, genetically engineered
drugs, chemical synthesis and cell-tissue culture which may compete with NaPro's
products or technology. In addition, certain companies are pursuing the
production of paclitaxel and other taxanes from natural product extraction
techniques.

Many of NaPro's competitors, most notably BMS and RPR, have substantially
greater capital resources, research and development capabilities, manufacturing
and marketing resources, and experience than NaPro. NaPro expects BMS to compete
intensely to maintain its dominance of the paclitaxel market, including through
pursuit of an aggressive patent strategy. NaPro's competitors may succeed in
developing products that are more effective or less costly than any that may be
developed by NaPro, or that gain regulatory approval prior to NaPro's products.
Many companies and research institutions are also seeking means to obtain
paclitaxel and taxanes from non-bark renewable biomass components of yew trees
and other sources in order to increase paclitaxel yields, avoid environmental
concerns and reduce the cost of biomass. In addition, NaPro is aware of several
potential competitors that have developed and patented or are developing various
processes for producing paclitaxel and paclitaxel-related substances
semi-synthetically, which may result in a low-cost, pure paclitaxel. The
discovery by a third party of a cost-effective means to fully synthesize
paclitaxel in commercial quantities or the manufacture of taxane derivatives or
analogs that are more efficacious than paclitaxel in treating cancer could have
a material adverse effect on NaPro.

Patents and Proprietary Technology

NaPro'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. Where appropriate, NaPro seeks protection of its proprietary
technology by applying for patents in the United States and abroad. NaPro

- 11 -

owns nine issued United States patents and has several United States patent
applications pending. In addition, NaPro owns five issued foreign patents and
has approximately 45 foreign patent applications pending. NaPro expects to make
additional filings as it believes appropriate. In addition, NaPro has obtained
licenses from third parties to use their proprietary technology, for which
patent applications have been filed in the United States and in certain other
areas of the world. There can be no assurance that either NaPro's or its
licensors' existing patent applications will become issued patents or that, if
issued, the coverage claimed in the applications will not be significantly
reduced prior to issuance or, that NaPro will be able to obtain any necessary or
desired additional licenses to patents or technologies of others or that NaPro
will be able to develop its own additional patentable technologies. In addition,
there can be no assurance that future patents issued to NaPro, if any, will
provide it with competitive advantages or that products or processes covered by
such patents will not be challenged as infringing upon the patents or
proprietary rights of others or that any such patents will not be invalidated,
or that the patents or proprietary rights of others will not have a material
adverse effect on the ability of NaPro to do business. Patent applications in
the United States are maintained in secrecy until patents are issued and patent
applications in certain other countries generally are not published until more
than 18 months after they are filed. In addition, publication of scientific or
patent literature often lags behind actual discoveries. As a result, NaPro
cannot be certain it or any of its licensors was the first creator of inventions
covered by NaPro's or its licensors' pending patent applications or that NaPro
or its licensors were the first to file such applications. Furthermore, there
can be no assurance that others will not independently develop similar
technology or, if patents are issued to NaPro, that others will not design
technology to circumvent NaPro's patents or proprietary rights.

Much of NaPro's proprietary technology, including much of its EIP.(TM)
technology, is not protected by patents and is held by NaPro as trade secrets.
NaPro's success will depend in part on its ability to protect the trade secrets
relating to extracting, isolating and purifying paclitaxel as well as to other
technology. NaPro relies on proprietary know-how and confidential information
and employs various methods, such as entering into confidentiality and
non-compete agreements with its current employees and with third parties to whom
it divulges proprietary information, to protect the processes, concepts, ideas
and documentation associated with its technologies, including its paclitaxel
production process. Such methods may afford incomplete protection and there can
be no assurance that NaPro will be able to adequately protect its trade secrets
or that other companies will not acquire information which NaPro considers to be
proprietary. The inability to maintain its trade secrets for its exclusive use
could have a material adverse effect on NaPro.

The patent position of pharmaceutical companies generally is highly uncertain
and involves complex legal and factual questions. Paclitaxel is an unpatentable,
naturally-occurring compound. Various compositions containing paclitaxel, and
also various processes and other technologies, including those relating to
extracting paclitaxel and preparing the drug for finished formulation, are or
may be patented. In addition, certain methods of administering paclitaxel are or
may be patented. Certain of these patents are owned or controlled by BMS and
RPR, two of NaPro's primary competitors. NaPro is aware of competitors and
potential competitors who are pursuing patent protection for various aspects of
the extraction, preparation, administration and production of natural and
semi-synthetic paclitaxel. In the event that NaPro's technology, products or
activities are deemed to infringe upon the rights of others, NaPro could be
subject to damages or enjoined from using such technology, or NaPro could be
required to obtain licenses to utilize such technology. No assurance can be
given that any such licenses would be made available on terms acceptable to
NaPro, or at all. If NaPro were unable to obtain such licenses or was enjoined
from using its technology, it could encounter significant delays in product
market introductions while it attempted to design around the patents or rights
infringed upon, or could find the development, manufacture or sale of products
to be foreclosed, any of which may have a material adverse effect on NaPro. In
addition, NaPro could experience a loss of revenue and may incur substantial
cost in defending

- 12 -

itself and indemnifying Faulding or IVAX in patent infringement or proprietary
rights violation actions brought against them. NaPro could also incur
substantial cost in the event it finds it necessary to assert claims against
third parties to prevent the infringement of its patents and proprietary rights
by others. Participation in such infringement proceedings could have a material
adverse effect on NaPro, even if the eventual outcome were favorable. See
"Strategic Alliances," "European Patent Litigation" and "Australian Petty
Patents."

Australian Petty Patents

In September 1993 and August 1994, BMS received two Australian petty patents
claiming certain methods of administering paclitaxel. Australian petty patents
have a maximum term of six years, are allowed to contain only three claims (one
independent and two dependent) and are granted on the basis of a prior art
search which is significantly more limited in scope than the searches done prior
to issuance of standard patents. Following publication of these patents,
Faulding instituted legal action to revoke these patents on the grounds that the
patent claims are invalid and that the subject matter claimed in the patents was
already known prior to the claimed date of invention. In February 1995, BMS
brought legal action against Faulding, based upon these patent claims, seeking
an injunction against Faulding to prevent Faulding from marketing NBT Paclitaxel
pursuant to Faulding's generic approval. In March 1995, the Australian court
denied BMS's request to enjoin Faulding from marketing NBT Paclitaxel. NaPro
believes, based on communications with Faulding, that BMS's claims will likely
be resolved in conjunction with Faulding's revocation action in 1998. No
assurance can be given, however, that BMS will not obtain an injunction against
Faulding which could prevent Faulding from marketing NBT Paclitaxel in
Australia. If Faulding were prevented from marketing NBT Paclitaxel in Australia
pursuant to its generic approval, Faulding would be unable to market NBT
Paclitaxel for commercial sale in Australia until such time as Faulding obtains
its own non-generic approval which will require substantial clinical trials and
regulatory approval. There can be no assurances, however, that Faulding would be
able to obtain its own non-generic approval in such circumstances. If BMS is
successful in enforcing its patent claims against Faulding such that Faulding is
unable to sell NBT Paclitaxel in Australia, NaPro's business, financial
condition and results of operations could be materially and adversely affected.
See "Patents and Proprietary Technology," and "Strategic Alliances."

European Patent Litigation

On May 14, 1997, BMS was issued a European Patent relating to certain methods of
treatment with paclitaxel. On the same day, NaPro instituted revocation
proceedings in the United Kingdom against this European Patent as issued in the
U.K. and a separate but related British Patent also owned by BMS. The revocation
action was not in response to any lawsuit or allegations of infringement against
NaPro relating to the patents, but BMS has subsequently instituted a countersuit
against NaPro alleging infringement. Because of the early stage of the
revocation proceedings, and issues regarding the scope and validity of these
patents, it is difficult to estimate the impact which these patents may have on
NaPro's business. However, in the event that NaPro is held liable for
infringement, NaPro expects no significant liability because it is not involved
in any activity in the U.K.
involving paclitaxel.

Government Regulation and Product Approvals

The production and marketing of NBT Paclitaxel and NaPro's research and
development activities are subject to extensive regulation by numerous
governmental authorities in the United States and other countries. In the United
States, drugs are subject to FDA regulation. The Federal Food, Drug and Cosmetic
Act ("FDC Act"), and the regulations promulgated thereunder, and other federal
and state statutes and regulations govern, among other things, the testing,
manufacture, quality, safety, efficacy,

- 13 -

labeling, storage, advertising and promotion of pharmaceutical products. Product
development within this regulatory framework takes a number of years and
involves the expenditure of substantial resources. The marketing of drugs in the
United States may not begin without FDA approval.

The steps required before a pharmaceutical product may be marketed in the United
States include: (i) preclinical laboratory tests, animal pharmacology,
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
an NDA to the FDA; and (v) FDA approval of the NDA prior to any commercial sale
or shipment of the drug. In addition to safety and efficacy requirements, the
FDA requires the applicant to demonstrate to the FDA's satisfaction that it can
manufacture the drug in compliance with the FDA's current Good Manufacturing
Practices ("cGMP") regulations. In addition to obtaining FDA approval for each
product, each domestic drug manufacturing establishment must be registered with
the FDA. 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 and in vivo
cytotoxicity, pharmacology, product chemistry and formulation, as well as animal
studies to assess the potential safety and activity 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. The data in an IND consists of animal data on safety,
possibly human data from a related use, and chemistry, formulation and
manufacturing data. If the FDA objects, the study may not commence. 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
patients under the supervision of a qualified principal investigator. Clinical
trials must be 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. 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,
the safety of human subjects and the possible liability of the institution. The
company sponsoring the trials is required to select qualified investigators to
supervise the administration of the drug and to ensure that the trials are
adequately monitored in accordance with FDA regulations.

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 likely 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.
Clinical trials require substantial time and effort. 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.

- 14 -

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. An NDA is a systematic
compilation of data, analysis and conclusions on a new drug product based on
studies conducted under an IND. The NDA testing and approval process requires
substantial time and effort, and there can be no assurance that approval will be
granted on a timely basis, if at all. The FDA may refuse to approve an NDA if
the FDA does not view the NDA as containing adequate evidence of the safety and
efficacy of the drug, or if other applicable regulatory criteria are not
satisfied. In addition, the FDA may require additional testing or information,
or require post-marketing testing and surveillance. Notwithstanding the
submission of complete data, the FDA may ultimately decide that the application
does not satisfy its criteria for approval. Moreover, if regulatory approval of
a drug is granted, such approval may entail limitations on the indicated uses
for which the drug may be marketed. Finally, product approvals may be withdrawn
if compliance with regulatory standards is not maintained or if problems occur
following initial marketing or if previously unknown information demonstrates a
lack of safety or effectiveness. Following an approved NDA, an SNDA may be
submitted to the FDA which requests a change in the existing approval. An SNDA
can be for changes in manufacturing, quality control or clinical data or for
changes in product labeling such as indications or warnings.

Manufacturers of drugs sold in the United States are required to satisfy the FDA
that their manufacturing facilities and processes adhere to applicable standards
for cGMP and to engage in extensive record keeping and reporting. Thus, even if
regulatory approval for NBT Paclitaxel is acquired, NaPro's current and any
future facilities will be subject to periodic review and inspections by the FDA
or the analogous regulatory authorities of other countries for compliance with
cGMP or similar foreign regulatory standards. Compliance with cGMP regulations
requires substantial time, attention and financial resources. Following
inspections of NaPro's United States and Canadian manufacturing facilities by a
cGMP Auditor of the Australian TGA, the TGA issued approvals to NaPro as an
Australian cGMP compliant paclitaxel manufacturer. In addition, NaPro's Boulder,
Colorado pilot-scale facility was found to be in compliance with United States
cGMP regulations by the FDA. These facilities are subject to periodic
reinspection, and there can be no assurance that the FDA or foreign regulatory
authorities will find NaPro's current facilities or facilities being constructed
to be in compliance with United States cGMP regulations or analogous foreign
standards in the future. Subsequent discovery of previously unknown with a
product or NaPro's manufacturing facilities may result in restrictions,
including withdrawal of the product from the market. Failure to comply with the
applicable regulatory requirements by NaPro, Faulding, or any future strategic
partner could, among other things, result in criminal prosecution and fines,
product recalls, product seizures and operating restrictions.

NaPro has met with the FDA to discuss technical issues associated with the its
DMF submitted in support of the approval of its bulk drug product as part of the
IVAX NDA. In these meetings, NaPro learned that the pilot scale facility, which
manufactured the drug which was used in the IVAX clinical trials, needed to be
inspected for approval in the initial NDA. The scaled-up commercial facility was
submitted in the NDA as an alternate facility, which required NaPro to prepare
two "commercial" facilities for FDA approval, resulting in the expenditure of
more resources than originally planned. The biomass strategy employing
plantation-grown ornamental yews was also discussed with the FDA.

NaPro is also subject to United States laws and regulations applicable to
exporting drugs. On April 26, 1996, the export provisions in the FDC Act were
amended in Chapter 1A of Title II, Supplemental Appropriations For The Fiscal
Year Ending September 30, 1996, in the "FDA Export Reform and Enhancement Act of
1996" to authorize the export of a drug before marketing approval is obtained in
the United States, to any country, if the drug (a) complies with the laws of the
importing country, and (b) has valid marketing authorization by the appropriate
authority in a country listed by the statute, one of which is Australia. NaPro's
Paclitaxel has received valid marketing authorization from Australia and NaPro's

- 15 -

Boulder, Colorado pilot-scale manufacturing facility has been found to be
compliant with cGMP by the Australian TGA.

NaPro is also subject to, among others, the regulations of Canada, the Province
of British Columbia, the United States Environmental Protection Agency, the
Department of Interior (United States Fish and Wildlife Services and the Bureau
of Land Management), the Department of Agriculture (United States Forest
Service) and other countries and regulatory agencies. Pursuant to the National
Environmental Policy Act, certain United States agencies have prepared an
Environmental Impact Statement that addresses the impact of harvesting wild
Pacific yew trees, including cutting down wild Pacific yew trees on federally-
managed land. NaPro is also subject to federal, state and local laws and
regulations governing the use and disposal of hazardous materials as well as
regulations imposed by the Occupational Safety and Health Administration
governing worker safety. There can be no assurance that NaPro is at all times in
complete compliance with all such requirements. NaPro has made and will continue
to make expenditures to comply with environmental requirements. Compliance with
these regulations is time-consuming and expensive. The failure to comply with
these regulations, however, could have a material adverse effect on NaPro's
business, financial condition and results of operations.

The adoption by federal, state or local governments of significant new laws or
regulations or a change in the interpretation or implementation of existing laws
or regulations relating to environmental or other regulatory matters could
increase the cost of producing products, delay regulatory approval or otherwise
adversely affect NaPro's ability to produce or sell NBT Paclitaxel or other
products. Adverse governmental regulations which might arise from future
legislative or administrative regulations or other actions cannot be predicted.
In addition, NaPro's activities have been opposed by the Oregon Natural
Resources Council ("ONRC") because of their concern over wild Pacific yew in old
growth forests. The ONRC and the FDA have reached an agreement on the National
Environmental Policy Act ("NEPA") requirements for NDAs, ANDAs and INDs
involving more than 200 patients involving paclitaxel from Pacific yew trees.
The agreement provides that an applicant shall include an Environmental
Assessment ("EA") which will identify all sources of Pacific yew which are
expected to be harvested in connection with the manufacture of paclitaxel
relating to the application. The FDA is to subject such EAs to the NEPA process
and shall complete and issue a Finding of No Significant Impact ("FONSI"), or an
Environmental Impact Statement ("EIS") and Record of Decision (ROD) as required
by NEPA before approving any NDA or ANDA involving paclitaxel derived from or
otherwise involving the Pacific yew tree. Because NaPro relies on plantation-
grown ornamental yews, and it will not harvest any Pacific yew trees to
manufacture paclitaxel for a marketed product, it believes that the ONRC-FDA
agreement requirements can be met, and that these requirements will not
jeopardize approval of any NDA which may be filed in the future. Even though
NaPro no longer harvests biomass from the bark of the wild Pacific yew, there
can be no assurance that the ONRC and other environmental activist groups will
not oppose other activities of NaPro, which may have the effect of delaying or
halting production of NBT Paclitaxel, each of which could have a material
adverse effect on NaPro's business, financial condition and results of
operations.

Outside the United States, NaPro'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.

NaPro has filed confidential DMFs and other documents containing certain of
NaPro's proprietary manufacturing processes with regulatory agencies in the
United States, Australia, Canada and Europe, relating to NaPro's manufacture of
NBT Paclitaxel. Faulding, referring to NaPro's Australian DMF, has received
marketing approval in Australia for NBT Paclitaxel for treating refractory
ovarian and breast cancers. Additionally, Faulding has completed clinical trials
with NBT Paclitaxel in Australia, which may

- 16 -

form the basis for applications for further marketing approvals in Australia and
other countries where Faulding has the right to market NBT Paclitaxel.

IVAX, using NaPro's United States DMF, filed an IND with the FDA in June 1994
relating to NBT Paclitaxel and began its Phase I clinical trials relating to NBT
Paclitaxel in the United States in October 1994. IVAX began Phase II/III
clinical trials in May 1995. In 1997, IVAX filed the IVAX NDA seeking commercial
approval to sell NBT Paclitaxel in the United States. On December 24,1997, the
FDA ruled on the IVAX NDA, the FDA determined that NBT Paclitaxel was safe and
effective in the treatment of Kaposi's sarcoma, but denied IVAX the authority to
market NBT Paclitaxel due to BMS's prior orphan drug approval for that
indication. No assurance can be given, however, that NBT Paclitaxel will prove
to be safe and effective in future clinical trials, that NaPro will be able to
obtain alternate approval, to market NBT Paclitaxel in the United States or
other countries.

Research and Development

During the years ended December 31, 1995, 1996 and 1997, NaPro spent
approximately $4.6 million, $6.8 million and $11.7 million, respectively, on
Company sponsored research and development activities and to produce NBT
Paclitaxel sold to Faulding and IVAX. Research and development is expected to
remain a significant cost component of NaPro's business. In the short term,
research and development is expected to concentrate primarily on: (i) improving
paclitaxel yield and reducing production cost; (ii) developing NaPro's
semi-synthesis process for paclitaxel production; and (iii) improving the yields
of NaPro's production methodology for processing needles and limbstock. NaPro
will focus its internal efforts on process development and plans to contract out
research considered essential but for which it lacks facilities or staff. NaPro
also intends to engage in early stage research and development to identify other
potential natural product pharmaceuticals.

Foreign and Domestic Operations; Export Sales

The following table sets forth, for the past three fiscal years revenue,
profitability (operating loss),and identifiable assets attributable to NaPro's
U.S. and foreign operations (amounts in thousand dollars):

Year Ended December 31,
1997 1996 1995
---- ---- ----

Sales to Unaffiliated Customers
United States $2,684 $ 1,692 $2,054
Canada 1,130 1,781 569
--------- --------- -------

Total Sales (1) 3,814 3,473 2,623

Operating Loss
United States (12,854) (6,719) (3,851)
Canada (952) (384) (433)

Identifiable Assets
United States 26,419 20,198 5,133
Canada 3,939 4,823 6,820

- ------------

(1) Includes export sales to Australia of $1,303 in 1997, $2,509 in 1996 and
$1,392 in 1995.

- 17 -

Sales from Canada include sales of product manufactured and shipped from NaPro
Canada, NaPro's Canadian subsidiary. Such products sold by NaPro Canada to NaPro
are then re-sold to Faulding for use outside the United States. Such "exported"
products never physically enter the United States.

Sales of NBT Paclitaxel into foreign markets accounted for approximately 72% of
NaPro's revenue for the year ended December 31, 1996 and 34% of NaPro's revenue
for the year ended December 31, 1997. NaPro anticipates that a significant
portion of its revenue will continue to be derived from sales of its products in
foreign markets for the foreseeable future.

A substantial portion of NaPro's revenues and operations will thus continue to
be subject to the risks associated with foreign business, including economic or
political instability, shipping delays, fluctuations in foreign currency
exchange rates and various trade restrictions, all of which could have a
significant impact on NaPro's ability to deliver products on a competitive and
timely basis. Future imposition of, or significant increases in, the level of
customs duties, export quotas, drug regulatory restrictions or other regulatory
or trade restrictions could have a material adverse effect on NaPro.

Employees

On February 17, 1998, NaPro announced a planned layoff of 53 employees, which
would result in a 43% reduction in full time positions. As part of this
downsizing, NaPro(Canada) discontinued operations at its British Columbia
manufacturing facility. This downsizing is expected to produce annualized
savings in personnel costs of about $2.8 million.

As of March 12, 1998, NaPro had 78 full-time employees, two part-time employees,
three project employees, and two temporary employees of whom thirteen hold Ph.D.
or M.D. degrees. Three employees were engaged in biological and clinical
research, 17 in chemical research, 14 in quality control/quality assurance, 28
in manufacturing, 19 in general administration and finance, and two in legal.
NaPro believes that its relations with its employees are good.

Item 2

Properties

NaPro leases approximately 54,000 square feet of space in Boulder, Colorado,
which is used for research and development and is planned to be used for
commercial-scale manufacturing upon completion of improvements and installation
and validation of equipment. This facility is also used for NaPro's executive
offices and warehousing of raw materials and equipment. NaPro leases an
additional 5,900 square feet of space in Boulder which is used for research and
development and small scale manufacturing. NaPro leases a facility of
approximately 3,400 square feet in British Columbia, Canada which is used for
manufacturing. NaPro leases an additional 10,090 square foot facility in British
Columbia, Canada, currently unused, that the it intends to sublease to a third
party.

As part of the downsizing announced by the Company on February 27, 1998, NaPro
temporarily closed its British Columbia manufacturing facility and suspended
construction of its commercial scale manufacturing facility in Boulder.
Completion of the Boulder facility will require additional financing, which the
Company intends to seek at such time as NaPro foresees sufficient product demand
to warrant completion of the facility.

- 18 -

Item 3

Legal Proceedings

NaPro is currently engaged in an action in which NaPro is attempting to
invalidate a European Patent held by Bristol-Myers Squibb Company. See "European
Patent Litigation." NaPro is not currently engaged in any other material legal
proceedings. See "Patents and Proprietary Technology" and "Australian Petty
Patents."

Item 4

Matters Submitted to Stockholders' Vote

No matters were submitted to a vote of NaPro's security holders during the
quarter ended December 1997.

Part II

Item 5

Market Information and Related Stockholder Matters

Market Information

NaPro's Common Stock is traded in the NASDAQ National Market under the symbol
"NPRO." The following table sets forth, for the fiscal periods indicated, the
high and low sale prices for the Common Stock.

High Low
1996
First Quarter $13 3/8 $ 8 7/8
Second Quarter 17 1/4 11 1/8
Third Quarter 15 1/4 8 5/8
Fourth Quarter 11 3/4 7 1/8

1997
First Quarter $13 3/8 $10 1/8
Second Quarter 12 1/8 6 1/4
Third Quarter 10 7/8 6 3/8
Fourth Quarter 6 11/16 1 15/16

Stockholders

As of December 31, 1997 there were approximately 138 stockholders of record of
NaPro's Common Stock.

- 19 -

Dividends

To date, NaPro has not paid any dividends on the Common Stock. NaPro intends to
retain future earnings, if any, to finance the operation and expansion of its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future, if at all.

Recent Sales of Unregistered Securities

On June 4, 1997, NaPro issued $10.3 million of Senior Convertible Notes due 2000
(the "Senior Notes"). The Senior Notes were sold to private investors. The
Senior Notes are convertible into common stock at discounts (ranging from 5% to
10%) from the market price of the common stock during specified periods prior to
the conversion. The net proceeds of the Senior Notes totaled $9.6 million after
the placement agent's fees and other offering cost. The Company also issued
49,721 shares of its common stock in payment of approximately $353,000 of
interest as permitted by the terms of the Senior Notes. In addition, the Company
issued 342,667 shares of common stock on November 19 and December 30, 1997 upon
the conversion of approximately $1,059,000 in principal of the Senior Notes. As
a negotiated transaction with sophisticated investors not involving any public
offering, the sale of the Senior Notes, the issuance of common stock in the
payment of interest and the issuance of common stock upon conversion of the
Senior Notes was exempt under Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act") and Regulation D thereunder.

On December 8, 1997, NaPro closed a private placement of 5,000 shares of Series
C Senior Convertible Preferred Stock (the "Series C Preferred") for an aggregate
issuance price of $5 million. The Series C Preferred was sold to an investment
limited partnership. The Series C Preferred is convertible into common stock at
a 5% discount from the average of the lowest closing trade prices to occur
during the 15 trading days immediately preceding the conversion date. As an
issuance to a single sophisticated investors not involving any public offering,
the sale of the Series C Preferred was exempt under Section 4(2) of the
Securities Act and Regulation D thereunder.

- 20 -

Item 6

Selected Financial Data

The selected financial data presented below for each year in the five years
ended December 31, 1997, are derived from NaPro's financial statements, which
have been audited by Ernst & Young LLP, independent auditors, and are qualified
by reference to such Financial Statements and Notes thereto. The data presented
below should be read in conjunction with the consolidated financial statements
at December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997, the related Notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information included elsewhere in this Report.

Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share data)

Statement of Operations Data:
Revenue:
Sales of products $ 3,814 $ 3,473 $ 2,623 $ 1,002 $ 1,248
Other - - - 5 1
------------ ------------ ----------- ----------- ----------
Total revenue 3,814 3,473 2,623 1,007 1,249

Operating Expense:
Research, development and cost of products sold 11,769 6,837 4,325 2,707 3,505
General and administrative 5,851 3,739 2,310 2,044 2,690
Faulding royalty - - - 1,000 -
Plantation cost - - 272 1,238 7
-------------- ------------ --------- -------- ----------
Total operating expense 17,620 10,576 6,907 6,989 6,202
----------- --------- --------- -------- --------
Operating loss (13,806) (7,103) (4,284) (5,982) (4,953)
Other income (expense):
Interest Income 494 651 373 188 79
Interest and other expense (2,161) (373) (160) (340) (34)
----------- ---------- --------- ---------- ----------
Loss before extraordinary item (15,473) (6,825) (4,071) (6,134) (4,908)
Loss on early extinguishment of debt - - - (512) -
--------------------------- ----------- ---------- ---------
Net loss (15,473) $(6,825) $(4,071) $(6,646) $(4,908)
========== ======== ======== ======== ========
Loss per share:
Before extraordinary item $ (1.28) $ (0.68) $ (0.51) $ (0.91) $ (0.79)
Extraordinary item - - - (0.08) -
-------------------------- ----------- --------- ---------
Net loss $ (1.28) $ (0.68) $ (0.51) $ (0.99) (0.79)
========== ========= ======== ======== ========
Weighted average shares outstanding 12,104 9,973 7,973 6,761 6,201
========= ========= ======== ======== =======

Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term securities $ 8,102 $14,767 $ 7,800 $ 1,400 $ 18
Working capital (2,485) 14,224 8,453 3,169 (435)
Total assets 30,358 25,021 11,953 4,976 2,120
Long-term obligations, net of current maturities 480 751 1,618 1,273 1,435
Senior convertible redeemable preferred stock 4,344 - - - -
Minority interest 2,574 3,715 3,715 - -
Accumulated deficit (40,998) (25,525) (18,700) (14,629) (7,983)
Stockholder's equity (deficit) 7,262 16,569 5,424 3,037 (944)

- 21 -

Item 7

Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the results of
operations of NaPro BioTherapeutics, Inc. (together with its subsidiaries,
"NaPro"). This discussion should be read in conjunction with the Financial
Statements and Notes included elsewhere in this Report. Special Note: Certain
statements set forth below constitute "forward-looking statements" within the
meaning of the Reform Act. See "Special Note Regarding Forward Looking
Statements."

General

NaPro is a natural product pharmaceutical company which is focusing primarily on
the development, manufacture and commercialization of paclitaxel, a
naturally-occurring anti-cancer agent found in certain species of yew (Taxus)
trees. NaPro's paclitaxel is referred to herein as "NBT Paclitaxel."

NaPro has devoted its efforts primarily to the development and implementation of
its propriety extraction, isolation and purification (EIP(TM)) technology for
producing NBT paclitaxel. To advance the development and commercialization of
NBT Paclitaxel, NaPro entered into 20-year, exclusive agreements with each of
F.H. Faulding & Co., Ltd. ("Faulding") and IVAX Corporation (including its
subsidiaries, "IVAX") for the clinical development, sales, marketing and
distribution of NBT Paclitaxel. NaPro and IVAX entered into an agreement on
March 20, 1998 (the "Termination Agreement") terminating their development and
marketing relationship , and NaPro is actively seeking one or more partners to
replace IVAX. NaPro is currently dependent for revenue exclusively on sales of
NBT Paclitaxel, on royalties from licenced technology and amounts due under the
Termination Agreement.

Through December 31, 1997, NaPro's production of NBT paclitaxel was limited
primarily to research and pilot-scale production, and much of NaPro's product
sales were for use in clinical trials and for research and development purposes.
Accordingly, NaPro has generated only limited revenue from such activities and
has incurred significant operating losses, including operating losses of
approximately $13.8 million, $7.1 million and $4.3 million for the years ended
December 31, 1997, 1996 and 1995, respectively, resulting in an accumulated
deficit of $41.0 million as of December 31, 1997. NaPro expects that it will
continue to have a high level of operating expense and will be required to make
significant up-front expenditures in connection with its biomass procurement,
product development and research and development activities. NaPro anticipates
that operating losses will continue until such time, if ever, as NaPro is able
to generate sufficient revenue to support its operations.

NaPro believes that its ability to generate such revenue depends primarily on
the ability to obtain regulatory approval in the U.S. or another major market
for the commercial sale of NBT paclitaxel, on NaPro's ability to obtain
regulatory approval for its manufacturing facilities and on NaPro's ability to
construct manufacturing facilities that produce quantities of NBT Paclitaxel
sufficient to supply NaPro's strategic partners' requirements for commercial
sales.

In January 1995, Faulding received approval to market NBT paclitaxel
commercially in Australia under the trade name ANZATAX(TM). The ability of
Faulding to continue to market NBT paclitaxel in Australia pursuant to
Faulding's marketing approval and the success of these marketing efforts will
continue to have a significant effect on NaPro's revenue and profitability.

- 22 -

In February 1997, Bristol-Myers Squibb Company ("BMS") submitted a Supplemental
New Drug Application with orphan drug designation for paclitaxel for the
treatment of Kaposi's sarcoma ("KS") ahead of the filing by IVAX of a New Drug
Application ("NDA") for the same indication. The BMS application was approved by
the Food and Drug Administration ("FDA") in August 1997. Under the Orphan Drug
Act of 1983, this approval resulted in IVAX/NaPro being denied marketing
approval for the KS indication for seven years.

In February 1998, due to the delay in receiving marketing approval for
paclitaxel, NaPro underwent a restructuring to decrease overall costs. NaPro's
total number of employees will be reduced to 53, resulting in a 43% reduction in
full time positions and an estimated annual savings of $2.8 million in payroll
expense. This decrease in payroll expense will be reflected in general and
administrative, as well as research and development expense. In addition,
non-payroll expenses are also expected to decrease as the result of the
restructuring. As part of this restructuring, the Company discontinued
operations at its British Columbia manufacturing facility. This restructuring is
expected to produce annualized savings in personnel costs of about $2.8 million.
As part of the restructuring, NaPro temporarily closed its British Columbia
manufacturing facility and suspended construction of its commercial scale
manufacturing facility in Boulder, Colorado. Completion of the Boulder facility
will require additional financing, which the Company intends to seek at such
time as NaPro foresees sufficient product demand to warrant completion of the
facility.

In March 1998, NaPro and IVAX entered into the Termination Agreement.
Termination of the IVAX Agreement leaves NaPro free to seek regulatory approvals
and market NBT Paclitaxel itself or to seek a new partner or partners with which
to pursue regulatory approvals and marketing of NBT Paclitaxel, in either such
case in areas outside the Faulding territory. However, the termination of the
IVAX Agreement currently leaves NaPro without such a partner, and there can be
no assurance that NaPro will be able to secure such approvals or form new
long-term relationships for the approval, marketing, and distribution of NBT
paclitaxel in these areas, or that NaPro or such a partner, if found, will be
able to effectively market NBT Paclitaxel. NaPro's future growth and
profitability will depend on the success of NaPro's strategic partners in
fostering acceptance in the oncology market for NBT Paclitaxel as a preferred
form of chemotherapy to be used alone or in combination with other
chemotherapeutic agents.

Results of Operations

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenue.
There were no sales to affiliate for 1997. Such sales for 1996 were $600,000.
Sales to affiliate were to IVAX, which was not an affiliate in 1997. Sales to
IVAX for 1997 were $2.3 million and are included in other sales. Sales to IVAX
are expected to increase substantially in 1998; however, as a result of the
Termination Agreement, such sales are expected to end soon thereafter. Future
product sales in territory outside that covered by NaPro's agreement with
Faulding (the "Faulding Agreement") may be dependant upon the ability of NaPro
to secure new agreements supporting the development and marketing of NBT
Paclitaxel within that territory. Sales other than to IVAX for 1997 were $1.5
million, representing a decrease of $1.3 million from 1996. Total sales for 1997
were $3.8 million, up $300,000 from 1996. The increase was due primarily to the
timing of product shipments and to inventory fluctuations of NaPro's strategic
partners. Shipments to NaPro's strategic partners may vary significantly
depending on a number of factors, including the timing and size of any clinical
trials, the level of inventory carried and changes in approved markets. This
variability will continue until stable commercial demand has been established
for the product in one of NaPro's principal markets.

- 23 -

Research, Development and Cost of Products Sold. Research and development
expense and cost of products sold for 1997 was $11.8 million, representing an
increase of $4.9 million from 1996. The increase resulted primarily from
expansion of NaPro's development and research operations in anticipation of
possible approval of the NDA filed by IVAX with the FDA. NaPro's production
process is not distinct from its research and development processes.
Accordingly, the cost of products sold is included with NaPro's research and
development expense.

General and Administrative Expense. General and administrative expense for 1997
was $5.9 million, an increase of $2.2 million from 1996. The increase is
attributable primarily to increases of $1.1 million in administrative and
support staff, $500,000 in legal costs, $100,000 of occupancy costs, and
$400,000 in consulting and outside service expense.

Interest Income. Interest income for 1997 was $500,000, a decrease of $200,000
from 1996. The decrease is attributable to smaller free cash balances available
for investment. See "Liquidity and Capital Resources."

Interest and Other Expense. Interest and other expense for 1997 was $2.2
million, representing an increase of $1.8 million from 1996. Approximately $1.1
million of the 1997 expense related to the amortization of original issue
discount, a non-recurring charge, on the senior convertible debt. The remainder
of the increase is attributable to interest on the senior convertible debt and
increased borrowing on equipment financing. See "Liquidity and Capital
Resources."

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Sales to affiliate increased $100,000 to $700,000 for 1996. Sales to
affiliate were to IVAX. Other sales increased $800,000 to $2.8 million for 1996
from $2 million for 1995. Total revenue increased $900,000 to $3.5 million for
1996 from $2.6 million for 1995. Through December 31, 1995, the majority of
product sales had been for use in clinical trials and for research and
development purposes.

Research, Development and Cost of Products Sold. Research, development and cost
of products sold increased $2.5 million to $6.8 million for 1996 from $4.6
million for 1995. The increase was due primarily to an increase in the level of
process development and research, including higher production cost due to higher
production volume. This was offset by plantation fees which decreased from
$300,000 in 1995 to zero, reflecting the completion of research related to
plantation development as of December 31, 1995. In 1996, NaPro began
capitalizing plantation expenditures incurred prior to the first commercial
harvest and depletes such cost over the remaining life of the plantation
contract using the units-of-production method.

General and Administrative Expense. General and administrative expense increased
$1.4 million to $3.7 million for 1996 from $2.3 million for 1995. This increase
was due primarily to an increase in facility cost and an increase in
administrative and support staff.

Interest Income. Interest income increased $300,000 to $700,000 for 1996 from
$400,000 for 1995. This increase was the result of larger free cash balances
associated with the completion of NaPro's offering of Common Stock in August
1996 and its warrant call completed in June 1996. See "Liquidity and Capital
Resources."

Interest and Other Expense. Interest and other expense increased $300,000 to
$400,000 for 1996 from $100,000 for 1995. The increase was attributable to
interest on increased borrowings on the equipment lease line and note payable to
Faulding. See "Liquidity and Capital Resources."

- 24 -

Liquidity and Capital Resources

NaPro's capital requirements have been and will continue to be significant. As
of December 31, 1997, NaPro had a negative working capital balance of $(2.5)
million. This compared to a working capital balance of $14.2 million as of
December 31, 1996, and reflects the classification as a current liability of
$9.2 million of NaPro's senior convertible notes (the "Senior Notes"), which are
due in 2000 but redeemable by the holders during 1998 under certain conditions.
To date, the funding of NaPro's capital requirements has been dependent
primarily on the net proceeds of public offerings of its common stock of
approximately $21.1 million, on private placements of its equity securities of
approximately $27.8 million, on the exercise of warrants and options of $5.6
million, on net borrowings of $11.8 million, and on loans and advances from its
stockholders and strategic partners.

NaPro raised approximately $15 million in 1997 through the sale of convertible
securities. The net proceeds from the sale of these securities, combined with
licensing fees associated with the Termination Agreement ranging from $6 to 12
million are expected to provide adequate capital to fund its 1998 operations and
capital expenditures. Pharmaceutical development is, however, a costly and time
consuming process. NaPro is actively pursuing partners to assist in the
development and marketing of its products, and may seek other forms of long-term
financing should such financing become available on acceptable terms.

In June 1997, NaPro privately placed $10.3 million of the Senior Notes. The
Senior Notes mature in June 2000 and bear an interest rate of 5%. The interest
on the Senior Notes is payable either in cash, or in NaPro common stock, at
NaPro's option. The Senior Notes are convertible into common stock at discounts
(ranging from 5% to 10%) from the market price of the common stock during
specified periods prior to the conversion. If not converted, upon maturity, the
Senior Notes will be exchanged for 13.75% 5-year debentures. The net proceeds of
the Senior Notes totaled $9.5 million after the placement agent's fees and other
offering cost. Under the original terms of the Senior Notes, the holders of the
Senior Notes are entitled to require partial redemption of the notes in certain
circumstances, including significant declines in the market value of NaPro
common stock. In January 1998 NaPro redeemed $397,000 in principal of the Senior
Notes and paid $53,000 premium and interest in connection with such a
redemption.

In December 1998, NaPro closed a private placement of 5,000 shares of Series C
Senior Convertible Preferred Stock (the "Series C Preferred") for an aggregate
issuance price of $5 million. The Series C Preferred accrues dividends at 5% per
year payable in common stock or cash at NaPro's option. The Series C Preferred
is convertible into common stock at a 5% discount from the average of the lowest
closing trade prices to occur during the 15 trading days immediately preceding
the conversion date. Under certain circumstances the investor can cause NaPro to
redeem a portion of the Series C Preferred. At December 2000, NaPro may force
the conversion of any remaining shares at the conversion price in effect as of
December 8, 2000.

In January 1998, NaPro entered into amendments (the "Amendments") with the
holder of the Series C Preferred and the holders of the Senior Notes (the
"Investors"). The parties agreed to, over the period through December 31, 1998:
(i) limit the number of shares which could be converted in the event the stock
price is below $4.00 per share to no more than 450,000 shares per month and (ii)
suspend the ability of the Investors to force NaPro to redeem any portion of the
securities for cash. In the event there is an unconverted amount of securities
outstanding on January 1, 1999, such amount will be convertible in accordance
with the original terms of the agreements. The Amendments require NaPro to
propose for approval by its stockholders, at a meeting to be held no later than
June 1, 1998, an amendment to its Certificate of Incorporation that would
increase its authorized number of shares of common stock and a proposal to
permit the issuance of common stock in excess of 20% of the common stock
outstanding at the dates of original

- 25 -

issuance of the Series C Preferred and the Senior Notes upon conversion of the
Series C Preferred and the Senior Notes, respectively. If stockholder approval
for those matters is not obtained, the Amendments will terminate and in certain
circumstances the holders of the Series C Preferred and the Senior Notes would
have the right to require NaPro to redeem any inconvertible portion of the
Series C Preferred and the Senior Notes, respectively. NaPro intends to seek the
stockholder approvals required by the Amendment. While there can be no assurance
that such approvals will be obtained, NaPro believes it to be in the interest of
stockholders that such approvals be given.

In March 1998, NaPro and IVAX entered into the Termination Agreement, which
terminated their development and marketing relationship. IVAX paid NaPro
approximately $6.0 million pursuant to the Termination Agreement, and IVAX
received a royalty-free limited, non-exclusive license for one of NaPro's
pending patents (the "Pending Patent") in the United States, Europe and certain
other markets. Another $6.4 million in additional payments is to be paid to
NaPro contingent upon the issuance of the Pending Patent in various countries.
While there can be no assurance these issuance will occur, NaPro believes it is
highly probable that they will do so. In addition, IVAX will transfer to NaPro
within 5 days of NaPro filing its 1997 Annual Report on Form 10-K, 1,126,398
shares of NaPro common stock currently owned by IVAX. NaPro is actively pursuing
another strategic partner, or partners, to assist in the regulatory approval and
marketing of NBT Paclitaxel in the U.S. and other areas not covered by the
Faulding Agreement.

Working Capital and Cash Flow Cash and cash equivalents decreased $1.4 million
to $8.1 million for the year ended December 31, 1997 from $9.5 million at
December 31, 1996. Net cash provided by 1997 financing activity and from the net
proceeds from investments was partially offset by $10.4 million used in
operating activities and by capital expenditures of $11.6 million.

Inventory increased $2.0 million to $4.3 million in the year ended December 31,
1997 from $2.3 million at December 31, 1996. The amount of product held as
finished goods equivalents in work-in-progress inventories as well as finished
goods inventories is dependent on a number of factors, including the shipping
requirements of NaPro's strategic partners and NaPro's production planning for
meeting those needs. Inventory balances may vary significantly during product
development and launch periods. NaPro made significant investments in biomass
and work-in-process in anticipation of the commencement of commercial production
if the DNA filed with the FDA had been approved.

Capital Expenditures NaPro expended $11.6 million during 1997 for capital
projects. These expenditures primarily included plantation cost, work on a new
large scale commercial EIP(TM) manufacturing facility in Boulder, and expansion
and improvement to NaPro's Boulder laboratories and facilities.

Due to the FDA's determination that NBT Paclitaxel could not be marketed in the
U.S. during BMS's period of exclusivity under the Orphan Drug Act, NaPro has
significantly reduced the scope of its operations and has reduced or delay
capital expenditures. NaPro is seeking a new strategic partner or partners to
replace IVAX. The nature of NaPro's relationship with its strategic partners may
change significantly its planned capital expenditures.

The amount and timing of future capital expenditures will depend upon numerous
factors, including the progress of NaPro's research and development programs,
the magnitude and scope of these activities, the cost of preparing, filing,
prosecuting, maintaining and enforcing patent claims and other intellectual
property rights, competing technological and marketing developments, changes in
or terminations of existing strategic relationships, the establishment of
additional strategic relationships and the cost of manufacturing scale-up. NaPro
may seek additional long-term financing to fund capital expenditures should such
financing become available on terms acceptable to NaPro.

- 26 -

Net Operating Loss Carryforwards As of December 31, 1997, NaPro had net
operating loss carryforwards for income tax purposes of approximately $35
million to offset future taxable income. Under Section 382 of the Internal
Revenue Code of 1986, as amended, the utilization of net operating loss
carryforwards is limited after an ownership change, as defined in such Section
382, to an annual amount equal to the value of the loss corporation's
outstanding stock immediately before the date of the ownership change multiplied
by the federal long-term tax-exempt rate in effect during the month the
ownership change occurred. Such an ownership change occurred in September 1993.
As a result, NaPro will be subject to an annual limitation on the use of its net
operating losses. This limitation only affects net operating losses incurred up
to the ownership change and does not reduce the total amount of net operating
loss which may be taken, but rather limits the amount which may be used during a
particular year. Therefore, in the event NaPro achieves profitability, such
limitation would have the effect of increasing NaPro's tax liability and
reducing the net income and available cash resources of NaPro if the taxable
income during a year exceeded the allowable loss carried forward to that year.

Year 2000 NaPro has determined that there no material year 2000 issues with its
own management information system and that is unlikely there will be any issues
with its vendors that would have a material effect upon it.

Special Note Regarding Forward-looking Statements

Certain statements in this report constitute "forward-looking statements" within
the meaning of the federal securities laws. In addition, NaPro or persons acting
on its behalf sometimes make forward-looking statements in other written and
oral communications. Such forward-looking statements may include, among other
things, statements concerning NaPro's plans, objectives and future economic
prospects, such as matters relative to seeking and obtaining strategic partners;
the availability of patent and other protection for its intellectual property;
the completion of clinical trials and regulatory filings; the prospects for and
timing of regulatory approvals; the need for and availability of additional
capital; the amount and timing of capital expenditures; timing of products
introductions and revenue; the availability of raw materials; prospects for
future operations; and other statements of expectations, beliefs, future plans
and strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of NaPro, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: adverse economic and general business
conditions; competition from BMS and other existing and new producers of
paclitaxel and other drugs; technological advances in cancer treatment and drug
development; the ability to obtain rights to technology; the ability to obtain
and enforce patents; the ability to obtain raw materials and commercialize
manufacturing processes; the effectiveness of NBT Paclitaxel and other
pharmaceuticals developed by NaPro in treating disease; the results of clinical
studies; the results of research and development activities; the business
abilities and judgment of NaPro's management and other personnel; the
availability of qualified personnel generally; changes in and compliance with
governmental regulations; the effect of capital market conditions and other
factors on capital availability for NaPro and other biopharmaceutical companies;
the ability of Faulding to perform its obligations under its existing agreement
with NaPro; the ability of NaPro to establish relationships with capable
strategic partners to develop and market NBT Paclitaxel in the territories not
covered by the Faulding Agreement and other factors referenced in this Report.

- 27 -

Item 8

Financial Statements and Supplementary Data

The information required by this item begins at Page F-1.

Item 9

Changes in and Disagreements with Accountants

None

Part III

Item 10

Directors and Executive Officers

The information concerning NaPro's directors and executive officers is
incorporated by reference to the section entitled "Election of Directors" in the
Company's definitive Proxy Statement with respect to NaPro's 1998 Annual Meeting
of Stockholders (the "Proxy Statement").

Item 11

Executive Compensation

The section labeled "Executive Compensation" appearing in NaPro's Proxy
Statement is incorporated herein by reference, except for such information as
need not be incorporated by reference under rules promulgated by the Securities
and Exchange Commission.

Item 12

Security Ownership of Certain Beneficial Owners and Management

The section labeled "Security Ownership of Directors and Executive Officers and
Certain Beneficial Owners" appearing in NaPro's Proxy Statement is incorporated
herein by reference.

Item 13

Certain Relationships and Related Transactions

The section labeled "Certain Relationships and Related Transactions" appearing
in NaPro's Proxy Statement is incorporated herein by reference.

- 28 -

Part IV

Item 14

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Financial Statements

The Financial Statement Index is found on Page F-1.

Financial Statement Schedules

All schedules are omitted because they are not applicable or not required or
because the information is included in the consolidated financial statements or
the notes thereto.

Exhibits and Reports on Form 8-K

NaPro filed a December 24, 1997 Current Report on Form 8-K reporting tentative
approval of the IVAX NDA and the resignations of Messrs. Bewkes and Bryson from
the Company's Board of Directors, a January 6, 1998 Current Report on Form 8-K
reporting an Agreement in Principle between the Company and the holders of the
5% Senior Convertible Notes and the Series C Convertible Preferred Stock and a
January 28, 1998 Current Report Form 8-K reporting amendments with respect to
the 5% Senior Convertible Notes and the Series C Convertible Preferred Stock.

Exhibit
Number Description of Exhibit

3.1 Amended and Restated Certificate of Incorporation of the Company, as amended August 2,
1996 (1)

3.2 Certificate of Designation for Convertible Preferred Stock, Series A (2)

3.3 Certificate of Designation for Series B Junior Participating Preferred Stock (3)

3.4 Certificate of Designation of Series C Senior Convertible Preferred Stock (4)

3.5 Bylaws of the Company (5)

4.1 Common Stock Certificate (5)

4.2 Underwriter's Warrant Agreement (5)

4.3 Warrant Agreement (5)

4.4 Warrant Certificate (5)

4.5 Rights Agreement dated as of November 8, 1996 between NaPro BioTherapeutics, Inc. and
American Stock Transfer and Trust Company, as Rights Agent (9)

4.6 The Certificate of Incorporation and Bylaws of the Company are included as Exhibits 3.1 - 3.5.

10.1* Company's 1993 Stock Option Plan (5)

10.2* Company's 1994 Long-Term Performance Incentive Plan, as amended July 30, 1996 (1)

10.3 Common Stock Warrant dated as of June 7, 1993 between the Company and Broadmark
Capital Corporation (5)

10.4 Stock Purchase Warrant dated as of June 7, 1993 between the Company and Arthur D.
Harrison (5)

10.5 Stock Purchase Warrant dated as of June 7, 1993 between the Company and D&N Holding
Company (5)

- 29-

10.6 Stock Purchase Warrant dated as of June 7, 1993 between the Company and Kirkland & Ellis
(5)

10.7 Stock Purchase Warrant dated as of December 15, 1992 between the Company and Kirkland &
Ellis (5)

10.8 Stock Purchase Warrant dated as of June 3, 1992 between the Company and Herbert L Lucas
(5)

10.9 Stock Purchase Warrant dated as of June 3, 1992 between the Company and H.J. Meyers &
Co., Inc (5)

10.10 Stock Purchase Warrant dated as of June 3, 1992 between the Company and
Freshman, Marantz, Orlanski, Cooper, and Klein 1993 Investments (5)

10.11 Stock Purchase Warrant dated as of April 30, 1993 between the Company and Pacific
Regeneration Technologies, Inc. (5)

10.12 Registration Agreement dated as of June 7, 1993 by and among the Company, D&N Holding
Company, Sterling K. Ainsworth, Patricia A. Pilia, Leonard P. Shaykin, and Lawrence
Helson (5)

10.13 Amended and Restated Stockholders Agreement dated as of May 31, 1994 by and among the
Company, D&N Holding Company, Sterling K. Ainsworth, Patricia A. Pilia, Leonard P.
Shaykin, and Lawrence Helson (5)

10.14 Amended and Restated Employment and Executive Stock Agreement dated as of June 7, 1993
and amended and restated as of May 31, 1994 between the Company and Leonard P. Shaykin
(5)

10.15* Amended and Restated Employment and Executive Stock Agreement dated as of June 7, 1993
and amended and restated as of May 31, 1994 between the Company and
Sterling K. Ainsworth (5)

10.16* Amended and Restated Employment and Executive Stock Agreement dated as of June 7, 1993
and amended and restated as of May 31, 1994 between the Company and
Patricia A. Pilia (5)

10.17* Amended and Restated Employment and Executive Stock Agreement dated as of June 7, 1993
and amended and restated as of May 31, 1994 between the Company and
Lawrence Helson (5)

10.18* Company's Stock Option Agreement with Sterling K. Ainsworth (5)

10.19* Company's Stock Option Agreement with Patricia A. Pilia (5)

10.20 Services and Supply Agreement dated as of December 1, 1993 between the Company and
Pacific BioTechnologies Inc. (5)

10.21 Subscription Agreement dated as of April 29, 1993 between the Company and Pacific
Regeneration Technologies (5)

10.22 Amended and Restated Master Agreement dated as of January 19, 1994 between the Company
and F.H. Faulding & Co., Ltd. (5)

10.23 Amendment No. 1 To Amended and Restated Master Agreement Dated January 19, 1994,
executed as of March 23, 1995 (6)

10.24 Agreement dated as of June 7, 1993 between the Company and Baker Norton Pharmaceuticals,
Inc. (5)

10.25 Lease dated February 28, 1995 between the Company and the Mutual Life of Canada (2)

10.26 Subscription Agreement and Investment Letter between the Company and NaPro
BioTherapeutics (Canada), Inc. (2)

10.27 Put/Call Agreement dated July 12, 1995 between the Company and the Purchasers of Series A
Preferred Shares of NaPro BioTherapeutics (Canada) Inc. (2)

10.28 Side Letter dated July 21, 1995 to Put/Call Agreement (2)

10.29 Lease between the Company and Gunbarrel Facility L.L.C. dated October 16, 1995 (7)

10.30 First Amendment to Lease November 27, 1995, between the Company and Gunbarrel Facility
L.L.C. (7)

10.31 Agreement between the Company and Pacific BioTechnologies Inc. dated March 29, 1996 (7)

10.32 Culture Agreement dated March 1, 1996 between Zelenka Nursery, Inc. ("Zelenka") and the
Company (8)

10.33 Agreement for Sale, Harvest and Storage of Nursery Stock dated May 1, 1996 between
Zelenka and the Company (8)

10.34 Culture Agreement dated as of March 1, 1997 between Zelenka and the Company (1)

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10.35 Lease Agreement dated as of March 1, 1997 between Zelenka and the Company (1)

10.36 Agreement for Sale, Harvest and Storage of Nursery Stock dated as of March 1, 1997 between
Zelenka and the Company (1)

10.37 Form of Note Purchase Agreement, dated as of June 4, 1997 between NaPro and each of the
Selling Stockholders (10)

10.38 Form of 5% Senior Convertible Note (10)

10.39 Form of Common Stock Purchase Warrant (10)

10.40 Pledge and Security Agreement dated as of June 4, 1997 between NaPro
and First Trust of New York, National Association, as Collateral Agent
(10)

10.41 Consulting agreement dated July 2, 1997 between NaPro and Life Science Advisors, LLP. (11)

10.42 Subscription Agreement between the Company and Advantage Fund II, Ltd., as to Series C
Senior Convertible Preferred Stock (4)

10.43 Common Stock Purchase Warrant between the Company and Advantage Fund II, Ltd. (4)

10.44 Amendment Agreement, dated as of January 28, 1998, by and among the Company and the
noteholders names therein (12)

10.45 Amendment Agreement, dated as of January 28, 1998, by and between the Company and
Advantage Fund II, Ltd. (12)

10.46 Termination Agreement dated as of March 20, 1998 among the Company, IVAX Baker Norton
Pharmaceuticals, Inc. ("BNP") and D&N Holding Corporation ("D&N") (