Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________________ to ________________.
Commission File Number 0-23272
--------------------------------
NPS PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 87-0439579
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
420 Chipeta Way, Salt Lake City, Utah 84108-1256
(Address of principal executive offices) (Zip Code)
(801) 583-4939
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
Par Value
Preferred Stock
Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the Common Stock held by non-
affiliates of the Registrant was $904,822,405 as of March 1, 2001, based upon
the closing price for the shares of common stock reported on The Nasdaq Stock
Market and The Toronto Stock Exchange, on such date./1/
The number of shares of Common Stock outstanding as of March 1, 2001 was
29,745,199, which includes 912,098 Exchangeable Shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report on Form 10-K incorporates by reference portions of
the Registrant's definitive Proxy Statement for the Registrant's Annual Meeting
of Stockholders, to be held May 24, 2001, which will be filed with the
Securities and Exchange Commission.
/1/ Excludes 1,579,521 shares of Common Stock held by directors and officers as
of March 1, 2001. The determination of affiliate status is not a conclusive
determination for other purposes.
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities and Exchange Act of 1934. These
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to the differences include,
but are not limited to, those discussed in the Section entitled "Business--Risk
Factors," as well as other parts of this Annual Report. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. We undertake no obligation to publicly release
updates or revisions to these statements.
PART I
ITEM 1. Business
Overview
NPS Pharmaceuticals, Inc. is a biopharmaceutical company with headquarters
in Salt Lake City, Utah, and additional operations in Toronto, Ontario, Canada.
We discover, develop and intend to commercialize small molecule drugs and
recombinant proteins, primarily for bone and mineral disorders and central
nervous system disorders. We have five drugs in clinical development and several
preclinical product candidates. Our two most advanced product candidates focus
on bone and mineral disorders. They are AMG 073, which has completed a series of
Phase II clinical trials for treatment of hyperparathyroidism, and ALX1-11,
which is in a pivotal Phase III clinical trial for treatment of post-menopausal
osteoporosis.
Strategy
Our objective is to build a profitable biopharmaceutical company by
developing innovative therapies that maintain human health and relieve
suffering. The key elements of our strategy to accomplish this objective are to:
. Build a diversified pipeline of products. We are developing a broad pipeline
of products that are in various stages of clinical and preclinical
development. We believe this strategy increases the likelihood that we will
successfully develop commercially viable pharmaceutical products. Our
portfolio approach will reduce our exposure to the impact of any single
product failure and will increase our flexibility to eliminate programs we
deem less promising.
. Retain greater product rights for internal development and commercialization.
We intend to participate in the development and commercialization of selected
product candidates, either independently or with collaborators. By
selectively pursuing the development and commercialization of product
candidates on our own or through collaborations, we employ a flexible
approach in an effort to optimize our products' value to us. In our future
collaborations, we will seek to retain strategic sales and marketing rights
to product candidates, or options to elect such rights, in therapeutic areas
where we think we will be able to achieve a greater return.
. In-license or acquire complementary products, technologies or companies. In
addition to our internal development efforts, we plan to expand our product
portfolio by identifying and evaluating potential products and technologies
developed by third parties that we believe fit within our overall portfolio
strategy. For example, in 1999 we acquired Allelix Biopharmaceuticals Inc.,
in part because its product candidates complemented our existing programs in
osteoporosis and central nervous system disorders.
. Leverage collaborations to reduce our risk and accelerate the
commercialization of our product candidates. We selectively enter into
collaboration agreements with large pharmaceutical companies to augment our
financial investment in our discovery and development programs. This strategy
allows us to devote greater resources to selected discovery efforts and to
develop a greater number of products than would otherwise be possible. In
addition, we believe collaborators with clinical development and marketing
expertise in specific therapeutic areas will facilitate more rapid entry into
the market for our products and accelerate their acceptance by healthcare
providers and third-party payors.
. Maintain our core discovery competencies. We have developed a significant
portion of our product pipeline through internal discovery efforts. We intend
to continue our focus on scientific discovery by retaining creative
scientists who we believe can make breakthrough discoveries leading to
innovative products.
1
Our Product Development Programs
The following is a summary of our product development programs by
therapeutic area:
==========================================================================================================
Product or Program Indication(s) Status Collaborators
- ----------------------------------------------------------------------------------------------------------
Bone and Mineral Disorders
- --------------------------
Calcimimetics: Hyperparathyroidism
AMG 073 Primary Phase II Amgen, Kirin
Secondary Phase II Amgen, Kirin
ALX1-11 Osteoporosis Phase III
Calcilytics Osteoporosis Phase I GlaxoSmithKline
Central Nervous System Disorders
- --------------------------------
NPS 1776 Epilepsy and bipolar disorder Phase I Abbott
ALX 0646 Migraine Phase I Forest
Metabotropic glutamate receptors Psychiatric and neurological Preclinical AstraZeneca
disorders and pain
Glycine reuptake inhibitors Schizophrenia and dementia Preclinical Janssen
Excitatory amino acid receptors Psychiatric disorders and pain Preclinical Eli Lilly
Gastrointestinal Disorders
- --------------------------
ALX-0600 Short bowel syndrome Pilot Phase II
- ----------------------------------------------------------------------------------------------------------
Bone and Mineral Disorders
- --------------------------
Overview of Parathyroid Hormone and Calcium Receptors
In normal circumstances, calcium receptors on parathyroid cells control the
level of calcium in the blood. These receptors are located in four parathyroid
glands in the neck. When the level of calcium in the blood falls, the calcium
receptors detect the change and stimulate the release of parathyroid hormone,
which acts to release calcium from bone, increase calcium retention in the
kidney and stimulate the synthesis of vitamin D in the kidney. Vitamin D
increases the efficiency of calcium absorption from dietary sources. As calcium
levels in the blood rise, calcium receptors then decrease the secretion of
parathyroid hormone. Calcium receptors play the key role in maintaining calcium
balance in the blood.
In 1993, we and our collaborators at The Brigham and Women's Hospital in
Boston were the first to isolate and clone calcium receptors. We have discovered
small molecules that mimic the role of calcium and cause a decrease in the
secretion of parathyriod hormone. These compounds are called "calcimimetic
compounds," and they are the foundation of our collaborations with Amgen Inc.
and Kirin Brewery Company, Ltd. to develop small molecule, orally administered
drugs for treatment of hyperparathyroidism.
2
We have also discovered compounds that block calcium receptors, and, by
this action, cause a rapid increase of parathyroid hormone. These calcium
receptor blockers, called "calcilytic compounds," have been shown to stimulate
new bone formation in animal models of osteoporosis. They form the basis of our
collaboration with GlaxoSmithKline, to develop small molecule, orally
administered drugs for treatment of osteoporosis.
AMG 073 for Hyperparathyroidism
We discovered and patented AMG 073, a small molecule calcimimetic compound
for the treatment of both primary and secondary hyperparathyroidism. We licensed
AMG 073 to Kirin in the territories of Japan, China, Taiwan and Korea, and to
Amgen for the rest of the world.
Market Opportunity. Hyperparathyroidism is characterized as either primary
or secondary. Primary hyperparathyroidism is an age-related disorder that
results from excessive secretion of parathyroid hormone and is characterized by
enlargement of one or more of the four parathyroid glands located in the neck.
Symptoms of primary hyperparathyroidism may include bone loss, muscle weakness,
depression and cognitive dysfunction.
Over 75,000 people in the United States develop new cases of primary
hyperparathyroidism each year, and over 500,000 people in the United States are
estimated to suffer from the disorder. The treatment for primary
hyperparathyroidism is surgery to remove one or more of the parathyroid glands
in the neck. There are currently no effective pharmaceutical therapies for the
treatment of primary hyperparathyroidism.
Secondary hyperparathyroidism is a physiological response to failing
kidneys. As renal function deteriorates, the body is unable to maintain proper
levels of calcium and phosphorus in the blood, or serum. To compensate,
parathyroid glands enlarge and produce increased amounts of parathyroid hormone
in an attempt to increase calcium and decrease phosphorus levels in the blood.
Symptoms of secondary hyperparathyroidism may include bone loss, bone pain, soft
tissue calcification and chronic, severe itching.
Parathyroid hyperplasia, which is a proliferation of cells in the
parathyroid glands, is a major component of hyperparathyroidism and occurs in
virtually all patients with chronic renal failure. More than 260,000 patients in
the United States suffer from chronic renal failure to a degree that they
require dialysis or kidney transplantation. Several million people in the United
States are thought to suffer from some degree of renal insufficiency. Secondary
hyperparathyroidism commonly develops during the early stages of chronic renal
failure before dialysis is necessary. Studies suggest that over 30% of such
patients are affected by secondary hyperparathyroidism. Current treatment for
secondary hyperparathyroidism includes calcium supplements, phosphate binding
chemicals and vitamin D, none of which directly regulate the secretion of
parathyroid hormone.
Development Status. We licensed AMG 073 to Kirin in the territories of
Japan, China, Taiwan, and Korea, and to Amgen for the rest of the world. Results
from Amgen's Phase II clinical trial in patients with primary
hyperparathyroidism were presented at the American Society for Bone and Mineral
Research meeting in September 2000 and other Amgen Phase II clinical trial
results in patients with secondary hyperparathyroidism were presented at the
American Society of Nephrology meeting in October 2000. Amgen has been and is
continuing to conduct a larger Phase II clinical trial in patients with
secondary hyperparathyroidism to confirm and build upon these results. While it
is impossible to predict the timing of the start or finish of any specific
clinical trial, we expect Amgen to begin Phase III clinical trials in 2001.
The results from Amgen's Phase II clinical trial in patients with primary
hyperparathyroidism, presented at the American Society of Bone and Mineral
Research conference, indicated that AMG 073 normalized total serum calcium
safely and effectively.
Amgen has also completed three Phase II clinical trials of AMG 073 in
patients with secondary hyperparathroidism. Data collected from the Phase II
clinical trials indicate that AMG 073 safely and effectively reduced parathyroid
hormone, phosphorus and calcium-phosphorus product in dialysis patients with
secondary hyperparathyroidism. The data from the first clinical trial indicate
single doses of AMG 073 reduced parathyroid hormone levels in a dose dependent
manner. In the second clinical trial, daily doses of AMG 073 effectively reduced
parathyroid hormone by 25% to 40% and serum phosphorus by approximately 25%. In
the third clinical trial conducted over an eighteen-week period, mean
parathyroid hormone levels were 48% lower for the AMG 073 group compared to
placebo during the final six-week period. These reductions in parathyroid
hormone were accompanied by minimal (6%) reductions in plasma calcium. However,
serum phosphorus and calcium-phosphorus product each fell approximately 25%
relative to the placebo group during the final six-week period. Persistently
elevated calcium-phosphorus product has been implicated as a cause of soft
tissue and vascular calcification in this disorder. Generally, the drug was safe
and well tolerated in each of these trials. Amgen has paid license fees,
development support payments and made equity purchases totaling $19.5 million in
connection with its license of AMG 073, and will pay us up to an additional
$26.0 million if it achieves development milestones. Amgen will also pay
royalties on any sales of AMG 073 in its territories. Kirin has already paid us
$16.0 million in license fees, research and development support
3
payments and milestone payments, and will pay us up to an additional $9.0
million upon accomplishment of development milestones. Kirin will also pay
royalties on any sales of AMG 073 in its territories.
ALX1-11 and Calcilytic Compounds for Osteoporosis
We are developing two products for the treatment of osteoporosis, ALX1-11
and calcilytic compounds. ALX1-11 is our patented recombinant, full-length
parathyroid hormone for treatment of osteoporosis. The drug will be delivered
subcutaneously on a daily basis. Although chronically high levels of parathyroid
hormone are known to cause bone loss as in hyperparathyroidism, pulsatile dosing
with ALX1-11, in which parathyroid hormone levels rise rapidly and then return
to normal levels within a few hours, actually stimulates bone growth. We are
independently developing ALX1-11 and are conducting a double blind, placebo-
controlled pivotal Phase III clinical trial in post-menopausal women for
osteoporosis. In a separate effort, we are pursuing a treatment for osteoporosis
in collaboration with GlaxoSmithKline. This collaboration focuses on small
molecule, orally administered calcilytic compounds.
Market Opportunity. Osteoporosis is an age-related disorder characterized
by a reduction in bone mass. Although bone loss is a universal consequence of
advancing age, the process is accelerated in women following menopause.
Osteoporosis is often diagnosed only after fractures in weakened bones.
Fractures of hip, spine or wrist bones can result in serious long-term
disability.
Ten million Americans have advanced osteoporosis and another 18 million are
at high risk of fractures because of low bone mass. One half of all women over
50 years of age in the United States will suffer an osteoporosis-related
fracture during their lifetime. Osteoporosis is responsible for 1.5 million
fractures annually in the United States, including 300,000 hip fractures.
Current therapies for osteoporosis, including supplementing dietary calcium
and vitamin D, help to slow the rate of bone loss. In post-menopausal women,
estrogen replacement therapy decreases the rate of bone resorption but does not
reverse the loss of bone mass. Other therapies include the use of compounds such
as bisphosphonates and raloxifene. These drugs can halt bone loss and, over
several years, can increase bone mass by amounts ranging from two to eight
percent. Fosamax, an oral bisphosphonate marketed by Merck, had sales of over
$1.0 billion in 1999. In clinical trials, Fosamax demonstrated an increase in
bone mineral density of seven to ten percent and a reduction in fractures over
three years. However, we believe there remains a need for a treatment that can
prevent fractures by more rapidly replacing lost bone.
Development Status. We are currently conducting a double blind, placebo-
controlled, pivotal Phase III clinical trial for ALX1-11. Our clinical trial
will measure increases in bone mineral density and determine the compound's
effectiveness in fracture prevention over an 18-month course of treatment in
1,800 patients. ALX1-11 also is being tested in a clinical trial coordinated by
the University of California, San Francisco, and sponsored by the NIH. This
trial will test the combination of ALX1-11 and Fosamax as a therapy for
osteoporosis.
In our Phase II clinical trial in over 200 post-menopausal women, daily
injections of ALX1-11 produced a clinically and statistically significant
average increase in bone mineral density of nearly seven percent in a one-year
course of treatment.
We believe our expectations for the safety and efficiency of ALX1-11 are
further validated by Eli Lilly's clinical experience with Forteo(TM). ALX1-11 is
our recombinant parathyroid hormone consisting of all 84 amino acids, while
Lilly's Forteo is an active fragment of parathyroid hormone comprised of the
first 34 amino acids. Eli Lilly recently announced that it has filed a U.S. New
Drug Application for Forteo for the treatment of osteoporosis. Data from Eli
Lilly's Phase III clinical trial indicated that, in post-menopausal women with
severe osteoporosis, daily injections of Forteo provided statistically
significant reductions in fractures and rapid and significant increases in bone
mineral density.
Calcilytic Compounds. We are collaborating with GlaxoSmithKline on the
discovery, identification and characterization of calcilytic compounds for
treatment of osteoporosis. Calcilytic compounds are aimed at temporarily
increasing the secretion of the body's own parathyroid hormone. In animal
studies, we demonstrated that intermittent increases in circulating levels of
parathyroid hormone can be obtained through the use of calcilytics. Increased
levels of parathyroid hormone achieved by this mechanism are equivalent to those
achieved by an injection of parathyroid hormone sufficient to cause bone growth.
We believe that orally administered calcilytic drugs that act on the parathyroid
cell calcium receptors could provide a cost-effective treatment for
osteoporosis. Preclinical studies with GlaxoSmithKline on some of the lead
compounds identified in this program have been conducted. In December 2000,
GlaxoSmithKline began clinical testing with a calcilytic for which we earned a
$1.0 million milestone payment.
GlaxoSmithKline has paid us a total of $32.5 million for license fees,
research support, milestone payments and equity purchases as part of our
collaboration. We will receive additional payments of up to an aggregate of
$13.0 million upon achievement
4
of clinical milestones and royalties on any sales by GlaxoSmithKline of products
commercialized through this collaboration. We also have a limited right to co-
promote any products we develop through our collaboration and we will receive a
share of the profits.
Central Nervous System Disorders
NPS 1776 for Epilepsy and Bipolar Disorder
We are developing NPS 1776 for epilepsy and bipolar disorder. In March
2000, we entered into a collaboration agreement with Abbott Laboratories for the
development of this drug. Prior to entering into that agreement, we completed
several Phase I clinical trials to confirm its safety and tolerability and
ability to be delivered in a sustained release formulation.
Market Opportunity. Many types of epileptic seizures have been medically
defined. They range from mild cases of nearly imperceptible behavior, such as
staring into space, to grand mal seizures where consciousness is lost and the
body convulses uncontrollably. In most cases of recurrent seizures, drugs are
the treatment of choice, although in some extreme instances, neurosurgery may be
an option. While the majority of epilepsy patients can control their seizures
with currently available drug therapies, in many cases seizure control is
achieved only at doses that cause significant side effects. Up to 30% of
patients with epilepsy do not respond adequately to any medication.
Bipolar disorder, known until recently as manic-depressive disorder, is
characterized by the occurrence of both manic and depressive states, usually in
alternation. Bipolar disorder, like other mood disorders, is a lifetime illness
with no known cure. As a result, the number of bipolar patients continues to
increase each year. In the United States, approximately 2.3 million people have
been diagnosed as having bipolar disorder. It is now generally accepted that
some drugs normally used in treating seizures may also be effective treatments
for bipolar disorder. For example, Abbott's drug, Depakote(R), has received FDA
approval for the treatment of both epilepsy and manic episodes in bipolar
disorder.
Development Status. Our studies show that NPS 1776 is effective in a number
of animal models of epilepsy. Importantly, it exhibited a high margin of safety
in the animal models compared to currently available epilepsy treatments, as
measured by a lack of motor impairment side effects following drug
administration. In addition, we have shown that NPS 1776 has the same broad
spectrum of anticonvulsant activity in animals as Depakote. We also believe NPS
1776 may have a better safety profile than other currently available
anticonvulsant drugs, particularly in terms of a reduced risk of birth defects
and liver damage. Thus, we believe that NPS 1776 may be useful for the treatment
of epilepsy and bipolar disorder.
In December 1998, we completed a Phase I clinical trial of NPS 1776 in
healthy male volunteers in the United Kingdom. Our analysis of the data
indicates that the drug was safe and well tolerated. In December 1999, we
completed other Phase I clinical trials in the United Kingdom to confirm safety
and tolerability in healthy volunteers receiving multiple doses of the drug and
to investigate sustained release formulations.
In March 2000, we entered into an agreement with Abbott in which we granted
Abbott worldwide marketing rights to NPS 1776 in return for Abbott's commitment
to fund further development of NPS 1776 and pay us milestone payments of up to
$18.0 million and royalties on any sales of NPS 1776. Abbott is currently
optimizing formulations of NPS 1776 in preparation for further clinical trial
development.
Metabotropic Glutamate Receptor Program
Since 1996, we have been working to find compounds that act on targets in
the central nervous system called metabotropic glutamate receptors, or mGluRs.
Because these nerve cell receptors are structurally related to calcium
receptors, we have been able to leverage our expertise in calcium receptors to
create proprietary methods for screening drug candidates active at mGluRs. We
have discovered a number of compounds that activate or inhibit mGluRs, and that
are highly selective for specific subtypes of mGluRs. Our animal studies with a
number of these compounds have demonstrated their potential as drug candidates
for the treatment of central nervous system disorders such as chronic pain.
There are three principal groups of mGluRs and several subtypes of mGluRs
within those groups that differ in their chemical composition, their effects on
cellular metabolism and their location in the central nervous system. Our
research indicates that different mGluRs are variously involved in diseases such
as stroke, epilepsy, Alzheimer's disease, schizophrenia and pain. Because we
have the ability to identify compounds that are selective for the various mGluR
subtypes, it is possible that we will be able to pursue the development of
products that will treat several central nervous system disorders.
In March 2001, we entered into an exclusive collaboration and license
agreement with AstraZeneca under which we will collaborate on a number of mGluR
subtypes for the identification, optimization, development, and
commercialization of mGluR subtype-selective compounds.
5
Other Programs for Central Nervous System Disorders
We are developing ALX-0646, a small molecule compound, for the treatment of
migraine. We completed a Phase I clinical trial outside the United States with
ALX-0646 in healthy volunteers in 1998. In August 2000, we entered into an
agreement with Forest Laboratories, Inc. in which we granted Forest worldwide
marketing rights to ALX-0646 in return for Forest's commitment to fund further
development of ALX-0646 and pay us milestone payments of up to $25.0 million
and royalties on any sales of ALX-0646. Forest is conducting additional
necessary toxicology studies prior to beginning clinical trials in the United
States.
We have two additional preclinical-stage central nervous system programs.
We were working with Janssen Pharmaceutica N.V., a division of Johnson & Johnson
on glycine reuptake inhibitors to identify prospective drug candidates for
schizophrenia and dementia. The initial research phase of this collaboration
expired in October 2000. Janssen has a one-year period to select lead candidates
for further clinical development. We also worked with Eli Lilly and Company to
identify excitatory amino acid receptors as therapeutic targets for various
central nervous system disorders. The initial research phase of this
collaboration expired in November 2000. We will receive milestone payments of
up to $21.5 million from Janssen and royalties from both Janssen and Eli Lilly
from any drugs developed or sold by them under these collaboration agreements.
Gastrointestinal Disorders
ALX-0600 for Short Bowel Syndrome
We are independently developing ALX-0600 for selected gastrointestinal
disorders. We are currently conducting a pilot Phase II clinical trial in a
small number of patients receiving treatment for short bowel syndrome. We
previously completed a Phase I clinical trial of ALX-0600 that demonstrated
safety and tolerability in healthy volunteers. In July 2000, we obtained orphan
drug designation for ALX-0600 for short bowel syndrome from the FDA, which
provides, subject to some restrictions, seven years of marketing exclusivity
once a product is launched for diseases that afflict fewer than 200,000
patients.
Market Opportunity. Short bowel syndrome is a condition in which disease or
surgical removal of a large portion of the small intestine results in an
inadequate surface area for absorption of nutrients, electrolytes and fluids. It
results in symptoms such as diarrhea, weight loss and fatigue. Patients with
short bowel syndrome often must be fed intravenously by a technique called total
parenteral nutrition for a period of time and, in some cases, permanently. Total
parenteral nutrition costs can exceed $100,000 annually per patient. There are
currently no effective therapies available for enhancing the growth and repair
of the cell lining of the small intestine. Approximately 20,000 to 40,000
patients in North America are afflicted with short bowel syndrome.
Development Status. ALX-0600 is an analog of glucagon-like peptide 2, a
naturally occurring hormone that regulates growth and proliferation of the cell
lining of the small intestine. Our animal studies have indicated that ALX-0600
has the ability to stimulate the regeneration of cells lining the small
intestine, expanding the surface area for absorption of nutrients. In animal
studies, ALX-0600 induced an approximately 50% increase in the weight of the
small intestine within 10 days of administration. Furthermore, the growth-
promoting properties of ALX-0600 appear to be highly tissue-specific,
predominantly affecting the small intestine, and thereby reducing the risk of
adverse side effects.
We are conducting a pilot Phase II clinical trial with ALX-0600 in a small
number of patients with short bowel syndrome. The clinical trial is designed to
measure improvement in nutrient absorption and physical changes in the small
intestine, as well as safety and tolerability. We previously completed a Phase I
clinical trial of ALX-0600 that demonstrated safety and tolerability in healthy
volunteers.
Although short bowel syndrome is a relatively small indication, we believe
that, if ALX-0600 demonstrates statistically significant benefit in patients
having short bowel syndrome, it may also be useful in treating other
gastrointestinal conditions marked by inefficient absorption or altered
absorptive capacity. Examples of these conditions include Crohn's disease,
inflammatory bowel disease and intestinal mucositis in cancer patients, which is
caused by chemotherapy or radiation therapy. If ALX-0600 is approved for
gastrointestinal conditions other than short bowel syndrome, we may lose our
exclusive marketing rights.
In November 1999, we entered into an agreement with the Canadian government
through a program known as Technology Partnerships Canada. Under the agreement,
the Canadian government will reimburse us up to Cdn. $8.4 million for our
qualified costs related to research and development of ALX-0600. As a result of
the funding, we will pay a 10% royalty to the Canadian government through
December 2008 on the sale or license of any product developed from the funded
research. If the payments have not reached a total of Cdn. $23.9 million by that
date, we will continue to pay royalty payments until we reach that amount or
until December 2017, whichever occurs first.
6
Collaborative Research, Development, and License Agreements
We currently have collaborative research, development and/or license
agreements with several collaborators, including Amgen, Kirin, GlaxoSmithKline,
AstraZeneca, Eli Lilly, Janssen, Abbott, Forest and The Brigham and Women's
Hospital.
Amgen
In March 1996, we entered into a development and license agreement with
Amgen which grants Amgen the exclusive right to develop and commercialize AMG
073 and related compounds for the treatment of hyperparathyroidism and
indications other than osteoporosis worldwide, excluding Japan, China, Hong
Kong, North and South Korea and Taiwan. Amgen has assumed full control,
authority and responsibility for conducting, funding and pursuing all aspects of
the development, submissions for regulatory approvals, manufacture and
commercialization of the AMG 073 compound in its territories. Amgen is required
to pay us royalties on any sales of AMG 073 in its territories. Amgen may
terminate the agreement for any reason on 90 days written notice, in which case
we would reacquire at no cost the technology, patent and commercialization
rights to AMG 073.
Kirin
In June 1995, we entered into a five-year collaborative research and
license agreement with Kirin to develop and commercialize AMG 073 for treatment
of hyperparathyroidism in Japan, China, Hong Kong, North and South Korea and
Taiwan. Kirin is responsible for conducting clinical trials and obtaining
regulatory approvals in its territories. Kirin is required to pay all costs of
developing and commercializing products within its territories and is required
to pay us royalties on any sales of AMG 073 within its territories. Kirin may
terminate the agreement for any reason on 90 days written notice. If Kirin
terminates the agreement, Amgen would receive worldwide rights to develop and
commercialize AMG 073 for treatment of hyperparathyroidism and other indications
except osteoporosis.
GlaxoSmithKline
In November 1993, we entered into a research and license agreement with
GlaxoSmithKline to collaborate on the discovery, development and marketing of
drugs for treatment of osteoporosis and other bone metabolism disorders. Under
the agreement, GlaxoSmithKline has an exclusive license to the worldwide
development and marketing of any calcium receptor-active compounds developed
under the agreement that are useful for treatment of osteoporosis and other bone
metabolism disorders, excluding hyperparathyroidism. Once compounds have been
selected for development, GlaxoSmithKline has agreed to conduct and fund all
product development, including all human clinical trials and regulatory
submissions. We have the right to co-promote any resulting products in the
United States. We are entitled to royalties on any sales of products for
osteoporosis and other bone metabolism disorders developed by GlaxoSmithKline
under the agreement and a share of the profits from any co-promotion of the
products. GlaxoSmithKline may terminate the agreement on 30 days' written
notice, and we may both agree to extend the agreement for an additional period
of time. Under certain circumstances, we have the right to terminate the
GlaxoSmithKline agreement after October 2000. Termination of the GlaxoSmithKline
agreement will result in the return of our technology, commercialization and
patent rights in the licensed field of osteoporosis and other bone and mineral
disorders, as well as all additional technology developed in the course of the
collaboration. We also have the right, under certain circumstances, after
October 2000 to terminate the sponsored research portion of the agreement.
Termination of the collaborative research portion of the agreement will result
in the return to NPS of certain technology rights.
AstraZeneca
In March 2001, we entered into an exclusive research collaboration and
license agreement with AstraZeneca to collaborate on the discovery, development,
and marketing of new small molecule therapies for the treatment of various
disorders of the central nervous system. Specifically, the collaboration will
focus on the identification of small molecules active on mGluRs. We granted
AstraZeneca an exclusive license to the worldwide development, manufacturing and
marketing of any mGluR-active compounds identified under the collaboration. The
parties will work exclusively together on the identification of mGluR-active
compounds for a period of five years. Either party may terminate the five year
research program after the second anniversary of the date of the agreement and
upon six months' written notice. Once compounds have been selected for
development, AstraZeneca has agreed to conduct and fund all product development,
including all human clinical trials and regulatory submissions. We have the
right to co-promote any resulting product in the United States and Canada.
Should we elect to co-promote products, in certain circumstances we will be
required to share in the development and regulatory costs associated with such
products. We are entitled to royalties on any sales of products developed and
marketed under the agreement and a share of the profits from any co-promotion of
the products. AstraZeneca may terminate the agreement at anytime upon 90 days'
written notice after the expiration or earlier termination of the research
program. Such termination by AstraZeneca of the agreement for reasons other than
for cause will result in the return to us of all technology, commercialization
and patent rights.
7
Eli Lilly
In December 1989, we entered into a collaborative research and license
agreement with Eli Lilly. Eli Lilly assigned the agreement to Lilly Canada in
December 1990, and the scope of the agreement was modified in December 1998 to
include only research related to excitatory amino acid receptors. Under the
agreement, Eli Lilly was granted an exclusive worldwide license to any and all
patents and technology developed under the agreement after December 1, 1989. Eli
Lilly is solely responsible for development, preclinical and clinical testing
and commercialization of any products under the collaboration, and has an
exclusive worldwide license to manufacture and market products developed under
the agreement. We are entitled to royalties on any sales of all excitatory amino
acid receptor products developed under the agreement. Eli Lilly solely owns the
right to any compounds and products developed under the agreement, and will
retain these rights if the agreement terminates. The initial research phase of
the agreement expired in November 2000. As a result, we reacquired our patent
and technology rights. Eli Lilly however, has a non-exclusive license to those
patents and technology, and has the exclusive right to develop any of the
compounds arising from Lilly's work under the agreement.
Janssen
In October 1998, we entered into a collaborative agreement with Janssen for
the research, development and marketing of new drugs for treatment of
schizophrenia and dementia. The research phase of this collaboration ended in
October 2000. We will receive royalties from any product sales resulting from
the collaboration. In addition, Janssen will assume responsibility for
development of the compounds, including all costs and expenses associated with
the development efforts. While Janssen has the right to market products
worldwide, we may co-promote any products developed under the agreement in
Canada.
Abbott
In March 2000, we entered into an exclusive license agreement with Abbott
for our compound NPS 1776 and related molecules. The agreement grants Abbott the
exclusive worldwide license to develop and commercialize NPS 1776 for all
indications. Abbott has committed to conduct and fund all preclinical
development and, if warranted, clinical development activities for NPS 1776 and
related molecules. We will receive royalties from any product sales resulting
from the collaboration. We will participate with Abbott on a joint project
review committee, where we will observe the progress of Abbott during the first
24 months of the agreement and where we will review progress on Abbott's
subsequent clinical development work plan. We will continue to prosecute all our
worldwide patent applications for NPS 1776. Abbott has the right to terminate
the agreement at any time. Upon termination, all of the data and intellectual
property covered by the agreement will be returned to us. We have the right to
institute binding alternative dispute resolution for the return of the program
and related technology in the absence of development progress.
Forest
In August 2000, we entered into an exclusive worldwide license with Forest
for the development and commercialization of ALX-0646. We are entitled to
receive licensing fees under the agreement, as well as royalties for any sales
of resulting products. If Forest does not obtain sublicense agreements in some
major markets outside of the United States within three years, we have the
option to remove those markets from Forest's territory, subject to Forest having
the right to buy our termination option. Forest may terminate the agreement upon
the occurrence of certain conditions. If the agreement is terminated, Forest's
license is terminated and the technology, commercialization and patent rights
relating to ALX-0646 will be returned to us.
The Brigham and Women's Hospital
In February 1993, we entered into a sponsored collaborative research
agreement and a patent license agreement with The Brigham and Women's Hospital,
an affiliate of Harvard University Medical School. The patent license agreement
grants us an exclusive license to certain calcium receptor and inorganic ion
receptor technology covered by patents we jointly own with the hospital. The
research agreement grants us a right of first negotiation for exclusive license
rights to any patentable subject matter arising out of research that we sponsor
at the hospital. Brigham and Women's Hospital is also entitled to a royalty on
any sales of certain products under the patent license agreement, and we have
committed to promote sales of any licensed products for hyperparathyroidism for
which we receive regulatory approval.
Government Regulation
Research, preclinical development, clinical trials, manufacturing and
marketing activities are subject to regulation for safety, efficacy and quality
by numerous governmental authorities in the United States and other countries.
In the United States, drugs are subject to rigorous FDA regulation. The Federal
Food, Drug and Cosmetic Act and other federal and state statutes and regulations
govern, among other things, the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and
8
promotion of our products. Product development and approval within this
regulatory framework take a number of years and involve the expenditure of
substantial resources.
The steps required before a pharmaceutical agent may be marketed in the
United States include:
. preclinical laboratory tests, animal pharmacology and toxicology studies
and formulation studies
. the submission of an investigational new drug application to the FDA for
human clinical testing, which must become effective before human
clinical trials commence
. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug
. the submission of a new drug application to the FDA
. FDA approval of the new drug application before any commercial sale or
shipment of the drug. In addition to obtaining FDA approval for each
product, each domestic drug manufacturing establishment must be
registered with, and approved by, the FDA
Domestic drug manufacturing establishments are subject to regular
inspections by the FDA and must comply with FDA regulations. To supply products
for use in the United States, foreign manufacturing establishments must comply
with FDA regulations and are subject to periodic inspection by the FDA, or by
corresponding regulatory agencies in their home countries under reciprocal
agreements with the FDA.
Preclinical studies include the laboratory evaluation of in vitro
pharmacology, product chemistry and formulation, as well as animal studies to
assess the potential safety and efficacy of a product. Compounds must be
formulated according to cGMP regulations, 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 investigational new drug application and are reviewed by the
FDA before human clinical trials can begin. Unless the FDA objects to an
investigational new drug application, the investigational new drug application
usually becomes effective 30 days following its receipt by the FDA.
Clinical trials must be sponsored and conducted in accordance with good
clinical practice under protocols and methodologies that: ensure receipt of
signed consents from participants that inform them of risks; detail the
objectives of the study; detail the parameters to be used to monitor safety; and
detail the efficacy criteria to be evaluated. Accurate documentation and
analyses must be submitted to the FDA as part of an investigational new drug
application. Furthermore, each clinical study must be conducted under the
supervision of a principal investigator operating under the auspices of an
Institutional Review Board, or IRB, at the institution where the study is
conducted. The IRB will consider, among other things, ethical factors, the
safety of human subjects and the possible liability of the institution.
Sponsors, investigators and IRB members must avoid conflicts of interests and
ensure compliance with all legal requirements.
Clinical trials typically are conducted in three sequential phases. In
Phase I, the initial introduction of the drug into a small number of healthy
volunteers is undertaken. The drug is evaluated for safety (adverse effects),
dosage tolerance, metabolism, distribution, excretion and pharmacodynamics
(clinical pharmacology). The Phase I trial must provide pharmacological data
that is sufficient to devise the Phase II trials.
Phase II trials involve studies in a larger, but still limited, patient
population in order to:
. determine the efficacy of the drug for specific, targeted indications
. determine dosage tolerance and optimal dosage
. identify possible adverse affects and safety risks
When a compound is determined to be effective and to have an acceptable
safety profile in Phase II evaluation, Phase III trials can be undertaken to
evaluate further safety and efficacy in expanded patient populations at
geographically diverse clinical trial sites.
The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of a new drug application,
which must be complete and accurate. The approval of a new drug application
permits the commercial-scale manufacturing, marketing, distribution, and
exportation from the United States and sale of the drug in the United States.
The testing and approval process typically requires substantial time, effort and
expense. The FDA may deny a new drug application if the applicable scientific
and regulatory criteria are not satisfied. Moreover, the FDA may require
additional testing or information, or may require post-approval testing,
surveillance and reporting to monitor the products. Notwithstanding any of the
foregoing, the FDA may ultimately decide that a new drug application does not
meet the applicable agency standards, and even if approval is granted, it can be
limited or revoked if the sponsor who received the approval does not comply with
regulatory standards. Finally, an approval may
9
entail limitations on the uses, labeling, dosage forms, distribution and
packaging of the product. An approval may also require that additional clinical
studies be conducted while the product is being marketed and sold.
Among the conditions for new drug approval is the requirement that the
prospective manufacturer's quality control, record keeping, notifications and
reporting and manufacturing systems conform to cGMP. In complying with the
standards contained in these regulations, manufacturers must continue to expend
time, money, resources and effort in order to ensure compliance.
Outside the United States, our ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authority. This foreign regulatory approval process includes many of the same
steps associated with FDA approval described above.
In addition to regulations enforced by the FDA, we are subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and future federal, state or local regulations.
Our research and development activities involve the controlled use of hazardous
materials, chemicals and various radioactive compounds. Although we believe that
our safety procedures for handling and disposing of these materials comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of an accident, we could be liable for any damages that
result.
Patents and Other Proprietary Technology
Our intellectual property portfolio includes patents, patent applications,
trade secrets, know-how, and trademarks. Our success will depend in part on our
ability to obtain additional patents, maintain trade secrets and operate without
infringing the proprietary rights of others, both in the United States and other
countries. We periodically file patent applications to protect the technology,
inventions and improvements that may be important to the development of our
business. We rely on trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain our competitive
position.
We file patent applications in our own name, and when appropriate, have
filed and expect to continue to file, applications jointly with our
collaborators. These patent applications cover compositions of matter, methods
of treatment, methods of discovery, use of novel compounds and novel modes of
action, as well as recombinantly expressed receptors and gene sequences that are
important in our research and development activities. Some of our principal
intellectual property rights related to processes, compounds, uses and
techniques related to calcium receptor science are now protected by issued U.S.
patents. We intend to file additional patent applications relating to our
technology and to specific products, as we think appropriate.
We hold patents directed to potential therapeutic products such as new
chemical entities, pharmaceutical compositions and methods of treating diseases.
We hold patents directed also to nucleic acid and amino acid sequences of novel
cellular receptors and methods of screening for compounds active at such
cellular receptors. We continue actively to seek patent protection for these and
related technologies in the U.S. and in foreign countries.
We also rely on trade secrets and contractual arrangements to protect our
trade secrets. Much of the know-how important to our technology and many of its
processes are dependent upon the knowledge, experience and skills of our key
scientific and technical personnel and are not the subject of pending patent
applications or issued patents. To protect our rights to know-how and
technology, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the
unauthorized use of, and restrict the disclosure of, confidential information,
and require disclosure and assignment to us of their ideas, developments,
discoveries and inventions.
In connection with our research and development activities, we have
sponsored research at various university and government laboratories. For
example, we have executed license and research agreements regarding research in
the area of calcium and other ion receptors with The Brigham and Women's
Hospital. We have also sponsored work at other government and academic
laboratories for various evaluations, assays, screenings and other tests.
Generally, under these agreements, we fund the work of investigators in exchange
for the results of the specified work and the right or option to a license to
any patentable inventions that may result in certain designated areas. If the
sponsored work produces patentable subject matter, we generally have the first
right to negotiate for license rights therein. Any resulting license would be
expected to require us to pay royalties on net sales of licensed products.
Competition
We and our licensees are pursuing areas of product development in which we
believe there is a potential for extensive technological innovation in
relatively short periods of time. We operate in a field in which new discoveries
occur at a rapid pace. Our competitors may succeed in developing technologies or
products that are more effective than ours, or in obtaining regulatory
10
approvals for their drugs more rapidly than we are able to, which could render
our products obsolete or noncompetitive. Competition in the pharmaceutical
industry is intense and is expected to continue to increase. Many competitors,
including biotechnology and pharmaceutical companies, are actively engaged in
the research and development of products in areas similar to the areas in which
we are developing products, including the fields of hyperparathyroidism,
osteoporosis, neuroprotection and neurological disorders. In particular, Eli
Lilly has been developing Forteo, an active fragment of human parathyroid
hormone comprising the first 34 amino acids of the parathyroid hormone, as a
potential treatment for osteoporosis. Eli Lilly has announced that it has filed
a U.S. New Drug Application for Forteo administered by sub-coetaneous injection.
We believe that our ALX1-11will compete with Forteo. ALX1-11 is also an
injectably administered while being the full length recombinant parathyroid
hormone consisting of all 84 amino acids. We believe that at least one other
company is developing a parathyroid hormone-based treatment that is not
delivered through injection. Additionally, Bone Care International is presently
marketing Hectoral, a vitamin D pro-hormone to relieve some symptoms of
secondary hyperparathyroidism. Also, GelTex is currently marketing RenaGel for
the treatment of secondary hyperparathyroidism. Lilly has announced that it is
creating a method of oral delivery of Forteo. NPS is also evaluating various
methods of alternative delivery of ALX1-11.
Many of our competitors have substantially greater financial, technical,
marketing and personnel resources. In addition, some of them have considerable
experience in preclinical testing, human clinical trials and other regulatory
approval procedures. Moreover, certain academic institutions, governmental
agencies and other research organizations are conducting research in the same
areas in which we are working. These institutions are becoming increasingly
aware of the commercial value of their findings and are more actively seeking
patent protection and licensing arrangements to collect royalties for the
technology that they have developed. These institutions may also market
competitive commercial products on their own or through joint ventures and will
compete with us in recruiting highly qualified scientific personnel. Our ability
to compete successfully will depend, in part, on our ability to:
. establish collaborations for the development of our products
. identify new product candidates
. develop products that reach the market first
. develop products that are technologically superior to other products
in the market
. obtain and enforce patents covering our technology
Manufacturing
We have no small molecule manufacturing facilities. Under our existing
collaborative agreements, each licensee is responsible for the manufacture of
the applicable product.
We currently produce some biological material at our Toronto, Ontario
site. We use those materials in connection with our preclinical and early
clinical testing activities for our ALX1-11 and ALX-0600 product candidates. We
obtain other biological material from contract production firms. For certain
tests, this material, including clinical grade ALX1-11 and ALX-0600, must be
manufactured under the cGMP of the FDA. We are currently reviewing alternatives
to meet our current and planned manufacturing needs of these materials and
expect from time to time to sign agreements with one or more suppliers.
Employees
As of March 1, 2001, we employed 136 individuals full-time, of which 34
hold Ph.D. degrees and 31 hold other advanced degrees. A total of 83 full-time
employees are engaged in research, development and support activities. A total
of 53 full-time employees are employed in finance, legal, human resources,
market research, corporate development and general administrative activities.
None of our employees are covered by collective bargaining agreements and our
management considers its relations with our employees to be good.
Risk Factors
You should carefully consider the following risk factors and other
information included or incorporated by reference in this prospectus before
deciding to invest in the shares.
We have a history of operating losses and may never reach profitability.
With the exception of 1996, we have not been profitable since our inception
in 1986. As of December 31, we had an accumulated deficit of approximately
$111.0 million. We have not generated any revenue from product sales to date,
and it is possible that we will never have significant product sales revenue. We
expect to continue to incur losses for the next several years.
11
We are dependent on the successful outcome of the clinical trials for our two
most advanced product candidates, AMG 073 and ALX1-11.
Amgen, our collaborator, has conducted Phase II clinical trials for AMG
073, and we are currently conducting a pivotal Phase III clinical trial for
ALX1-11. Our success will depend, to a great degree, on the success of these and
subsequent clinical trials. Prior to receiving approval for commercialization,
we must demonstrate to the satisfaction of the FDA and comparable foreign
regulatory authorities that each of the product candidates are both safe and
efficacious. While no significant safety issues have emerged in Phase I and
Phase II clinical trials with respect to either of these candidates, we will
still need to demonstrate their efficacy for the treatment of the specific
indication as well as the product candidates' continued safety through the
conduct of Phase III clinical trials. The successful outcome of the Phase III
clinical trials will depend in part on our and Amgen's ability to successfully
complete enrollment in the clinical trials. To date, neither long term safety
nor efficacy has been demonstrated in clinical trials with either of these
product candidates. Accordingly, the results of future studies may indicate that
the candidates are unsafe, ineffective, or both, notwithstanding the results of
earlier clinical trials. If either or both of these products do not continue to
prove to be safe and are not shown to be efficacious to the satisfaction of the
FDA and comparable foreign regulatory authorities, our business would be
materially harmed and our stock price would be adversely affected.
The FDA has not approved any of our product candidates and we cannot assure you
that data collected from clinical trials of our product candidates will be
sufficient to support approval by the FDA, the failure of which could delay our
profitability and adversely impact our stock price.
Many of our research and development programs are at an early stage.
Clinical trials are long, expensive and uncertain processes. We cannot assure
you that the clinical trials will be commenced or completed on schedule, or that
the FDA will ultimately approve our product candidates for commercial sale.
Furthermore, even if the results of our preclinical studies or clinical trials
are initially positive, it is possible that we will obtain different results in
the later stages of drug development. Drugs in late stages of clinical
development may fail to show the desired safety and efficacy traits despite
having progressed through initial clinical testing. For example, positive
results in early Phase I or Phase II clinical trials may not be repeated in
larger Phase II or Phase III clinical trials. All of our potential drug
candidates are prone to the risks of failure inherent in drug development.
The clinical trials of any of our drug candidates could be unsuccessful,
which would prevent us from commercializing the drug. Our failure to develop
safe, commercially viable drugs would substantially impair our ability to
generate revenues and sustain our operations and would materially harm our
business and adversely affect our stock price.
If we fail to maintain our existing or establish new collaborative
relationships, or if our collaborators do not devote adequate resources to the
development and commercialization of our licensed drug candidates, we may have
to reduce our rate of product development and may not be able to achieve
profitability.
Our strategy for developing, manufacturing and commercializing our products
includes entering into various relationships with large pharmaceutical companies
to advance our programs. We have granted exclusive development,
commercialization and marketing rights to a number of our collaborators for some
of our key product development programs, including AMG 073, calcilytics, NPS
1776, ALX-0646, metabotropic glutamate receptors, glycine reuptake inhibitors
and excitatory amino acid receptors. Except in the case of AstraZeneca, our
collaborators have full control over those efforts in their territories, the
resources they commit to the program, and the success of the development and
commercialization of products in those programs depends on their efforts. Under
our collaboration with AstraZeneca for metabotropic glutamate receptor research,
we are required to co-direct the research and to pay for an equal share of the
research through a minimum of thirty months and perhaps for the full term of
sixty months. This commitment of personnel and capital may limit or restrict our
ability to initiate or pursue other research efforts. For us to receive any
significant royalty payments from our collaborators, they must establish the
safety and efficacy of our drug candidates, obtain regulatory approvals and
achieve market acceptance of those products.
We continue to evaluate whether to seek collaborators for ALX1-11 and ALX-
0600. We may not be able to negotiate further collaborative arrangements for
those or our other programs on acceptable terms, if at all. If we are not able
to establish additional collaborative arrangements, we will either have to delay
further development of these or other programs or increase our capital
expenditures and undertake the development activities at our own expense.
Collaborative agreements, including our existing agreements, pose the
following risks:
. our contracts with collaborators may be terminated and we may not be
able to replace them
. the terms of our contracts with our collaborators may not be favorable
to us in the future
. our collaborators may not pursue further development and
commercialization of compounds resulting from their collaborations
with us
12
. a collaborator with marketing and distribution rights to one or more
of our products may not commit enough resources to the marketing and
distribution of our products
. disputes with our collaborators may arise, leading to delays in or
termination of the research, development or commercialization of our
product candidates, or resulting in significant litigation or
arbitration
. contracts with our collaborators may fail to provide significant
protection if one or more of them fail to perform
. our collaborators could independently develop, or develop with third
parties, drugs that compete with our products
. we may be unable to meet our financial obligations under the
agreement.
There is a great deal of uncertainty surrounding the success of our current
and future collaborative efforts. If our collaborative efforts fail, our
business and financial condition would be materially harmed.
We may need additional financing, but our access to capital funding is
uncertain.
Our current and anticipated development projects, particularly our clinical
trial programs for ALX1-11and ALX-0600 require substantial additional capital.
We also have a contractual commitment to maintain our current level of funding
in our metabotropic glutamate receptor program for at least thirty months from
March 2001. We expect that our existing assets will sufficiently fund our
operations for at least the next 24 months. However, our future capital needs
will depend on many factors, including receiving milestone payments from our
collaborators and making progress in our research and development activities.
Our capital requirements will also depend on the magnitude and scope of these
activities, the progress and level of unreimbursed costs associated with
preclinical studies and clinical trials, the costs associated with acquisitions,
the cost of preparing, filing, prosecuting, maintaining and enforcing patent
claims and other intellectual property rights, competing technological and
market developments, changes in or terminations of existing collaboration and
licensing arrangements, and the establishment of additional collaboration and
licensing arrangements, particularly for ALX1-11 and ALX-0600. We do not have
committed external sources of funding and we cannot assure you that we will be
able to obtain additional funds on acceptable terms, if at all. If adequate
funds are not available, we may be required to:
. delay, reduce the scope of or eliminate one or more of our development
programs
. obtain funds through arrangements with collaborators or others that
may require us to relinquish rights to technologies, product
candidates or products that we would otherwise seek to develop or
commercialize ourselves
. license rights to technologies, product candidates or products on
terms that are less favorable to us than might otherwise be available
If funding is insufficient at any time in the future, we may not be able to
develop or commercialize our products, take advantage of business opportunities
or respond to competitive pressures.
We may be unable to obtain patents to protect our technologies from other
companies with competitive products, and patents of other companies could
prevent us from developing or marketing our products.
The patent positions of pharmaceutical and biotechnology firms are
uncertain and involve complex legal and factual questions. In addition, the
scope of the claims in a patent application can be significantly modified during
prosecution before the patent is issued. Consequently, we cannot know whether
our pending applications will result in the issuance of patents or, if any
patents are issued, whether they will provide us with significant proprietary
protection or will be circumvented or invalidated. Generally, patent
applications in the United States are maintained in secrecy until the patents
issue, and publication of discoveries in scientific or patent literature often
lags behind actual discoveries. In addition, we cannot assure you that, even if
published, we will be aware of all such literature. Accordingly, we cannot be
certain that the named inventors of our products and processes were the first to
invent that product or process or that we were the first to pursue patent
coverage for our inventions.
Moreover, we may have to participate in interference proceedings declared
by the U.S. Patent and Trademark Office to determine priority of invention,
which could result in substantial cost, even if the eventual outcome is
favorable to us. We cannot assure you that our pending patent applications, if
issued, would be held valid. Third parties may assert infringement or other
intellectual property claims against us based on their patents or other
intellectual property rights. An adverse outcome in these proceedings could
subject us to significant liabilities to third parties, require disputed rights
to be licensed from third parties or require us to cease or modify our use of
the technology. Additionally, many of our foreign patent applications have been
published as part of the patent prosecution process in such countries.
Protection of the rights revealed in published patent applications can be
complex, costly and uncertain.
The pursuit of patent applications is intensely competitive for therapeutic
products in our areas of research. A number of pharmaceutical companies,
biotechnology companies, universities and research institutions have filed
patent applications or received
13
patents in these and related fields. Some of these applications or patents may
limit or preclude our applications and could result in a significant reduction
in the coverage of our patents.
We also rely on trade secrets, know-how and confidentiality provisions in
our agreements with our collaborators, employees and consultants to protect our
intellectual property. However, these and other parties may not comply with the
terms of their agreements with us, and we might be unable to adequately enforce
our rights against these people or obtain adequate compensation for the damages
caused by their unauthorized disclosure or use.
We are subject to extensive government regulation that may cause us to cancel or
delay the introduction of our products to market.
Our research and development activities and the investigation, manufacture,
distribution and marketing of drug products are subject to extensive regulation
by governmental authorities in the United States, Canada and other countries.
Prior to marketing in the United States, a drug must undergo rigorous testing
and an extensive regulatory approval process implemented by the FDA under
federal law, including the Federal Food, Drug and Cosmetic Act. To receive
approval, we or our collaborators must, among other things, show the FDA that
the product is both safe and effective. Depending upon the type, complexity and
novelty of the product and the nature of the disease or disorder to be treated,
that approval process can take several years and require substantial
expenditures. Data obtained from testing are susceptible to varying
interpretations that could delay, limit or prevent regulatory approvals of our
products. Drug testing is subject to complex FDA rules and regulations,
including the requirement to conduct human testing on a large number of test
subjects. We, our collaborators or the FDA may suspend human trials at any time
if a party believes that the test subjects are exposed to unacceptable health
risks. Other countries, including Canada, also have extensive requirements
regarding clinical trials, market authorization and pricing. These regulatory
schemes vary widely from country to country, but, in general, are subject to all
of the risks associated with U.S. approvals.
If any of our products receive regulatory approval, the approval will be
limited to those disease states and conditions for which the product is useful,
as demonstrated through clinical trials. Furthermore, governmental approval may
subject us to ongoing requirements for post-marketing studies. Even if we obtain
governmental approval, a marketed product, its U.S. manufacturer and its
manufacturing facilities are subject to biannual inspections by the FDA and must
comply with the FDA's current Good Manufacturing Practices, or cGMP, and other
regulations. These regulations govern all areas of production, record keeping,
personnel and quality control, and are designed to insure full technical
compliance. If a manufacturer fails to comply with any of the manufacturing
regulations, it may be subject to, among other things, product seizures,
recalls, fines, injunctions, suspensions or revocations of marketing licenses,
operating restrictions and criminal prosecution. Other countries also impose
similar manufacturing requirements. We may discover previously unknown problems
with a product, manufacturer or facility that may result in restrictions on that
product or manufacturer, including costly recalls or withdrawals of the product
from the market.
As a result of intense competition and technological change in the
pharmaceutical industry, the marketplace may not accept our products and we may
not be able to compete successfully against other companies in our industry and
achieve profitability.
Many of our competitors have drug products that have already been approved
or are in development, and operate large, well-funded research and development
programs in these fields. For example, Hectoral(TM), a product of Bone Care
International, Inc. is being marketed as a treatment to relieve some symptoms of
secondary hyperthyroidism and may compete directly with AMG 073 if it is
approved. Also, GelTex Pharmaceuticals, Inc. is currently marketing RenaGel(TM),
which is a treatment for secondary hyperparathyroidism. Eli Lilly & Co. is
currently developing Forteo(TM), a fragment of the full-length parathyroid
hormone for the treatment of osteoporosis that will compete with our product
candidate, ALX1-11, if it is approved. In addition, many of our competitors have
greater financial resources, more effective marketing and sales, superior
intellectual property positions and substantially greater management resources
than we do. Existing and future products, therapies and technological approaches
will compete directly with our products. Competing products may provide greater
therapeutic benefits for a specific problem or may offer comparable performance
at a lower cost. Any products we develop may become obsolete before we recover
any expenses we incurred in connection with the development of these products.
As a result, we may never achieve profitability.
Because we do not have internal manufacturing facilities and rely on third-party
manufacturers, we are unable to control the availability of our products.
We rely on third-party manufacturers for the manufacture of most of the
products we use in our clinical trials and intend to rely on third-party
manufacturers to manufacture any products we sell. If we are unable to contract
for a sufficient supply of our products on acceptable terms, or if we encounter
delays and difficulties in our relationships with manufacturers, we may not have
sufficient product to conduct or complete our clinical trials, particularly in
the case of our Phase III clinical trials for ALX1-11, which could delay those
trials. A delay would set back our timetable for the submission of our products
for regulatory approval, market introduction and subsequent sales, and would
postpone revenues and profitability. Because we do not have or intend to develop
the capacity to manufacture ALX1-11, we intend to establish agreements with
third-party manufacturers for pre-launch supplies and for
14
commercial scale manufacturing of ALX1-11. Our third-party manufacturers may be
unable to manufacture ALX1-11 or any other products we develop in commercial
quantities on a cost-effective basis. We will need to expand our existing
relationships or establish new relationships with additional third-party
manufacturers for products that we commercialize or develop in the future. We
may be unable to establish or maintain relationships with third-party
manufacturers on acceptable terms. Our dependence on third parties may reduce
our profit margins and delay our ability to develop and commercialize our
products on a timely and competitive basis. Furthermore, third-party
manufacturers may encounter manufacturing or quality control problems in
connection with the manufacture of our products and may be unable to maintain
the necessary governmental licenses and approvals to continue manufacturing our
products.
Because we do not have sales, marketing or distribution capabilities, we may be
unable to market and sell our products and generate revenues.
We do not have any sales, marketing or distribution capabilities. We will
have to develop a sales force or rely on third parties to perform these
functions for any products we decide to commercialize. To market products
directly, we would have to develop a marketing and sales force with technical
expertise and supporting distribution capability. Our inability to establish in-
house sales and distribution capabilities or relationships with third parties
may limit our ability to generate revenues.
For example, if we are successful in our Phase III clinical trials with
ALX1-11, and the FDA grants approval for the commercialization of ALX1-11, we
will be unable to introduce the product to market without developing these
channels.
Because of the uncertainty of pharmaceutical pricing, reimbursement and
healthcare reform measures, we may be unable to sell our products profitably.
The availability of reimbursement by governmental and other third-party
payors affects the market for any pharmaceutical product. These third-party
payors continually attempt to contain or reduce the costs of healthcare. There
have been a number of legislative and regulatory proposals to change the
healthcare system and further proposals are likely. Under current guidelines,
Medicare does not reimburse patients for self-administered drugs. Medicare's
policy may decrease the market for our products that are designed to treat
patients with age-related disorders, such as hyperparathyroidism and
osteoporosis. In addition, third-party payors are increasingly challenging the
price and cost-effectiveness of medical products and services. Significant
uncertainty exists with respect to the reimbursement status of newly approved
healthcare products. We might not be able to sell our products profitably if
reimbursement is unavailable or limited in scope.
If we fail to attract and retain key employees and consultants, we may have to
delay the development and commercialization of our products.
We are highly dependent on the principal members of our scientific and
management staff. If we lose any of these persons, our ability to develop
products and become profitable could suffer. The risk of being unable to retain
key personnel may be increased by the fact that we have not executed long term
employment contracts with our employees. Our future success will also depend in
large part on our continued ability to attract and retain other highly qualified
scientific and management personnel. We face competition for personnel from
other companies, academic institutions, government entities and other
organizations.
If product liability claims are brought against us, we may incur substantial
liabilities that could reduce our financial resources.
The testing and commercial use of pharmaceutical products involves
significant exposure to product liability claims. The use of our product
candidates in clinical trials and the sale of our products following regulatory
approval may expose us to product liability claims. We have obtained limited
product liability insurance coverage for our clinical trials on humans.
Currently, we are conducting clinical trials with humans for a number of our
product candidates. Our insurance coverage may be insufficient to protect us
against product liability damages. We might not be able to obtain or maintain
product liability insurance in the future on acceptable terms or in sufficient
amounts to protect us against product liability damages. If we are required to
pay a product liability claim, we may not have sufficient financial resources to
complete development or commercialization of any of our products.
Our operations involve hazardous materials and we must comply with environmental
laws and regulations, which can be expensive and restrict how we do business.
Our research and development activities involve the controlled use of
hazardous materials, radioactive compounds and other potentially dangerous
chemicals and biological agents. Although we believe our safety procedures for
these materials comply with governmental standards, we cannot eliminate the risk
of accidental contamination or injury from these materials. If an accident or
environmental discharge occurs, we could be held liable for any resulting
damages, which could exceed our financial resources.
15
Our stock price has been and may continue to be volatile and your investment
could suffer a decline in value.
You should consider an investment in our common stock as risky and invest
only if you can withstand a significant loss and wide fluctuations in the market
value of your investment. We receive only limited attention by securities
analysts and frequently experience an imbalance between supply and demand for
our common stock. The market price of our common stock has been highly volatile
and is likely to continue to be volatile. Factors affecting our common stock
price include:
. fluctuations in our operating results
. announcements of technological innovations or new commercial products
by us, our collaborators or our competitors
. published reports by securities analysts
. the progress of our and our collaborators' clinical trials
. governmental regulation
. changes in medical and pharmaceutical product reimbursement policies
. developments in patent or other intellectual property rights
. publicity concerning the discovery and development activities by our
licensees
. public concern as to the safety and efficacy of drugs we and our
competitors develop
. general market conditions
Anti-takeover provisions in our certificate of incorporation, bylaws,
stockholders rights plan and under Delaware law may discourage or prevent a
change of control.
Provisions of our certificate of incorporation, bylaws and Section 203 of
the Delaware General Corporation Law could delay or prevent a change in control
of NPS. For example, our board of directors, without further stockholder
approval, may issue preferred stock that could delay or prevent a change in our
control as well as reduce the voting power of the holders of common stock, even
to the extent of losing control to others. In addition, our board of directors
has adopted a stockholder rights plan, commonly known as a "poison pill," that
may delay or prevent a change in control.
ITEM 2. Properties.
We have ongoing operations in both Salt Lake City, Utah and Toronto,
Ontario. In Salt Lake City, we lease approximately 54,000 square feet of
laboratory, support and administrative space in the University of Utah's
Research Park. That lease expires in September 2004, but may be extended for
three additional three-year terms. In Toronto, we own a building consisting of
approximately 90,000 square feet of laboratory, support, and administrative
space. We anticipate that we will not need to acquire additional space in order
to meet our needs over the next three years.
ITEM 3. Legal Proceedings.
From time to time, we are involved in certain litigation arising out of our
operations. We maintain liability insurance, including product liability
coverage, in amounts our management believes is adequate. We are not currently
engaged in any legal proceedings that we expect would materially harm our
business or financial condition.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to the stockholders during the fourth quarter of
2000.
Executive Officers of the Registrant.
The executive officers of the Company and their ages are as follows:
Name Age Position
- ---- --- --------
Hunter Jackson, Ph.D. 50 Chief Executive Officer, President and Chairman of the Board
David L. Clark 47 Vice President, Operations
N. Patricia Freston, Ph.D. 61 Vice President, Human Resources
James U. Jensen, J.D. 56 Vice President, Corporate Development and Legal Affairs,
16
Secretary and Director
Thomas B. Marriott, Ph.D. 53 Vice President, Development Research
Robert K. Merrell 45 Vice President, Finance, Chief Financial Officer and Treasurer
Alan L. Mueller, Ph.D 46 Vice President, Discovery Research
Edward F. Nemeth, Ph.D. 48 Vice President and Chief Scientific Officer
Hunter Jackson, Ph.D. has been Chief Executive Officer and Chairman of our
board since founding NPS in 1986. He was appointed to the additional position of
President in January 1994. Before founding NPS, he was an Associate Professor in
the Department of Anatomy at the University of Utah School of Medicine. Dr.
Jackson received a Ph.D. in Psychobiology from Yale University. He received
postdoctoral training in the Department of Neurosurgery, University of Virginia
Medical School.
David L. Clark has been Vice President, Business Development and Corporate
Communications since January 2000 and Vice President, Operations since March
2000. Before being appointed to these positions, he served as Director of
Business Development and Corporate Communications for us from September 1998 to
December 1999. He served as Director of Corporate Communications for us from
March 1996 to September 1998. From 1988 to 1996 he served as Vice President,
Business Development for Agridyne Technologies Inc., a publicly held
biotechnology company. Mr. Clark received an M.S. in Plant Genetics from the
University of Illinois. He received an M.B.A. from the University of Utah.
N. Patricia Freston, Ph.D. has been Vice President, Human Resources since
March 1997. From 1980 to February 1997, she served as Manager of Personnel
Services, Questar Corporation, a public integrated energy company. From 1977 to
1980, Dr. Freston was Assistant Director of Training for Mountain Fuel Supply, a
subsidiary of Questar. From 1971 to 1977, she was Director of Academic
Programming for the Division of Continuing Education, University of Utah. Dr.
Freston received a Ph.D. in Industrial Psychology from the University of Utah.
James U. Jensen, J.D. has been Vice President, Corporate Development and
Legal Affairs and Secretary since August 1991. He has been Secretary and a
director of NPS since 1987. From 1986 to July 1991, he was a partner in the law
firm of Woodbury, Jensen, Kesler & Swinton, P.C., or its predecessor firm,
concentrating on technology transfer and licensing and corporate finance. From
July 1985 until October 1986, he served as Chief Financial Officer of Cericor, a
software company. He serves as a director of Wasatch Funds, Inc., a registered
investment company, and of Interwest Home Medical, Inc., a public home use
medical equipment distributor. Mr. Jensen received a J.D. and an M.B.A. from
Columbia University.
Thomas B. Marriott, Ph.D. has been Vice President, Development Research
since August 1993. From February 1990 to July 1993, he served as Director,
Clinical Investigations for McNeil Pharmaceutical, a subsidiary of Johnson &
Johnson with responsibility for developing and implementing clinical trial
strategies for a number of products. From 1986 until 1990, Dr. Marriott was
Director, Drug Metabolism for McNeil Pharmaceutical with the responsibility for
planning, initiating and completing bioanalytical drug disposition and clinical
biopharmaceutics and pharmacokinetics research required for investigational new
drug applications and new drug applications. He received a Ph.D. in Chemistry
from the University of Oregon.
Robert K. Merrell has been Vice President, Finance, Chief Financial Officer
and Treasurer since January 1995 and served as Director of Finance and
Administration and Treasurer from December 1993 to December 1994. He joined NPS
as Controller/Treasurer in September 1988. Prior to that time, he was a Senior
Manager at KPMG LLP. Mr. Merrell has been a licensed C.P.A. since 1980. He
received an M.M. from Kellogg Graduate School of Management at Northwestern
University.
Alan L. Mueller, Ph.D., has been Vice President, Discovery Research since
January 2001. Before being appointed to that position, he served as Director,
Discovery Research for the Company from September 1999 to January 2001. He
joined NPS in February 1989 as a Senior Scientist. Prior to that time, he was a
Pharmacologist at Abbott Laboratories. Dr Mueller received a Ph.D. in
Pharmacology from the University of Colorado Health Sciences Center, Denver.
Edward F. Nemeth, Ph.D. has been a Vice President of NPS since January 1994
and was appointed Chief Scientific Officer in July 1997. He joined NPS as
Director of Pharmacology in March 1990. From 1986 until joining NPS, Dr. Nemeth
was an Assistant Professor in the Department of Physiology and Biophysics at
Case Western Reserve University School of Medicine. He received a Ph.D. in
Pharmacology from Yale University.
17
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is quoted on The Nasdaq Stock Market under "NPSP." The
exchangeable shares are traded on the Toronto Stock Exchange under the symbol
"NX." The following table sets forth the quarterly high and low closing sales
prices for NPS common stock for each quarter in the two most recent fiscal years
as reported by The Nasdaq Stock Market:
High Low
1999 First Quarter $ 7.500 $ 6.563
Second Quarter $ 8.625 $ 5.875
Third Quarter $ 8.000 $ 5.500
Fourth Quarter $12.500 $ 3.813
2000 First Quarter $29.750 $10.750
Second Quarter $26.750 $ 9.500
Third Quarter $56.563 $26.750
Fourth Quarter $52.375 $35.063
On March 1, 2001, there were approximately 365 holders of record of our
common stock, which includes 162 holders of exchangeable shares.
We have never declared or paid cash dividends on capital stock. We intend
to retain any future earnings to finance growth and development and therefore do
not anticipate paying cash dividends in the foreseeable future.
We have adopted a policy and implemented procedures allowing directors and
officers to effect sales of the Company's securities under SEC Rule 10b5-1.
Under this rule, directors and officers may adopt a prearranged contract,
instructions, or written plan arranging for the sale of Company securities on
specified conditions. To this effect, certain prearranged plans have already
been implemented.
ITEM 6. Selected Financial Data.
The selected consolidated financial data presented below are for each
fiscal year in the five-year period ended December 31, 2000, and for the period
from October 22, 1986 (inception) through December 31, 2000. This is derived
from, and qualified by reference to, NPS's audited consolidated financial
statements and notes thereto. NPS is considered a development stage enterprise
as described in note 1 of notes to consolidated financial statements.
Year Ended December 31, October 22, 1986
---------------------- (inception) through
2000 1999 1998 1997 1996 December 31, 2000
---- ---- ---- ---- ---- -----------------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues from research and
license agreements $ 7,596 $ 3,445 $ 3,568 $ 5,842 $20,342 $ 63,109
Operating expenses:
Research and development 27,888 16,935 17,856 15,090 11,326 119,456
General and administrative 12,036 5,983 5,546 5,587 5,111 47,052
Amortization of goodwill
and acquired intangibles 3,561 -- -- -- -- 3,561
In process research and
development acquired -- 17,760 -- -- -- 17,760
-------- -------- -------- -------- ------- ---------
Total operating expenses 43,485 40,678 23,402 20,677 16,437 187,829
Operating income (loss) (35,889) (37,233) (19,834) (14,835) 3,905 (124,720)
18
Other income, net 4,277 1,579 2,672 3,308 2,550 15,203
-------- -------- -------- -------- ------- ---------
Income (loss) before income
tax expense (31,612) (35,654) (17,162) (11,527) 6,455 (109,517)
Income tax expense -- -- -- 167 350 1,018
-------- -------- -------- -------- ------- ---------
Income (loss) before cumulative
effect of change in
accounting principle (31,612) (35,654) (17,162) (11,694) 6,105 (110,535)
Cumulative effect on prior years
(to December 31, 1999) of
changing to a different revenue
recognition method(1) (500) -- -- -- -- (500)
-------- -------- -------- -------- ------- ---------
Net income (loss) $(32,112) $(35,654) $(17,162) $(11,694) $ 6,105 $(111,035)
======== ======== ======== ======== ======= =========
Diluted income (loss) per share:
Income before cumulative effect
of change in accounting
principle $ (1.32) $ (2.77) $ (1.39) $ (0.98) $ 0.55
Cumulative effect on prior
years (to December 31, 1999) of
changing to a different revenue
recognition method (1) (0.02) -- -- -- --
-------- -------- -------- -------- -------
Net income (loss)
per share (2) $ (1.34) $ (2.77) $ (1.39) $ (0.98) $ 0.55
======== ======== ======== ======== =======
Diluted weighted average
shares outstanding (2) 24,007 12,863 12,337 11,956 11,086
Proforma amounts assuming
revenue recognition method
is applied retroactively:
Net income (loss) $(34,654) $(16,162) $(10,694) $ 7,105 $(111,035)
Diluted net income (loss)
per share $ (2.69) $ (1.31) $ (0.89) $ 0.64
___________________
(1) During the fourth quarter of 2000, the Company adopted Staff Accounting
Bulletin No. 101, Revenue Recognition (SAB No. 101). SAB No. 101 provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements. The result of the adoption of SAB No. 101 was to
reduce recognition of previously reported license fee revenues prior to
December 31, 1999 by $500,000 through a cumulative effect of accounting
change for the year ended December 31, 2000. These revenues were recognized
as income in the year ended December 31, 2000.
(2) See note 1 of notes to financial statements for information concerning the
computation of net income (loss) per share.
19
Year Ended December 31,
----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheets Data:
Cash, cash equivalents, and
marketable investment
securities $ 246,936 $ 35,679 $ 43,444 $ 57,942 $ 68,962
Working capital 244,712 32,532 40,767 56,365 67,413
Total assets 269,270 64,966 48,111 62,634 72,160
Long-term portion of capital
leases and long-term debt 54 1,940 32 65 327
Deficit accumulated during
development stage (111,035) (78,923) (43,269) (26,107) (14,413)
Stockholders' equity 265,340 56,079 45,146 60,319 69,870
Quarterly Financial Data (Unaudited)
Quarter Ended
December 31 September 30 June 30 (1) March 31 (1)
----------- ------------ ------- --------
2000
- ----
Revenue from research and license
agreements $ 1,788 $ 1,654 $ 1,957 $ 2,196
Operating loss (8,854) (8,616) (8,207) (10,213)
Loss before cumulative effect of change
in accounting principle (6,210) (7,383) (7,434) (10,585)
Net loss (6,210) (7,383) (7,434) (11,085)
Basic and diluted loss per common and
common share equivalent: (2)
Loss before cumulative effect of change
in accounting principle $ (0.22) $ (0.30) $ (0.32) $ (0.53)
Net loss $ (0.22) $ (0.30) $ (0.32) $ (0.56)
1999
- ----
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Revenue from research and license
agreements $ 700 $ 915 $ 915 $ 915
Operating loss (20,536) (5,024) (5,500) (6,173)
Net loss (20,219) (4,671) (5,006) (5,758)
Basic and diluted loss per common and
common share equivalent: (2)
Net loss $ (1.50) $ (0.37) $ (0.40) $ (0.46)
Proforma amounts assuming the new
revenue recognition method is applied
retroactively:
Net loss $(19,969) $(4,421) $(4,756) $ (5,508)
Basic and diluted loss per common and
common equivalent share $ (1.48) $ (0.35) $ (0.38) $ (0.44)
___________________
(1) The first and second quarter financial data of 2000 have been restated to
reflect the Company's adoption of SAB No. 101 in the fourth quarter of
2000. The third quarter of 2000 was not impacted by the change.
(2) Earnings per share are computed independently for each of the quarters
presented and therefore may not sum to the total for the year.
20
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
You should read this discussion together with the consolidated financial
statements and notes thereto included elsewhere in this report.
Overview
We discover, develop and intend to commercialize small molecule drugs and
recombinant proteins, primarily for bone and mineral disorders and central
nervous system disorders. We have five drugs in clinical development and several
preclinical product candidates. Our two most advanced product candidates focus
on bone and mineral disorders. They are AMG 073, which has completed a series of
Phase II clinical trials for treatment of hyperparathyroidism, and ALX1-11,
which is in a pivotal Phase III clinical trial for treatment of post-menopausal
osteoporosis.
On December 23, 1999 we acquired all of the outstanding common stock of
Allelix, a biopharmaceutical company based in Ontario, Canada for 6,516,923
shares of our common stock and assumed options and warrants for the issuance of
an additional 675,520 shares of our common stock. The acquisition was accounted
for under the purchase method of accounting, with an effective date of December
31, 1999. Accordingly, operating results of Allelix are only included in our
consolidated statements of operations for periods after that date. We did,
however, record an expense of $17.8 million in 1999 for in-process research and
development that we acquired as part of our purchase of Allelix.
Substantially all of our resources are devoted to our research and
development programs. To date, we have not completed the development of any
pharmaceutical product for sale. We have incurred cumulative losses through
December 31, 2000 of approximately $111.0 million, net of cumulative revenues
from research and license agreements of approximately $63.1 million. We expect
to incur significant operating losses over at least the next several years as we
continue to expand our clinical trials and research activities. In particular,
we recently initiated an 1,800 to 2,000 patient Phase III clinical trial for
ALX1-11, and expect to expend a significant portion of our resources on the
development of this product.
Results of Operations
Revenues
Substantially all our revenues have come from license fees, milestone
payments, and research and development support payments from our licensees and
collaborators. These revenues fluctuate from year to year. All of the research
and development support payments under our existing license or collaborative
agreements expired in 2000. Our revenues were $7.6 million in 2000, $3.4 million
in 1999, and $3.6 million in 1998. We recognized revenue from our agreements as
follows:
. Under our agreement with GlaxoSmithKline we recognized $1.8 million in
2000, $2.0 million in 1999, and $2.2 million in 1998;
. Under our agreement with Kirin, we recognized $1.0 million in each of
2000, 1999, and 1998;
. Under our agreement with Amgen we recognized $400,000 in each of 2000,
1999, and 1998;
. Under our agreement with Forest, we recognized $200,000 in 2000 and
nothing in each of 1999 and 1998;
. Under our agreement with Lilly Canada, we recognized $1.7 million in
2000, and nothing in each of 1999 and 1998;
. Under our agreement with Janssen Parmaceutica, N.V., we recognized $1.9
million in 2000, and nothing in each of 1999 and 1998; and
. Under our agreement with Technology Partnership Canada, we recognized
$404,000 in 2000 and nothing in each of 1999 and 1998.
The increases in revenues in 2000 were primarily due to revenues from
license agreements we acquired as a result of our purchase of Allelix. In
addition, we received a $1.0 million one-time milestone payment from
GlaxoSmithKline. See "Liquidity and Capital Resources" below for further
discussion of payments that we may earn in the future under these agreements.
Operating Expenses
Research and Development Expenses. Our research and development expenses
arise primarily from the compensation and other related costs of our personnel
who are dedicated to research and development activities and from the fees paid
to outside professionals to conduct clinical studies and trials. Our research
and development expenses increased to $27.9 million in 2000 from $16.9 million
in 1999 after a decrease from $17.9 million in 1998. The decrease in research
and development expenses from 1998 to 1999 was principally due to the completion
of Phase 1 clinical trials for NPS 1776 in mid-1999. The increase in research
and development expenses from 1999 to 2000 is principally due to the
commencement of a pivotal Phase III clinical trial for ALX1-11 and
21
a pilot Phase II clinical trial from ALX-0600, two product candidates that we
acquired as a result of our acquisition of Allelix. We have the right to be
reimbursed under our agreement with Technology Partnerships Canada, or TCP, for
a portion of our research and development expenses for ALX-0600. We expect
research and development expenses to increase as these clinical trials progress
and as we begin to manufacture ALX1-11 for market launch. We may incur
additional research and development expenses if we start other clinical trials,
or if we acquire new technologies, product candidates, or companies.
General and Administrative Expenses. Our general and administrative
expenses consist primarily of the costs of our executive management, finance and
administrative staff, business insurance, taxes and professional fees. Our
general and administrative expenses increased to $12.0 million in 2000 from $6.0
million in 1999 and $5.5 million in 1998. The increase in general and
administrative expenses was primarily the result of increased costs of our
operations including our recently acquired subsidiary, NPS Allelix, and a charge
of $990,000 for compensation expense for stock options held by management that
vested on the signing of a license agreement in 2000. We expect that general and
administrative expenses in the future will equal or exceed the amount for 2000
in order to support operations in Canada and the U.S. and pre-launch
commercialization costs for product candidates.
Amortization of Goodwill and Acquired Intangibles. We are required to
amortize goodwill and other acquired intangibles as a result of our December 23,
1999 acquisition of Allelix. The remaining intangible assets at December 31,
2000 total approximately $14.9 million. We are amortizing these assets over
their expected lives, which range from two to six years. We recorded
amortization expense of $3.6 million in 2000. We did not record any amortization
of goodwill and acquired intangibles in 1999 and 1998, since the effective date
of the Allelix acquisition for accounting purposes was December 31, 1999.
In-Process Research and Development Acquired. We recorded an expense of
$17.8 million in 1999 for in-process research and development that we acquired
as part of our purchase of Allelix. The acquired in-process research and
development consisted of five drug development programs. The two most advanced
product candidates, ALX1-11, for osteoporosis, and ALX-0600, for
gastrointestinal disorders, accounted for 83% of the total value of the acquired
in-process research and development.
We determined the fair value assigned to the in-process research and
development by estimating the total costs to develop the product candidates into
commercially viable products (i.e., to obtain FDA approval). We then discounted
the projected net cash flows related to these product candidates back to their
present value using a risk-adjusted discount rate. At the date of the
acquisition, the product candidates had not yet received FDA approval and had no
alternative future uses.
Since the date of the acquisition, we revised our plans for the next series
of clinical trials for ALX1-11 and ALX-0600. We started a pivotal Phase III
clinical trial with ALX1-11, which we expect will include an 18-month course of
treatment in 1,800 to 2,000 patients with osteoporosis. We also started
enrolling a small number of patients with short bowel syndrome in a pilot Phase
II clinical trial with ALX-0600. Since the date of acquisition and through
December 31, 2000, we have incurred development costs of approximately $13.7
million for ALX1-11 and $1.3 million for ALX-0600. Total development costs and
time-to-completion for each of these product candidates will depend on the costs
we incur to conduct current clinical trials and any additional testing we find
necessary to obtain FDA approval.
We believe the assumptions we used in the valuation of the in-process
research and development we acquired from Allelix were reasonable at the time of
the acquisition. However, we have modified our development plans as new data
have become available regarding each product candidate. Accordingly, actual
results may vary from the projected results in the valuation.
Other Income (Expense)
Interest Income. Interest income was $4.8 million in 2000, $1.8 million in
1999, and $2.4 million in 1998. The increase from 1999 to 2000 is the result of
higher average balances of cash, cash equivalents, and marketable investment
securities. These balances increased primarily due to cash received from a
private placement offering of 3.9 million common shares of the Company which was
completed in February 2000 and closed in April 2000, and from a follow-on
offering of 4.6 million shares of the Company which was completed in November
2000. We expect that interest income will be higher in 2001 due to higher
average cash, cash equivalents, and marketable investment security balances for
the year resulting from these offerings. However, we anticipate that interest
income will decrease in the future as cash is utilized for operations.
Loss on Disposition of Equipment, Leasehold Improvements, and Leases. Loss
on the disposition of equipment, leasehold improvements, and leases was $1.1
million in 2000, $131,000 in 1999, and zero in 1998. The increase in the loss
from 1999 to 2000 is primarily due to a non-cash loss of approximately $1.2
million in 2000 associated with closing a facility in New Jersey that we
acquired as part of the acquisition of Allelix in December 1999. We anticipated
at the time of the acquisition that we would sublease the facility for the
remaining nine-year term of our lease obligation and retain the existing
leasehold improvements. However, we were able to negotiate a release of our
obligation from the landlord subject to our forfeiting the leasehold
improvements and certain office
22
furniture and equipment which had a net book value of approximately $1.2
million. We expect that the loss on disposition of equipment, leasehold
improvements, and leases in the future to be immaterial.
Cumulative Effect on Prior Years (to December 31, 1999) of Changing to a
Different Revenue Recognition Method. During the fourth quarter of 2000, we
adopted Staff Accounting Bulletin No. 101, Revenue Recognition (SAB No. 101).
SAB No. 101 provides guidance on the recognition, presentation, and disclosure
of revenue in financial statements. Under our previous accounting policy,
revenues from nonrefundable licensing fees were recognized when received when we
had no further obligations relative to such licensing fees. In compliance with
SAB No. 101, we now recognize revenues from nonrefundable licensing fees over
the continuing involvement period with each licensee. The adoption of SAB No.
101 resulted in an increase in operating income of $500,000 and no change in the
net loss for the year ended December 31, 2000. Prior-year financial statements
have not been restated to reflect the change in accounting principle.
Taxes. As of December 31, 2000 we had a U.S. federal income tax net
operating loss carryforward of approximately $77.5 million and a U.S. federal
income tax research credit carryforward of approximately $4.8 million. We also
had a Canadian federal and provincial income tax net operating loss carryforward
of approximately $7.1 million and $10.9 million, respectively, a Canadian
research pool carryforward of approximately $86.0 million and a Canadian
investment tax credit carryforward of approximately $3.8 million. Our ability to
utilize the U.S. operating loss and credit carryforwards against future taxable
income will be subject to annual limitations in future periods pursuant to the
"change in ownership rules" under Section 382 of the Internal Revenue Code of
1986.
Liquidity and Capital Resources
We have financed our operations since inception primarily through
collaborative research and license agreements and the private and public
placement of our equity securities. As of December 31, 2000, we had recognized
$63.1 million of cumulative revenues from payments for research support and
license fees and $325.7 million from the sale of equity securities for cash. The
sale of equity securities includes $7.1 million received from the exercise of
options during 2000, $43.3 million, net, from the sale of 3.9 million shares of
common stock we closed in April 2000, $180.7 million net, from the sale of 4.6
million shares of common stock we completed in November 2000, $2.0 million from
the sale of 168,492 shares of common stock under the terms of an agreement with
an existing corporate licensee during May 2000, $136,000 from the sale of common
stock under the terms of our Employee Stock Purchase Plan, and $4.2 million from
the exercise of warrants to acquire 264,650 shares of exchangeable shares of the
Company's wholly-owned subsidiary, NPS Allelix Inc. The exchangeable shares may
be exchanged into the Company's common shares at any time. Our principal sources
of liquidity are cash, cash equivalents, and marketable investment securities,
which totaled $246.9 million at December 31, 2000.
Net cash used in operating activities was $24.4 million for the year ended
December 31, 2000 compared to $18.1 million and $14.9 million for the years
ended 1999 and 1998, respectively. Net cash used in investing activities was
$93.2 million for the year ended December 31, 2000 compared to $5.8 million and
$900,000 provided by investing activities for the years ended December 31, 1999
and 1998, respectively. Net cash provided by financing activities was $235.4
million for the year ended December 31, 2000 compared to $1.8 million and $1.4
million for the years ended December 31, 1999 and 1998, respectively. The
decrease in cash flows from operating activities in 2000 was due primarily to
the first full year of operations for NPS Allelix Corp., our Canadian
subsidiary, which was acquired in late December 1999. The Allelix transaction
was accounted for as a purchase and the subsidiary's operations were therefore
not included in the years