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, 1997
[_] 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 OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
420 CHIPETA WAY, SALT LAKE CITY, UTAH 84108-1256
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(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 $86,364,224 as of February 27, 1998, based
upon the closing price of $8.125 for the shares of the Company's Common Stock
reported on The Nasdaq Stock Market on such date./1/
The number of shares of Common Stock outstanding as of February 27, 1998 was
12,259,610.
----------------
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 20, 1998, which will be filed with the
Securities and Exchange Commission.
- --------
/1/ Excludes 1,630,167 shares of Common Stock held by directors and officers as
of February 27, 1998. 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, AS
AMENDED (THE "EXCHANGE ACT"). SUCH STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH 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.
THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE UPDATES OR REVISIONS
TO THESE STATEMENTS.
PART I
ITEM 1. BUSINESS.
GENERAL
NPS Pharmaceuticals, Inc. ("NPS" or the "Company") is engaged in the
discovery and development of prescription drugs that are intended to be active
on selected biological targets, including cell surface receptors, ion
channels, and other metabolic pathways. The Company's three most advanced
programs focus on the development of small molecule drugs for the treatment of
hyperparathyroidism ("HPT"), osteoporosis and for neuroprotection in stroke
and head trauma. The HPT and osteoporosis programs arose from the Company's
pioneering work on a cell surface receptor termed the calcium receptor or the
"calcium sensing receptor." This receptor detects levels of extracellular
calcium and is involved in numerous bodily functions. NPS's neuroprotection
program is based on the Company's work on small molecules with novel
characteristics in their activity at the NMDA subtype of glutamate receptor-
operated calcium channels. Additionally, the Company is pursuing several
discovery programs that are extensions of its research in calcium receptors
and ion channels, and is actively considering other late-stage development
candidates for potential in-license or collaboration opportunities.
In the field of HPT, NPS has established a research collaboration and
license arrangement with the Pharmaceutical Division of Kirin Brewery Company,
Ltd. ("Kirin") and a development and license arrangement with Amgen Inc.
("Amgen"). In the field of osteoporosis, the Company has established a
research collaboration and license arrangement with SmithKline Beecham
Corporation ("SmithKline Beecham"). Kirin, Amgen and SmithKline Beecham are
referred to herein as the "licensees." The licensees are responsible for all
costs of product development in their respective territories and fields. As
part of these arrangements, the licensees have paid to NPS an aggregate of
$21.0 million in non-refundable license fees. Amgen, SmithKline Beecham, and
S.R. One, Limited, an affiliate of SmithKline Beecham ("S.R. One") have also
paid the Company an aggregate of $16.5 million for purchases of the Company's
Common Stock. SmithKline Beecham is required to purchase an additional 453,000
shares of the Company's Common Stock by December 1999 if the research
agreement is not terminated earlier. In addition, the licensees have made or
have agreed to make up to an aggregate of $56.0 million in contingent
milestone payments, of which $7.0 million has been paid to the Company through
December 31, 1997. The licensees are also obligated to pay research and/or
development support payments to the Company under certain circumstances.
Approximately $11.5 million has been paid to the Company for such support
through December 31, 1997. Each of the licensees is obligated to pay royalties
to NPS upon relevant product sales. See "Risk Factors--Dependence on
Collaborative Research and Licensee Relationships" and "Business--
Collaborative Research and License Agreements."
HPT is a growing medical concern and is typically characterized as being
either primary or secondary. Primary HPT is an age-related disorder that
results from excessive secretion of parathyroid hormone ("PTH"), leading to
elevated levels of calcium in the blood. Symptoms may include bone loss,
muscle weakness, depression, and cognitive dysfunction. There are currently no
pharmaceutical therapies for the treatment of major symptoms of primary HPT,
with surgery in severe cases being the only effective treatment. Secondary HPT
results from other disease states which are accompanied by excessive secretion
of PTH. Secondary HPT is most
1
often associated with renal dysfunction. Symptoms of secondary HPT include
excessive bone loss, bone pain, and chronic, severe itching. The Company
believes that current drug therapy treatments for symptoms of secondary HPT,
such as phosphate binders and calcitriol, have certain disadvantages. See
"Product Development Programs--Hyperparathyroidism Program."
Prior to entering into the arrangements with Kirin and Amgen, the Company
had initiated and conducted four clinical trials of the Company's initial drug
candidate NPS R-568 in the United States. Under the Amgen agreement, on March
18, 1996, Amgen acquired full authority and assumed full responsibility for
the further development and commercialization of a drug for HPT in its
territory. Amgen has informed the Company that it has since concluded dosing
in a Phase II clinical trial using NPS R-568 in secondary HPT patients
(patients on kidney dialysis) and is analyzing the data from that trial.
Additionally, Amgen has announced publicly that it has commenced a Phase I
safety trial of a second generation compound, with more favorable metabolism
and kinetic profiles, licensed from the Company and directed toward the
treatment of HPT. Effective June 30, 1995, Kirin acquired full authority and
assumed full responsibility for the development of a calcimimetic drug program
for HPT in Japan, China (including Hong Kong), North and South Korea, and
Taiwan. Kirin commenced a Phase II clinical trial of NPS R-568 in Japan in
December 1997 for which the Company earned a $2.0 million milestone payment.
NPS is working with Amgen and Kirin to discover, identify, and characterize
backup and second generation compounds for the treatment of HPT. There can be
no assurance that the clinical trials will proceed as indicated or that a drug
for the treatment of HPT will prove safe and effective, meet applicable
regulatory standards or be successfully marketed. See "Risk Factors--Early
Stage of Product Development" and "Risk Factors--Dependence on Collaborative
Research and Licensee Relationships."
In conjunction with SmithKline Beecham, NPS is also applying its calcium
receptor technology to discover, identify, and characterize orally active
therapeutics for the treatment of osteoporosis. Osteoporosis is an age-related
disorder affecting more than 200 million people worldwide and is characterized
by reduced bone density and an increased susceptibility to fractures. Among
the elderly in particular, osteoporosis is a major cause of morbidity and
mortality. Earlier, the Company pursued two approaches for the treatment of
osteoporosis, stimulation of bone formation and suppression of bone
resorption. The Company is now focused solely on the stimulation of bone
formation. Most osteoporosis patients are first diagnosed only after they have
already lost significant bone mass. As a result, the Company believes that a
therapy that not only halts further bone loss, but that also builds new bone,
would constitute a significant advancement in the treatment of osteoporosis.
Under its collaboration with SmithKline Beecham, research efforts are being
conducted by NPS and SmithKline Beecham seeking small molecules which will
stimulate bone formation. In January 1996, the Company earned a milestone
payment of $3.0 million from SmithKline Beecham for progress made in its
osteoporosis program. In November 1997, the term of the research support
obligation of SmithKline Beecham was extended for an additional period of up
to three years.
The Company is developing a chosen lead compound, called NPS 1506, from a
new class of compounds which modulate certain calcium channels for
neuroprotection in stroke and head trauma. The influx of calcium through
glutamate receptor-operated calcium channels has been linked to a number of
neurological disorders, including nerve cell death following stroke and head
trauma. The Company's proprietary compounds antagonize the NMDA (N-methyl-D-
aspartate) subtype of glutamate receptor-operated calcium channels ("NMDA
receptor-operated calcium channels"), thereby reducing the influx of calcium.
The Company believes that these compounds work through a novel mechanism and
exhibit potentially advantageous pharmacological properties. These compounds
demonstrated neuroprotectant activity in preclinical animal models of stroke
and head trauma. In July 1997, the Company commenced Phase I clinical trials
for NPS 1506 in healthy male volunteers. The trials are presently ongoing. The
Company expects to announce results of these trials, as well as results from
preclinical studies, in the first half of 1998. The Company continues to
formulate its clinical development plan and expects to begin safety studies in
stroke patients in the first half of 1998. There can be no assurance that NPS
1506 or any of the other lead compounds will advance through clinical
development, will prove safe and effective, meet applicable regulatory
standards, or be successfully marketed. See "Risk Factors--Early Stage of
Product Development."
2
The Company is also actively engaged in several discovery programs that seek
to identify molecular targets for the development of new drugs. Among these,
the Company believes it has made significant discoveries with regard to novel
forms of metabotropic glutamate receptors ("mGluRs"), and has identified small
molecules active at these receptors. The Company believes that drugs acting at
specific mGluRs may provide relevant therapies for a number of neurological
disorders.
PRODUCT DEVELOPMENT PROGRAMS
The Company's primary product development programs are centered around its
calcium receptor technology. Clinical development of orally active compounds
that target calcium receptors as drug therapies for HPT is being advanced by
two licensees in separate territories; by Kirin, NPS's collaborator and
licensee for Japan, China (including Hong Kong), North and South Korea, and
Taiwan and by Amgen, the Company's licensee for the rest-of-the world.
Together with SmithKline Beecham, the Company is pursuing orally active
compounds targeting calcium receptors as drug therapies for osteoporosis. The
Company is also pursuing in the clinic active compounds that target NMDA
receptor-operated calcium channels as neuroprotectants to reduce neurological
damage associated with stroke or head trauma. Additionally, the Company is
seeking to in-license late-stage technologies in an effort to increase its
preclinical and clinical product development portfolio.
Calcium levels in the blood are tightly regulated. The Company's calcium
receptor technology represents a novel method of regulating circulating
calcium levels. Calcium receptors are the basis of a newly discovered
mechanism by which certain cells detect and respond to small changes in the
level of extracellular calcium. One key role of calcium receptors is to
regulate secretion of PTH and calcitonin, two hormones that play opposing
roles in bone and mineral metabolism. The Company believes that manipulation
of PTH levels could be beneficial in the treatment of various disorders, such
as HPT and osteoporosis. The Company has utilized its expertise in certain
functional screening technologies and its proprietary recombinant cell lines
in an effort to discover and develop orally active compounds that can directly
manipulate the circulating levels of PTH by modulating the activities of
calcium receptors. Compounds that mimic or potentiate the effect of
extracellular calcium at calcium receptors are referred to as "calcimimetics"
(agonists) while those that block the effect of calcium at such receptors are
referred to as "calcilytics" (antagonists).
NMDA receptor-operated calcium channels play critical roles in normal
excitatory neurotransmission and are also recognized for their major role in
events that lead to much of the neurological damage associated with stroke and
with head trauma. Several pharmaceutical companies have recognized the
potential of NMDA receptor-operated calcium channels as molecular targets.
These companies have begun development of drugs to treat neurological
disorders and have identified various lead compounds but no such drug has
successfully completed clinical trials nor been marketed. Work in this field
is all the more challenging because NMDA receptor-operated calcium channels
are also the site of action of phencyclidine ("PCP" or "angel dust"), and most
clinically tested compounds that target NMDA receptor-operated calcium
channels exhibit undesirable PCP-like side effects (e.g. inducing symptoms of
psychosis). NPS 1506 has not exhibited PCP-like effects in a variety of in
vitro and in vivo studies in animals intended to identify PCP-like effects.
3
The following chart summarizes the Company's product development programs:
DEVELOPMENT PROGRAM MOLECULAR TARGET COMPOUND/STATUS COMMERCIAL RIGHTS
------------------- ---------------- --------------- -----------------
HYPERPARATHYROIDISM(1)
Primary HPT Parathyroid calcium NPS R-568/Phase II; Amgen, Kirin
receptor (calcimimetics) Second Generation
Compound/Phase I;
Searching for and
evaluating later
generation
compounds(2)
Secondary HPT Parathyroid calcium NPS R-568/Phase II; Amgen, Kirin
receptor (calcimimetics) Second Generation
Compound/Phase I
Searching for and
evaluating later
generation
compounds(2)
OSTEOPOROSIS
Stimulation of bone Parathyroid calcium Preclinical Research(3) SmithKline
formation receptor (calcilytics) Beecham/NPS(4)
NEUROPROTECTION
Stroke, Head Trauma NMDA receptor-operated NPS 1506/Phase I(5) NPS
calcium channel
- --------
(1) Amgen and Kirin have assumed full authority and responsibility for
development and commercialization of NPS R-568 and later generation
compounds relating to HPT. The Company continues to work with Amgen and
Kirin on identification of later generation compounds.
(2) See "Business--Hyperparathyroidism Program--Development Status."
(3) "Preclinical Research" refers to one or more active compounds or series of
related active compounds that have met predetermined activity criteria in
various in vitro and/or in vivo models. More extensive evaluation of lead
compounds is undertaken to determine if they have the requisite properties
to enter preclinical development.
(4) NPS has certain co-promotion rights in the United States. See "Business--
Collaborative Research and License Agreements--SmithKline Beecham
Corporation."
(5) See "Business--Neuroprotection Program--NPS 1506--Development Status."
Hyperparathyroidism Program
Overview. HPT is a growing medical concern. It is typically characterized as
being either primary or secondary. Primary HPT is an age-related disorder that
results from excessive secretion of PTH. PTH acts in the kidney and on bone to
elevate the levels of calcium in the blood. Symptoms may include bone loss,
muscle weakness, depression, and cognitive dysfunction. Approximately 100,000
new patients are diagnosed with primary HPT in the United States each year.
There are currently no pharmaceutical therapies for the treatment of primary
HPT. In severe cases surgical removal of the affected parathyroid gland(s)
from the neck region is presently the only effective treatment.
Secondary HPT results from other disease states and is most often associated
with renal dysfunction. Symptoms of secondary HPT include excessive bone loss,
bone pain, and chronic, severe itching. Studies have also shown that secondary
HPT develops early in the course of renal failure, before patients start
dialysis. Current treatments for secondary HPT involve drug therapy with
phosphate binders and/or calcitriol. The Company believes that these therapies
have certain disadvantages. For example, phosphate binders are not well
tolerated
4
by many people and calcitriol often leads to hypercalcemia and
hyperphosphatemia, which can exacerbate the underlying disease. In severe
cases, surgery may be required to remove all or some of the parathyroid
glands.
The results of the research and preclinical and clinical trials conducted by
the Company and its licensees, Kirin and Amgen, have led the Company to
believe that calcimimetic compounds (calcium receptor agonists) could prove to
be effective in treating both types of HPT. NPS is no longer conducting
clinical trials in this field. Amgen and Kirin are now conducting further
clinical trials to confirm this conclusion. The Company has entered into
agreements with Amgen and Kirin relating to the development and
commercialization of calcimimetic compounds for HPT. See "Business--
Collaborative Research and License Agreements."
Development Status. Prior to entering into the respective agreements with
Amgen and Kirin, the Company had commenced clinical trials of the initial
product candidate, NPS R-568, in the United States. These trials included two
Phase I safety and tolerance studies, a multisite, Phase I/II study in women
with mild primary HPT and a pilot Phase I/II study in kidney dialysis patients
with secondary HPT. In October 1996, Kirin initiated clinical trials for NPS
R-568 in Japan and commenced a Phase II clinical trial in primary HPT with NPS
R-568 in December 1997. Amgen has concluded dosing in a Phase II study of NPS
R-568 in dialysis patients. As a result of more favorable metabolism and
kinetic profiles, second generation calcimimetic compounds have been screened
and evaluated. A Phase I safety trial of a second generation compound chosen
by Amgen was commenced in 1997 and is ongoing. NPS is actively working with
Amgen and Kirin to discover, identify, and characterize second generation
compounds. Each compound that might be considered by Amgen and Kirin is
subject to the same contractual provisions governing development and to the
same royalty and milestone obligations as NPS R-568. There can be no assurance
that clinical trials will proceed as indicated or that NPS R-568 or any other
compound will prove safe and effective, meet applicable regulatory standards,
or be successfully marketed. See "Risk Factors--Early Stage of Product
Development" and "Risk Factors--Dependence on Collaborative Research and
Licensee Relationships."
Osteoporosis Program
Overview. Osteoporosis is an age-related disorder that affects more than 200
million people worldwide and is characterized by reduced bone density and an
increased susceptibility to fractures. Osteoporosis is a major cause of
morbidity and mortality among the elderly.
Throughout life, bone undergoes constant remodeling that involves anabolic
processes leading to bone formation and catabolic processes leading to bone
resorption. The balance between these two types of processes determines
whether there is net bone loss, net bone formation, or no net change. In
osteoporosis, this balance has shifted in favor of bone resorption, resulting
in net bone loss.
Current drugs approved for the treatment of osteoporosis include estrogen,
injectable calcitonin, and alendronate (a bisphosphonate). These drugs are
antiresorptives and act to suppress bone resorption. The Company believes that
each of these therapies presents one or more disadvantages. For example, use
of estrogen is believed to be associated with increased risk of breast cancer,
calcitonin is expensive and cannot currently be administered orally, and
bisphosphonates have been associated with side effects such as
gastrointestinal distress. In contrast to bone suppression, anabolic agents
stimulate new bone formation. While no anabolic agents are currently available
for the treatment of osteoporosis, the Food and Drug Administration ("FDA")'s
Endocrinologic and Metabolic Drugs Advisory Committee has recommended that
slow release fluoride, an anabolic agent, be approved for the treatment of
osteoporosis in postmenopausal patients who have suffered a fracture.
Most osteoporosis patients are first diagnosed after they have already lost
significant bone mass. As a result, the Company believes that a therapy that
not only halts further bone resorption but also builds new bone would
constitute a significant advancement in the treatment of osteoporosis. Under
its collaboration with SmithKline Beecham, preclinical research efforts are
being conducted by NPS and SmithKline Beecham seeking small molecules which
will stimulate intermittent increases in PTH secretion thereby stimulating
bone formation.
5
Bone Formation. NPS's primary approach to the treatment of osteoporosis is
currently focused on calcilytic compounds (calcium receptor antagonists) that,
in contrast to calcimimetic compounds, stimulate secretion of PTH. The Company
believes that this novel approach, which is intended to manipulate the body's
own PTH reserves, could provide an effective anabolic therapy for
osteoporosis, stimulating new bone formation to replace bone that has already
been lost to the disease.
While chronically high levels of PTH are known to cause bone loss as in HPT,
normally PTH levels fluctuate daily and this is thought to play a key role in
regulating the balance between bone resorption and bone formation. Recent
studies in animals and in humans by other organizations have shown that
frequent (usually daily) injections of exogenous PTH that are sufficient to
cause a transient increase in circulating PTH levels, resulting in significant
stimulation of new bone formation. Several published animal studies have
evaluated the structural integrity of the newly formed bone and have found
that the increases in bone mass achieved with PTH injections are accompanied
by improvements in biomechanical strength and in certain indices of bone
structure thought to be related to biomechanical strength.
Although the anabolic effects of PTH on bone were first noted over sixty
years ago, evaluation of the therapeutic potential of PTH treatment has only
recently begun. Because of its potential as an effective anabolic therapy for
osteoporosis, certain other companies are currently conducting clinical trials
of injectable PTH or PTH analogs for treating osteoporosis. However, PTH is
currently expensive to manufacture and cannot be administered orally. The
Company believes that orally administered, calcilytic drugs that act on the
parathyroid cell calcium receptor to increase PTH release from the body's own
PTH reserves could provide a cost-effective means of intermittently increasing
PTH levels and could lead to greater patient compliance and therefore greater
acceptance.
The Company has demonstrated in in vivo animal studies that intermittent
increases in circulating levels of PTH can be obtained by regulating the
activity of calcium receptors on the parathyroid cells with proprietary small
molecules. Increased levels of PTH achieved by this mechanism are equivalent
to levels of PTH achieved by an injection of PTH sufficient to cause bone
growth.
Preclinical Research Status. In January 1996, the Company received the first
milestone payment of $3.0 million from SmithKline Beecham for progress made in
its osteoporosis program. At NPS and SmithKline Beecham, medicinal chemistry
efforts are being applied to various lead compounds with the goal of
identifying clinical development candidates. NPS has produced a cell line that
expresses the human parathyroid calcium receptor and serves as a proprietary
tool for the high-throughput screening of compounds to identify new drug
candidates. The Company continues to screen SmithKline Beecham and NPS
compound libraries and to discover, identify, and characterize additional
compounds with calcilytic or calcimimetic activity. There can be no assurance
that lead compounds will be identified, that preclinical and clinical trials
will proceed, or that such candidates will prove safe and effective, meet
applicable regulatory standards, or be successfully marketed. See "Risk
Factors--Early Stage of Product Development."
Neuroprotection Program-NPS 1506
Overview. Stroke is the third leading cause of death in the United States,
with over 500,000 cases reported each year. In stroke, a blood vessel becomes
blocked, leading to inadequate blood supply (ischemia) to the brain. While
many stroke victims survive, approximately 100,000 to 150,000 per year are
left severely and permanently disabled by nerve damage resulting from stroke.
Much of this damage occurs within the first 24 to 48 hours after the incident
and is caused in part by the excessive release of glutamate and the resultant
influx of calcium into nerve cells. Published research in animals has shown
that much of this damage can be prevented by blocking the influx of calcium
into cells, in particular the influx that results from the activation of NMDA
receptor-operated calcium channels. Calcium influx resulting from the
activation of NMDA receptor-operated calcium channels also appears to cause
neuronal damage associated with head trauma. Approximately two million
traumatic brain injuries occur each year in the United States, with twenty
five percent of such injuries requiring hospitalization and about one percent
resulting in death.
6
Certain medical procedures are associated with an increased risk of stroke.
For example, strokes occur in three to seven percent of coronary artery
bypass, carotid endarterectomy, and heart valve replacement surgeries. Mild to
severe central nervous system dysfunction occurs in up to eighty percent of
such procedures. This is thought to result from multiple micro strokes caused
by the release of numerous tiny blood clots into the circulation. The Company
believes that it might be possible to lessen the severity of neuronal damage
and cognitive impairment occurring as a result of such procedures by
prophylactic treatment with neuroprotective compounds.
Because NMDA receptor-operated calcium channels play critical roles in
normal excitatory neurotransmission and are also recognized for their major
role in events that lead to much of the neurological damage associated with
stroke and with head trauma, several pharmaceutical companies have recognized
the potential of NMDA receptor-operated calcium channels as molecular targets.
These companies have begun development of drugs to treat neurological
disorders and have identified various lead compounds, although no such drug
has successfully completed clinical trials or been marketed. Work in this
field is all the more challenging because NMDA receptor-operated calcium
channels are also the site of action of phencyclidine ("PCP" or "angel dust"),
and most clinically tested compounds that target NMDA receptor-operated
calcium channels exhibit undesirable PCP-like side effects (e.g. inducing
symptoms of psychosis). There are currently no effective neuroprotective
therapeutics available that act to slow or stop the progression of brain
damage once a stroke or head trauma has occurred.
Systemic administration of the Company's proprietary class of lead
compounds, particularly NPS 1506, has demonstrated significant neuroprotectant
activity in certain animal models of ischemic stroke and head trauma. In these
animal studies, significant neuroprotectant activity was still observed when
administration of the compound was delayed for two hours following the
ischemic event. In addition, the Company's compounds have not exhibited PCP-
like effects in a variety of in vitro and in vivo animal studies intended to
identify PCP-like effects.
Development Status. In July 1997, the Company commenced Phase I clinical
trials for NPS 1506 in healthy male volunteers. The trials are presently
ongoing. The Company expects to announce results of these trials, as well as
results from preclinical studies in the first half of 1998. The Company
continues to formulate its clinical development plan and expects to begin
safety studies in stroke patients in the first half of 1998. There can be no
assurance that NPS 1506 or any of the other lead compounds will advance
through clinical development, will prove safe and effective, meet applicable
regulatory standards, or be successfully marketed. See "Risk Factors--Early
Stage of Product Development."
In-licensing and Product Acquisition
The Company is actively engaged in evaluation of alternatives for
acquisition of late-stage product opportunities. Such evaluation includes the
consideration of merger and acquisition candidates. Such evaluation also
includes the search for in-licensing or joint venture development candidates.
To date the Company has not entered into any such arrangement. There can be no
assurance that the Company will be able to negotiate acceptable license and/or
collaborative agreements in the future or that efforts under any such license
and/or collaborative agreements will be successful. See "Risk Factors--
Difficulty of Acquiring Rights in External Technologies, Programs, and
Development Candidates."
DISCOVERY PROGRAMS
The Company is actively engaged in other discovery programs that seek to
identify new molecular targets for the development of new drugs. These
discovery programs are extensions of the Company's discoveries in calcium
receptors and ion channels.
7
Metabotropic Glutamate Receptors
Metabotropic glutamate receptors ("mGluRs") are structurally distinct from
the NMDA receptor-operated calcium channels and other glutamate receptor-
operated calcium channels. Rather, mGluRs are related in structure to the
general class of G-protein the parathyroid cell calcium receptor. The Company
believes that its experience in the discovery and development of drug
candidates that act at calcium receptors provides the Company with certain
advantages in the mGluR field. mGluRs are involved in the regulation of a
number of important brain functions and the Company believes that drugs that
target specific mGluRs may be useful in treating various neurological
disorders, including neurodegenerative disorders such as Alzheimer's disease,
cognitive dysfunction, anxiety, and certain psychiatric disorders.
NPS scientists have discovered proprietary small molecules that are active
at mGluRs. In addition, NPS scientists have cloned a novel mGluR and have
developed proprietary assays and cell lines for use in the Company's mGluR
program. The Company's compounds have substantially different structures than
existing compounds that are active at mGluRs and the Company believes these
compounds could reach the brain more efficiently. Medicinal chemistry efforts
with these lead compounds are ongoing at the Company.
Additional Calcium Receptor Therapeutics
The Company is pursuing drug candidates that target calcium receptors in
distinct tissues for the treatment of several disorders. In the kidney, for
example, NPS and its collaborators have shown that calcium receptors are
abundantly expressed in certain cells that regulate the excretion and
reabsorption of calcium, magnesium, and certain electrolytes. Calcium
receptors are also expressed in cells that regulate excretion and reabsorption
of water in the kidney. The Company believes that these calcium receptors
participate in the regulation of mineral, electrolyte, and fluid balance in
the body and that drugs that target calcium receptors in the kidney may
provide therapies for abnormal states of ion and water retention. Such
abnormal states occur in congestive heart failure, for example, and in
nephrolithiasis (kidney stone formation).
Drug Discovery Technologies
The Company's approach to the discovery of novel drugs is to identify new
drug targets and to identify small molecules that modulate the activities of
these targets (or of previously identified targets) in ways that provide
unique and effective therapies. NPS has pioneered the use of various whole
cell and tissue functional screens in its drug discovery programs. The Company
believes that its functional screens substantially enhance its abilities to
discover new receptors and ion channels and new drug candidates that modulate
the activities of specific receptors or ion channels through novel mechanisms.
Functional screens were of critical importance, for example, in the Company's
discovery of calcimimetic compounds that modulate calcium receptor function.
The Company also utilizes a unique library of invertebrate venoms. These
venoms are isolated from a wide variety of species of spiders, scorpions,
centipedes, parasitic wasps, and other invertebrates collected from around the
world. Lead molecules from this library have been useful in the discovery
phases of many of the Company's programs. Examples include the first-
generation, small molecule Araxin(TM) ("arachnid toxin") compounds that
identified a novel site on NMDA receptor-operated calcium channels, peptide
leads being used in the Company's ion channel discovery efforts, and early
calcium receptor agonist leads.
COLLABORATIVE RESEARCH AND LICENSE AGREEMENTS
NPS is pursuing research and product development both on an independent
basis and in collaboration with others. NPS currently has collaborative
research and/or license agreements with Amgen, Kirin, SmithKline Beecham,
Systems Integration Drug Discovery Company, Inc. in Tucson, Arizona
("SIDDCO"), The Brigham and Women's Hospital, Inc. ("Brigham and Women's"),
AquaBio Products Sciences, L.L.C. in Maine ("APS"), the State University of
New York at Buffalo, and several other academic institutions. See "Risk
Factors--Dependence on Collaborative Relationships."
8
Amgen Inc.
The Company entered into a development and license agreement with Amgen
effective December 1995 (the "Amgen Agreement") which grants Amgen the
exclusive right to develop and commercialize drugs for the treatment of HPT
(and other indications other than osteoporosis) worldwide excluding Japan,
China (including Hong Kong), North and South Korea and Taiwan (the "Kirin
Territory"). The license includes NPS R-568, the second generation compound in
clinical trials at Amgen, and other HPT compounds. Under the terms of the
Amgen Agreement, NPS may receive from Amgen up to an aggregate of $43.5
million in license fees, equity purchases, and milestone payments plus
royalties from any future product sales. 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 such compounds worldwide, other than in the Kirin
Territory ("Amgen Territory") including conducting clinical trials and making
regulatory submissions. Amgen paid NPS a license fee of $10.0 million and
purchased one million shares of Common Stock for an aggregate purchase price
of $7.5 million. The balance of the $43.5 million includes up to $26.0 million
payable to NPS upon the achievement of specific development milestones. NPS
has the option to participate with Amgen, under the direction of Amgen, in the
clinical development of a drug for primary HPT. Amgen is required to reimburse
NPS for such participation, limited to a total cost of $400,000 per year for a
maximum time period of five years. Amgen may terminate the Amgen Agreement for
any reason upon 90 days written notice. Termination of the Amgen Agreement
will result in the reversion to NPS of its technology, patent, and
commercialization rights in the Amgen Territory. There can be no assurance
that Amgen will not terminate the Amgen Agreement. In the event of termination
of the license agreement with Kirin, Amgen would receive worldwide rights to
develop and commercialize NPS R-568, the second generation compound in
clinical trials at Amgen, and other HPT compounds. NPS is actively working
with Amgen and Kirin to discover, identify, and characterize backup and second
generation compounds. See "Risk Factors--Dependence on Collaborative Research
and License Relationships."
Kirin Brewery Company, Ltd.
In June 1995, the Company entered into a five-year collaborative research
and license agreement with Kirin (the "Kirin Agreement") to develop and
commercialize NPS R-568 and other HPT compounds for the treatment of HPT in
the Kirin Territory. Under the terms of the Kirin Agreement, NPS may receive
from Kirin up to an aggregate of $25.0 million in license fees, research
support, and milestone payments plus royalties from any future product sales
in exchange for exclusive rights to develop, manufacture, and sell NPS R-568,
the second generation compound under development at Amgen, and other HPT
compounds for the treatment of HPT in the Kirin Territory. Kirin is
responsible for conducting clinical trials and obtaining regulatory approvals
in the Kirin Territory. Kirin paid NPS an initial license fee of $5.0 million
and committed to make $7.0 million in research payments for research
concerning NPS R-568 and second generation compounds over five years. The
Kirin research support payments were $500,000 per quarter through June 1997
and are $250,000 per quarter over the remaining three years of the agreement.
The remaining $13.0 million is payable to NPS upon achievement of specific
development milestones in the United States and in the Kirin Territory. In
October 1996, the Company earned its first milestone payment from Kirin in the
amount of $2.0 million for the start of clinical trials in Japan.
Additionally, in December 1997, the Company earned its second milestone
payment from Kirin in the amount of $2.0 million for the commencement of a
Phase II clinical trial in Japan for primary HPT. Kirin is required to pay all
costs of developing and commercializing products within the Kirin Territory
and will pay royalties to NPS on any product sales. NPS is actively working
with Kirin and Amgen to discover, identify, and characterize second generation
compounds. Kirin may terminate the Kirin Agreement for any reason upon 90 days
written notice. Termination of the Kirin Agreement will result in Amgen
receiving worldwide rights to develop and commercialize NPS R-568, the second
generation compound in clinical trials at Amgen and other HPT compounds. There
can be no assurance that Kirin will not terminate the Kirin Agreement. See
"Risk Factors--Dependence on Collaborative Research and Licensee
Relationships."
SmithKline Beecham Corporation
In November 1993, NPS entered into a three-year collaborative research and
license agreement with SmithKline Beecham (the "SmithKline Agreement") to
collaborate on the discovery, development, and
9
marketing of drugs to treat osteoporosis and other bone metabolism disorders.
Under the SmithKline Agreement, SmithKline Beecham has the exclusive license
to develop and market worldwide any calcium receptor-active compounds
developed under the SmithKline Agreement that are useful for treating
osteoporosis and other bone metabolism disorders, excluding HPT. In addition,
SmithKline Beecham has a six-month right of first negotiation of a research
and license agreement with NPS with respect to any compounds relating to
osteoporosis not covered under the SmithKline Agreement. Once compounds have
been selected for development, SmithKline Beecham has agreed to conduct and
fund all development of such products, including all human clinical trials and
regulatory submissions. NPS has the right to copromote with SmithKline Beecham
any resulting products in the United States. In 1992, S.R. One, an affiliate
of SmithKline Beecham, purchased $2.0 million of the Company's Preferred
Stock. In 1993, at the time NPS entered into the SmithKline Agreement, S.R.
One purchased an additional $7.0 million in equity of the Company and it
acquired $495,000 of Common Stock in the Company's initial public offering.
All of the Preferred Stock was converted into Common Stock upon the closing of
the Company's initial public offering.
Under the terms of the SmithKline Agreement, in addition to the $7.0 million
equity purchase, SmithKline Beecham paid the Company a $6.0 million license
fee and agreed to make additional payments to the Company upon the achievement
of specific milestones. A $3.0 million milestone payment was made in January
1996. In July 1995, the Company began receiving payments from SmithKline
Beecham to support the Company's research efforts and has recognized revenue
of $6.2 million through 1997. In November 1997, the research term of the
SmithKline Agreement was extended for an additional period of up to three
years. Concurrently with the execution of the extension agreement, SmithKline
Beecham purchased 160,000 shares of Common Stock of the Company and agreed to
purchase an additional 453,000 shares of the Company's Common Stock over the
next two years if the agreement is not terminated earlier. Research support
payments are expected to be approximately $437,500 per quarter through October
2000 unless terminated earlier by SmithKline Beecham. NPS is entitled to
royalties on sales of products for osteoporosis and other bone metabolism
disorders developed by SmithKline Beecham under the SmithKline Agreement and a
share of the profits from any copromotion of such products. The SmithKline
Agreement may be terminated by SmithKline Beecham upon thirty days written
notice, with NPS having the right to extend the SmithKline Agreement for an
additional period of time, provided that drug marketing has commenced. Under
certain circumstances, NPS has the right to terminate the SmithKline Agreement
after October 2000. Termination of the SmithKline Agreement will result in
reversion to NPS of its technology, commercialization, and patent rights in
the licensed field of osteoporosis and other bone and mineral disorders, as
well as all additional technology developed in the course of the
collaboration. There can be no assurance that SmithKline Beecham will not
terminate the SmithKline Agreement or that funded research will be extended
upon its termination in October 2000. See "Risk Factors--Dependence on
Collaborative Research and Licensee Relationships."
SIDDCO
In July 1997, NPS entered into a research and development agreement with
SIDDCO (the "SIDDCO Agreement"). Under the SIDDCO Agreement, the companies are
working together to develop combinatorial chemistry databases, identify novel
compounds, develop automated chemical synthesis systems, and generate
computational and analytical methods. NPS is obligated to pay to SIDDCO the
sum of $1.2 million per year (on a quarterly basis) for a period of three
years. The Company has the right to extend the SIDDCO Agreement for an
additional two years at an adjusted rate based on SIDDCO costs at that time.
The Brigham and Women's Hospital, Inc.
In February 1993, NPS entered into two agreements with Brigham and Women's,
a sponsored collaborative research agreement (the "Brigham Research
Agreement") and a patent license agreement (the "Brigham License Agreement").
Brigham and Women's, an affiliate of Harvard University Medical School, is a
leading research group in the area of calcium receptors. In February 1996, the
Company reached an agreement with Brigham and Women's to extend the Brigham
Research Agreement. This agreement was further amended, effective March 1,
1997, to update the amount of research support payments to be made by NPS for
the final
10
year of the agreement. During the five year period from February 1993 through
February 1998, NPS paid license fees and made research support and milestone
payments to Brigham and Women's totaling approximately $1.2 million. Effective
March 1, 1998, the Brigham Research Agreement was extended on a month to month
basis while the parties discuss the terms of a possible extension. The Brigham
License Agreement grants NPS an exclusive license to calcium receptor and
inorganic ion receptor technology arising under the Brigham Research
Agreement. The Brigham Research Agreement also grants NPS a right of first
negotiation for exclusive license rights to any other patentable subject
matter arising out of the sponsored research. NPS also has agreed to pay
Brigham and Women's a royalty on sales of any products covered by an issued
patent under the Brigham License Agreement and to promote sales of any
licensed products for HPT for which the Company receives regulatory approval.
AquaBio Products Sciences, L.L.C.
In July 1997, NPS entered into an agreement with APS (the "APS Agreement")
whereunder NPS licensed to APS certain rights in its calcium receptor
technology to be used by APS solely in the field of non-mammalian aquatic
organisms. APS will utilize the technology to explore innovative ways to
improve aquaculture. In return for the license, NPS will receive from APS
rights in technology identified by APS that may have therapeutic value in
mammalian organisms. In connection with the APS Agreement, NPS also made an
equity investment in APS.
PATENTS AND PROPRIETARY TECHNOLOGY
Periodically, the Company files patent applications to protect technology,
inventions, and improvements that the Company believes are important to the
development of its business. The Company also relies on trade secrets, know-
how, continuing technological innovations, and licensing opportunities to
develop and maintain its competitive position.
The Company files patent applications in its own name, and when appropriate,
it has filed and expects to continue to file, applications jointly with its
collaborators. These patent applications cover compositions of matter, methods
of treatment, methods of discovery, use of novel compounds and novel modes of
action, and recombinantly expressed receptors and gene sequences that are
believed by the Company to be important in its research and development
activities. Certain of the Company's principal proprietary rights related to
process, compounds, use, and technique related to its calcium receptor science
are now protected by issued U.S. patents. Few of the Company's principal
proprietary rights, including rights related to process, compounds, use, and
technique related to its calcium receptor science and NMDA receptor-operated
calcium channel technology, are protected by issued patents in the Company's
principal markets. The Company believes that its pending patent applications
in the fields of calcium receptors, inorganic ion receptors, mGluRs, and NMDA
receptor-operated calcium channels and compounds active at the same receptors
give the Company a competitive advantage. The Company intends to file
additional patent applications relating to its technology and to specific
products of the Company, as appropriate.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions. In
addition, the scope of the claims in a patent application can be significantly
modified during prosecution before the patent is issued. Consequently, the
Company does not know whether any of its pending applications will result in
the issuance of patents or, if any patents are issued, whether they will
provide significant proprietary protection or will be circumvented or
invalidated. Generally, patent applications in the United States are
maintained in secrecy until patents issue and publication of discoveries in
the scientific or patent literature often lag behind actual discoveries. In
addition, no assurance can be given that, even if published, the Company is
aware of all such literature. Accordingly, the Company cannot be certain that
the named inventors were the first to invent or that the Company is the first
to pursue patent coverage for such inventions. Moreover, the Company may have
to participate in interference proceedings declared by the United States
Patent and Trademark Office to determine priority of invention, which could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. There can be no assurance that the
11
Company's pending patent applications, if issued, would be held valid. An
adverse outcome could subject the Company to significant liabilities to third
parties, could require disputed rights to be licensed from third parties, or
require the Company to cease or modify its use of such technology.
Additionally, many of the Company's foreign patent applications have been
published as part of the patent prosecution process in such countries.
Protection of the rights revealed in such published patent applications can be
complex, costly, and uncertain. See "Risk Factors--Uncertainty of Protection
of Patents and Proprietary Technology."
The development of therapeutic products for applications in the Company's
product fields is intensely competitive. A number of pharmaceutical companies,
biotechnology companies, universities, and research institutions have filed
patent applications or received patents in these and related fields. Some of
these applications or patents may limit or preclude the Company's applications
and could result in a significant reduction of the coverage of the Company's
patents, if issued.
NPS also relies on trade secrets and contractual arrangements to protect its
trade secrets. There can be no assurance that these agreements will be
adequate, that they will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors.
Much of the know-how important to the Company's technology and many of its
processes are dependent upon the knowledge, experience, and skills of key
scientific and technical personnel and are not the subject of pending patent
applications or issued patents. To protect its rights to its know-how and
technology, the Company requires all employees, consultants, advisors, and
collaborators to enter into confidentiality agreements that prohibit the
unauthorized use and restrict the disclosure of confidential information, and
require disclosure and assignment to the Company of ideas, developments,
discoveries, and inventions made by them. There can be no assurance that these
agreements will effectively prevent disclosure of the Company's confidential
information or will provide meaningful protection for the Company's
confidential information if there is unauthorized use or disclosure. It must
also be recognized that competitors may develop substantially equivalent know-
how and technology.
In connection with certain research in the field of calcium and other ion
receptors, NPS has sponsored research by various university and government
laboratories. For example, the Company has executed a license agreement and a
research agreement regarding research in the area of calcium and other ion
receptors with Brigham and Women's. See "Collaborative Research and Licensing
Agreements--The Brigham and Women's Hospital, Inc."
The Company has also sponsored work at other government and academic
laboratories for various evaluations, assays, screenings, and tests of its
natural products library and lead compounds in the central nervous system
field. Generally, under these agreements, the Company funds the work of
investigators in exchange for the results of the specified works and the right
or option to a license to any patentable inventions that may result in
designated areas. Generally, if the sponsored work produces patentable subject
matter, the Company has the first right to negotiate for license rights
therein. Any resulting license would be expected to require the Company to pay
royalties on net sales of licensed products. There can be no assurance that
any such inventions will arise, that any patent applications thereon will be
filed or, if filed, that any patents will issue, that any license thereon can
be negotiated, or that any license agreement would give the Company valuable
rights.
MANUFACTURING
NPS anticipates that all of its products will be made by synthetic chemical
manufacturing techniques. As such, the Company believes the compounds can be
precisely defined and characterized and should generally have relatively low
manufacturing costs compared to recombinant proteins produced by the
fermentation methods common to currently available biotechnology products.
NPS has no manufacturing facilities. Under the Amgen, Kirin and SmithKline
Beecham agreements, each of such licensees is responsible for the manufacture
of the applicable product. The Company relies on other
12
manufacturers to produce its proprietary compounds for research and
development activities and in sufficient quantities for preclinical and
clinical purposes. The proposed pharmaceutical products under development by
the Company have never been manufactured on a commercial scale, and there can
be no assurance that such products can be manufactured at a cost or in
quantities to make them commercially viable. If the Company were unable to
contract for sufficient supply of its compounds on acceptable terms, or if it
should encounter delays or difficulties in its relationships with
manufacturers, the Company's preclinical and clinical testing schedule would
be delayed. Such delay might postpone the submission of products for
regulatory approval or the market introduction and subsequent sales of such
products, which would have a materially adverse effect on the Company.
Moreover, contract manufacturers that the Company may use must adhere to
Quality System Regulations ("QSR") of the FDA, which incorporate the FDA's
former Good Manufacturing Practices ("GMP").
GOVERNMENT REGULATION
The production and marketing of the Company's product candidates and its
research and development activities are subject to regulation for safety,
efficacy, and quality by numerous governmental authorities in the United
States and other countries. In the United States, drugs are subject to
rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act, as amended,
the regulations promulgated thereunder, and other federal and state statutes
and regulations govern, among other things, the testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising, and
promotion of the Company's products. Product development and approval within
this regulatory framework take a number of years and involve the expenditure
of substantial resources.
The steps required before a pharmaceutical agent may be marketed in the
United States include: (a) preclinical laboratory tests, animal pharmacology
and toxicology studies and formulation studies; (b) the submission to the FDA
of an Investigational New Drug ("IND") application for human clinical testing,
which must become effective before human clinical trials commence; (c)
adequate and well-controlled human clinical trials to establish the safety and
efficacy of the drug; (d) the submission of a New Drug Application ("NDA") to
the FDA; and (e) FDA approval of the NDA prior to any commercial sale or
shipment of the drug. In addition to obtaining FDA approval for each product,
each domestic drug manufacturing establishment must be registered with, and
approved by, the FDA under QSR regulations. Domestic drug manufacturing
establishments are subject to regular inspections by the FDA and must comply
with QSR regulations. To supply products for use in the United States, foreign
manufacturing establishments must comply with QSR regulations and are subject
to periodic inspection by the FDA or by corresponding regulatory agencies in
their home countries under reciprocal agreements with the FDA.
Preclinical studies include the laboratory evaluation of in vitro
pharmacology, product chemistry and formulation, as well as animal studies to
assess the potential safety and efficacy of the product. Compounds must be
formulated according to QSR, and preclinical safety tests must be conducted by
laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of the preclinical tests are submitted to the FDA as
part of an IND and are reviewed by the FDA prior to the commencement of human
clinical trials. Unless the FDA objects to an IND, the IND will usually become
effective thirty days following its receipt by the FDA. There can be no
assurance that submission of an IND will result in FDA authorization to
commence clinical trials.
Clinical trials involve the administration of the investigational new drug
to healthy volunteers and to patients under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the study,
the parameters to be used to monitor safety, and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be conducted under the auspices of an
Institutional Review Board ("IRB") at the institution at which the study will
be conducted. The IRB will consider, among other things, ethical factors, the
safety of human subjects, and the possible liability of the institution.
13
Clinical trials typically are conducted in three sequential phases, which
may overlap. In Phase I, the initial introduction of the drug into healthy
subjects, the drug is tested for safety (adverse effects), dosage tolerance,
metabolism, distribution, excretion, and pharmacodynamics (clinical
pharmacology). Phase II involves studies in a limited patient population to:
(a) determine the efficacy of the drug for specific, targeted indications; (b)
determine dosage tolerance and optimal dosage; and (c) identify possible
adverse effects and safety risks. When a compound is found to be effective and
to have an acceptable safety profile in Phase II evaluations, Phase III trials
are undertaken to evaluate further clinical efficacy and to test for safety
within an expanded patient population at geographically dispersed clinical
study sites. There can be no assurance that Phase I, Phase II, or Phase III
testing will be completed successfully within any specific time period, if at
all, with respect to any of the Company's products subject to such testing,
including NPS R-568 and second-generation compounds in the Company's HPT
program and NPS 1506 in the neuroprotection program. Furthermore, the Company,
its collaborators, licensees, or the FDA may suspend clinical trials at any
time if they feel that the subjects or patients are being exposed to an
unacceptable health risk. See "Risk Factors--Government Regulation; No
Assurance of Regulatory Approval."
The results of the pharmaceutical development, preclinical studies, and
clinical studies are submitted to the FDA in the form of an NDA for approval
of the marketing and commercial shipment of the drug. The testing and approval
process is likely to require substantial time and effort, and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
FDA may deny an NDA if applicable regulatory criteria are not satisfied,
require additional testing or information, or require postmarketing testing
and surveillance to monitor the safety of the Company's products if the FDA
does not view the NDA as containing adequate evidence of the safety and
efficacy of the drug. Notwithstanding the submission of such data, the FDA may
ultimately decide that the application does not satisfy its regulatory
criteria for approval. Moreover, if regulatory approval of a drug is granted,
such approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures
conform to QSR, which must be followed at all times. In complying with
standards set forth in these regulations, manufacturers must continue to
expend time, money, and effort in the area of production and quality control
to ensure full technical compliance. See "Risk Factors--Government Regulation;
No Assurance of Regulatory Approval."
In addition to regulations enforced by the FDA, the Company is also subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation
and Recovery Act and other present and future federal, state, or local
regulations. The Company's research and development activities involve the
controlled use of hazardous materials, chemicals, and various radioactive
compounds. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed
by state and federal regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that
result, and any such liability could exceed the resources of the Company. See
"Risk Factors--Risk of Product Liability" and "Risk Factors--Use of Hazardous
Materials."
Outside the United States, the Company's ability to market a product is
contingent upon receiving a marketing authorization from the appropriate
regulatory authority. This foreign regulatory approval process includes all of
the risks associated with FDA approval set forth above.
COMPETITION
NPS and its licensees are pursuing areas of product development in which the
Company believes there is a potential for extensive technological innovation
in relatively short periods of time. The Company operates in a field in which
new discoveries occur and are expected to occur at a rapid pace. The Company's
competitors may
14
succeed in developing technologies or products that are more effective than
those of the Company or in obtaining regulatory approvals of their drugs more
rapidly than the Company and its collaborative partners, and could render the
Company's products obsolete or noncompetitive. Competition in the
pharmaceutical industry is intense and is expected to continue to increase.
Many of the Company's competitors, including biotechnology and pharmaceutical
companies, are actively engaged in the research and development of products in
the Company's targeted areas, including the fields of HPT, osteoporosis,
neuroprotection, and neurological disorders. Many of the Company's competitors
have substantially greater financial, technical, marketing, and personnel
resources than the Company. In addition, some of them have considerable
experience in preclinical testing, human clinical trials, and other regulatory
approval procedures. Moreover, certain academic institutions, governmental
agencies, and other research organizations are conducting research in areas in
which the Company is working. These institutions are becoming increasingly
aware of the commercial value of their findings and are becoming more active
in seeking patent protection and licensing arrangements to collect royalties
for use of technology that they have developed. These institutions may also
market competitive commercial products on their own or through joint ventures
and will compete with the Company in recruiting highly qualified scientific
personnel. There can be no assurance that a pharmacological method of
treatment for certain diseases, such as HPT, will prove to be superior to
existing or newly discovered approaches to the treatment of those diseases.
See "Risk Factors--Rapid Technological Change; Intense Competition."
ENVIRONMENTAL LIABILITY
On November 29, 1995, the Company received a letter from the Environmental
Protection Agency ("EPA") notifying the Company that it may have incurred
liability under section 107(a) of the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, for two barrels of radioactive
waste taken by a third party contractor to a hazardous and radioactive waste
storage, treatment, and disposal facility in Denver, Colorado. Upon the EPA's
request, the Company has identified the waste and has verified that the
barrels containing the waste have been removed from the Denver, Colorado
facility. Removal of wastes from the facility and remediation of soil and
groundwater at this site is currently underway. The ultimate cost of removal
and remediation actions and the length of time for such actions are difficult
to estimate. Based upon its inspection of the site, the Company is of the
belief that the barrels containing the waste disposed of by the Company were
neither leaking nor damaged. Although the Company was a small contributor to
the site and the Company believes that there are a number of other financially
responsible contributors, there can be no assurance that the Company will not
be held liable for all or a portion of the cleanup cost or any other costs or
damages associated with this disposal site. See "Risk Factors--Risk of Product
Liability" and "Risk Factors--Use of Hazardous Materials."
EMPLOYEES
As of December 31, 1997, NPS employed 105 individuals full-time, 22 of whom
hold Ph.D. or M.D. degrees, and 20 of whom hold other advanced degrees. A
total of 76 full-time employees are engaged in research and development
activities, including a variety of disciplines within the areas of molecular
biology, pharmacology, medicinal chemistry, computer sciences, and clinical
development. A total of 29 full-time employees are employed in finance, legal
and regulatory affairs, market research, corporate development, and general
administrative activities. None of the Company's employees is covered by
collective bargaining agreements, and management considers relations with its
employees to be good. Additionally, NPS augments its full-time staff through
consulting arrangements with experienced scientists and managers. The
Company's anticipated growth and expansion will require the hiring of
additional management, research and development, and administrative personnel.
RISK FACTORS
Early Stage of Product Development. The Company was founded in 1986, has not
completed development of any drugs, and does not expect that any drugs
resulting from its or its licensees' research and development efforts will be
commercially available for several years, if at all. NPS R-568, a second-
generation HPT
15
compound, and NPS 1506 are the only product candidates currently in clinical
development by the Company and its licensees. Clinical trials in humans are
necessary to determine whether or not a compound will be safe, commercially
attractive, or effective. Results obtained in preclinical trials are not
necessarily indicative of results that will be obtained in later stages of
preclinical development or in human clinical testing. All product candidates
developed by the Company or its licensees will require extensive research,
development, and preclinical and clinical testing prior to submission of any
regulatory application, as well as a lengthy regulatory approval process.
Preclinical and clinical testing of safety and efficacy takes several years
and the time required to commercialize new drugs cannot be predicted with
accuracy. Product development of new pharmaceuticals is highly uncertain, and
unanticipated developments, clinical or regulatory delays, unexpected adverse
side effects, or inadequate therapeutic efficacy could slow or prevent the
product development efforts of the Company and its licensees, and have a
materially adverse effect on the Company's operations. There can be no
assurance that the Company's current product candidates or any future product
candidates, will advance to or in clinical trials, prove safe and effective,
meet applicable regulatory standards, be capable of being produced in
commercial quantities at acceptable cost, or be successfully marketed. Also,
there can be no assurance that a pharmacological method for the treatment of
diseases targeted by the Company, including HPT, will prove to be superior to
nonpharmacological treatments.
Dependence on Collaborative Research and Licensee Relationships. The
Company's strategy for the development, clinical testing, manufacturing, and
commercialization of certain of its product candidates and the research and
development of new product candidates includes entering into various
agreements with corporate partners, licensees, and others. The Company has
entered into a license agreement with Amgen pursuant to which Amgen has
assumed full control of the development and commercialization of a
calcimimetic drug therapy for the treatment of HPT in its territory. The
Company has also signed a collaborative research and license agreement with
Kirin for the development of calcimimetic drug therapy for the treatment of
HPT in Kirin's Territory. Additionally, the Company has signed a collaborative
research and license agreement with SmithKline Beecham for research and
development in osteoporosis. The licensees each have received from NPS certain
exclusive rights to commercialize products developed under their respective
agreements, have paid license fees to NPS, and have committed to make
milestone payments to NPS upon achievement of specified goals. The licensees
have agreed to fund the research or development efforts in HPT and
osteoporosis, conduct human clinical testing of lead compounds, prepare and
file submissions for regulatory approval, and pay royalties on any resulting
products. Because the Company has granted exclusive development,
commercialization, and marketing rights to the licensees in the fields of HPT
and osteoporosis, the success of the Company's HPT and osteoporosis programs
is dependent upon the efforts of the licensees. There can be no assurance that
the licensees will perform their obligations under their respective
agreements, that they will successfully develop, register or market any
products under these agreements, or that the Company will ever receive any
royalties or milestone or research support payments under these agreements.
Occurrence of any such adverse circumstances could have a materially adverse
effect on the Company's operations. Furthermore, there can be no assurance
that business conflicts will not arise between the licensees over rights to
existing compounds or future compounds with respect to certain indications.
The Company's collaborative research and license agreements, including the
agreements with the licensees, generally may be terminated under a variety of
circumstances upon prior written notice. If any of the licensees terminates or
breaches its agreement, such termination or breach may have a materially
adverse effect on the Company's operations. Furthermore, there can be no
assurance that present or future collaborators will not pursue existing or
alternative technologies in preference to treatments being pursued under
licensing with the Company.
Difficulty of Acquiring Rights in External Technologies, Programs, and
Development Candidates. NPS also intends to seek additional collaborative or
license arrangements to develop and commercialize other product candidates.
Many of the Company's competitors are similarly seeking to develop or expand
their collaborative and license arrangements with pharmaceutical companies,
universities and other development state biotechnology companies. The success
of these efforts by the Company's competitors could have an adverse impact on
the Company's ability to obtain rights to product candidates through future
collaborative arrangements. There can be no assurance that the Company will be
able to negotiate any such acceptable license and/or collaborative agreements
in the future or that efforts under any such license and/or collaborative
agreements will
16
be successful. To the extent that the Company chooses not to or is unable to
enter into such future agreements, it could experience increased capital
requirements to undertake research, development, and marketing of proprietary
product candidates at its own expense. Likewise, to the extent the Company
chooses to and is successful in entering into such future agreements, the
Company will also experience increased capital requirements to undertake
research, development, and marketing of such in-licensed technologies,
programs, and development candidates. In addition, the Company may encounter
significant delays in introducing any such in-licensed product candidates into
certain markets or find that the development, manufacture or sale of such
product candidates in such markets is adversely affected by competition from
others.
Lack of Product Sales; History of Operating Losses. Substantially all of the
Company's revenues to date have come from collaborative research and license
agreements with the licensees. No material revenues have been generated from
product sales. Other working capital has come from equity and debt financings.
NPS has incurred cumulative losses through December 31, 1997 of $26.1 million,
net of cumulative revenues from research and license agreements of $48.5
million. The Company expects to incur significant operating losses over at
least the next several years as the Company continues and expands its research
and development and preclinical and clinical testing activities and as the
Company seeks other external in-license opportunities. The Company expects
that losses will fluctuate from quarter to quarter and that such fluctuations
may be substantial. The Company's ability to achieve profitability depends in
part upon its licensees' ability to complete development of a drug for the
treatment of HPT, the Company's ability to develop, alone or with others, NPS
1506 and other product candidates, obtain required regulatory approvals, and
manufacture and successfully market such products, of which there can be no
assurance. As such, there can be no assurance that the Company will be able to
achieve profitability on a sustained basis, if at all.
Government Regulation; No Assurance of Regulatory Approval. The research and
development activities of the Company, and the investigation, manufacture,
distribution, and marketing of therapeutic products are subject to extensive
regulation by governmental authorities in the United States and other
countries. Prior to marketing in the United States, a drug must undergo
rigorous preclinical and clinical testing and an extensive regulatory approval
process implemented by the FDA under federal law, including the Federal Food,
Drug, and Cosmetic Act, as amended. Receipt of such regulatory approval
involves, among other things, satisfying the FDA that the product is both safe
and effective. Typically, this process takes several years or more depending
upon the type, complexity and novelty of the product and the nature of the
disease or other indication to be treated and requires the expenditure of
substantial resources. Preclinical studies must be conducted in accordance
with the FDA's Good Laboratory Practice regulations. Clinical testing is also
subject to FDA regulations and must meet requirements for Institutional Review
Board oversight and informed consent by clinical trial subjects and patients.
Clinical trials may require large numbers of test subjects. Furthermore, the
Company or the FDA may suspend clinical trials at any time if either believes
that the subjects participating in such trials are being exposed to
unacceptable health risks, including undesirable or unintended side effects.
Certain of the Company's employees have some experience in conducting and
managing the clinical trials, but the Company has conducted only limited
clinical trials of its initial product candidates and anticipates that it will
rely on its collaborative partners, licensees and outside consultants in
material aspects of its clinical development activities.
Before receiving FDA approval to market a product, NPS may have to
demonstrate that such product represents an improved form of treatment
compared to existing therapies. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations that could delay, limit,
or prevent regulatory approvals. In addition, delays or rejections may be
encountered based upon additional government regulation from future
legislation or administrative action or changes in FDA policy during the
period of product development, clinical trials, and FDA regulatory review. If
regulatory approval of a product is granted, such approval will be limited to
those disease states and conditions for which the product is useful, as
demonstrated through clinical studies. Furthermore, approval may entail
ongoing requirements for post-marketing studies. Even if such regulatory
approval is obtained, a marketed product, its manufacturer, and its
manufacturing facilities are
17
subject to continual review and periodic inspections. The regulatory standards
for QSR will be applicable to the Company or its manufacturers/suppliers.
Discovery of previously unknown problems with a product, manufacturer, or
facility may result in restrictions on such product or manufacturer, including
costly recalls or even withdrawal of the product from the market. There can be
no assurance that any compound developed by the Company alone or in
conjunction with others will prove to be safe and effective in clinical trials
and will meet all of the applicable regulatory requirements needed to receive
marketing approval.
Rapid Technological Change; Intense Competition. NPS is pursuing areas of
product development in which the Company believes there is a potential for
extensive technological innovation in relatively short periods of time. The
Company operates in a field in which new discoveries occur and are expected to
occur at a rapid pace. The Company's competitors may succeed in developing
technologies or products that are more effective than those of the Company or
in obtaining regulatory approvals of their drugs more rapidly than the Company
and its collaborative partners and licensees. Such success could render the
Company's products obsolete or noncompetitive thereby have a materially
adverse effect on the Company. Competition in the pharmaceutical and
biotechnology industry is intense and is expected to continue. Many of the
Company's competitors, including biotechnology and pharmaceutical companies,
are actively engaged in the research and development of products in the
Company's targeted therapeutic areas. Many of the Company's competitors have
substantially greater financial, technical, marketing, and personnel resources
than the Company, as well as considerable experience in preclinical testing,
human clinical trials, and other regulatory approval procedures. Moreover,
certain academic institutions, governmental agencies and other research
organizations are conducting research in areas in which the Company is
working. These institutions seek to exploit the commercial value of their
findings and are active in seeking patent protection and licensing
arrangements for biotechnology and pharmaceutical companies.
Uncertainty of Protection of Patents and Proprietary Technology. The
Company's success depends, in part, on its ability to obtain patents, maintain
trade secret protection, and operate without infringing on the proprietary
rights of third parties. Because the patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and frequently involve
complex legal and factual questions, the breadth and interpretation of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted.
Certain of the Company's principal proprietary rights, including rights
related to process, compounds, use and technique related to its calcium
receptor science are now protected by issued U.S. patents. However, no
assurance can be given that other patents being sought by the Company will
issue from any of the Company's current or anticipated patent applications or
that such current or prospective patents, if any, will allow the Company to
preclude others from practicing some or all of the art described and claimed
therein. Generally, patent applications in the United States are maintained in
secrecy until patents issue and publication of discoveries in scientific or
patent literature often lag behind actual discoveries. No assurance can be
given that, even if published, the Company is aware of all such literature.
Accordingly, the Company cannot be certain that the named inventors in its
patent applications were the first to invent, or that the Company is the first
to pursue patent coverage for such inventions. There can be no assurance that
the claims of current or prospective patents will be sufficiently broad to
protect the Company's technology or to prevent competition. No assurance can
be given that any patents issued to the Company will be enforceable. Such
patents may be challenged, invalidated or circumvented or the rights granted
thereunder may provide no competitive advantages to NPS. Moreover, the Company
may have to participate in interference proceedings declared by the United
States Patent and Trademark Office to determine priority of invention, which
could result in substantial cost to the Company even if the eventual outcome
is favorable to the Company. If certain of the Company's current or
prospective patents are successfully challenged (as to prospective patents,
fail to issue), particularly those related to its calcium receptor science and
NMDA receptor-operated calcium channel technology, such event(s) may have a
materially adverse effect on the Company's operations or its ability to
maintain or establish collaborations and/or attract capital. Furthermore,
there can be no assurance that others will not independently develop similar
products, duplicate any of the Company's products or design around the
patented products or technology developed by NPS. There can also be no
assurance that any products developed by NPS will not be found to infringe
patents held by third parties, or that, in such cases, licenses from such
third parties would be available on commercially
18
attractive terms, if at all. If NPS does not obtain such licenses, it could
encounter delays in product market introductions or could find that it is
unable to develop, manufacture or sell its products requiring such licenses.
In addition, the Company could incur substantial costs in defending lawsuits
brought against NPS on such patents or in prosecuting lawsuits by NPS against
another party. Additionally, many of the Company's foreign patent applications
have been published as part of the patent prosecution process in such
countries. Protection of the rights revealed in such published patent
applications can be complex, costly, and uncertain.
The discovery and development of therapeutic products for applications in
the Company's product fields is intensely competitive. A number of
pharmaceutical companies, biotechnology companies, universities, and research
institutions have filed patent applications or received patents in the areas
pursued by the Company. Some of these applications or patents may limit or
preclude the Company's applications, and could result in a significant
reduction of the coverage of the Company's patents, if issued.
NPS also relies on trade secrets and proprietary know-how that it seeks to
protect, in part, by confidentiality agreements with its corporate
collaborators, licensees, employees, and consultants. NPS expects to continue
to rely on trade secrets and know-how to protect certain aspects of its
technologies. The Company believes it has, and can maintain, a competitive
advantage through its use of written confidential disclosure agreements,
restricted use agreements, and invention assignment provisions with its
employees, consultants, advisors, and potential and actual collaborators and
licensees. Nonetheless, no assurance can be given that these agreements will
provide meaningful protection for the Company's trade secrets or proprietary
know-how as a result of an unauthorized use or disclosure in the public
domain. There can be no assurance that these agreements will not be breached,
that NPS would have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known or be independently discovered
by competitors.
Dependence on Third Parties for Manufacturing. To be successful, the
Company's products, if successfully developed, must be manufactured in
commercial quantities in accordance with regulations prescribed by the FDA and
at acceptable costs. NPS does not have the capability to manufacture products
under QSR regulations prescribed by the FDA and does not intend to develop
such a capability in the near future. Accordingly, the Company anticipates
that for the foreseeable future, it will pursue a strategy of seeking
production capability from corporate collaborators, licensees, or contract
manufacturers. There can be no assurance that the Company's current or
prospective corporate collaborators, licensees, or contract manufacturers will
be able to manufacture any developed compounds on a commercial scale or that
any collaborator, licensee or manufacturer will be able to manufacture
products in quantities or at prices that will be commercially viable or
beneficial for the Company. The licensees are responsible for manufacturing
any products developed under their respective agreements with the Company. If
the Company or its collaborators and licensees encounter difficulty in
obtaining third-party manufacturing on commercially acceptable terms, their
ability to commercialize products may be delayed or foreclosed. Moreover, any
manufacturer of the Company's products must adhere to QSR regulations enforced
by the FDA through its facilities inspection program. If these facilities
cannot pass a pre-approval or periodic plant inspection, FDA approval of the
product will not be granted or sale of the product may be barred.
Presently, the Company relies on contract manufacturers to produce its
proprietary compounds for research activities and in sufficient quantities for
preclinical and clinical purposes. If the Company were unable to contract for
sufficient supply of its compounds on acceptable terms, or if it should
encounter delays or difficulties in its relationships with manufacturers, the
Company's preclinical and human clinical testing schedule would be delayed.
Such delay would adversely affect the schedule for submission of products for
regulatory approval and the market introduction and subsequent sales of such
products, which would have a materially adverse effect on the Company.
Future Capital Needs; Uncertainty of Additional Funding. The Company has
incurred negative cash flows from operations since its inception. Substantial
expenditures will be required to enable NPS to conduct existing and planned
preclinical studies and clinical trials, to manufacture products or to have
products manufactured, to market products from current research and
development efforts, and to continue research and development activities.
19
The Company anticipates that its existing capital resources, including
interest earned thereon and expected research and development support payments
and equity purchases from its licensees, will be sufficient to enable it to
maintain its current and planned operations for at least 24 months. However,
actual needs are dependent on numerous factors, including the progress of the
Company's current and future research and development programs, the magnitude
and scope of these activities, progress with preclinical and clinical trials,
the cost of preparing, filing, prosecuting, maintaining and enforcing patent
claims and other intellectual property rights, competing technological and
market developments, changes in or terminations of existing research and
license arrangements, the establishment of additional license arrangements,
the cost of manufacturing scale-up and development of marketing activities, if
undertaken by the Company. Furthermore, in the event the Company were to in-
license or otherwise acquire a product candidate in clinical development,
substantial expenditures for clinical trials and regulatory submissions would
be required. Substantial expenditures will be required to conduct preclinical
studies and clinical trials, manufacture or have manufactured and market any
proprietary products of NPS that may be derived from current research and
development efforts and perform research and development activities in
additional areas. In addition, if any licensee terminates its agreement, the
Company may not have sufficient capital to complete the development and
commercialization of a product in the respective territory. A reduction in the
expected amount of research and development support payments or equity
purchases may shorten the period during which the Company could maintain its
operations or require the Company to reduce its operations.
NPS may need to raise additional funds to support its long-term product
development and commercialization programs. The Company is presently seeking
additional funding for certain of its current programs through corporate
collaborations and licensing agreements. The Company may also seek additional
funding through public or private financing. There can be no assurance that
additional funding will be available on acceptable terms, if at all. If
adequate funds are not available, the Company may be required to delay, reduce
the scope of or eliminate one or more of its research and development programs
or to obtain funds through arrangements that may require the Company to
relinquish rights to certain of its technologies, product candidates or
products that the Company may otherwise seek to develop or commercialize on
its own. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Lack of Marketing Capabilities. The Company's licensees currently have
marketing and distribution rights with respect to products under development
for the treatment of HPT and osteoporosis; however, such commercialization
rights may revert to NPS, under certain circumstances, including upon
termination of any of the related agreements. NPS may retain commercialization
rights to other products developed in the future. The Company currently lacks
sales, marketing, and distribution capability. In order to market any of its
products directly, the Company would have to develop a marketing and sales
force with technical expertise and with supporting distribution capability.
There can be no assurance that the Company will be able to establish in-house
sales and distribution capabilities or relationships with third parties, or
that it will be successful in gaining market acceptance for its products.
Health Care Legislation; Uncertainty of Third-Party Reimbursement. There is
significant national concern today about the availability and rising cost of
health care in the United States. New federal and/or state legislation may be
passed or regulations adopted to attempt to provide broader and better health
care and to manage and contain its cost. NPS cannot predict whether any such
legislative or regulatory proposals will be adopted or the effect such
proposals may have on its business. Moreover, the pendency of such proposals
could have a materially adverse effect on the Company's ability to raise
capital, and the adoption of such proposals could have a materially adverse
effect on the Company in general.
In both domestic and foreign markets, sales of the Company's product
candidates will depend in part on the availability of reimbursement from
third-party payors such as government health administration authorities,
private health insurers, and other organizations. Under current guidelines,
Medicare does not reimburse patients for self-administered drugs. Such policy
may adversely affect the market for products designed to treat patients with
age-related disorders, such as HPT and osteoporosis. In addition, third-party
payors are increasingly challenging the price and cost-effectiveness of
medical products and services. Significant uncertainty exists as to
20
the reimbursement status of newly approved health care products. There can be
no assurance that the Company's product candidates will be considered cost-
effective or that adequate third-party reimbursement will be available to
enable NPS to maintain price levels sufficient to realize an appropriate
return on its investment in product development. Failure to achieve sufficient
price levels for its drugs could adversely affect the Company's business.
Legislation and regulations affecting the pricing of pharmaceuticals may
change before any of the Company's product candidates are approved for
marketing. Adoption of such legislation or regulations could further limit
reimbursement for medical products and services. Furthermore,
commercialization of any potential product of the Company may be adversely
affected to the extent that such legislation has a materially adverse effect
on the business, financial condition and profitability of other companies that
are current or future collaborators for certain of the Company's product
candidates.
Dependence on Key Personnel; Ability to Manage Growth. The Company is highly
dependent on the principal members of its scientific and management staff.
Loss of any of these persons could adversely affect the Company's operations.
The Company does not have long-term employment contracts. The Company's future
success will also depend in large part upon its continued ability to attract
and retain other highly qualified scientific and management personnel. The
Company faces competition for personnel from other companies, academic
institutions, government entities, and other organizations. There can be no
assurance that NPS will be successful in hiring or retaining personnel. In
addition, the Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as clinical trials, government
approvals, production and marketing, and general pharmaceutical company
management are expected to place increased demands on the Company's resources.
These demands may require the addition of new management, research and
development, and administrative personnel, and the development of additional
expertise by existing management personnel. The failure to acquire such
services or to develop such expertise could materially adversely affect
prospects for the Company's success. Certain of these anticipated future needs
are expected to be met through the agreements with the licensees and potential
additional corporate collaborations, but there can be no assurance that any
services provided by the licensees or other potential corporate collaborators
will be sufficient to meet the Company's personnel or management needs.
Risk of Product Liability. The testing and commercial use of human
therapeutic products entail significant risks. If the Company succeeds in
developing products under its product development programs, use of such
products in clinical trials and the sale of such products following regulatory
approval may expose the Company to liability claims allegedly resulting from
use of such products. These claims might be made directly by consumers or
others. NPS has obtained limited product liability insurance coverage for its
human clinical trials. There can be no assurance that NPS will be able to
maintain such insurance or obtain similar insurance for any of its future
clinical trials or that coverage will be in sufficient amount to protect
against damages for liability that could have a materially adverse effect on
NPS. There can also be no assurance that NPS will be able to obtain or
maintain product liability insurance in the future on acceptable terms or in
sufficient amounts to protect the Company against damages for liability that
could have a materially adverse effect on the Company. The agreements with the
licensees each provide for certain indemnification against such claims, but
there can be no assurance that any claim arising from products sold by a
collaborative partner or licensee would not also include claims directly
against NPS or that any such claim would be indemnifiable under such
agreement.
Use of Hazardous Materials. Certain of the Company's research activities
involve the controlled use of hazardous materials, radioactive compounds,
other potentially dangerous chemicals and biological agents. The Company is
required to comply with complex local, state and federal regulations involving
the use, storage, and handling of these materials and may incur certain costs
in complying therewith. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by local, state and federal regulations, the possibility
of unintended noncompliance with such regulations or the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
In the event of such an accident, the Company could be liable for any damages
that result, and any such liability could exceed the resources of the Company.
The Company may incur substantial costs to comply with environmental
regulations.
21
The Company contracts with third parties to remove radioactive and
biohazardous waste generated by the Company. The disposal of such waste,
third-party waste disposal companies contracted by the Company, and their
disposal sites are regulated by the EPA. There can be no assurance that the
Company will not be held liable for any costs or damages associated with use,
handling, and disposal of such waste.
Volatile Stock Price. The market price of the shares of Common Stock, like
that of the common stock of many other biotechnology and biopharmaceutical
companies, has been and is likely to continue to be highly volatile. Factors
such as fluctuations in the Company's operating results, announcements of
technological innovations or new commercial products by the Company or its
competitors, progress with clinical trials, governmental regulation, changes
in reimbursement policies, developments in patent or other proprietary rights,
developments in the Company's relationships with current or future
collaborative partners, public concern as to the safety and efficacy of drugs
developed by the Company and its competitors, and general market conditions
for biotechnology or pharmaceutical stocks could have a significant adverse
effect on the future price of the Common Stock.
Dilution through Employee Stock Plans. The Company maintains stock incentive
plans whereby employees, directors, and consultants can acquire shares of
common stock in the Company through the exercise of granted stock options,
stock grants, and stock purchases. Such stock incentive plans will result in
dilution to existing shareholders.
Anti-takeover Effects of Certain Provisions and Delaware Law. Certain
provisions of the Company's Certificate of Incorporation and Bylaws and
Section 203 of the Delaware General Corporation Law could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. Such provisions could diminish the opportunities for a stockholder to
participate in tender offers, including tender offers at a price above the
then current market value of the Common Stock. Such provisions may also
inhibit fluctuations in the market price of the Common Stock that could result
from takeover attempts. In addition, the Board of Directors, without further
stockholder approval, may issue Preferred Stock that could have the effect of
delaying or preventing a change in control of the Company as well as adversely
affecting the voting power of the holders of Common Stock, including the loss
of voting control to others. In addition, the Board of Directors has adopted a
Shareholder Rights Plan (commonly known as a "poison pill") that may have the
effect of delaying or preventing a change in control.
Absence of Dividends. The Company has never paid any cash dividends and does
not anticipate paying cash dividends in the foreseeable future.
ITEM 2. PROPERTIES.
NPS currently occupies approximately 45,000 square feet of leased
laboratory, support and administrative space in the University of Utah
Research Park. The Company pays approximately $700,000 annually under its
facilities lease. The lease on these facilities expires in September 1999. The
Company anticipates that it will need to acquire additional space in order to
meet its needs over the next three years. The Company believes that it will be
able to acquire additional space on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to the stockholders during the fourth quarter of
1997.
22
EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company and their ages as of December 31, 1997
are as follows:
NAME AGE POSITION
---- --- --------
Chief Executive Officer, President and Chairman of
Hunter Jackson, Ph.D. .. 47 the Board
N. Patricia Freston,
Ph.D. ................. 58 Vice President, Human Resources
James U. Jensen, J.D.... 53 Vice President, Corporate Development and Legal
Affairs, Secretary and Director
Thomas B. Marriott,
Ph.D. ................. 50 Vice President, Development Research
Vice President, Finance, Chief Financial Officer and
Robert K. Merrell....... 42 Treasurer
Edward F. Nemeth,
Ph.D. ................. 45 Vice President and Chief Scientific Officer
Douglas Reed, M.D. ..... 43 Vice President, Business Development
- ---------------------
Hunter Jackson, Ph.D., has been Chief Executive Officer and Chairman of the
Board since founding the Company in 1986. He was appointed to the additional
position of President in January 1994. Prior to founding the Company, he was
an Associate Professor in the Department of Anatomy at the University of Utah
School of Medicine. Dr. Jackson received a B.A. in English from the University
of Illinois and a Ph.D. in Psychobiology from Yale University. He received
postdoctoral training in the Department of Neurosurgery, University of
Virginia Medical School.
N. Patricia Freston, Ph.D., has been Vice President, Human Resources since
March 1997. From 1980 to February 1997, she served as Manager of Personnel
Services, Questar Corporation a public integrated energy company. From 1977 to
1980, Dr. Freston was Assistant Director of Training for Mountain Fuel Supply,
a subsidiary of Questar. From 1971 to 1977, she was Director of Academic
Programming for the Division of Continuing Education, University of Utah. Dr.
Freston received a B.A. in English from Weber State University, an M.A. in
English from Utah State University, an M.S. in Education from the University
of Texas and a Ph.D. in Industrial Psychology from the University of Utah.
James U. Jensen, J.D., has been Vice President, Corporate Development and
Legal Affairs and Secretary since August 1991. He has been Secretary and a
director of the Company since 1987. From 1986 to July 1991, he was a partner
in the law firm of Woodbury, Jensen, Kesler & Swinton, P.C. (or its
predecessor firm) concentrating on technology transfer and licensing and
corporate finance. From July 1985 until October 1986, he served as Chief
Financial Officer of Cericor, a software company, and from 1983 to July 1985,
as its outside general counsel. From 1980 to 1983, he served as General
Counsel and Secretary of Dictaphone Corporation, a subsidiary of Pitney Bowes
Inc. He serves as a director of Wasatch Funds, Inc., a registered investment
company, and of Interwest Home Medical, Inc., a public home use medical
equipment distributor. Mr. Jensen received a B.A. in English/Linguistics from
the University of Utah and a J.D. and an M.B.A. from Columbia University.
Thomas B. Marriott, Ph.D., has been Vice President, Development Research
since August 1993. From February 1990 to July 1993, he served as Director,
Clinical Investigations for McNeil Pharmaceutical, a subsidiary of Johnson &
Johnson with responsibility for developing and implementing clinical trial
strategies for a number of products. From 1986 until 1990, Dr. Marriott was
Director, Drug Metabolism for McNeil Pharmaceutical with the responsibility
for planning, initiating, and completing bioanalytical drug disposition and
clinical biopharmaceutics and pharmacokinetics research required for INDs and
NDAs. In this position, he participated in the preparation of several INDs and
NDAs with responsibility for preparing or supervising the preparation of the
IND preclinical drug metabolism section and the NDA preclinical and clinical
metabolism and biopharmaceutics sections, and was responsible for integrating
the pharmacology, toxicology and clinical sections of INDs and NDAs. He
received a B.S. in Chemistry from Carleton College and a Ph.D. in Chemistry
from the Institute of Molecular Biology at the University of Oregon.
Robert K. Merrell has been Vice President, Finance, Chief Financial Officer,
and Treasurer since January 1995 and served as Director of Finance and
Administration and Treasurer from December 1993 to December
23
1994. He joined the Company as Controller/Treasurer in September 1988. Prior
to that time, he was a Senior Manager at KPMG Peat Marwick LLP. Mr. Merrell
has been a licensed C.P.A. since 1980. He received a B.A. in Accounting from
the University of Utah and an M.M. from Kellogg Graduate School of Management
at Northwestern University.
Edward F. Nemeth, Ph.D., has been a Vice President of the Company since
January 1994 and was appointed Chief Scientific Officer in July 1997. He
joined the Company as Director of Pharmacology in March 1990. From 1986 until
joining the Company, Dr. Nemeth was an Assistant Professor in the Department
of Physiology and Biophysics at Case Western Reserve University School of
Medicine. He holds a B.A. in Chemistry and Psychology from Lawrence University
and a Ph.D. in Pharmacology from Yale University.
Douglas Reed, M.D., has been Vice President, Business Development since
April 1996. He also served on the Board of Directors of the Company from 1992
to 1996. From May 1989 to 1996, Dr. Reed was a Vice President of S.R. One, a
venture capital firm. From 1985 to 1987, he was Assistant Professor at Yale
University School of Medicine. Dr. Reed received an M.D. from the University
of Missouri and an M.B.A. from the Wharton School at the University of
Pennsylvania.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "NPSP." The following table sets forth the quarterly high and low
closing sales prices for the Company's Common Stock for each quarter in the
two most recent fiscal years as reported by the Nasdaq National Market:
HIGH LOW
------- -------
1996
First Quarter............................................. $16.500 $12.500
Second Quarter............................................ $16.750 $11.750
Third Quarter............................................. $14.250 $ 9.750
Fourth Quarter............................................ $11.625 $ 9.750
1997
First Quarter............................................. $12.250 $ 9.500
Second Quarter............................................ $11.000 $ 8.250
Third Quarter............................................. $10.750 $ 8.125
Fourth Quarter............................................ $10.063 $ 7.500
On February 27, 1998, there were approximately 1600 beneficial holders of
the Company's Common Stock.
The Company has never declared or paid dividends on its capital stock. The
Company currently intends to retain any future earnings to finance the growth
and development of its business and therefore does not anticipate paying any
cash dividends in the foreseeable future.
24
RECENT SALES OF UNREGISTERED SECURITIES
On November 26, 1997, the Company sold 160,000 shares of Common Stock, par
value $.001 to SmithKline Beecham for an aggregate purchase price of
$1,954,000 in reliance on Section 4(2) of the Securities Act of 1933. The sale
of such shares was made in conjunction with the execution of an amendment to a
collaborative research and license agreement between the parties.
(The balance of this page is intentionally left blank.)
25
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below is for each fiscal year in the
five-year period ended December 31, 1997, and for the period from October 22,
1986 (inception) through December 31, 1997. This has been derived from the
Company's financial statements, which have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, and are qualified by reference
to such Financial Statements and Notes thereto. The Company is considered a
development stage company as described in Note 1 of Notes to Financial
Statements.
OCTOBER 22, 1986
YEAR ENDED DECEMBER 31, (INCEPTION)
--------------------------------------------- THROUGH
1993 1994 1995 1996 1997 DECEMBER 31, 1997
-------- ------- ------- ------- -------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations
Data:
Revenues from research
and license
agreements........... $ 868 $ 3,861 $ 9,562 $20,342 $ 5,842 $ 48,500
Operating expenses:
Research and
development........ 6,021 7,765 8,727 11,326 15,090 56,776
General and
administrative..... 2,004 3,122 3,975 5,111 5,587 23,487
-------- ------- ------- ------- -------- --------
Total operating
expenses......... 8,025 10,887 12,702 16,437 20,677 80,263
-------- ------- ------- ------- -------- --------
Operating income
(loss)........... (7,157) (7,026) (3,140) 3,905 (14,835) (31,763)
Other income
(expense), net....... (2) 270 322 2,550 3,308 6,674
-------- ------- ------- ------- -------- --------
Income (loss) before
income tax expense... (7,159) (6,756) (2,818) 6,455 (11,527) (25,089)
Income tax expense.... -- -- 500 350 167 1,018
-------- ------- ------- ------- -------- --------
Net income (loss)..... $ (7,159) $(6,756) $(3,318) $ 6,105 $(11,694) $(26,107)
Diluted net income
(loss) per share(1).. $ (1.91) $ (1.13) $ (0.48) $ 0.55 $ (0.98)
======== ======= ======= ======= ========
Diluted weighted
average shares
outstanding(1)....... 3,751 5,977 6,924 11,086 11,956
YEAR ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995 1996 1997
-------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Balance Sheet Data:
Cash, cash
equivalents, and
marketable
securities........... $ 6,414 $ 9,323 $ 8,340 $68,962 $ 57,942
Working capital....... 5,839 8,104 5,832 67,413 56,365
Total assets.......... 12,599 12,084 10,600 72,160 62,634
Long-term portion of
capital leases and
long-term debt....... 830 440 747 327 65
Deficit accumulated
during development
stage................ (10,443) (17,199) (20,517) (14,413) (26,107)
Stockholders' equity.. 7,011 10,165 7,322 69,870 62,634
- --------
(1) See Note 1 of Notes to Financial Statements for information concerning the
computation of net income (loss) per share.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the results of operations and financial
condition of NPS should be read in conjunction with the Financial Statements
and Notes thereto included elsewhere in this report.
Overview
Since its inception in 1986, NPS has devoted substantially all of its
resources to its research and development programs. To date, the Company has
not completed development of any pharmaceutical product for sale and has
incurred substantial losses. NPS has incurred cumulative losses through
December 31, 1997 of $26.1 million, net of cumulative revenues from research
and license agreements of $48.5 million. The Company expects to incur
significant operating losses over at least the next several years as the
Company continues and expands its research and development and preclinical and
clinical testing activities. Substantially all of the Company's revenues are
derived from license fees, milestone payments and research and development
support payments from its licensees and these revenues fluctuate from quarter
to quarter. Accordingly, the Company expects that income