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NaPro BioTherapeutics, Inc. and Subsidiaries Financial Statements Index to Consolidated Financial Statements

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

Commission File Number 0-24320

NAPRO BIOTHERAPEUTICS, INC.
(Exact name of Registrant as specified in its charter)

        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 the past 90 days. Yes ý    No o

        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.    o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý    No o

        The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $44,499,000 as of July 2, 2003 (the last business day of the registrant's second fiscal quarter in 2003). For purposes of determining this number, 2,949,722 shares of common stock held by affiliates are excluded. For purposes of making this calculation, the registrant has defined affiliates as including all directors and officers, related parties thereto, and beneficial owners of more than ten percent of the common stock of the Company.

        As of March 1, 2004, the Registrant had 30,974,121 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Table of Contents

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Part I
Item 1
Business

General

        NaPro BioTherapeutics, Inc. ("we", "NaPro" or "the Company") is a pharmaceutical company focused on research and development of novel, anti-cancer agents, and novel genomic technologies, primarily in the area of gene editing, for applications in human therapeutics and diagnostics.

        Historically, the focus of our business has been the production and sale of paclitaxel, a naturally occurring chemotherapeutic anti-cancer agent found in certain species of yew, or Taxus, trees. The majority of our resources had been devoted to this endeavor. We had accumulated approximately $100 million of losses over the past 13 years, principally through research and development activities, and the development and implementation of our manufacturing capabilities so that we could supply bulk paclitaxel to our marketing partners, Mayne Pharma (USA) Inc. (f/k/a/ Faulding Pharmaceutical Co.) ("Mayne Pharma"), a subsidiary of Mayne Group Limited, and Abbott Laboratories ("Abbott").

        On December 12, 2003, we sold our worldwide generic injectable paclitaxel business to Mayne Pharma for $71.7 million in cash minus an inventory adjustment of $4.6 million to reflect the Company's actual inventory as of the closing. In addition, Mayne Pharma assumed certain liabilities associated with our paclitaxel business. Approximately $21.9 million of the proceeds of the transaction were paid to Abbott to retire all outstanding debt and payables we owed to Abbott. The remaining proceeds from the sale will be used to fund the development of products based on NaPro's proprietary oncology and gene editing platforms and for general corporate purposes.

        The assets sold to Mayne Pharma included our paclitaxel manufacturing assets, yew plantations, domestic and international issued and pending paclitaxel patents, a worldwide registration dossier, worldwide development and supply agreements, inventories and settlement of accounts receivable. NaPro retained all of its intellectual property not used in connection with the business sold and we retained intellectual property rights to research, develop, make, use and sell products other than those associated with the generic injectable paclitaxel business. We also retained liabilities related to our ongoing business, including those relating to our employees, our contracts and license agreements unrelated to the paclitaxel business and certain leases and purchase orders. In addition, we retained other liabilities related to our manufacturing and sale of paclitaxel that arose prior to the closing of the asset sale. Upon closing of the asset sale, we exited the generic paclitaxel business, terminated the development agreements with Abbott and Mayne Pharma, and transferred our other generic paclitaxel marketing agreements to Mayne Pharma.

        Our results of operations for 2003 reflect the fact that we were engaged in the business of manufacturing bulk paclitaxel for our two principal marketing partners, Abbott and Mayne Pharma, for substantially all of 2003. These results are not indicative of our current operations, which are primarily limited to research and development activities. During 2003 we obtained the raw material for our paclitaxel principally through supply contracts with third party manufacturers who processed crude paclitaxel from raw biomass materials. Using our proprietary manufacturing technology for bulk paclitaxel, we purified the crude paclitaxel in our facilities located in Boulder, Colorado. Prior to the sale of our generic paclitaxel business to Mayne Pharma, we had alliances with established pharmaceutical companies who assisted us in marketing these products, including Abbott for sales and distribution in the U.S., Tzamal Pharma for sales and distribution in Israel, and Mayne Pharma for sales and distribution in Australia and more than 25 other countries in the Middle East, Latin America and Asia.

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NaPro Research and Development Activities

        The following chart identifies our therapeutic products under development. All of our products are in pre-clinical research:

        We have determined that the speed and probability of approval of our oncology programs in the near term is higher than for our gene-editing therapeutics and that the timelines for development are likely to be shorter; therefore, we have decided to focus our long-term efforts and internal resources in the oncology area. We will continue over the short term to spend resources in the gene-editing area, primarily with the intent of developing adequate data to support finding partners or purchasers of the opportunities of the gene-editing technology. This allocation of effort and resources will continually be reviewed and is subject to change based on the data being generated by each individual program.

        In addition to oncology and gene editing research and development activities, we are also actively engaged in evaluating the in-licensing or purchase of potential new products and/or technologies, whether or not those products or technologies are derived from natural products, are chemotherapeutic agents, or complement our gene editing technology. Our evaluation of new products and technologies may involve the examination of individual molecules, classes of compounds, or platform technologies, in both cancer and other therapeutic areas. Acquisitions of new products or technologies may involve the purchase of such products or technologies, or the acquisition of, or merger with, other companies. In the event we enter into any such relationships or transactions, we may consider using available cash, issuing equity securities or increasing our debt. We also may evaluate disposing of assets or operations from time to time. Such transactions could materially affect our capital structure.

Oncology Products

        We are developing several targeted and non-targeted compounds that we believe have potential as anti-cancer agents to treat a variety of cancers including, but not limited to, breast, small cell lung, prostate, pancreatic, and squamous cell head and neck carcinomas. Non-targeted compounds are cytotoxic chemotherapeutic agents which are intended to be used either as single agents or in combination with other approved compounds. By contrast, our targeted compounds consist of conjugates of a cytotoxic agent coupled to a peptide, which have potential to selectively and specifically target certain types of tumor cells. We believe that coupling cytotoxic agents with targeting agents will lead to greater safety and efficacy when compared to the untargeted cytotoxic chemotherapy agents currently available on the market. We are testing four targeted compounds described below in various in vitro assays and animal models, and are currently undertaking the development work necessary to introduce these agents into human clinical trials. These targeted compound programs are being performed at facilities contracted by NaPro in collaboration with academic researchers under the direction of our drug development team.

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•

We are developing a third generation taxane, referred to as NBT-287, designed to overcome the primary mechanisms leading to taxane drug resistance, specifically the development of mutant tubulin and multi-drug resistance. We are currently testing this molecule in a variety of taxane resistant cell lines.



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NBT-273 is a NaPro developed and patented quassinoid analog. Quassinoids are complex polyfunctional, polycyclic natural products of the plant family Simaroubaceae, which exhibit excellent antineoplastic activity. NaPro has in-licensed several quassinoid compositions as well as their isolation and synthesis from Advanced Research and Technology Institute, Inc. NaPro's proprietary semisynthetic quassinoid compound NBT-273 has shown promise in several different in vivo and in vitro cancer models where it appears to selectively down regulate Cmyc.



•

We are developing another set of compounds known as BBN-Taxane conjugates, which is Bombesin, a peptide ligand, chemically linked to taxanes. These proprietary new chemical entities are designed to selectively internalize taxanes, such as paclitaxel, into cancer cells. The peptide ligands bind to cell surface BBN receptors which then cause the tumor cells to internalize the conjugate. Once inside the tumor cell, the cytotoxic agent is released from the ligand and induces apoptosis (cell death). We have in-licensed intellectual property from the University of Alabama which permits the internalization of drug conjugates by tumor cells expressing unregulated gastrin-releasing peptide receptors.



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We are also developing HN-1 Taxane conjugates, which consist of synthetic peptide ligands chemically linked to taxanes. The HN-1 peptide ligands are selectively internalized by squamous cell carcinomas found in head and neck tumors. This peptide does not appear to be internalized by any normal cells. We in-licensed intellectual property in this area from the University of Texas M. D. Anderson Cancer Center.

        We anticipate bringing two of our oncology products into clinical trials during 2004. The clinical development of oncology drugs has many opportunities for failure. Clinical development of these compounds are expected to take at least five years from the initiation of human clinical trials followed by a lengthy review by the U.S. Food and Drug Administration ("FDA"). FDA review will likely add at least another year to the development timeline prior to commercialization, suggesting that commercial sales of these compounds, if fully developed and approved, would not likely commence before 2010.

Genomics Products

        In the field of genomics, we are engaged in the discovery, patenting, and development of a range of products using our proprietary gene editing technology. Employing this technology, we are developing products that specifically and precisely edit genes. We believe these products can contribute to the prevention and treatment of many different types of disease, both inherited and acquired.

        We have entered into a 20-year gene editing technology license with the University of Delaware and Thomas Jefferson University. The license agreement grants us exclusive, worldwide rights to intellectual property including patent applications relating to the use of proprietary molecules designed to edit genes in humans, animals, plants, viruses and microbes. One of the licensed technologies allows us to use proprietary oligonucleotides to make small, specifically targeted modifications in the chromosomes of a target animal or plant. With this technology, we are attempting to develop products and processes that may allow us to effectively treat certain human genetic disorders and/or develop processes to detect genetic variations in a patient's genes.

        We have agreed to provide research and patent funding to the University of Delaware and Thomas Jefferson University, as well as an ongoing license fee paid in our common stock. As of December 31, 2003, we have issued 301,200 shares of common stock under the license to the University of Delaware, 51,300 shares to Thomas Jefferson University and 47,500 shares to The Samuel Roberts Noble

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Foundation, Inc., each of which has an ownership interest in the licensed intellectual property. Assuming we do not cancel the license, we will issue an additional 800,000 shares in 100,000 share-per-year increments on the license anniversaries and/or in 200,000 share increments upon the achievement of certain milestone events. We may, at our option, accelerate the issuance dates. The license is terminable at our option and, if it is terminated, no further shares will be issued. We have committed to fund at least $300,000 in research at the University of Delaware during 2004. Unless we terminate the license, we are also committed to funding at least $300,000 per year in research at the University of Delaware during 2005 and 2006 as well.

        Among the disorders we are focusing on in our genomics program for clinical treatment are Sickle Cell disease and Huntington's disease. Sickle Cell disease is a hereditary blood disorder caused by a single point mutation of the betaglobin gene. It is characterized by a defined change in the composition of hemoglobin, the protein used to carry oxygen in the blood. The sickle hemoglobin molecules polymerize into long fibers within red blood cells when deoxygenated, causing the cell to become deformed (sickled), rigid and adhesive. The sickled red blood cells block oxygen flow to the tissues leading to organ damage, stroke and joint pain. The majority of current treatments for Sickle Cell disease address only the symptoms of the disease. These treatments include the use of pain medications and blood transfusions. While all of these treatments are used to manage the disease, breakthrough crises occur in most patients. We are developing an ex vivo technique aimed at treating this disorder. We are in the early stages of this development and our prospects for success, if any, cannot be measured at this time.

        Huntington's disease is a progressive, neurological disorder resulting in degeneration of nerve cells in the brain. It is specifically characterized by lethal aggregate formation in neural tissue. Eventually, the patient suffers dementia, uncontrolled movements, and death. There is no known cure for this rare disease. Symptoms usually appear between the ages of 35 and 50, although younger people can also develop the disease. The disease affects five per every one million people. We are developing an oligonucleotide, which may potentially allow the cells to survive. We are in the early stages of this program and we can provide no assurance that we will be successful in this development effort.

        Both the Sickle Cell and the Huntington's programs are in pre-clinical development and will require significant additional work before entering the clinic. We hope to have the Huntington's program in the clinic in 2005, assuming continued success in pre-clinical development and assuming we continue these programs. Our gene editing enables us to develop many different products and services and, assuming continued success in developing the technology, we expect to seek funding from the federal government, private foundations and possible collaborators.

        We may also be able to develop products for diagnostics, reagents, cell lines and animal models that can be used by the scientific and medical research community to further their own research. This technology may permit specific control over changes in any genome under examination and should help determine the function of genes and the consequences of natural variations in chromosomes in research, therapeutic, and agricultural applications.

        In December 2002, we acquired the genomics business of Pangene Corporation for $1.3 million in cash and assumption of debt obligations totaling approximately $65,000. The acquisition consisted primarily of patents and intellectual property relating to Pangene's homologous recombination technology and gene isolation and service business, physical assets, instrumentation, software, customer relationships and third-party licenses. In connection with this agreement, we acquired additional patents in January 2003 for $400,000. In December 2003, we discontinued the gene isolation and service component of this acquisition, and the revenues and costs related to this business are included in discontinued operations. In connection with the decision to sell the gene isolation business, equipment and software with a net book value of $122,000 and intangible assets, consisting of customer

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relationships, with a net book value of $83,000 are considered held for sale at December 31, 2003. The remaining assets we acquired are still being used in our ongoing operations.

Patents and Proprietary Technology

        Our success in commercializing, producing and marketing products and technologies in the future depends in part on our ability to obtain and maintain adequate protection of the intellectual property related to our technologies and products, both in the U.S. and other countries, and to operate without infringing the proprietary rights of third parties. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. The patent positions of biotechnology companies, including our patent position, are generally uncertain and involve complex legal and factual questions.

        We cannot predict the breadth of claims that will be allowed and issued to us for patents related to biotechnology or pharmaceutical applications. Before a patent is issued, its coverage can be significantly narrowed, either in the U.S. or abroad. We also do not know whether any of our pending or future patent applications will result in the issuance of patents. To the extent patents have been issued or will be issued, some of these patents are subject to further proceedings that may limit their scope and once patents have been issued, we cannot predict how the claims will be construed or enforced. It is not possible to determine which patents may provide significant proprietary protection or competitive advantage, or which patents may be circumvented or invalidated. Furthermore, patents already issued to us, or patents that may be issued on our pending applications, may become subject to dispute, including interference proceedings in the U.S. to determine priority of invention. If our currently issued patents are invalidated or if the claims of those patents are narrowed, our ability to prevent competitors from marketing products that are currently protected by those patents could be reduced or eliminated. We could then face increased competition resulting in reduced market share, prices and profit.

        In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting and defending their proprietary rights in foreign jurisdictions. For example, methods of treating humans are not patentable in many countries outside of the U.S.

        Our patents may not afford us protection against competitors, especially since there is a lengthy time between when a patent application is filed and when it is issued. We may also incur substantial costs in asserting claims against, and defending claims asserted against us by third parties to prevent the infringement of our patents and proprietary rights by others. Participation in such infringement proceedings may adversely affect our business and financial condition, even if the eventual outcome is favorable.

        Our commercial success also depends in part on our ability to avoid infringing patents and proprietary rights of third parties and not breaching any licenses that we have entered into with regard to any future products. There are many genomics, pharmaceutical and chemical patents being issued every week throughout the world. Other parties have filed, and in the future are likely to file, patent applications covering technologies we are developing. Many of those have patent claims that are difficult to categorize and interpret. Because of this, we may infringe on intellectual property rights of others without being aware of the infringement.

        If our technology, products or activities are deemed to infringe the other companies' rights, we could be subject to damages or be prevented from using the technology that is infringing other companies' rights, or we could be required to obtain licenses to use that technology. If patents covering technologies required by our operations are issued to others, we may have to rely on licenses from third parties, which may not be available on commercially reasonable terms, or at all. Third parties may

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accuse us of employing their proprietary technology without authorization. In addition, third parties may obtain patents that relate to our technologies and claim that our use of such technologies infringes their patents, even if we have received patent protection for our technology. Such claims could require us to incur substantial costs and could have a material adverse effect on us, regardless of the merit of the claims, including the following:

•

the diversion of management and technical personnel in defending us against any such claims or enforcing our patents. In this regard, we may be required to defend a lawsuit or defend a proceeding, in the United States Patent and Trademark Office, either of which could be expensive and time consuming;



•

paying a large sum for damages if we are found to be infringing;



•

being prohibited from selling or licensing our products or product candidates unless and until we obtain a license from the patent holder, who may refuse to grant us a license or who may only agree to do so on unfavorable terms. Even if we are granted a license, we may have to pay substantial royalties or grant cross-licenses to our patents;



•

redesigning our products or product candidates so they do not infringe on the patent holder's technology if we are unable to obtain a license. This may not be possible and, even if possible, it could require substantial additional capital and could significantly delay commercialization while we attempt to design around the patents or rights infringed; and



•

incurring substantial cost in defending ourselves and indemnifying our strategic partners in patent infringement or proprietary rights violation actions brought against them relating to their development and commercialization of our products.

        We own issued patents and have applied for patents relating to our targeted and non-targeted oncology programs as well as our genomics programs. As of December 31, 2003, we (either alone or with Bryn Mawr College) have 5 issued patents related to non-targeted oncology and 9 related to our genomics programs. The following lists the U.S. patents the Company holds as of December 31, 2003:

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*

The actual expiration date could be affected by certain factors including terminal disclaimers, extensions or abandonment before expiration, among other things.

        In addition, we (either alone or with the University of Illinois, Chicago) have applied for 1 U.S. patent in relation to our targeted oncology program, 4 U.S. patents in relation to our non-targeted oncology program and 10 related to our genomics programs.

        We have 3 issued foreign patents and 18 pending foreign applications in relation to our non-targeted oncology program and 7 pending foreign applications in relation to our targeted-oncology program. We own (by acquisition from Pangene) 40 issued foreign patents and 18 pending foreign applications related to our genomics programs. Although we have aggressively worked to protect our proprietary technologies through the patenting process, there is no assurance that we will have freedom to operate in the fields where we are developing commercial products.

        We have applied for and will continue to apply for patents covering our technologies, processes and products as and when we deem appropriate. However, these applications may fail to result in issued patents.

        The following lists the U.S. patents we have in-licensed as of December 31, 2003 that are owned by third parties:

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*

The actual expiration date could be affected by certain factors including terminal disclaimers, extensions or abandonment before expiration, among other things.

        In addition, we have in-licensed 1 U.S. patent application and 3 foreign patent applications from the University of Texas M.D. Anderson Cancer Center and 6 foreign patent applications from the UAB Research Foundation, in relation to our targeted oncology program. We in-licensed 2 U.S. patent applications from the University of Mississippi and 1 U.S. patent application and 19 issued foreign patents from the Advanced Research and Technology Institute, Inc., in relation to our non-targeted oncology program. In our genomics business, we have in-licensed 3 U.S. and 13 foreign patent applications from SRI International and 1 issued foreign patent, 19 U.S. and 6 foreign patent applications from the University of Delaware.

        We also rely on trade secrets and other proprietary information to develop and protect our competitive position, some of which is not patented. Our success will depend in part on our ability to protect our trade secrets related to our oncology and gene editing programs. While we believe that we have protected our trade secrets, some of our current or former employees, consultants, scientific advisors or collaborators could make unauthorized disclosures of our confidential information to competitors or use our technology for their own benefit. Enforcing a claim alleging the infringement of our trade secrets would be expensive and difficult to prove, making the outcome uncertain. Our competitors may also independently develop equivalent knowledge, methods and technology or gain access to our proprietary information through some other means.

        See "Item 3. Legal Proceedings," for a description of pending patent litigation.

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Government Regulation and Product Approvals

        Pharmaceutical research, pre-clinical development, clinical trials, manufacturing and marketing activities are subject to regulation for safety, efficacy and quality by governmental authorities in the U.S. and other countries. Regulations govern, among other things, the testing, manufacture, labeling, storage, record keeping, approval, advertising and promotion of our products and product candidates. 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 U.S. include pre-clinical laboratory tests, animal pharmacology and toxicology studies and formulation studies, the submission of an Investigational New Drug Application ("IND") to the FDA for human clinical testing, the carrying out of adequate and well-controlled human clinical trials to establish the safety and efficacy of the pharmaceutical agent, the submission of a New Drug Application ("NDA") to the FDA, and FDA approval of the NDA. In addition to obtaining FDA approval for each product, each domestic drug manufacturing establishment must be registered with the FDA. Domestic drug manufacturing establishments are subject to regular inspections by the FDA and must comply with FDA regulations.

        Pre-clinical studies include the laboratory evaluation of in vitro pharmacology, product chemistry and formulation, as well as animal studies to assess safety. Pre-clinical safety tests must be conducted by laboratories that comply with FDA regulations. The results of some of the pre-clinical tests form a part of an IND along with the proposed clinical study, and chemistry and manufacturing information. The IND process may be costly.

        Clinical trials are typically conducted in three sequential phases. In Phase I, the initial introduction of the drug into a small number of healthy volunteers is undertaken. The drug is evaluated for safety. The Phase I trial must also provide pharmacological data that is sufficient to design the Phase II trials. For certain drugs such as cancer drugs Phase I trials may be conducted in patients rather than in healthy volunteers. Clinical trials must be sponsored and conducted in accordance with good clinical practice.

        Phase II trials involve studies in a limited patient population in order to obtain initial indications of the efficacy of the drug for specific, targeted indications, to determine dosage tolerance and optimal dosage, and to identify possible adverse affects and safety risks. When a compound is determined preliminarily to be effective and to have an acceptable safety profile in Phase II evaluation, Phase III trials can be undertaken to evaluate safety and efficacy further in expanded patient populations at geographically diverse clinical trial sites. Positive results in Phase II are no guarantee of positive results in Phase III.

        The results of the clinical trials and manufacturing, toxicology and pharmacology information are submitted to the FDA in the form of an NDA. The approval of an NDA permits commercial-scale manufacturing, marketing, distribution, and sale of the drug in the U.S. The FDA may deny a new drug application filed by us or our collaborators, if any, if the applicable scientific and regulatory criteria are not satisfied. The FDA may require additional testing or information, and may require post-approval testing, surveillance and reporting to monitor the products. The FDA may ultimately decide that an NDA does not meet the applicable agency standards, and even if approval is granted, it can be limited or revoked.

        Federal and state laws protect the confidentiality of certain patient health information, including patient records, and restrict the use and disclosure of that protected information. In particular, the US Department of Health and Human Services published patient privacy rules under the Health Insurance Portability and Accountability Act of 1996. These privacy rules protect medical records and other personal health information by limiting its use and release, giving patients the right to access their medical records and limiting most disclosures of health information to the minimum amount necessary

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to accomplish an intended purpose. We believe that we generally have taken all necessary steps to comply with health information privacy and confidentiality statutes and regulations in all jurisdictions, both state and Federal. However, we, or the parties with which we do business, may not be able to maintain compliance in all jurisdictions where we do business. Failure to maintain compliance, or changes in state or Federal laws regarding privacy, could result in civil and/or criminal penalties and could have a material adverse effect on our business.

        Outside the U.S., our ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authority. This foreign regulatory approval process includes many of the same steps and uncertainties associated with FDA approval described above.

Competition

        The biopharmaceutical industry is an expanding and rapidly changing industry characterized by intense competition for product sales, financing, executive talent and intellectual property. We compete with all entities developing and producing therapeutic agents, including those for cancer treatment. Our competitors vary in terms of scale from small biotech companies to large pharmaceutical companies. Companies developing or selling taxane products include Aventis, Bristol Myers Squibb, Wyeth, Daiichi, Abbott Laboratories and Bayer.

        In the event we develop and commercialize products and technologies in the future, we expect competition from fully integrated pharmaceutical companies and more established biotechnology companies as well as government, universities and public and private research institutions. These companies and institutions conduct research, seek patent protection and establish collaborative arrangements for product development and marketing. Most of these companies and institutions have significantly greater financial resources and expertise than we do in the following:

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research and development;



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preclinical studies and clinical trials;



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obtaining regulatory approvals;



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manufacturing; and



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marketing and distribution.

        Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical companies or other organizations. In addition, other companies and institutions compete with us in recruiting and retaining highly qualified scientific and management personnel.

Research and Development Expenditures

        During the years ended December 31, 2003, 2002 and 2001, we spent approximately $10.8 million, $15.9 million and $13.4 million, respectively, on research and development activity for our oncology and genomics product candidates. Research and development is expected to remain a significant expense of our business. Our research and development is expected to concentrate on the development of novel, anti-cancer agents, and the development of novel genomic technologies, primarily in the area of gene editing, for applications in human therapeutics and diagnostics. We anticipate bringing two of our oncology products into clinical trials during 2004. Assuming success in our ongoing research, our Huntington's disease program may go into clinical trials during 2005. However, there can be no assurance that we will be able to achieve the expected timing of these programs. We also cannot estimate the cost of the effort necessary to complete the programs or the timing of commencement of material net cash inflows from these programs.

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Foreign and Domestic Operations; Export Sales

        All sales relate to discontinued operations and have been included in discontinued operations for the current and prior years. The following table sets forth, for the past three years, profitability (operating income (loss)), and identifiable assets attributable to our U.S. and foreign operations (in thousands):

(1)

Includes export sales into Australia of $13,073,000 in 2003, $7,330,000 in 2002, and $7,576,000 in 2001, as well as sales into Israel of $1,881,000 in 2002 and $1,954,000 in 2001.

        Sales of our paclitaxel into foreign markets accounted for approximately 51% of our 2003 revenue, 27% of our 2002 revenue, and 60% of our 2001 revenue.

Employees

        As of December 31, 2003, we had 67 employees, which included 12 part-time employees. Of these employees, 14 held Ph.D. or M.D. degrees, 37 employees, including 8 part-time employees, were engaged in drug development, and 30 employees, including 4 part-time employees, were in administration, legal, information technology and finance. We believe that our relations with our employees are good. In addition, we contract with many outside consultants for services relating to our drug development programs.

Environmental Law Compliance

        We may use radioactive materials and other hazardous or biohazardous substances in our research and development. As a result, we are potentially subject to material liabilities related to personal injuries or property damages that may be caused by the spread of radioactive contamination or by other hazardous substance releases or exposures at, or from, our facilities. Decontamination costs associated with radioactivity releases, other clean-up costs, and related damages or liabilities could be significant and could harm our business. The cost of this liability could exceed our resources.

        We are required to comply with increasingly stringent laws and regulations governing environmental protection and workplace safety, including requirements governing the handling, storage and disposal of radioactive and other hazardous substances and wastes, and laboratory operating and safety procedures. These laws and regulations can impose substantial fines and criminal sanctions for violations. Maintaining compliance with these laws and regulations with regard to our operations could require substantial additional capital. These costs could decrease our ability to conduct operations in a cost-effective manner.

Available Information

        We make available, free of charge, on or through our internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). Our internet address is www.naprobio.com. Our

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internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

Item 2
Properties

        We lease 10,000 square feet of administrative space and 5,580 square feet of space for research and development in Boulder, Colorado. We lease 13,500 square feet in Newark, Delaware and 1,100 square feet in Allentown, Pennsylvania for research and development, and we lease 2,100 square feet of office space in New York City, New York for administration. We also own five acres of undeveloped land in Longmont, Colorado. Our oncology research and development activities are conducted at a contract research laboratory leased to us by ChromaDex, Inc. ChromaDex is a supplier of phytochemical reference standards to which we sold our analytical and service group in April 2003 in exchange for approximately 15% of ChromaDex's then outstanding common stock. In addition, we sold property and equipment, valued at approximately $1.0 million to ChromaDex as well as provided rent and other subsidies of $468,000. As part of this transaction, ChromaDex assumed the lease for our research facility in Boulder, Colorado, and we sublease a portion of this facility back from ChromaDex.

Item 3
Legal Proceedings

        In June 2001, we and Abbott filed a patent infringement lawsuit in the Federal District Court in the Western District of Pennsylvania ("the court") against Mylan Laboratories, Inc. The lawsuit alleges infringement of U.S. Patent numbers 5,733,888, 5,972,992, 5,977,164, 6,140,359 and 6,306,894, all of which relate to paclitaxel. Mylan asserted defenses that, if successful, would result in the invalidity or unenforceability of the patents. On October 6, 2003, the Federal District Court in the Western District of Pennsylvania made a number of rulings in favor of NaPro and against Mylan. The court ruled that Mylan infringes on NaPro patents related to both stabilized formulations of paclitaxel and methods for making stable formulations. The court also ruled that the inventors listed on the NaPro patents were the first to invent the compositions and methods claimed in such patents. The court also adopted NaPro's interpretations of the patent claims asserted against Mylan in this case. On December 23, 2003, the court ruled that NaPro's patents were valid and that Mylan's claims that the patents were procured through inequitable conduct and fraud on the patent office were neither true nor justified. The Federal Circuit court has stayed an injunction which would have prevented Mylan from selling the infringing products, pending a ruling on Mylan's appeal by the Federal Circuit court. A trial to determine damages owed by Mylan in this case, and to resolve any issues which may be remanded to the District Court as a result of Mylan's appeal, has been set for February, 2005. The patents which are the subject of this litigation were sold in connection with the sale of the paclitaxel business to Mayne Pharma. Mayne Pharma has full control over the damages phase of this litigation, and may direct it, or settle it upon any terms it chooses. However, the transaction with Mayne Pharma provides that NaPro will be entitled to a portion of any cash award received with respect to this patent litigation with Mylan.

        TL Ventures Funds, one of our principal institutional investors, has advised us that it believes that the completion of the sale of our paclitaxel business to Mayne Pharma will entitle it to have its $8.0 million of Company 4% convertible subordinated debentures redeemed. We disputed this position and engaged in discussions with TL Ventures Funds regarding this matter. On September 8, 2003, TL Ventures Funds reasserted its position and informed us that, if we could not resolve this issue promptly, it intended to pursue legal remedies. On September 11, 2003, we filed a complaint in a case captioned NaPro BioTherapeutics, Inc. v. TL Ventures V L.P. and TL Ventures V Interfund L.P., Case No. 2003-CV-1812, District Court, Boulder County, Colorado. In our complaint, we seek a declaratory judgment from the court that the asset sale to Mayne Pharma did not permit TL Ventures to have the 4% convertible subordinated debentures redeemed. TL Ventures has filed a motion to dismiss the suit,

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and has filed an action in a case captioned TL Ventures V L.P. and TL Ventures V Interfund L.P. v. NaPro BioTherapeutics, Inc., Case No. 110-N, Delaware Court of Chancery, alleging that TL Ventures is entitled to redeem its 4% convertible subordinated debentures. The cases are ongoing. One of our former directors, Marc Ostro, is a general partner in certain of the TL Ventures Funds. Dr. Ostro resigned from our Board of Directors effective March 11, 2004.

Item 4
Submission of Matters to Vote of Security Holders

        At NaPro's special meeting of stockholders on December 12, 2003, the two matters listed below were submitted to a vote of, and approved by, NaPro's stockholders.

1.

To adopt a resolution approving the Company's sale of its paclitaxel business to Mayne Pharma under the terms set forth in the asset purchase agreement between Mayne Pharma and NaPro, dated August 25, 2003.

2.

To approve a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation of proxies in the event there are not sufficient votes to approve the asset sale at the time the special meeting is convened or to allow additional time for the satisfaction of conditions to the sale*.

*

The votes for this proposal were tallied by the Inspector of Election. However, because the resolution to sell the Company's paclitaxel business was adopted and approved by the Company's stockholders, the proposal to adjourn the special meeting was not brought before the meeting or otherwise acted upon.

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Part II
Item 5
Market for Registrant's Common Equity and Related Stockholder Matters

Market Information

        Prior to February 28, 2003 our common stock was traded on the Nasdaq National Market. On February 6, 2003, Nasdaq informed us that our common stock no longer met the requirements for continued listing. On February 28, 2003, we transferred our common stock listing to the Nasdaq SmallCap Market, where it trades under the symbol "NPRO." The following table sets forth, for the periods indicated, the high and low closing sale prices for our common stock for the fiscal years ended December 31, 2003 and 2002:

Stockholders

        As of December 31, 2003, we had 297 stockholders of record.

Dividends

        To date, we have not paid any dividends on our common stock. We intend to retain future earnings, if any, to finance the operation and expansion of our business and, therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future, if at all.

Sales of Unregistered Securities

        During 2003, we issued 76,725 shares of common stock to the University of Delaware, 11,400 shares of common stock to Thomas Jefferson University and 11,875 shares of common stock to The Samuel Robert Noble Foundation, Inc., all in connection with a 20-year gene editing technology license. The shares were issued in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, and Regulation D thereunder. The license requires the Company to provide for research and patent funding commitments and payments in common stock. To date, we have issued 301,200 shares of common stock under the license agreement to the University of Delaware, 51,300 shares to Thomas Jefferson University and 47,500 shares to The Samuel Roberts Noble Foundation, Inc., each of which has an ownership interest in the licensed intellectual property. Assuming we do not cancel the license, we will issue an additional 800,000 shares in 100,000 share-per-year increments on the license anniversaries and/or 200,000 share increments upon the achievement of certain milestone events. We may, at our option, accelerate the issuance dates. The license is terminable at NaPro's option and, if it is terminated, no further shares would be issued.

        In October 2003, we issued 45,046 restricted shares, valued at $45,000, to a vendor for services provided. As an issuance to a sophisticated investor not involving any public offering, this sale was exempt from registration under Section 4(2) of the Securities Act.

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Item 6
Selected Financial Data

        The selected financial data presented below for each year in the five years ended December 31, 2003, are derived from our financial statements, which have been audited by Ernst & Young LLP, independent auditors, and are qualified by reference to such Financial Statements and Notes thereto. The data presented below should be read in conjunction with our consolidated financial statements at December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003, and the related Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included elsewhere in this report. The results of our generic paclitaxel business, which was sold on December 12, 2003 to Mayne Pharma, have been reported as a discontinued operation.

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