-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HCGFfJR6bunQdXM8Y/B23Ke/rlF5U/soB+s2D842EEwt9PtZnsm3G2EXoIWd1h+n 1glejjC6AwFFVL675l60oQ== 0000912057-97-011300.txt : 19970401 0000912057-97-011300.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011300 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NPS PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000890465 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 870439579 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-23272 FILM NUMBER: 97570231 BUSINESS ADDRESS: STREET 1: 420 CHIPETA WAY SUITE 240 CITY: SALT LAKE CITY STATE: UT ZIP: 84108-1256 BUSINESS PHONE: 8015834939 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1996 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-23272 ------------------------ NPS PHARMACEUTICALS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 87-0439579 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification organization) No.) 420 CHIPETA WAY, SALT LAKE 84108-1256 CITY, UTAH (Address of principal (Zip Code) executive 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. /X/ To the best of the Company's knowledge, there have been no delinquent filers. The approximate aggregate market value of the Common Stock held by nonaffiliates of the Registrant was $118,992,467 as of March 3, 1997, based upon the closing price of $11.00 for the shares of the Company's Common Stock reported on The Nasdaq Stock Market.(1) The number of shares of Common Stock outstanding as of March 3, 1997 was 11,880,865. ------------------------ DOCUMENTS INCORPORATED BY REFERENCE: Part III--Portions of the Registrant's definitive Proxy Statement for the Registrant's Annual Meeting of Stockholders, to be held May 20, 1997, which will be filed with the Securities and Exchange Commission, are incorporated by reference to the extent stated herein. - ------------------------ (1) Excludes 1,063,368 shares of Common Stock held by directors and officers as of March 3, 1997. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED, WITHOUT LIMITATION, BY USE OF THE WORDS "ESTIMATE," "PROJECT," "INTEND" AND "EXPECT" AND SIMILAR EXPRESSIONS. SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF SUCH RISKS, SEE "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 is engaged in the discovery and development of orally-active, small molecule drugs that target selected biological targets, including cell surface receptors and ion channels. The Company's most advanced development program involves the development of a small molecule drug for the treatment of hyperparathyroidism ("HPT"). The HPT program arose from the Company's pioneering work on a new class of cell surface receptors which detect levels of extracellular calcium involved in numerous bodily functions. The Company is also applying its calcium receptor technology to the development of therapies for osteoporosis. The Company's other main programs involve the development of orally-active, small molecule drugs which have neuroprotectant properties and target certain calcium channels in order to provide treatments for stroke and head trauma. Additionally, the Company is pursuing several discovery programs which are extensions of its discoveries in calcium receptors and ion channels. NPS has established in the field of HPT a research collaboration and license arrangement with the Pharmaceutical Division of Kirin Brewery Company, Limited ("Kirin") and a development and license arrangement with Amgen Inc. ("Amgen"). With regards to the field of osteoporosis, the Company has established a research collaboration and license arrangement with SmithKline Beecham Corporation ("SmithKline Beecham"). Kirin, SmithKline Beecham and Amgen are referred to herein as the "Licensees." The Licensees are responsible for all costs of product development in their respective territories and fields. As part of these arrangements, the Licensees have paid to NPS an aggregate of $21.0 million in non-refundable license fees and Amgen and an affiliate of SmithKline Beecham have also purchased $14.5 million of the Company's Common Stock. In addition, the Licensees have made or have agreed to make up to an aggregate of $56.0 million in milestone payments, of which $2.0 million has been paid to the Company through December 31, 1996 under the Kirin agreement and $3.0 million has been paid to the Company through December 31, 1996 under the SmithKline Beecham agreement. SmithKline Beecham and Kirin are also obligated to pay research and development support payments to the Company. Approximately $7.9 million has been paid to the Company through December 31, 1996. Each of the Licensees is obligated to pay royalties to NPS on any product sales. See "Risk Factors--Dependence on Collaborative Research and License Relationships" and "Business--Collaborative Research and License Agreements." HPT is a growing medical concern and is typically characterized as being either primary or secondary. Primary HPT is an age-related disorder that results from excessive secretion of parathyroid hormone ("PTH"), leading to elevated levels of calcium in the blood. Symptoms may include bone loss, muscle weakness, depression and cognitive dysfunction. There are currently no pharmaceutical therapies for the treatment of primary HPT, with surgery being the only effective treatment. Secondary HPT results from other disease states and is most often associated with renal dysfunction. Symptoms of secondary HPT include excessive bone loss, bone pain, and chronic, severe itching. The Company believes that current 1 drug therapy treatments for secondary HPT, such as phosphate binders and calcitriol have certain disadvantages. Prior to entering into the arrangements with Kirin and Amgen, the Company had initiated and conducted four clinical trials of the Company's lead drug candidate NPS R-568 in the United States. Under the Amgen agreement, Amgen acquired full authority and assumed full responsibility for the further development and commercialization of a drug for HPT. Amgen has informed the Company that it has commenced a Phase II clinical trial in the United States on NPS R-568 and is continuing to develop its clinical strategy for the development of a drug to treat HPT. Effective June 30, 1995, Kirin acquired full authority and assumed full responsibility for the development of a drug for HPT in Japan, China (including Hong Kong), North and South Korea and Taiwan. Kirin commenced a Phase I clinical trial of NPS R-568 in Japan in October 1996. NPS is working with Amgen and Kirin to discover, identify and characterize back-up and second generation compounds for the treatment of HPT. There can be no assurance that the clinical trials will proceed as indicated or that NPS R-568 will prove safe and effective, meet applicable regulatory standards or be successfully marketed or that suitable back-ups or later generation compounds will be identified or that if identified any such back-up or later generation compound will prove safe and effective, meet applicable regulatory standards, or be successfully marketed. See "Risk Factors--Early Stage of Product Development;" and - --"Dependence on Collaborative Research and License Relationships." In conjunction with SmithKline Beecham, NPS is also applying its calcium receptor technology to the development of orally-active therapeutics for the treatment of osteoporosis. Osteoporosis is an age-related disorder affecting more than 200 million people worldwide and is characterized by reduced bone density and an increased susceptibility to fractures. Among the elderly in particular, osteoporosis is a major cause of morbidity and mortality. The Company is pursuing two approaches for the treatment of osteoporosis, stimulation of bone formation and suppression of bone resorption. Most osteoporosis patients are first diagnosed only after they have already lost significant bone mass. As a result, the Company believes that a therapy that not only halts further bone loss, but that also builds new bone, would constitute a significant advancement in the treatment of osteoporosis. Under its collaboration with SmithKline Beecham, research efforts are being conducted by NPS concurrently on both approaches to osteoporosis. In January 1996, the Company received a milestone payment of $3.0 million from SmithKline Beecham for progress made in its osteoporosis program. In October 1996, the term of research support obligation of SmithKline Beecham was extended for an additional year. The Company is developing a new class of orally-active compounds which modulate certain calcium channels for neuroprotection in stroke and head trauma. The influx of calcium through glutamate receptor-operated calcium channels has been linked to a number of neurological disorders, including nerve cell death following stroke and head trauma. The Company's proprietary compounds antagonize the NMDA (N-methyl-D-aspartate) subtype of glutamate receptor-operated calcium channels ("NMDA receptor-operated calcium channels"), thereby reducing the influx of calcium. The Company believes that these compounds work through a novel mechanism and exhibit potentially advantageous pharmacological properties. These compounds demonstrated neuroprotectant activity in preclinical animal models of stroke and head trauma. The Company has designated one of these compounds, NPS 1506, for preclinical development and expects to file an Investigational New Drug Application ("IND") and begin clinical trials in the United States by June 30, 1997. The Company is actively engaged in several discovery programs which seek to identify molecular targets for the development of new drugs. Among these, the Company believes it has made significant discoveries with regard to novel forms of metabotropic glutamate receptors ("mGluRs"), and has identified small molecules active at these receptors. The Company believes that drugs acting at specific mGluRs may provide relevant therapies for a number of neurological disorders. 2 PRODUCT DEVELOPMENT PROGRAMS The Company's primary product development programs are centered around its calcium receptor technology. Clinical development of orally-active compounds that target calcium receptors as drug therapies for HPT is being advanced by Kirin, NPS's collaborator and licensee for Japan, China (including Hong Kong), Taiwan, North Korea, and South Korea and by Amgen for the rest-of-the world. Together with SmithKline Beecham, the Company is pursuing orally-active compounds targeting calcium receptors as drug therapies for osteoporosis. The Company is also pursuing orally-active compounds that target NMDA receptor-operated calcium channels as neuroprotectants to reduce neurological damage associated with stroke or head trauma. Calcium levels in the blood are tightly regulated. The Company's calcium receptor technology represents a novel method of regulating circulating calcium levels. Calcium receptors are the basis of a newly discovered mechanism by which certain cells detect and respond to small changes in the level of extracellular calcium. One key role of calcium receptors is to regulate secretion of PTH and calcitonin, two hormones which play opposing roles in bone and mineral metabolism. The Company believes that manipulation of PTH and calcitonin levels could be beneficial in the treatment of various disorders, such as HPT and osteoporosis. The Company has utilized its expertise in certain functional screening technologies and its proprietary recombinant cell lines to discover and develop orally-active compounds which can directly manipulate the circulating levels of PTH and calcitonin by modulating the activities of calcium receptors. Compounds which mimic or potentiate the effect of extracellular calcium at calcium receptors are referred to as "calcimimetics" (agonists) while those which block the effect of calcium at such receptors are referred to as "calcilytics" (antagonists). NMDA receptor-operated calcium channels play critical roles in normal excitatory neurotransmission and are also recognized for their major role in events which lead to much of the neurological damage associated with stroke and with head trauma. Several pharmaceutical companies have recognized the potential of NMDA receptor-operated calcium channels as molecular targets for the development of drugs to treat neurological disorders and have identified various lead compounds. Such work is all the more challenging because NMDA receptor-operated calcium channels are also the site of action of phencyclidine ("PCP"; angel dust), and most compounds which target NMDA receptor-operated calcium channels exhibit undesirable PCP-like side effects such as inducing symptoms of psychosis. The Company has utilized its expertise in certain functional screening technologies to discover and develop orally-active compounds which antagonize NMDA receptor-channels by binding to a novel site, distinct from the PCP binding site. The Company's compounds have not exhibited PCP-like effects in a variety of IN VITRO and IN VIVO studies in animals intended to identify PCP-like effects. 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 (2) Amgen, Kirin receptor Evaluating back-ups Searching for later generation compounds Secondary HPT Parathyroid calcium NPS R-568/Phase II (2) Amgen, Kirin receptor Evaluating back-ups Searching for later generation compounds OSTEOPOROSIS Stimulation of bone Parathyroid calcium Preclinical Research (3) SmithKline Beecham/ NPS (4) formation receptor Suppression of bone C-cell calcium Preclinical Research SmithKline Beecham/ NPS (4) resorption receptors NEUROPROTECTION Stroke, Head Trauma NMDA receptor-operated NPS 1506/Preclinical NPS calcium channel Research for stroke
- ------------------------ (1) Amgen and Kirin have assumed full authority and responsibility for development and commercialization of NPS R-568, back-ups and later generation compounds. The Company continues to work with Amgen and Kirin on identification of back-ups and later generation compounds. (2) See "Business--Hyperparathyroidism Program--Status of Clinical Trials." (3) "Preclinical Research" refers to one or more active compounds or series of related active compounds which have met predetermined activity criteria in various IN VITRO and/or IN VIVO models. More extensive evaluation of the lead compounds is undertaken to determine if they have the requisite properties to enter preclinical development. (4) NPS has certain co-promotion rights in the United States. See "Business--Collaborative Research and License Agreements--SmithKline Beecham Corporation." HYPERPARATHYROIDISM PROGRAM OVERVIEW. HPT is a growing medical concern. It is typically characterized as being either primary or secondary. Primary HPT is an age-related disorder that results from excessive secretion of PTH. PTH acts in the kidney and on bone to elevate the levels of calcium in the blood. Symptoms may include bone loss, muscle weakness, depression and cognitive dysfunction. Approximately 100,000 new patients are diagnosed with primary HPT in the United States each year. There are currently no pharmaceutical therapies for the treatment of primary HPT. Surgical removal of the affected parathyroid gland(s) from the neck region is presently the only effective treatment. Secondary HPT results from other disease states and is most often associated with renal dysfunction. Symptoms of secondary HPT include excessive bone loss, bone pain, and chronic, severe itching. Studies have also shown that secondary HPT develops early in the course of renal failure, before patients start dialysis. Current treatments for secondary HPT involve drug therapy with phosphate binders and/or 4 calcitriol. The Company believes that these therapies have certain disadvantages. For example, phosphate binders are not well tolerated by many people and calcitriol often leads to hypercalcemia and hyperphosphatemia which can exacerbate the underlying disease. In severe cases, surgery may be required to remove all or some of the parathyroid glands. The results of the Company's research and preclinical and clinical trials have led the Company to believe that calcimimetic compounds (calcium receptor agonists) could prove to be effective in treating both types of HPT. NPS is no longer conducting clinical trials in this field. Amgen and Kirin are now conducting further clinical trials to confirm this conclusion. PTH secretion is normally regulated by changes in the circulating level of calcium. Increased levels of circulating calcium activate the parathyroid cell calcium receptor, which then suppresses the secretion of PTH. In HPT, however, PTH levels remain elevated. NPS R-568 is a calcimimetic compound which activates the calcium receptor on parathyroid cells, thereby reducing the secretion of PTH. The Company has entered into agreements with Amgen and Kirin relating to the development and commercialization of calcimimetic compounds for HPT. See "Business-- Collaborative Research and License Agreements." [PICTURE] IN HPT, EXCESS PTH TRIGGERS CHANGES IN BONE AND IN THE KIDNEY, THEREBY INCREASING THE LEVEL OF CALCIUM IN THE BLOOD. CALCIMIMETIC DRUGS, SUCH AS NPS R-568, ACTIVATE CALCIUM RECEPTORS LEADING TO SUPPRESSION OF PTH SECRETION. IN PATIENTS WITH HPT, CALCIMIMETIC DRUGS ARE EXPECTED TO AMELIORATE SYMPTOMS CAUSED BY EXCESS PTH AND HIGH CALCIUM LEVELS. 5 DEVELOPMENT STATUS. Prior to entering into the respective agreements with Amgen and Kirin, the Company had commenced clinical trials of NPS R-568 in the United States. These included two Phase I safety and tolerance studies, a multi-site, Phase I/II study in women with mild, primary HPT and a pilot Phase I/II study in kidney dialysis patients with secondary HPT. Kirin has initiated (beginning in October 1996) clinical trials for NPS R-568 in Japan. Amgen informed the Company that it began a Phase II trial for NPS R-568 in dialysis patients in 1996. NPS is actively working with Amgen and Kirin, to discover, identify and characterize back-up and second generation compounds. Each compound which might be considered by Amgen and Kirin is subject to the same contractual provisions governing development and is subject to the same royalty and milestone obligations as NPS R-568. There can be no assurance that clinical trials will proceed as indicated or that NPS R-568 or any other compound will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors--Early Stage of Product Development" and --"Dependence on Collaborative Research and License Relationships." OSTEOPOROSIS PROGRAM OVERVIEW. Osteoporosis is an age-related disorder which affects more than 200 million people worldwide and is characterized by reduced bone density and an increased susceptibility to fractures. Osteoporosis is a major cause of morbidity and mortality among the elderly. Throughout life, bone undergoes constant remodeling involving anabolic processes leading to bone formation and catabolic processes leading to bone resorption. The balance between these two processes determines whether there is net bone loss, net bone formation or no net change. In osteoporosis, this balance has shifted in favor of bone resorption, resulting in net bone loss. Current drugs approved for the treatment of osteoporosis include estrogen, injectable calcitonin, and alendronate (a bisphosphonate). These drugs are anti-resorptives and act to suppress bone resorption. The Company believes that each of these therapies presents one or more disadvantages. For example, use of estrogen is believed to be associated with increased risk of breast cancer, calcitonin is expensive and cannot currently be administered orally and bisphosphonates have been associated with side effects such as gastrointestinal distress. In contrast, anabolic agents stimulate new bone formation. While no anabolic agents are currently available for the treatment of osteoporosis, the FDA's Endocrinologic and Metabolic Drugs Advisory Committee has recently recommended that slow- release fluoride, an anabolic agent, be approved for the treatment of osteoporosis in postmenopausal patients who have suffered a fracture. Most osteoporosis patients are first diagnosed after they have already lost significant bone mass. As a result, the Company believes that a therapy that not only halts further bone resorption but also builds new bone would constitute a significant advancement in the treatment of osteoporosis. Under its collaboration with SmithKline Beecham, research efforts are being conducted by NPS concurrently on both stimulation of bone formation and suppression of bone resorption. Both of these approaches are focused on the development of orally-active molecules that are particularly suitable for long-term therapy. BONE FORMATION. NPS's primary approach to the treatment of osteoporosis is currently focused on calcilytic compounds (calcium receptor antagonists) which, in contrast to calcimimetic compounds, stimulate secretion of PTH. The Company believes that this novel approach, which is intended to manipulate the body's own PTH reserves, could provide an effective anabolic therapy for osteoporosis, stimulating new bone formation to replace bone which has already been lost to the disease. While chronically high levels of PTH are known to cause bone loss as in HPT, PTH levels fluctuate daily and this is thought to play a key role in regulating the normal balance between bone resorption and bone formation. Recent studies in animals and in humans have shown that frequent (usually daily) injections of exogenous PTH sufficient to cause a transient increase in circulating PTH levels result in significant stimulation of new bone formation. Several published animal studies have evaluated the structural integrity of the newly formed bone and have found that the increases in bone mass achieved with 6 PTH injections are accompanied by improvements in biomechanical strength and in certain indices of bone structure thought to be related to biomechanical strength. Although the anabolic effects of PTH on bone were first noted over 60 years ago, evaluation of the therapeutic potential of PTH treatment has only recently begun. Because of its potential as an effective anabolic therapy for osteoporosis, certain other companies are currently conducting clinical trials of injectable PTH or PTH analogs for osteoporosis. However, PTH is currently expensive to manufacture and cannot be administered orally. The Company believes that orally-administered, calcilytic drugs acting on the parathyroid cell calcium receptor to increase PTH release from the body's own PTH reserves could provide a cost-effective means of intermittently increasing PTH levels and could lead to greater patient compliance and therefore greater acceptance. [PICTURE] THE COMPANY IS WORKING IN COLLABORATION WITH SMITHKLINE BEECHAM TO DEVELOP CALCILYTIC DRUGS THAT, BY BLOCKING THE PARATHYROID CELL CALCIUM RECEPTOR, WOULD STIMULATE LOW-LEVEL, INTERMITTENT SECRETION OF PARATHYROID HORMONE, THEREBY STIMULATING NEW BONE FORMATION. The Company has demonstrated in IN VIVO animal studies that intermittent increases in circulating levels of PTH can be obtained by regulating the activity of calcium receptors on the parathyroid cells. Increased levels of PTH achieved by this mechanism are equivalent to levels of PTH achieved by an injection of PTH sufficient to cause bone growth. SUPPRESSION OF BONE RESORPTION. Bone resorption is the function of specialized bone cells called osteoclasts. NPS is pursuing new anti-resorptive therapies which involve calcimimetic drugs acting indirectly on osteoclasts via C-cells of the thyroid. The Company believes that orally-active calcimimetic drugs could provide cost-effective alternatives to current anti-resorptive drugs and could potentially lead to greater patient compliance. C-cells of the thyroid secrete the hormone, calcitonin. Osteoclasts are known to possess cell membrane receptors for calcitonin. Activation of these receptors by calcitonin suppresses osteoclastic bone resorption. Studies in animals and in humans have shown that repetitive injections of calcitonin (usually daily) are effective at inhibiting bone resorption, and injectable calcitonin is currently used in some countries as a therapy for osteoporosis. The Company's novel approach is to develop orally-active drugs 7 which can be used to manipulate the body's own internal reserves of calcitonin in order to achieve a similar effect. NPS and its collaborators at The Brigham and Women's Hospital, Inc. ("Brigham and Women's") have confirmed that calcium receptors are present on C-cells of the thyroid and that activation of C-cell calcium receptors induces calcitonin secretion. In animal studies, the Company has demonstrated that oral administration of calcimimetic compounds stimulates secretion of calcitonin and can lead to increased circulating calcitonin levels. Further IN VIVO studies are necessary to determine if this approach will result in a significant decrease in bone resorption. [PICTURE] CALCIMIMETIC DRUGS THAT ACTIVATE C-CELL CALCIUM RECEPTORS INCREASE CALCITONIN LEVELS IN THE BLOOD. CALCITONIN ACTS DIRECTLY ON OSTEOCLAST CALCITONIN RECEPTORS TO SUPPRESS BONE RESORPTION ACTIVITY. CALCIMIMETIC DRUGS ACTING ON A DISTINCT OSTEOCLAST CALCIUM RECEPTOR THAT NPS IS WORKING TO IDENTIFY WOULD MIMIC THE EFFECT OF EXTRACELLULAR CALCIUM, DIRECTLY SUPPRESSING BONE RESORPTION ACTIVITY. PRECLINICAL RESEARCH STATUS. In January 1996, the Company received the first milestone payment of $3.0 million from SmithKline Beecham for progress made in its osteoporosis program. Medicinal chemistry efforts are being applied at NPS and SmithKline Beecham to various lead compounds with the goal of identifying clinical development candidates. NPS has produced a cell line that expresses the human parathyroid and C-cell calcium receptor and serves as a proprietary tool for the high-throughput screening of compounds to identify new drug candidates. The Company continues to screen SmithKline Beecham and NPS compound libraries and to discover, identify and characterize additional compounds with calcilytic or calcimimetic activity. There can be no assurance that lead compounds will be identified as proprietary clinical development candidates, that preclinical and clinical trials will proceed as indicated or that such candidates will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors--Early Stage of Product Development." 8 NEUROPROTECTION PROGRAM--NPS 1506 OVERVIEW. Stroke is the third leading cause of death in the United States, with over 500,000 cases reported each year. In stroke, a blood vessel becomes blocked, leading to inadequate blood supply (ischemia) to the brain. While many stroke victims survive, approximately 100,000 to 150,000 per year are left severely and permanently disabled by nerve damage resulting from stroke. Much of this damage occurs within the first 24 to 48 hours after the incident and is caused in part by the excessive release of glutamate and the resultant influx of calcium into nerve cells. Published research in animals has shown that much of this damage can be prevented by blocking the influx of calcium into cells, especially the influx which results from the activation of NMDA receptor-channels. Calcium influx resulting from the activation of NMDA receptor-channels also appears to cause neuronal damage associated with head trauma. Approximately two million traumatic brain injuries occur each year in the United States, with 25% of such injuries requiring hospitalization and about one percent resulting in death. Certain medical procedures are associated with an increased risk of stroke. For example, strokes occur in three to seven percent of coronary artery bypass, carotid endarterectomy and heart valve replacement surgeries. Mild to severe central nervous system dysfunction occurs in up to 80% of such procedures. This is thought to result from multiple micro-strokes caused by the release into the circulation of numerous tiny blood clots. The Company believes that it might be possible to lessen the severity of neuronal damage and cognitive impairment occurring as a result of such procedures by prophylactic treatment with certain of the Company's neuroprotective compounds. Because of the importance of glutamate receptor-operated calcium influx in various neurological disorders, a number of companies are attempting to develop antagonists of NMDA receptor-channels as therapeutics. Most of these compounds have been associated with significant adverse side effects such as symptoms of psychosis. There are currently no effective neuroprotective therapeutics available that act to slow or stop the progression of brain damage once a stroke or head trauma has occurred. PRECLINICAL DEVELOPMENT STATUS. Systemic administration of the Company's proprietary class of lead compounds, particularly NPS 1506, has demonstrated significant neuroprotectant activity in certain animal models of ischemic stroke and head trauma. In these animal studies, significant neuroprotectant activity was still observed when administration of the compound was delayed for two hours following the ischemic event. In addition, the Company's compounds have not exhibited PCP-like effects in a variety of in vitro and in vivo animal studies intended to identify PCP-like effects. The Company plans to file an IND and begin human clinical Phase I trials before June 30, 1997. There can be no assurance that NPS 1506 or any of the other lead compounds will enter clinical development, will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors--Early Stage of Product Development." DISCOVERY PROGRAMS The Company is actively engaged in several other discovery programs which seek to identify new molecular targets for the development of new drugs. These discovery programs are extensions of the Company's discoveries in calcium receptors and ion channels. METABOTROPIC GLUTAMATE RECEPTORS Metabotropic glutamate receptors ("mGluRs") are structurally distinct from glutamate receptor-operated calcium channels like the NMDA receptor-operated calcium channel and are related in structure to the parathyroid cell calcium receptor. The Company believes that its experience in the discovery and development of drug candidates which act at calcium receptors provides the Company with certain advantages in the mGluR field. mGluRs are involved in the regulation of a number of important brain functions, and the Company believes that drugs which target specific mGluRs may be useful in treating 9 various neurological disorders, including neurodegenerative disorders such as Alzheimer's disease, cognitive dysfunction, anxiety and certain psychiatric disorders. NPS scientists have discovered proprietary small molecules which are active at mGluRs. In addition, NPS scientists have cloned a novel mGluR and have developed proprietary assays and cell lines for use in the Company's mGluR program. The Company's compounds have substantially different structures than existing compounds active at mGluRs which the Company believes could allow them to reach the brain more efficiently. Medicinal chemistry efforts with these lead compounds are ongoing at the Company. ADDITIONAL CALCIUM RECEPTOR THERAPEUTICS The Company is actively pursuing drug candidates which target calcium receptors in distinct tissues for the treatment of several disorders. In the kidney, for example, NPS and its collaborators have shown that calcium receptors are abundantly expressed in certain cells which regulate the excretion and reabsorption of calcium, magnesium and certain electrolytes. Calcium receptors are also expressed in cells that regulate excretion and reabsorption of water in the kidney. The Company believes that these calcium receptors participate in the regulation of mineral, electrolyte and fluid balance in the body and that drugs which target calcium receptors in the kidney may provide therapies for abnormal states of ion and water retention. Such abnormal states occur in congestive heart failure, for example, and in nephrolithiasis (kidney stone formation). INORGANIC ION RECEPTORS The Company believes that calcium receptors are representative of a new and important class of cell surface receptors, receptors that are able to detect and respond to changes in the concentration of inorganic ions such as sodium, chloride, potassium and phosphate. It has been known for some time that many different tissues respond to changes in the level of such ions. For example, Vitamin D synthesis and certain critical kidney functions are regulated in part by changes in circulating phosphate ion concentrations. Similarly, certain functions of the adrenal gland are affected by changes in potassium levels, and the maintenance of fluid concentrations by the brain may depend on the activation of sodium receptors. Therapeutic agents that act directly on receptors for other ions could provide effective treatments for many disease states. As a result, inorganic ion receptors are attractive targets for the development of novel therapeutic agents. The Company's scientists and its collaborators are actively engaged in research to clone new inorganic ion receptors, to determine their roles in human physiology and disease, and to discover new drug candidates which act selectively on such inorganic ion receptors. NEURONAL ION CHANNELS The Company has isolated, from its unique library of arthropod venoms, various peptides that target neuronal ion channels, in particular, certain calcium channels and certain potassium channels. The Company believes that its discoveries of such peptide leads provide the Company with opportunities for the discovery of drugs to treat various neurological disorders. For example, one such peptide modulates a particular neuronal potassium channel by binding at a previously unknown site on this channel. Blocking this potassium channel in nerve cells is known to enhance specific neural activities, especially the prolongation of neuronal signals that may have a potential palliative effect in disorders such as Parkinson's disease, Alzheimer's disease and multiple sclerosis. DRUG DISCOVERY TECHNOLOGIES The Company's approach to the discovery of novel drugs is to identify new drug targets and to identify small molecules which modulate the activities of these targets (or of previously identified targets) in ways that provide unique and effective therapies. NPS has pioneered the use of various whole cell and tissue functional screens in its drug discovery programs. The Company believes that its functional screens 10 substantially enhance its abilities to discover new receptors and ion channels and new drug candidates which modulate the activities of specific receptors or ion channels through novel mechanisms. Functional screens were of critical importance, for example, in the Company's discovery of calcimimetic compounds that modulate calcium receptor function. The Company also utilizes a unique library of invertebrate venoms. These venoms are isolated from a wide variety of species of spiders, scorpions, centipedes, parasitic wasps and other invertebrates collected from around the world. Lead molecules from this library have been useful in the discovery phases of many of the Company's programs. Examples include the first-generation, small molecule Araxin ("arachnid toxin") compounds which identified a novel site on NMDA receptor-channels, peptide leads being used in the Company's ion channel discovery efforts, and early calcium receptor agonist leads. COLLABORATIVE RESEARCH AND LICENSE AGREEMENTS NPS is pursuing research and product development both on an independent basis and in collaboration with others. NPS currently has collaborative research and/or license agreements with Amgen, Kirin, SmithKline Beecham, Brigham and Women's, the State University of New York at Buffalo, the University of Texas in Galveston and several other academic institutions. See "Risk Factors--Dependence on Collaborative Relationships." AMGEN INC. In March 1996, the Company entered into a development and license agreement with Amgen effective December 1995 (the "Amgen Agreement") which grants Amgen the exclusive right to develop and commercialize a drug for the treatment of HPT (and other indications other than osteoporosis) worldwide excluding Japan, China, North and South Korea and Taiwan (the "Kirin Territory"). The license includes NPS R-568 and certain other compounds. Under the terms of the Amgen Agreement, NPS may receive from Amgen up to an aggregate of $43.5 million in license fee, equity purchases and milestone payments plus royalties from any future product sales in exchange for exclusive rights to develop, manufacture and sell compounds for the treatment of HPT worldwide, excluding the Kirin Territory. Amgen has assumed full control, authority and responsibility for conducting, funding and pursuing all aspects of the development, submissions for regulatory approvals, manufacture and commercialization of NPS R-568 and certain related compounds worldwide, other than in the Kirin Territory ("Amgen Territory") including conducting clinical trials and making regulatory submissions. Amgen has paid NPS an initial non-refundable license fee of $10.0 million and purchased one million shares of Common Stock at the price of the Company's Common Stock in November 1995 when the Amgen Agreement was negotiated for an aggregate purchase price of $7.5 million. The balance of the $43.5 million includes up to $26.0 million payable to NPS upon the achievement of specific development milestones. NPS has the option to participate with Amgen, under the direction of Amgen, in the clinical development of a drug for primary HPT. Amgen is required to reimburse NPS for such participation which is limited to a total cost of $400,000 per year for a maximum time period of five years. Amgen may terminate the Amgen Agreement for any reason upon 90 days written notice. Termination of the Amgen Agreement will result in the reversion to NPS of its technology, patent and commercialization rights in the Amgen Territory. There can be no assurance that Amgen will not terminate the Amgen Agreement. In the event of termination of the license agreement with Kirin, Amgen would receive worldwide rights to develop and commercialize NPS R-568 and other HPT compounds. NPS is actively working with Amgen and Kirin to discover, identify and characterize back-up and second generation compounds. See "Risk Factors--Dependence on Collaborative Research and License Relationships." KIRIN BREWERY COMPANY, LIMITED In June 1995, the Company entered into a five-year collaborative research and license agreement with Kirin (the "Kirin Agreement") to develop and commercialize the Company's NPS R-568 and other 11 compounds for the treatment of HPT in the Kirin Territory. Under the terms of the Kirin Agreement, NPS may receive from Kirin up to an aggregate of $25.0 million in license fee, research support and milestone payments plus royalties from any future product sales in exchange for exclusive rights to develop, manufacture and sell NPS R-568 and certain other compounds for the treatment of HPT in the Kirin Territory. Kirin is responsible for conducting clinical trials and obtaining regulatory approvals in the Kirin Territory. Kirin has paid NPS an initial, non-refundable license fee of $5.0 million and committed to make $7.0 million in research payments for research concerning NPS R-568 and back-up and second generation compounds over five years. The Kirin research support payments are $500,000 per quarter through June 1997 and $250,000 per quarter over the remaining three years. The remaining $13.0 million is payable to NPS upon achievement of specific development milestones in the United States and the Kirin Territory. In October 1996, the Company received its first milestone payment from Kirin in the amount of $2.0 million for the start of clinical trials in Japan. Kirin is required to pay all costs of developing and commercializing products within the Kirin Territory and will pay royalties to NPS on any product sales. NPS is actively working with Kirin and Amgen to discover, identify and characterize back-up and second generation compounds. Kirin may terminate the Kirin Agreement for any reason upon 90 days written notice. Termination of the Kirin Agreement will result in Amgen receiving worldwide rights to develop and commercialize NPS R-568 and other HPT compounds. There can be no assurance that Kirin will not terminate the Kirin Agreement. See "Risk Factors--Dependence on Collaborative Research and License Relationships." SMITHKLINE BEECHAM CORPORATION In November 1993, NPS entered into a three-year collaborative research and license agreement with SmithKline Beecham (the "SmithKline Agreement") to collaborate on the discovery, development and marketing of drugs to treat osteoporosis and other bone metabolism disorders. Under the SmithKline Agreement, SmithKline Beecham has the exclusive license to develop and market worldwide any calcium receptor-active compounds developed under the SmithKline Agreement that are useful for treating osteoporosis and other bone metabolism disorders, excluding HPT. In addition, SmithKline Beecham has a six-month right of first negotiation of a research and license agreement with NPS with respect to any compounds relating to osteoporosis not covered under the SmithKline Agreement. Once compounds have been selected for development, SmithKline Beecham has agreed to conduct and fund all development of such products, including all human clinical trials and regulatory submissions. NPS has the right to co- promote with SmithKline Beecham any resulting products in the United States. In 1992, S.R. One, an affiliate of SmithKline Beecham, purchased $2.0 million of the Company's Preferred Stock. In 1993, at the time NPS entered into the SmithKline Agreement, S.R. One purchased an additional $7.0 million in equity of the Company and it acquired $495,000 of Common Stock in the Company's initial public offering. All of the Preferred Stock was converted into Common Stock upon the closing of the Company's initial public offering. Under the terms of the SmithKline Agreement, in addition to the $7.0 million equity purchase, SmithKline Beecham paid the Company a $6.0 million non-refundable license fee and agreed to make additional payments to the Company upon the achievement of specific milestones. A $3.0 million milestone payment was made in January 1996. In July 1995 the Company began receiving payments from SmithKline Beecham to support the Company's research efforts and has recognized $4.3 million through 1996. In October 1996, the research term of the SmithKline Agreement was extended for an additional one year period through October 1997. Research support payments are expected to be approximately $475,000 per quarter through October 1997. NPS is entitled to royalties on sales of products for osteoporosis and other bone metabolism disorders developed by SmithKline Beecham under the SmithKline Agreement and a share of the profits from any co-promotion of such products. The SmithKline Agreement may be terminated by SmithKline Beecham upon 30 days written notice, with NPS having the right to extend the SmithKline Agreement for an additional period of time, provided that drug marketing has commenced. Funded research under the SmithKline Agreement will terminate in October 1997. Under certain 12 circumstances, NPS has the right to terminate the SmithKline Agreement after October 1997. Termination of the SmithKline Agreement will result in reversion to NPS of its technology, commercialization and patent rights in the licensed field of osteoporosis and other bone and mineral disorders as well as all additional technology developed in the course of the collaboration. There can be no assurance that SmithKline Beecham will not terminate the SmithKline Agreement or that funded research will be extended upon its termination in October 1997. See "Risk Factors--Dependence on Collaborative Research and License Relationships." THE BRIGHAM AND WOMEN'S HOSPITAL, INC. In February 1993, NPS entered into two agreements with Brigham and Women's, a sponsored collaborative research agreement (the "Brigham Research Agreement") and a patent license agreement (the "Brigham License Agreement"). Brigham and Women's, an affiliate of Harvard University Medical School, is a leading research group in the area of calcium receptors. During the three-year period from February 1993 through January 1996, NPS paid license fees and made research support and milestone payments to Brigham and Women's totaling approximately $1.0 million. In February 1996, the Company reached an agreement with Brigham and Women's to extend the Brigham Research Agreement. This agreement was further amended effective March 1, 1997, to update the amount of research support payments to be made by NPS for the final year of the agreement. Under the terms of the extension, NPS has agreed to continue funding research on calcium receptors and other inorganic ion receptors at Brigham and Women's through February 1998. The extended Brigham Research Agreement, as amended, calls for NPS to make research support and advance royalty payments of $645,000 to Brigham and Women's during the period from February 1996 through February 1998. Of this, $430,000 has been paid through 1996. The Brigham License Agreement grants NPS an exclusive license to calcium receptor and inorganic ion receptor technology arising under the Brigham Research Agreement. The Brigham Research Agreement also grants NPS a right of first negotiation for exclusive license rights to any other patentable subject matter arising out of the sponsored research. NPS also has agreed to pay Brigham and Women's a royalty on sales of any products covered by an issued patent under the Brigham License Agreement and to promote sales of any licensed products for HPT for which the Company receives regulatory approval. PATENTS AND PROPRIETARY TECHNOLOGY Periodically the Company files patent applications to protect technology, inventions and improvements which the Company believes are important to the development of its business. The Company also relies on trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. The Company files patent applications in its own name, and when appropriate, it has filed, and expects to continue to file, applications jointly with its collaborators. These patent applications cover compositions of matter, methods of treatment, methods of discovery, use of novel compounds and novel modes of action, and recombinantly expressed receptors and gene sequences which are believed by the Company to be important in its research and development activities. None of the Company's principal proprietary rights, including rights related to process, compounds, use and technique related to its calcium receptor science and NMDA receptor-channel technology, are protected by issued patents in the Company's principal markets. The Company believes that its pending patent applications in the fields of calcium receptors, inorganic ion receptors, mGluRs and NMDA receptor-channels and compounds active at the same give the Company a competitive advantage. The Company intends to file additional patent applications as appropriate relating to its technology and to specific products of the Company. The patent positions of pharmaceutical and biotechnology firms, including the Company, are uncertain and involve complex legal and factual questions. In addition, the scope of the claims in a patent application can be significantly modified during prosecution before the patent is issued. Consequently, the Company does not know whether any of its applications will result in the issuance of patents or, if any 13 patents are issued, whether they will provide significant proprietary protection or will be circumvented or invalidated. Generally, patent applications in the United States are maintained in secrecy until patents issue and publication of discoveries in the scientific or patent literature often lag behind actual discoveries. In addition, no assurance can be given that, even if published, the Company is aware of all such literature. Accordingly, the Company cannot be certain that the named inventors were the first to invent or that the Company is the first to pursue patent coverage for such inventions. Moreover, the Company may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial cost to the Company, even if the eventual outcome is favorable to the Company. There can be no assurance that the Company's pending patent applications, if issued, would be held valid. An adverse outcome could subject the Company to significant liabilities to third parties, could require disputed rights to be licensed from third parties or require the Company to cease or modify its use of such technology. Additionally, many of the Company's foreign patent applications have been published as part of the patent prosecution process in such countries. Protection of the rights revealed in such published patent applications can be complex, costly and uncertain. See "Risk Factors--Uncertainty of Protection of Patents and Proprietary Technology." The development of therapeutic products for applications in the Company's product fields is intensely competitive. A number of pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents in these and related fields. Some of these applications or patents may limit or preclude the Company's applications and could result in a significant reduction of the coverage of the Company's patents, if issued. NPS also relies on trade secrets and contractual arrangements to protect its trade secrets. There can be no assurance that these agreements will be adequate, that they will not be breached, that the Company would have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors. Much of the know-how important to the Company's technology and many of its processes are dependent upon the knowledge, experience and skills of key scientific and technical personnel and are not the subject of pending patent applications or issued patents. To protect its rights to its know-how and technology, the Company requires all employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit the unauthorized use and restrict the disclosure of confidential information, and require disclosure and assignment to the Company of ideas, developments, discoveries and inventions made by them. There can be no assurance that these agreements will effectively prevent disclosure of the Company's confidential information or will provide meaningful protection for the Company's confidential information if there is unauthorized use or disclosure. It must also be recognized that competitors may develop substantially equivalent know-how and technology. In connection with certain research in the field of calcium and other ion receptors, NPS has sponsored research by various university and government laboratories. For example, the Company has executed a license agreement and a research agreement regarding research in the area of calcium and other ion receptors with Brigham and Women's. See "Collaborative Research and Licensing Agreements--The Brigham and Women's Hospital, Inc." The Company has also sponsored work at other government and academic laboratories for various evaluations, assays, screenings and tests of its natural products library and lead compounds in the central nervous system field. Generally, under these agreements the Company funds the work of investigators in exchange for the results of the specified works and the right or option to a license to any patentable inventions that may result in designated areas. Generally, if the sponsored work produces patentable subject matter, the Company has the first right to negotiate for license rights therein. Any resulting license would be expected to require the Company to pay royalties on net sales of licensed products. There can be no assurance that any such inventions will arise, that any patent applications thereon will be filed or, if filed, that any patents will issue, that any license thereon can be negotiated, or that any license agreement would give the Company valuable rights. 14 MANUFACTURING NPS anticipates that all of its products will be made by synthetic chemical manufacturing techniques. As such, the Company believes the compounds can be precisely defined and characterized and should generally have relatively low manufacturing costs compared to recombinant proteins produced by the fermentation methods common to currently available biotechnology products. NPS has no manufacturing facilities. Under the Amgen, Kirin and SmithKline Agreements, each of such Licensee's is responsible for the manufacture of the applicable product. The Company relies on other manufacturers to produce its proprietary compounds for research and development activities and in sufficient quantities for preclinical and clinical purposes. The proposed pharmaceutical products under development by the Company have never been manufactured on a commercial scale, and there can be no assurance that such products can be manufactured at a cost or in quantities to make them commercially viable. If the Company were unable to contract for sufficient supply of its compounds on acceptable terms, or if it should encounter delays or difficulties in its relationships with manufacturers, the Company's preclinical and clinical testing schedule would be delayed. Such delay might postpone the submission of products for regulatory approval or the market introduction and subsequent sales of such products, which would have a materially adverse effect on the Company. Moreover, contract manufacturers that the Company may use must adhere to Good Manufacturing Practices (cGMP) regulations enforced by the FDA through its facilities inspection program. GOVERNMENT REGULATION The production and marketing of the Company's product candidates and its research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. In the United States, drugs are subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act, as amended, and the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. Product development and approval within this regulatory framework take a number of years and involve the expenditure of substantial resources. The steps required before a pharmaceutical agent may be marketed in the United States include: (i) preclinical laboratory tests, animal pharmacology and toxicology studies and formulation studies; (ii) the submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials commence; (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug; (iv) the submission of a New Drug Application ("NDA") to the FDA; and (v) FDA approval of the NDA prior to any commercial sale or shipment of the drug. In addition to obtaining FDA approval for each product, each domestic drug manufacturing establishment must be registered with, and approved by, the FDA under cGMP regulations. Domestic drug manufacturing establishments are subject to regular inspections by the FDA and must comply with cGMP regulations. To supply products for use in the United States, foreign manufacturing establishments must comply with cGMP regulations and are subject to periodic inspection by the FDA or by corresponding regulatory agencies in their home countries under reciprocal agreements with the FDA. Preclinical studies include the laboratory evaluation of IN VITRO pharmacology, product chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of the product. Compounds must be formulated according to cGMP, and preclinical safety tests must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices. The results of the preclinical tests are submitted to the FDA as part of an IND and are reviewed by the FDA prior to the commencement of human clinical trials. Unless the FDA objects to an IND, the IND will usually become effective 30 days following its receipt by the FDA. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials. 15 Clinical trials involve the administration of the investigational new drug to healthy volunteers and to patients under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with Good Clinical Practices under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical study must be conducted under the auspices of an Institutional Review Board ("IRB") at the institution at which the study will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. Clinical trials typically are conducted in three sequential phases, which may overlap. In Phase I, the initial introduction of the drug into healthy subjects, the drug is tested for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited patient population to: (i) determine the efficacy of the drug for specific, targeted indications; (ii) determine dosage tolerance and optimal dosage; and (iii) identify possible adverse effects and safety risks. When a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to evaluate further clinical efficacy and to test further for safety within an expanded patient population at geographically dispersed clinical study sites. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specific time period, if at all, with respect to any of the Company's products subject to such testing, including NPS R-568. Furthermore, the Company, its collaborators, Licensees or the FDA may suspend clinical trials at any time if they feel that the subjects or patients are being exposed to an unacceptable health risk. See "Risk Factors--Government Regulation; No Assurance of Regulatory Approval." The results of the pharmaceutical development, preclinical studies and clinical studies are submitted to the FDA in the form of an NDA for approval of the marketing and commercial shipment of the drug. The testing and approval process is likely to require substantial time and effort, and there can be no assurance that any approval will be granted on a timely basis, if at all. The FDA may deny an NDA if applicable regulatory criteria are not satisfied, require additional testing or information, or require post-marketing testing and surveillance to monitor the safety of the Company's products if the FDA does not view the NDA as containing adequate evidence of the safety and efficacy of the drug. Notwithstanding the submission of such data, the FDA may ultimately decide that the application does not satisfy its regulatory criteria for approval. Moreover, if regulatory approval of a drug is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Among the conditions for NDA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform to cGMP, which must be followed at all times. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance. See "Risk Factors--Government Regulation; No Assurance of Regulatory Approval." In addition to regulations enforced by the FDA, the Company is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and future federal, state or local regulations. The Company's research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company. See "Risk Factors--Risk of Product Liability; Use of Hazardous Materials." 16 Outside the United States, the Company's ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authority. This foreign regulatory approval process includes all of the risks associated with FDA approval set forth above. COMPETITION NPS and its Licensees are pursuing areas of product development in which the Company believes there is a potential for extensive technological innovation in relatively short periods of time. The Company operates in a field in which new discoveries occur and are expected to occur at a rapid pace. The Company's competitors may succeed in developing technologies or products that are more effective than those of the Company or in obtaining regulatory approvals of their drugs more rapidly than the Company and its collaborative partners, and could render the Company's products obsolete or noncompetitive. Competition in the pharmaceutical industry is intense and is expected to continue to increase. Many of the Company's competitors, including biotechnology and pharmaceutical companies, are actively engaged in the research and development of products in the Company's targeted areas, including the fields of HPT, osteoporosis, neuroprotection and neurological disorders. Many of the Company's competitors have substantially greater financial, technical, marketing and personnel resources than the Company. In addition, some of them have considerable experience in preclinical testing, human clinical trials and other regulatory approval procedures. Moreover, certain academic institutions, governmental agencies and other research organizations are conducting research in areas in which the Company is working. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed. These institutions may also market competitive commercial products on their own or through joint ventures and will compete with the Company in recruiting highly qualified scientific personnel. There can be no assurance that a pharmacological method of treatment for certain diseases, such as HPT, will prove to be superior to existing or newly discovered approaches to the treatment of those diseases. See "Risk Factors--Rapid Technological Change; Intense Competition." ENVIRONMENTAL LIABILITY On November 29, 1995, the Company received a letter from the EPA notifying the Company that it may have incurred liability under section 107(a) of the Comprehensive Environmental Response, Compensation and Liability Act, as amended, for two barrels of radioactive waste taken by a third party contractor to a hazardous and radioactive waste storage, treatment and disposal facility in Denver, Colorado. Upon the EPA's request, the Company has identified the waste and has verified that the barrels containing the waste have been removed from the Denver, Colorado facility. Removal of wastes from the facility and remediation of soil and groundwater at this site is currently underway. The ultimate cost of removal and remediation actions and the length of time for such actions are difficult to estimate. Based upon its inspection of the site, the Company is of the belief that the barrels containing the waste disposed of by the Company were neither leaking nor damaged. Although the Company was a small contributor to the site and the Company believes that there are a number of other financially responsible contributors, there can be no assurance that the Company will not be held liable for all or a portion of the cleanup cost or any other costs or damages associated with this disposal site. See "Risk Factors--Risk of Product Liability; Use of Hazardous Materials." EMPLOYEES As of December 31, 1996, NPS employed 90 individuals full-time, 21 of whom hold Ph.D. or M.D. degrees and 19 of whom hold other advanced degrees. Approximately 62 full-time employees are engaged in research and development activities, including a variety of disciplines within the areas of molecular biology, pharmacology, medicinal chemistry, computer sciences and clinical development. Approximately 28 full-time employees are employed in finance, legal and regulatory affairs, market research, corporate 17 development and general administrative activities. None of the Company's employees is covered by collective bargaining agreements, and management considers relations with its employees to be good. Additionally, NPS augments its full-time staff through consulting arrangements with experienced scientists and managers. The Company's anticipated growth and expansion will require the hiring of additional management, research and development, and administrative personnel. RISK FACTORS EARLY STAGE OF PRODUCT DEVELOPMENT. The Company was founded in 1986, and has not completed development of any drugs and does not expect that any drugs resulting from its or its Licensees' research and development efforts will be commercially available for several years, if at all. NPS R-568 is the only product candidate currently in clinical development by the Company and its Licensees. Clinical trials in humans are necessary to determine whether or not a compound will be a safe, commercially attractive or effective drug. Results obtained in preclinical trials are not necessarily indicative of results that will be obtained in later stages of preclinical development or in human clinical testing. All product candidates developed by the Company or its Licensees, including NPS R-568, will require extensive research, development and preclinical and clinical testing prior to submission of any regulatory application, as well as a lengthy regulatory approval process. Preclinical and clinical testing of safety and efficacy takes several years and the time required to commercialize new drugs cannot be predicted with accuracy. Product development of new pharmaceuticals is highly uncertain, and unanticipated developments, clinical or regulatory delays, unexpected adverse side effects or inadequate therapeutic efficacy could slow or prevent the product development efforts of the Company and its Licensees, and have a materially adverse effect on the Company's operations. There can be no assurance that the Company's current product candidates, including NPS R-568, or any future product candidates, will advance to clinical trials, prove safe and effective, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable cost or be successfully marketed. Also, there can be no assurance that a pharmacological method for the treatment of diseases targeted by the Company, including HPT, will prove to be superior to non-pharmacological treatments. DEPENDENCE ON COLLABORATIVE RESEARCH AND LICENSE RELATIONSHIPS. The Company's strategy for the development, clinical testing and manufacturing and commercialization of certain of its product candidates and the research and development of new product candidates includes entering into various research, development and license agreements with corporate partners, licensees and others. The Company has entered into a license agreement with Amgen pursuant to which Amgen has assumed full control of the development and commercialization of a compound for the treatment of HPT in its territory, a collaborative research and license agreement with Kirin for the development of a compound for the treatment of HPT in Kirin's Territory and a collaborative research and license agreement with SmithKline Beecham for research and development in osteoporosis. The Licensees each have received from NPS certain exclusive rights to commercialize products developed under their respective agreements, have paid license fees to NPS and have committed to make milestone payments to NPS upon achievement of specified goals. The Licensees have agreed to fund the research or development efforts in HPT and osteoporosis, conduct human clinical testing of lead compounds, prepare and file submissions for regulatory approval and pay royalties on any resulting products. Because the Company has granted exclusive development, commercialization and marketing rights to the Licensees in the fields of HPT and osteoporosis, the success of its existing HPT and osteoporosis programs is dependent upon the efforts of the Licensees. There can be no assurance that the Licensees will perform their obligations under their respective agreements, that they will successfully develop or proceed to market any products under these agreements, or that the Company will ever receive any royalties or milestone or research support payments under these agreements, any of which could have a material adverse effect on the business of the Company. Furthermore, there can be no assurance that business conflicts will not arise between the Licensees over rights to existing compounds or future compounds with respect to certain indications. The Company's collaborative research and license agreements, including the agreements with the Licensees, generally provide that they may be terminated 18 under a variety of circumstances upon prior written notice. If any of the Licensees terminates or breaches its agreement, such termination or breach may have a material adverse effect on the Company's operations. Furthermore, there can be no assurance that present or future collaborators will not pursue existing or alternative technologies in preference to treatments being developed in collaboration with the Company. NPS also intends to seek additional collaborative or license arrangements to develop and commercialize other product candidates. Many of the Company's competitors are similarly seeking to develop or expand their collaborative and license arrangements with pharmaceutical companies. The success of these efforts by the Company's competitors could have an adverse impact on the Company's ability to form future collaborative arrangements and maintain existing ones. There can be no assurance that the Company will be able to negotiate acceptable collaborative agreements in the future or that efforts under any such collaborative agreements will be successful. To the extent that the Company chooses not to or is unable to enter into future collaborative agreements, it would experience increased capital requirements to undertake research, development and marketing of its product candidates at its own expense. In addition, the Company may encounter significant delays in introducing its product candidates into certain markets or find that the development, manufacture or sale of its product candidates in such markets is adversely affected by the absence of such collaborative agreements. LACK OF PRODUCT SALES; HISTORY OF OPERATING LOSSES. Substantially all of the Company's revenues to date have come from collaborative research and license agreements with the Licensees. Aside from the incidental revenues from the sale of research chemicals, no revenues have been generated from product sales. Other working capital has come from equity and debt financings. NPS has incurred cumulative losses through December 31, 1996 of $14.4 million, net of cumulative revenues from research and license agreements of $42.7 million. The Company expects to incur significant operating losses over at least the next several years as the Company continues and expands its research and development and preclinical and clinical testing activities. The Company expects that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. The Company's ability to achieve profitability depends in part upon its Licensees' ability to complete development of NPS R-568 and identify and develop back-up and later generation compounds, the Company's ability to develop, alone or with others, other product candidates, obtain required regulatory approvals and manufacture and successfully market such products, of which there can be no assurance. As such, there can be no assurance that the Company will be able to achieve profitability on a sustained basis, if at all. GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL. The research and development activities of the Company, as well as the investigation, manufacture, distribution and marketing of therapeutic products, are subject to extensive regulation by numerous governmental authorities in the United States and other countries. Prior to marketing in the United States, a drug must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process implemented by the FDA under federal law, including the Federal Food, Drug and Cosmetic Act, as amended. Receipt of such regulatory approval involves, among other things, satisfying the FDA that the product is both safe and effective. Typically, this process takes several years or more depending upon the type, complexity and novelty of the product and the nature of the disease or other indication to be treated and requires the expenditure of substantial resources. Preclinical studies must be conducted in conformance with the FDA's Good Laboratory Practice regulations. Clinical testing must meet requirements for Institutional Review Board oversight and informed consent by clinical trial subjects and patients, as well as FDA prior review, oversight and the FDA's Good Clinical Practice requirements. Clinical trials may require large numbers of test subjects. Furthermore, the Company or the FDA may suspend clinical trials at any time if either believes that the subjects participating in such trials are being exposed to unacceptable health risks, including undesirable or unintended side effects. While certain of the Company's employees have some experience in conducting and managing the clinical testing necessary to obtain regulatory approval, the Company has conducted only limited clinical trials of one of its product candidates to date and anticipates that it will need to either 19 rely on its collaborative partners, licensees and outside consultants or attract and retain additional employees with expertise in this area. Before receiving FDA approval to market a product, NPS may have to demonstrate that such product represents an improved form of treatment compared to existing therapies. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approvals. In addition, delays or rejections may be encountered based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. If regulatory approval of a product is granted, such approval will be limited to those disease states and conditions for which the product is useful, as demonstrated through clinical studies. Furthermore, approval may entail ongoing requirements for post-marketing studies. Even if such regulatory approval is obtained, a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections. The regulatory standards for current Good Manufacturing Practices ("cGMP") are currently being applied stringently by the FDA. Discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on such product or manufacturer, including costly recalls or even withdrawal of the product from the market. There can be no assurance that any compound developed by the Company alone or in conjunction with others will prove to be safe and effective in clinical trials and will meet all of the applicable regulatory requirements needed to receive marketing approval. RAPID TECHNOLOGICAL CHANGE; INTENSE COMPETITION. NPS is pursuing areas of product development in which the Company believes there is a potential for extensive technological innovation in relatively short periods of time. The Company operates in a field in which new discoveries occur and are expected to occur at a rapid pace. The Company's competitors may succeed in developing technologies or products that are more effective than those of the Company or in obtaining regulatory approvals of their drugs more rapidly than the Company and its collaborative partners and licensees. Such success could render the Company's products obsolete or non-competitive and have a material adverse effect on the Company. Competition in the pharmaceutical and biotechnology industry is intense and is expected to continue to increase. Many of the Company's competitors, including biotechnology and pharmaceutical companies, are actively engaged in the research and development of products in the Company's targeted areas, including the fields of HPT, osteoporosis, neuroprotection and neurological disorders. Many of the Company's competitors have substantially greater financial, technical, marketing and personnel resources than the Company as well as considerable experience in preclinical testing, human clinical trials and other regulatory approval procedures. Moreover, certain academic institutions, governmental agencies and other research organizations are conducting research in areas in which the Company is working. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed. These institutions may also market competitive commercial products on their own or through joint ventures and will compete with the Company in recruiting highly qualified scientific personnel. UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success depends, in part, on its ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. Because the patent positions of biotechnology and pharmaceutical companies can be highly uncertain and frequently involve complex legal and factual questions, the breadth of claims allowed in biotechnology and pharmaceutical patents or their enforceability cannot be predicted. None of the Company's principal proprietary rights, including rights related to process, compounds, use and technique related to its calcium receptor science and NMDA receptor-channel technology, are protected by issued patents in the Company's principal potential markets. No assurance can be given that patents will issue from any of the Company's current or anticipated patent applications or that such patent applications will allow the Company to preclude others from practicing some or all of the art described in the publicly available versions of these pending patent applications either before such patent applications issue as patents or after such patent applications issue as patents. Generally, patent applications in the 20 United States are maintained in secrecy until patents issue and publication of discoveries in scientific or patent literature often lag behind actual discoveries. No assurance can be given that, even if published, the Company is aware of all such literature. Accordingly, the Company cannot be certain that the named inventors in its patent applications were the first to invent, or that the Company is the first to pursue patent coverage for such inventions. If patents do issue, there can be no assurance that the claims allowed will be sufficiently broad to protect the Company's technology or to prevent competition. No assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented or that rights granted thereunder will provide competitive advantages to NPS. Moreover, the Company may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial cost to the Company, even if the eventual outcome is favorable to the Company. If certain of the Company's patent applications fail to issue or are successfully challenged, particularly those related to its calcium receptor science and NMDA receptor-channel technology, it may have a material adverse effect on the Company's operations or its ability to maintain or establish collaborations. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate any of the Company's products or design around the patented products or technology developed by NPS. There can also be no assurance that any products developed by NPS will not be found to infringe patents held by third parties, or that, in such cases, licenses from such third parties would be available on commercially attractive terms, if at all. If NPS does not obtain such licenses, it could encounter delays in product market introductions or could find that it is unable to develop, manufacture or sell its products requiring such licenses. In addition, the Company could incur substantial costs in defending lawsuits brought against NPS on such patents or in prosecuting lawsuits by NPS against another party. Additionally, many of the Company's foreign patent applications have been published as part of the patent prosecution process in such countries. Protection of the rights revealed in such published patent applications can be complex, costly and uncertain. The development of therapeutic products for applications in the Company's product fields is intensely competitive. A number of pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents in these and related fields. Some of these applications or patents may limit or preclude the Company's applications and could result in a significant reduction of the coverage of the Company's patents, if issued. NPS also relies on trade secrets and proprietary know-how, which it seeks to protect, in part, by confidentiality agreements with its corporate collaborators, licensees, employees and consultants. NPS expects to continue to rely on trade secrets and know-how to protect certain aspects of its technologies. The Company believes it has, and can maintain, a competitive advantage through its use of written confidential disclosure agreements and invention assignment provisions with its employees, consultants, advisors and potential and actual collaborators and licensees. Nonetheless, no assurance can be given that these agreements will provide meaningful protection for the Company's trade secrets or proprietary know-how as a result of an unauthorized use or disclosure in the public domain. There can be no assurance that these agreements will not be breached, that NPS would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors. DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING. To be successful, the Company's products, if successfully developed, must be manufactured in commercial quantities in accordance with regulations prescribed by the FDA and at acceptable costs. NPS does not have the capability to manufacture products under cGMP regulations prescribed by the FDA and does not intend to develop such a capability in the near future. Accordingly, the Company anticipates that, for the foreseeable future, it will pursue a strategy of seeking production capability from corporate collaborators, licensees or contract manufacturers. There can be no assurance that the Company's current or prospective corporate collaborators, licensees or contract manufacturers will be able to manufacture any developed compounds on a commercial scale or that any collaborator, licensee or manufacturer will be able to manufacture products in quantities or at prices which will be commercially viable or beneficial for the Company. The Licensees are responsible for manufacturing any products developed under their respective agreements with the Company. If the Company or its 21 collaborators and licensees encounter difficulty in obtaining third-party manufacturing on commercially acceptable terms, their ability to commercialize products may be delayed or foreclosed. Moreover, any manufacturer of the Company's products must adhere to cGMP regulations enforced by the FDA through its facilities inspection program. If these facilities cannot pass a pre-approval or periodic plant inspection, FDA approval of the product will not be granted or sale of the product may be barred. Presently, the Company relies on contract manufacturers to produce its proprietary compounds for development activities and in sufficient quantities for preclinical and clinical purposes. If the Company were unable to contract for sufficient supply of its compounds on acceptable terms, or if it should encounter delays or difficulties in its relationships with manufacturers, the Company's preclinical and human clinical testing schedule would be delayed. Such delay would adversely affect the schedule for submission of products for regulatory approval and the market introduction and subsequent sales of such products, which would have a materially adverse effect on the Company. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company has incurred negative cash flows from operations since its inception. Substantial expenditures will be required to enable NPS to conduct existing and planned preclinical studies and clinical trials, to manufacture or to have manufactured and to market products from current research and development efforts, and to continue research and development activities. The Company anticipates that its existing capital resources, including research and development support payments from existing collaborations will be sufficient to enable it to maintain its current and planned operations through at least 1999. However, the Company's future capital needs will be dependent upon many factors, including progress in its research and development activities, the magnitude and scope of these activities, progress with preclinical and clinical trials, the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in or terminations of existing collaborative arrangements and license arrangements, the establishment of additional collaborative and license arrangements, and the cost of manufacturing scale-up and development of marketing activities, if undertaken by the Company. If Amgen terminates its agreement to develop NPS R-568 or other calcimimetic compounds in the Amgen Territory, the Company may not have the resources necessary to complete the development and commercialization of NPS R-568 in the Amgen Territory. Depending on the factors described above, NPS may need to raise substantial additional funds to support its long-term product development and commercialization programs. The Company intends to seek additional funding through corporate collaborations and license agreements. There can be no assurance the Company will be able to negotiate such agreements in the future on acceptable terms, or at all. The Company may also seek additional funding through public or private financings. If additional funds are raised by issuing equity securities, further dilution to stockholders will result. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its research and development programs or to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company may otherwise seek to develop or commercialize on its own, any one of which could have a material adverse effect on the Company's operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LACK OF MARKETING CAPABILITIES. The Licensees currently have marketing and distribution rights with respect to products under development for the treatment of HPT and osteoporosis; however, such commercialization rights may revert to NPS, under certain circumstances, including upon termination of any of the related agreements. NPS may retain commercialization rights to other products developed in the future. The Company currently lacks sales, marketing and distribution capability. In order to market any of its products directly, the Company would have to develop a marketing and sales force with technical expertise and with supporting distribution capability. There can be no assurance that the Company will be able to establish in-house sales and distribution capabilities or relationships with third parties, or that it will be successful in gaining market acceptance for its products. 22 Outside the United States, the Company's ability to market a product is contingent upon receiving marketing authorization from the appropriate foreign regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. This foreign regulatory approval process includes all of the risks associated with FDA approval set forth above. HEALTH CARE LEGISLATION/UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. There is significant national concern today about the availability and rising cost of health care in the United States. It is anticipated that new federal and/or state legislation will be passed and regulations adopted to attempt to provide broader and better health care and to manage and contain its cost. While NPS cannot predict whether any such legislative or regulatory proposals will be adopted or the effect such proposals may have on its business, the pendency of such proposals could have a material adverse effect on the Company's ability to raise capital, and the adoption of such proposals could have a material adverse effect on the Company in general. In both domestic and foreign markets, sales of the Company's product candidates will depend in part on the availability of reimbursement from third-party payors such as government health administration authorities, private health insurers and other organizations. Under current guidelines, Medicare does not reimburse patients for self-administered drugs. Such policy may adversely affect the market for products designed to treat patients with age-related disorders, such as HPT and osteoporosis. In addition, third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products. There can be no assurance that the Company's product candidates will be considered cost-effective or that adequate third-party reimbursement will be available to enable NPS to maintain price levels sufficient to realize an appropriate return on its investment in product development. Failure to achieve sufficient price levels for its drugs could adversely affect the Company's business. Legislation and regulations affecting the pricing of pharmaceuticals may change before any of the Company's product candidates are approved for marketing. Adoption of such legislation or regulations could further limit reimbursement for medical products and services. Furthermore, the Company's ability to commercialize its potential product portfolio may be adversely affected to the extent that such legislation has a material adverse effect on the business, financial condition and profitability of other companies that are current or future collaborators for certain of the Company's product candidates. DEPENDENCE ON KEY PERSONNEL; ABILITY TO MANAGE GROWTH. The Company is highly dependent on the principal members of its scientific and management staff. Loss of any of these persons could adversely affect the Company's business. The Company does not have employment contracts. The Company's future success will also depend in large part upon its continued ability to attract and retain other highly qualified scientific and management personnel. The Company faces competition for personnel from other companies, academic institutions, government entities and other organizations. There can be no assurance that NPS will be successful in hiring or retaining personnel. In addition, the Company's anticipated growth and expansion into areas and activities requiring additional expertise, such as clinical trials, government approvals, production and marketing and general pharmaceutical company management are expected to place increased demands on the Company's resources. These demands are expected to require the addition of new management, research and development and administrative personnel, and the development of additional expertise by existing management personnel. The failure to acquire such services or to develop such expertise could materially adversely affect prospects for the Company's success. Certain of these anticipated future needs are expected to be met through the agreements with the Licensees and potential additional corporate collaborations, but there can be no assurance that any services provided by the Licensees or other potential corporate collaborators will be sufficient to meet the Company's personnel or management needs. RISK OF PRODUCT LIABILITY. The testing, marketing and sale of human therapeutic products entail significant risks. If the Company succeeds in developing products under its product development programs, 23 use of such products in clinical trials and the sale of such products following regulatory approval may expose the Company to liability claims allegedly resulting from use of such products. These claims might be made directly by consumers or others. NPS has obtained limited product liability insurance coverage for its human clinical trials. There can be no assurance that NPS will be able to maintain such insurance or obtain similar insurance for any of its future clinical trials or that coverage will be in sufficient amount to protect against damages for liability that could have a material adverse effect on NPS. There can also be no assurance that NPS will be able to obtain or maintain product liability insurance in the future on acceptable terms or in sufficient amounts to protect the Company against damages for liability that could have a material adverse effect on the Company. The agreements with the Licensees each provide for certain indemnification against such claims, but there can be no assurance that any claim arising from products sold by a collaborative partner or licensee would not also include claims directly against NPS or that any such claim would be indemnifiable under such agreement. USE OF HAZARDOUS MATERIALS. The Company's research and development activities involve the controlled use of hazardous materials, radioactive compounds and other chemicals. The Company is required to comply with complex local, state and federal regulations involving the use, storage and handling of these materials and may incur certain costs in complying therewith. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by local, state and federal regulations, the possibility of unintended non-compliance with such regulations or the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company. The Company may incur substantial costs to comply with environmental regulations. The Company contracts with third parties to remove biohazardous waste generated by the Company. The disposal of such waste, third-party waste disposal companies contracted by the Company, and their disposal sites are regulated by the Environmental Protection Agency ("EPA"). The EPA has initiated cleanup of a site where a waste disposal firm contracted by the Company disposed of certain waste generated by the Company. The Company has not accrued any liability with respect to this matter. Although the Company was a small contributor to the site and the Company believes that there are a number of other financially responsible contributors, there can be no assurance that the Company will not be held liable for all or a portion of the cleanup cost or any other costs or damages associated with this disposal site. VOLATILE STOCK PRICE. The market price of the shares of Common Stock, like that of the common stock of many other biotechnology and biopharmaceutical companies, has been and is likely to continue to be highly volatile. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new commercial products by the Company or its competitors, progress with clinical trials, governmental regulation, changes in reimbursement policies, developments in patent or other proprietary rights, developments in the Company's relationships with current or future collaborative partners, public concern as to the safety and efficacy of drugs developed by the Company and its competitors, and general market conditions for biotechnology or pharmaceutical stocks could have a significant adverse effect on the future price of the Common Stock. ANTITAKEOVER EFFECTS OF SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BYLAW PROVISIONS. Certain provisions of the Company's Certificate of Incorporation and Bylaws and Section 203 of the Delaware General Corporation Law could also discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions could diminish the opportunities for a stockholder to participate in tender offers, including tender offers at a price above the then current market value of the Common Stock. Such provisions may also inhibit fluctuations in the market price of the Common Stock that could result from takeover attempts. In addition, the Board of Directors, without further stockholder approval, may issue Preferred Stock that could have the effect of delaying or preventing a change in 24 control of the Company as well as adversely affecting the voting power of the holders of Common Stock, including the loss of voting control to others. In addition, the Board of Directors has adopted a Rights Agreement (commonly known as a "poison pill") which may have the effect of delaying or preventing a change in control. ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends and does not anticipate paying cash dividends in the foreseeable future. ITEM 2 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 1996. EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers of the Company and their ages are as follows as of December 31, 1996:
NAME AGE POSITION - ------------------------------------ --- --------------------------------------------------------------------- Hunter Jackson, Ph.D................ 46 Chief Executive Officer, President and Chairman of the Board N. Patricia Freston, Ph.D. (1)...... 57 Vice President, Human Resources James U. Jensen, J.D................ 52 Vice President, Corporate Development and Legal Affairs, Secretary and Director Thomas B. Marriott, Ph.D............ 48 Vice President, Development Research Robert K. Merrell................... 41 Vice President, Finance, Chief Financial Officer and Treasurer Edward F. Nemeth, Ph.D.............. 44 Vice President, Research Douglas Reed, M.D................... 43 Vice President, Business Development
- ------------------------ (1) Dr. Freston joined the Company in March 1997. HUNTER JACKSON, PH.D., has been Chief Executive Officer and Chairman of the Board since founding the Company in 1986. He was appointed to the additional position of President in January 1994. Prior to founding the Company, he was an Associate Professor in the Department of Anatomy at the University of Utah School of Medicine. Dr. Jackson received a B.A. in English from the University of Illinois and a Ph.D. in Psychobiology from Yale University. He received postdoctoral training in the Department of Neurosurgery, University of Virginia Medical School. N. PATRICIA FRESTON, PH.D., has been Vice President, Human Resources since March 1997. From 1980 to February 1997, she served as Manager of Personnel Services, Questar Corporation, a public integrated energy company. From 1977 to 1980, Dr. Freston was Assistant Director of Training for Mountain Fuel Supply, a subsidiary of Questar. From 1971 to 1977, she was Director of Academic Programming for the Division of Continuing Education, University of Utah. Dr. Freston received a B.A. in English from Weber State University, a M.A. in English from Utah State University, an M.S. in Education from the University of Texas and a Ph.D. in Industrial Psychology from the University of Utah. 25 JAMES U. JENSEN, J.D., has been Vice President, Corporate Development and Legal Affairs and Secretary since August 1991. He has been Secretary and a director of the Company since 1987. From 1986 to July 1991, he was a partner in the law firm of Woodbury, Jensen, Kesler & Swinton, P.C. (or its predecessor firm) concentrating on technology transfer and licensing and corporate finance. From July 1985 until October 1986, he served as chief financial officer of Cericor, a software company, and from 1983 to July 1985, as its outside general counsel. From 1980 to 1983, he served as General Counsel and Secretary of Dictaphone Corporation, a subsidiary of Pitney Bowes Inc. He serves as a director of Wasatch Funds, Inc., a registered investment company, and of Interwest Home Medical, Inc., a public home use medical equipment distributor. Mr. Jensen received a B.A. in English/Linguistics from the University of Utah and a J.D. and an M.B.A. from Columbia University. THOMAS B. MARRIOTT, PH.D., has been Vice President, Development Research since August 1993. From February 1990 to July 1993, he served as Director, Clinical Investigations for McNeil Pharmaceutical, a subsidiary of Johnson & Johnson with responsibility for developing and implementing clinical trial strategies for a number of products. From 1986 until 1990, Dr. Marriott was Director, Drug Metabolism for McNeil Pharmaceutical with responsibility for planning, initiating and completing bioanalytical drug disposition and clinical biopharmaceutics and pharmacokinetics research required for INDs and NDAs. In this position, he participated in the preparation of several INDs and NDAs with responsibility for preparing or supervising the preparation of the IND preclinical drug metabolism section and the NDA preclinical and clinical metabolism and biopharmaceutics sections, and was responsible for integrating the pharmacology, toxicology and clinical sections of INDs and NDAs. He received a B.S. in Chemistry from Carleton College and a Ph.D. in Chemistry from the Institute of Molecular Biology at the University of Oregon. ROBERT K. MERRELL has been Vice President, Finance, Chief Financial Officer and Treasurer since January 1995 and previously was Director of Finance and Administration and Treasurer from December 1993 to December 1994. He joined the Company as Controller/Treasurer in September 1988. Prior to that time, he was a Senior Manager at KPMG Peat Marwick LLP. Mr. Merrell has been a licensed C.P.A. since 1980. He received a B.A. in Accounting from the University of Utah and an M.M. from Kellogg Graduate School of Management at Northwestern University. EDWARD F. NEMETH, PH.D., has been Vice President, Research since January 1994. He joined the Company as Director of Pharmacology in March 1990. From 1986 until joining the Company, Dr. Nemeth was an Assistant Professor in the Department of Physiology and Biophysics at Case Western Reserve University School of Medicine. He holds a B.A. in Chemistry and Psychology from Lawrence University and a Ph.D. in Pharmacology from Yale University. DOUGLAS REED, M.D., has been Vice President, Business Development since April 1996. He also served on the Board of Directors of the Company from 1992 to 1996. From May 1989 to 1996, Dr. Reed was a Vice President of S.R. One, a venture capital firm. From 1985 to 1987, he was Assistant Professor at Yale University School of Medicine. Dr. Reed received an M.D. from the University of Missouri and an M.B.A. from the Wharton school at the University of Pennsylvania. 26 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company completed its initial public offering on May 26, 1994. The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "NPSP." The following table sets forth the quarterly high and low closing sales prices for the Company's Common Stock for each quarter in the two most recent fiscal years as reported by the Nasdaq National Market:
HIGH LOW --------- --------- 1995 First Quarter.......................................................... $ 4.25 $ 3.25 Second Quarter......................................................... 5.00 2.88 Third Quarter.......................................................... 8.75 4.50 Fourth Quarter......................................................... 18.50 6.13 1996 First Quarter.......................................................... $ 16.50 $ 12.50 Second Quarter......................................................... 16.75 11.75 Third Quarter.......................................................... 14.25 9.75 Fourth Quarter......................................................... 11.625 9.75
On December 31, 1996, there were approximately 1,200 beneficial holders of record of the Company's Common Stock. The Company has never declared or paid dividends on its capital stock. The Company currently intends to retain any future earnings to finance the growth and development of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. RECENT SALES OF UNREGISTERED SECURITIES On March 18, 1996, the Company sold 1 million shares of Common Stock, par value $.001 to Amgen for an aggregate purchase price of $7.5 million in reliance on Section 4(2) of the Securities Act of 1933. The offer of such shares was made solely to Amgen, a sophisticated investor, and was made as part of the terms of a development and license agreement between the parties. 27 ITEM 6 SELECTED FINANCIAL DATA. The selected financial data presented below for each fiscal year in the five-year period ended December 31, 1996 and the period from October 22, 1986 (inception) through December 31, 1996 have been derived from the Company's financial statements, which have been audited by KPMG Peat Marwick LLP, independent certified public accountants, and are qualified by reference to such Financial Statements and Notes thereto. The Company is considered a development stage company as described in Note 1 of Notes to Financial Statements.
OCTOBER 22, 1986 YEAR ENDED DECEMBER 31, (INCEPTION) ----------------------------------------------------- THROUGH 1992 1993 1994 1995 1996 DECEMBER 31, 1996 --------- --------- --------- --------- --------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Statement of Operations Data: Revenues from research and license agreements........................... $ 1,259 $ 868 $ 3,861 $ 9,562 $ 20,342 $ 42,658 Operating expenses: Research and development............. 2,722 6,021 7,765 8,727 10,959 41,319 General and administrative........... 1,283 2,004 3,122 3,975 5,478 18,267 --------- --------- --------- --------- --------- -------- Total operating expenses........... 4,005 8,025 10,887 12,702 16,437 59,586 --------- --------- --------- --------- --------- -------- Operating income (loss)............ (2,746) (7,157) (7,026) (3,140) 3,905 (16,928) Other income (expense), net............ 139 (2) 270 322 2,550 3,365 --------- --------- --------- --------- --------- -------- Income (loss) before income tax expense.............................. (2,607) (7,159) (6,756) (2,818) 6,455 (13,563) Income tax expense..................... -- -- -- 500 350 850 --------- --------- --------- --------- --------- -------- Net income (loss)...................... $ (2,607) $ (7,159) $ (6,756) $ (3,318) $ 6,105 $ (14,413) Net income (loss) per share (1)........ $ (.95) $ (1.91) $ (1.13) $ (.48) $ .55 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average shares outstanding (1).................................... 2,746 3,751 5,977 6,924 11,086
DECEMBER 31, --------------------------------------------------------- 1992 1993 1994 1995 1996 --------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Balance Sheet Data: Cash and cash equivalents............................ $ 6,779 $ 6,414 $ 9,323 $ 8,340 $ 68,962 Working capital...................................... 6,363 5,839 8,104 5,832 67,413 Total assets......................................... 8,101 12,599 12,084 10,600 72,160 Long-term portion of capital leases and long-term debt............................................... 473 830 440 747 327 Deficit accumulated during development stage......... (3,284) (10,443) (17,199) (20,517) (14,413) Stockholders' equity................................. 7,081 7,011 10,165 7,322 69,870
- ------------------------ (1) See Note 1 of Notes to Financial Statements for information concerning the computation of net income (loss) per share. 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. 28 OVERVIEW Since its inception in 1986, NPS has devoted substantially all of its resources to its research and development programs. To date, the Company has not completed development of any pharmaceutical products for sale and has incurred substantial losses. NPS has incurred cumulative losses through December 31, 1996 of $14.4 million, net of cumulative revenues from collaborative research and license agreements of $42.7 million. The Company expects to incur significant operating losses over at least the next several years as the Company continues and expands its research and development and preclinical and clinical testing activities. Substantially all of the Company's revenues are derived from license fees, milestone payments and research and development support payments from its Licensees and these revenues fluctuate from quarter to quarter. Accordingly, the Company expects that income or loss will fluctuate from quarter to quarter, that such fluctuations may be substantial, and that results from prior quarters may not be indicative of future operating results. The Company's ability to achieve profitability depends in part on its ability, alone and/or with others and the efforts of its Licensees, to complete development of its products, to obtain required regulatory approvals and to manufacture and market such products, of which matters there can be no assurance. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 Substantially all of the Company's revenues of $3.9 million, $9.6 million and $20.3 million in 1994, 1995 and 1996, respectively, were derived from research and license agreements. The Company recognized $3.6 million in 1994, $3.4 million in 1995 and $5.7 million in 1996 under the terms of the SmithKline Agreement, $6.0 million in 1995 and $4.0 million in 1996 under the terms of the Kirin Agreement and $10.6 million in 1996 under the terms of the Amgen Agreement. These revenues were derived from a combination of one-time license fees, milestone payments and research and development support payments and are not indicative of future revenue under these agreements. See "Liquidity and Capital Resources" below for further discussion of payments that may be received by the Company in the future under these agreements. Research and development expenses increased from $7.8 million in 1994 to $8.7 million in 1995 and to $11.0 million in 1996. The increases in research and development expenses were principally due to the conduct of increasingly expensive clinical trials for NPS R-568 in 1994, 1995 and early 1996, preclinical development of NPS 1506 in 1996 and the hiring of additional personnel. Research and development expenses are expected to increase significantly in the future as NPS conducts discovery, preclinical development and clinical trials for non-licensed product candidates, sponsors research or obtains licenses for technology from academic or research institutions and hires more research and development personnel. General and administrative expenses increased from $3.1 million in 1994 to $4.0 million in 1995 and to $5.5 million in 1996. The increase in 1995 was primarily due to costs incurred for advisory services in connection with the consummation of the Amgen and Kirin agreements, and the increased costs associated with operating a public company for a full year. The increase in 1996 was primarily due to hiring of additional personnel in the areas of business development, investor relations and legal affairs and costs associated with a follow-on offering of the Company's stock which was completed in May 1996. The Company expects that general and administrative expenses will continue to increase in the future as more personnel and facilities are needed to support research and development activities. Interest income increased from $398,000 in 1994 and $480,000 in 1995 to $2.7 million in 1996 primarily due to higher average cash balances resulting from the net proceeds of the follow-on offering of stock in May 1996. The Company anticipates that interest income will decrease in the future as the Company's cash is utilized for operations. 29 Income tax expense of $500,000 in 1995 and $200,000 in 1996 resulted from a 10% Japanese tax withheld on the license fee and milestone payment by Kirin. Future license, milestone and royalty payments from Kirin will be subject to the same 10% tax. In addition, U.S. alternative minimum tax of $150,000 was incurred on net income in 1996. As of December 31, 1996, the Company had a federal income tax net operating loss carryforward of approximately $11.0 million and a federal income tax research credit carryforward of approximately $1.2 million. The Company's ability to utilize these operating loss and research credit carryforwards against future taxable income will be subject to annual limitations in future periods pursuant to the "change in ownership rules" under Section 382 of the Internal Revenue Code of 1986, as amended. See Note 7 of Notes to Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations since inception primarily through collaborative research and license agreements and the private and public placement of equity securities. As of December 31, 1996, the Company had recognized approximately $42.7 million of cumulative revenues from research and license agreements and approximately $84.3 million in consideration for the sale of equity securities for cash and services. The Company's principal sources of liquidity are its cash and cash equivalents which totaled approximately $69.0 million at December 31, 1996. The Company receives quarterly payments under its agreements with Kirin and SmithKline Beecham to support the Company's research efforts in HPT and osteoporosis, respectively. The Kirin payments are $500,000 per quarter through June 30, 1997 and $250,000 per quarter thereafter through the remaining three years of the research term of the Kirin Agreement. The scheduled expiration date of the SmithKline Beecham agreement is October 31, 1997 and NPS expects to receive approximately $475,000 per quarter in 1997 through that date from SmithKline Beecham. Amgen will reimburse the Company up to $400,000 per year for a period not to exceed five years for costs incurred by the Company for designation of NPS personnel to be available to participate in the development of a compound for primary HPT in the Amgen Territory, with such participation occurring under the direction of Amgen. The Company could receive additional payments of up to $51.0 million in the aggregate from Amgen, Kirin and SmithKline Beecham upon the accomplishment of specified research and/or development milestones under the respective agreements. NPS does not control the subject matter, timing or resources applied by its Licensees under their respective development programs. Thus, the Company's potential receipt of milestone payments from these Licensees is largely beyond the control of NPS. Progress under these agreements is subject to risk and each of these agreements may be terminated before the scheduled expiration date by the respective Licensee. Therefore, no assurance can be given that any future milestone or research or development support payments will be received thereunder. The Company has entered into certain sponsored research and license agreements which obligate the Company to make research support payments to academic or research institutions. Additional payments may be required upon the accomplishment of research milestones by the institutions or as license fees or royalties to maintain the licenses. As of December 31, 1996, the Company had a total commitment of approximately $1.1 million for future research support payments. The Company expects to enter into additional sponsored research and license agreements in the future. As of December 31, 1996, the Company's net investment in leasehold improvements, equipment and furnishings was approximately $2.2 million. The Company has financed a portion of such expenditures through capital leases and long-term debt with a total principal obligation of approximately $1.5 million as of December 31, 1996. Additional equipment and facilities will be needed as the Company increases its research and development activities, a portion of which may be financed with debt. Equipment and leasehold improvements subject to the capital leases and the long-term debt have been pledged in support of such obligations. 30 The Company anticipates that its existing capital resources, including interest earned thereon and expected research development support payments from its Licensees will be sufficient to enable it to maintain its current and planned operations through at least 1999. However, actual needs are dependent on numerous factors, including the progress of the Company's research and development programs, the magnitude and scope of these activities, progress with preclinical and clinical trials, the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in or terminations of existing research and license arrangements, the establishment of additional license arrangements and the cost of manufacturing scale-up and development of marketing activities, if undertaken by the Company. Substantial expenditures will be required to conduct preclinical studies and clinical trials, manufacture or have manufactured and market any proprietary products of NPS which may be derived from current research and development efforts and perform research and development activities in additional areas. In addition, if Amgen terminates its agreement, the Company may not have sufficient capital to complete the development and commercialization of a drug for HPT in Amgen Territory. NPS may need to raise substantial additional funds to support its long-term product development and commercialization programs. The Company intends to seek additional funding through collaborations and licensing agreements and the Company may seek additional funding through public or private financing. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its research and development programs or to obtain funds through arrangements with licensees or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company may otherwise seek to develop or commercialize on its own. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's Financial Statements and notes thereto appear on pages F-1 to F-24 of this Form 10-K Annual Report. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes in and disagreements with accountants on accounting and financial disclosure. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Certain of the information required by this item will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to be held on May 20, 1997, under the caption "Election of Directors," and is incorporated by reference herein. For information regarding executive officers, See Part I of this Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11 EXECUTIVE COMPENSATION. Certain of the information required by this item will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to be held on May 20, 1997, under the caption "Executive Compensation," and, except for the information appearing under the captions "Report of the Compensation Committee of the Board of Directors" and "Performance Measurement Comparison," is incorporated by reference herein. 31 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. This information required by this item will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to be held May 20, 1997, under the caption "Security Ownership of Certain Beneficial Owners and Management," and is incorporated by reference herein. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. This information required by this item will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to be held May 20, 1997, under the caption "Certain Transactions," and is incorporated by reference herein. 32 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. INDEX TO FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT AUDITORS. The Financial Statements required by this item are submitted in a separate section beginning on page F-1 of this report.
PAGE NUMBER ----------- Index to Financial Statements...................................................................... F-1 Report of KPMG Peat Marwick LLP, Independent Auditors.............................................. F-2 Balance Sheets..................................................................................... F-3 Statements of Operations........................................................................... F-4 Statements of Stockholders' Equity................................................................. F-5 Statements of Cash Flows........................................................................... F-12 Notes to Financial Statements...................................................................... F-14
2. INDEX TO FINANCIAL STATEMENTS SCHEDULES. There are no Financial Statements Schedules included because they are either not applicable or the required information is shown in the Financial Statements or the notes thereto. 3. EXHIBITS.
EXHIBIT NUMBER - -------------- 3.1** Amended and Restated Certificate of Incorporation of the Registrant. 3.2** Amended and Restated Bylaws of the Registrant. 4.1++ Rights Agreement, dated as of December 4, 1996, between NPS Pharmaceuticals, Inc. and American Stock Transfer & Trust, Inc., with Exhibit A, Form of Certificate of Designation of Series A Junior Participating Preferred Stock; Exhibit B, Form of Right Certificate; and Exhibit C, Summary of Rights to Purchase Shares of Preferred Stock. 10.1** Stock Purchase Agreement between the Registrant and S.R. One, Limited, dated November 18, 1993. 10.2** Amended Agreement and Waiver, among the Registrant and the other parties thereto, dated November 18, 1993. 10.3** Form of Registrant's 1994 Non-Employee Directors' Stock Option Plan. 10.4** Form of Registrant's 1994 Equity Incentive Plan and Form of Stock Option Agreements. 10.5** Registrant's 1987 Stock Option Plan, as amended, and Form of Stock Option Agreement. 10.6** Form of Registrant's 1994 Employee Stock Purchase Plan and Form of Offering Document. 10.7** Master Lease Agreement between the Registrant and LINC Scientific Leasing, dated October 7, 1992, with related addenda. 10.8** Form of Indemnity Agreement entered into between the Registrant and its officers and directors. 10.9+** Collaborative Research and License Agreement between the Registrant and SmithKline Beecham Corporation, dated November 1, 1993. 10.10+** Patent Agreement Between the Registrant and The Brigham and Women's Hospital, Inc., dated February 19, 1993, with related amendment. 10.11+** Research Agreement between the Registrant and The Brigham and Women's Hospital, Inc., dated February 19, 1993, with related amendment.
33
EXHIBIT NUMBER - -------------- 10.15+**** Collaborative Research and License Agreement between the Registrant and Kirin Brewery Company, Ltd. dated June 29, 1995. 10.16+ Development and License Agreement between the Registrant and Amgen Inc. effective as of December 27, 1995. 10.17+ Stock Purchase Agreement between Registrant and Amgen Inc. dated March 18, 1996. 10.18* Lease Agreement with GATX dated June 1, 1995, with related addenda. 10.19* Office Lease between Salt Lake Research Park Associates and Registrant dated June 3, 1994, with related amendments. 10.20** Consultant Services Agreement between the Registrant and Thomas N. Parks, Ph.D., dated January 30, 1989. 10.21*** Consulting Agreement between the Registrant and Plexus Ventures, Inc. dated August 5, 1994, as amended. 10.22+***** Binding Letter of Intent between Amgen Inc. and the Registrant dated December 27, 1995. 10.23+ Amendment effective February 7, 1996 to Research Agreement between the Registrant and The Brigham and Women's Hospital, Inc. dated February 19, 1993. 10.24+ Amendment effective February 7, 1996 to Patent Agreement between the Registrant and The Brigham and Women's Hospital, Inc., dated February 19, 1993. 10.25+ Amendment effective January 29, 1996 to the Collaborative Research and License Agreement between the Registrant and SmithKline Beecham Corporation, dated November 1, 1993. 10.26****** Form of Registrant's 1994 Employee Stock Purchase Plan and Form of Offering Document as amended and adopted by the Board of Directors dated December 1996. 10.27****** Form of Registrant's 1994 Non-Employee Directors' Stock Option Plan as amended and adopted by the Board of Directors dated December 1996. 10.28****** Form of Registrant's 1994 Equity Incentive Plan as amended and adopted by the Board of Directors dated December 1996. 10.29 Consulting Services Agreement between the Registrant and Donald E. Kuhla, Ph.D. dated November 1, 1996. 10.30+ Amendment Agreement between SmithKline Beecham Corporation and NPS Pharmaceuticals, Inc. dated October 28, 1996. 10.31 1997 Research Agreement Amendment between The Brigham and Women's Hospital, Inc. and NPS Pharmaceuticals, Inc. 11.1 Statement regarding calculation of net loss per share. 23.1 Consent of KPMG Peat Marwick LLP, independent auditors.
- ------------------------ * Incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1995. ** Incorporated herein by reference to the Registrant's registration statement on Form S-1 filed January 21, 1994 (File No. 33-74318). *** Incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1994. **** Incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1994. 34 ***** Incorporated herein by reference to the Registrant's Form 8-K dated February 29, 1996. ****** Incorporated hereby by reference to the Registrant's Form S-8 dated December 3, 1996. + Confidential treatment has been granted with respect to these exhibits. ++ Incorporated herein by reference to the Registrant's Form 8-K dated December 19, 1996. (b) Reports on Form 8-K. The Registrant filed a report on Form 8-K with the Securities and Exchange Commission on December 19, 1996, reporting developments in its hyperparathyroidism and osteoporosis programs and reporting the adoption of a Shareholder Rights Agreement. (c) See Exhibits listed under Item 14(a)(3). (d) The financial statement schedules required by this Item are listed under Item 14(a)(2). 35 SIGNATURES Pursuant to the requirements of the Securities 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on the 28th day of March, 1997. NPS PHARMACEUTICALS, INC. By /s/ HUNTER JACKSON, PH.D. ----------------------------------------- Hunter Jackson, Ph.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER, AND CHAIRMAN OF THE BOARD POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Hunter Jackson and James U. Jensen, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement and any registration statement related to this Registration Statement and filed pursuant to Rule 462 under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys- in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE - ------------------------------ -------------------------- ------------------- President and Chief /s/ HUNTER JACKSON Executive Officer - ------------------------------ (Principal Executive March 28, 1997 Hunter Jackson, Ph.D. Officer) and Chairman of the Board Vice President, Finance, /s/ ROBERT K. MERRELL Chief Financial Officer - ------------------------------ and Treasurer (Principal March 28, 1997 Robert K. Merrell Financial and Accounting Officer) /s/ JAMES U. JENSEN Vice President, Corporate - ------------------------------ Development and Legal March 28, 1997 James U. Jensen Affairs, Director /s/ SANTO J. COSTA - ------------------------------ Director March 28, 1997 Santo J. Costa
36
NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ JAMES G. GRONINGER - ------------------------------ Director March 28, 1997 James G. Groninger /s/ DONALD E. KUHLA - ------------------------------ Director March 28, 1997 Donald E. Kuhla, Ph.D. /s/ THOMAS N. PARKS - ------------------------------ Director March 28, 1997 Thomas N. Parks, Ph.D. /s/ TIMOTHY J. RINK - ------------------------------ Director March 28, 1997 Timothy J. Rink, M.D.
37 INDEX TO FINANCIAL STATEMENTS
PAGE --------- Report of KPMG Peat Marwick LLP, Independent Auditors...................................................... F-2 Balance Sheets............................................................................................. F-3 Statements of Operations................................................................................... F-4 Statements of Stockholders' Equity......................................................................... F-5 Statements of Cash Flows................................................................................... F-12 Notes to Financial Statements.............................................................................. F-14
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders NPS Pharmaceuticals, Inc.: We have audited the accompanying balance sheets of NPS Pharmaceuticals, Inc. (a development stage enterprise) as of December 31, 1995 and 1996, and the related statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, and for the period from October 22, 1986 (inception) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NPS Pharmaceuticals, Inc. (a development stage enterprise) as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, and for the period from October 22, 1986 (inception) to December 31, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Salt Lake City, Utah February 21, 1997 F-2 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS ASSETS
DECEMBER 31, -------------------------- 1995 1996 ------------ ------------ Current assets: Cash and cash equivalents............................... $ 8,339,625 $ 68,961,764 Accounts receivable..................................... 23,000 415,208 ------------ ------------ Total current assets.............................. 8,362,625 69,376,972 ------------ ------------ Plant and equipment (note 3): Equipment............................................... 2,272,006 3,259,376 Leasehold improvements.................................. 1,635,189 1,997,994 ------------ ------------ 3,907,195 5,257,370 Less accumulated depreciation and amortization.......... 1,711,551 2,477,665 ------------ ------------ Net plant and equipment............................... 2,195,644 2,779,705 Other assets, at cost..................................... 42,154 3,267 ------------ ------------ $ 10,600,423 $ 72,159,944 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of obligations under capital leases (note 3).............................................. $ 435,230 $ 53,339 Current installments on long-term debt (note 4)......... 331,746 369,467 Accounts payable........................................ 1,036,464 619,120 Accrued expenses........................................ 139,714 271,677 Deferred income (note 2)................................ 587,500 500,000 Income tax payable (note 7)............................. -- 150,000 ------------ ------------ Total current liabilities......................... 2,530,654 1,963,603 Obligations under capital leases, excluding current installments (note 3)................................. 53,761 27,295 Long-term debt, excluding current installments (note 4).................................................... 693,528 299,534 ------------ ------------ Total liabilities................................. 3,277,943 2,290,432 ------------ ------------ Commitments and contingencies (notes 2, 3, and 9) Stockholders' equity (notes 5 and 6): Common stock, $.001 par value. Authorized 20,000,000 shares; issued and outstanding 7,072,801 shares at December 31, 1995, and 11,807,221 shares at December 31, 1996.............................................. 7,073 11,807 Additional paid-in capital................................ 28,067,130 84,270,283 Deferred compensation..................................... (234,458) -- Deficit accumulated during development stage.............. (20,517,265) (14,412,578) ------------ ------------ Net stockholders' equity.......................... 7,322,480 69,869,512 ------------ ------------ $ 10,600,423 $ 72,159,944 ------------ ------------ ------------ ------------
See accompanying notes to financial statements. F-3 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS
OCTOBER 22, 1986 (INCEPTION) YEAR ENDED DECEMBER 31, THROUGH ------------------------------------------- DECEMBER 31, 1994 1995 1996 1996 ------------- ------------- ------------- --------------- Revenues from research and license agreements...... $ 3,860,706 $ 9,562,319 $ 20,342,330 $ 42,658,179 Operating expenses: Research and development........................... 7,765,326 8,727,316 10,958,884 41,319,074 General and administrative......................... 3,121,688 3,975,379 5,478,811 18,267,256 ------------- ------------- ------------- --------------- Total operating expenses......................... 10,887,014 12,702,695 16,437,695 59,586,330 ------------- ------------- ------------- --------------- Operating income (loss).......................... (7,026,308) (3,140,376) 3,904,635 (16,928,151) Other income (expense): Interest income.................................... 398,388 480,029 2,690,568 3,947,412 Interest expense................................... (128,413) (157,744) (141,705) (617,418) Other.............................................. -- -- 1,189 35,579 ------------- ------------- ------------- --------------- Total other income............................... 269,975 322,285 2,550,052 3,365,573 ------------- ------------- ------------- --------------- Income (loss) before income tax expense.......... (6,756,333) (2,818,091) 6,454,687 (13,562,578) Income tax expense (note 7)...................... -- 500,000 350,000 850,000 ------------- ------------- ------------- --------------- Net income (loss).................................. $ (6,756,333) $ (3,318,091) $ 6,104,687 $ (14,412,578) ------------- ------------- ------------- --------------- ------------- ------------- ------------- --------------- Net income (loss) per common and common equivalent share (note 1)................................... $ (1.13) $ (.48) $ .55 ------------- ------------- ------------- ------------- ------------- ------------- Weighted average common and common-equivalent shares outstanding during the year (note 1)...... 5,977,300 6,924,400 11,086,000 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to financial statements. F-4 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS' EQUITY OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
SERIES A SERIES B SERIES C SERIES D SERIES E ADDITIONAL PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED COMMON PAID-IN STOCK STOCK STOCK STOCK STOCK STOCK CAPITAL ----------- ----------- ----------- ----------- ----------- ----------- ---------- Issuance of 1,125,000 shares of common stock for cash and equipment valued at fair value upon incorporation at October 22, 1986...................... $ -- $ -- $ -- $ -- $ -- $ 1,125 $ 13,875 Net loss................................ -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Balances, December 31, 1986............. -- -- -- -- -- 1,125 13,875 Repurchase of 375,000 shares of common stock................................. -- -- -- -- -- (375) (4,625) Issuance of 82,500 shares of common stock for services.................... -- -- -- -- -- 83 1,017 Net income.............................. -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Balances, December 31, 1987............. -- -- -- -- -- 833 10,267 Issuance of 55,556 shares of preferred stock for cash........................ 5,556 -- -- -- -- -- 294,446 Issuance of 11,448 shares of common stock for cash under option plan...... -- -- -- -- -- 11 1,516 Issuance of 97,500 shares of common stock for services under option plan.................................. -- -- -- -- -- 98 32,402 Net loss................................ -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Balances, December 31, 1988............. 5,556 -- -- -- -- 942 338,631 DEFICIT ACCUMULATED DURING NET DEFERRED DEVELOPMENT STOCKHOLDERS' COMPENSATION STAGE EQUITY ------------- ------------ ------------ Issuance of 1,125,000 shares of common stock for cash and equipment valued at fair value upon incorporation at October 22, 1986...................... $ -- $ -- $ 15,000 Net loss................................ -- (12,477) (12,477) ------------- ------------ ------------ Balances, December 31, 1986............. -- (12,477) 2,523 Repurchase of 375,000 shares of common stock................................. -- -- (5,000) Issuance of 82,500 shares of common stock for services.................... -- -- 1,100 Net income.............................. -- 121,274 121,274 ------------- ------------ ------------ Balances, December 31, 1987............. -- 108,797 119,897 Issuance of 55,556 shares of preferred stock for cash........................ -- -- 300,002 Issuance of 11,448 shares of common stock for cash under option plan...... -- -- 1,527 Issuance of 97,500 shares of common stock for services under option plan.................................. -- -- 32,500 Net loss................................ -- (105,643) (105,643) ------------- ------------ ------------ Balances, December 31, 1988............. -- 3,154 348,283
F-5 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
SERIES A SERIES B SERIES C SERIES D SERIES E ADDITIONAL PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED COMMON PAID-IN STOCK STOCK STOCK STOCK STOCK STOCK CAPITAL ----------- ----------- ----------- ----------- ----------- ----------- ---------- Issuance of 37,037 shares of preferred stock for cash........................ $ -- $ 3,704 $ -- $ -- $ -- $ -- $ 336,296 Issuance of 7,500 shares of common stock for services under option plan........ -- -- -- -- -- 7 2,493 Net loss................................ -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Balances, December 31, 1989............. 5,556 3,704 -- -- -- 949 677,420 Issuance of 37,037 shares of preferred stock for cash........................ -- 3,703 -- -- -- -- 336,297 Issuance of 2,475 shares of common stock for cash under option plan............ -- -- -- -- -- 2 898 Net loss................................ -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Balances, December 31, 1990............. 5,556 7,407 -- -- -- 951 1,014,615 Issuance of 4,500 shares of common stock for cash under option plan............ -- -- -- -- -- 5 2,245 Net loss................................ -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Balances, December 31, 1991............. 5,556 7,407 -- -- -- 956 1,016,860 DEFICIT ACCUMULATED DURING NET DEFERRED DEVELOPMENT STOCKHOLDERS' COMPENSATION STAGE EQUITY ------------- ------------ ------------ Issuance of 37,037 shares of preferred stock for cash........................ $ -- $ -- $ 340,000 Issuance of 7,500 shares of common stock for services under option plan........ -- -- 2,500 Net loss................................ -- (5,025) (5,025) ------------- ------------ ------------ Balances, December 31, 1989............. -- (1,871) 685,758 Issuance of 37,037 shares of preferred stock for cash........................ -- -- 340,000 Issuance of 2,475 shares of common stock for cash under option plan............ -- -- 900 Net loss................................ -- (212,976) (212,976) ------------- ------------ ------------ Balances, December 31, 1990............. -- (214,847) 813,682 Issuance of 4,500 shares of common stock for cash under option plan............ -- -- 2,250 Net loss................................ -- (462,054) (462,054) ------------- ------------ ------------ Balances, December 31, 1991............. -- (676,901) 353,878
F-6 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
SERIES A SERIES B SERIES C SERIES D SERIES E ADDITIONAL PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED COMMON PAID-IN STOCK STOCK STOCK STOCK STOCK STOCK CAPITAL ----------- ----------- ----------- ----------- ----------- ----------- ---------- Issuance of 3,675 shares of common stock for cash under option plan............ $ -- $ -- $ -- $ -- $ -- $ 4 $ 2,221 Issuance of 230,334 shares of common stock upon conversion of 129,630 shares of preferred stock............. (5,556) (7,407) -- -- -- 230 12,733 Repurchase and cancellation of 83,334 shares of common stock for cash....... -- -- -- -- -- (83) (299,917) Issuance of 781,250 shares of preferred stock for cash, net of offering costs................................. -- -- 781 -- -- -- 4,937,462 Issuance of 678,573 shares of preferred stock for cash, net of \ offering costs................................. -- -- -- 679 -- -- 4,693,794 Issuance of 101,452 shares of common stock for services related to preferred stock offering.............. -- -- -- -- -- 101 (101) Net loss................................ -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Balances, December 31, 1992............. -- -- 781 679 -- 1,208 10,363,052 DEFICIT ACCUMULATED DURING NET DEFERRED DEVELOPMENT STOCKHOLDERS' COMPENSATION STAGE EQUITY ------------- ------------ ------------ Issuance of 3,675 shares of common stock for cash under option plan............ $ -- $ -- $ 2,225 Issuance of 230,334 shares of common stock upon conversion of 129,630 shares of preferred stock............. -- -- -- Repurchase and cancellation of 83,334 shares of common stock for cash....... -- -- (300,000) Issuance of 781,250 shares of preferred stock for cash, net of offering costs................................. -- -- 4,938,243 Issuance of 678,573 shares of preferred stock for cash, net of \ offering costs................................. -- -- 4,694,473 Issuance of 101,452 shares of common stock for services related to preferred stock offering.............. -- -- -- Net loss................................ -- (2,607,359) (2,607,359) ------------- ------------ ------------ Balances, December 31, 1992............. -- (3,284,260) 7,081,460
F-7 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
SERIES A SERIES B SERIES C SERIES D SERIES E ADDITIONAL PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED COMMON PAID-IN STOCK STOCK STOCK STOCK STOCK STOCK CAPITAL ----------- ----------- ----------- ----------- ----------- ----------- ---------- Issuance of 37,524 shares of common stock for cash under option plan...... $ -- $ -- $ -- $ -- $ -- $ 38 $ 25,545 Issuance of 583,334 shares of preferred stock for cash, net of offering costs................................. -- -- -- -- 583 -- 6,968,115 Issuance of 6,050 shares of preferred stock for services.................... -- -- -- -- 6 -- 72,594 Deferred compensation related to grant of stock options, net of current year expense............................... -- -- -- -- -- -- 766,500 Net loss................................ -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Balances, December 31, 1993............. -- -- 781 679 589 1,246 18,195,806 DEFICIT ACCUMULATED DURING NET DEFERRED DEVELOPMENT STOCKHOLDERS' COMPENSATION STAGE EQUITY ------------- ------------ ------------ Issuance of 37,524 shares of common stock for cash under option plan...... $ -- $ -- $ 25,583 Issuance of 583,334 shares of preferred stock for cash, net of offering costs................................. -- -- 6,968,698 Issuance of 6,050 shares of preferred stock for services.................... -- -- 72,600 Deferred compensation related to grant of stock options, net of current year expense............................... (745,458) -- 21,042 Net loss................................ -- (7,158,581) (7,158,581) ------------- ------------ ------------ Balances, December 31, 1993............. (745,458) (10,442,841) 7,010,802
F-8 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
SERIES A SERIES B SERIES C SERIES D SERIES E ADDITIONAL PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED COMMON PAID-IN STOCK STOCK STOCK STOCK STOCK STOCK CAPITAL ----------- ----------- ----------- ----------- ----------- ----------- ---------- Issuance of 3,475,666 shares of common stock upon conversion of 2,049,207 shares of preferred stock............. $ -- $ -- $ (781) $ (679) $ (589) $ 3,475 $ (1,426) Issuance of 2,000,000 shares of common stock for cash, net of offering costs................................. -- -- -- -- -- 2,000 9,530,252 Issuance of 20,000 shares of common stock for services.................... -- -- -- -- -- 20 95,958 Issuance of 46,118 shares of common stock for cash and options for 432 shares under option plans............. -- -- -- -- -- 46 26,477 Amortization of deferred compensation... -- -- -- -- -- -- -- Net loss................................ -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Balances, December 31, 1994............. -- -- -- -- -- 6,787 27,847,067 DEFICIT ACCUMULATED DURING NET DEFERRED DEVELOPMENT STOCKHOLDERS' COMPENSATION STAGE EQUITY ------------- ------------ ------------ Issuance of 3,475,666 shares of common stock upon conversion of 2,049,207 shares of preferred stock............. $ -- $ -- $ -- Issuance of 2,000,000 shares of common stock for cash, net of offering costs................................. -- -- 9,532,252 Issuance of 20,000 shares of common stock for services.................... -- -- 95,978 Issuance of 46,118 shares of common stock for cash and options for 432 shares under option plans............. -- -- 26,523 Amortization of deferred compensation... 255,500 -- 255,500 Net loss................................ -- (6,756,333) (6,756,333) ------------- ------------ ------------ Balances, December 31, 1994............. (489,958) (17,199,174) 10,164,722
F-9 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
SERIES A SERIES B SERIES C SERIES D SERIES E ADDITIONAL PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED COMMON PAID-IN STOCK STOCK STOCK STOCK STOCK STOCK CAPITAL ----------- ----------- ----------- ----------- ----------- ----------- ---------- Issuance of 242,385 shares of common stock for cash and options for 14,816 shares under option plans............. $ -- $ -- $ -- $ -- $ -- $ 243 $ 100,378 Issuance of 39,771 shares of common stock for cash under employee purchase plan.................................. -- -- -- -- -- 40 109,827 Issuance of 3,287 shares of common stock for services.......................... -- -- -- -- -- 3 9,858 Amortization of deferred compensation... -- -- -- -- -- -- -- Net loss................................ -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Balances, December 31, 1995............. -- -- -- -- -- 7,073 28,067,130 DEFICIT ACCUMULATED DURING NET DEFERRED DEVELOPMENT STOCKHOLDERS' COMPENSATION STAGE EQUITY ------------- ------------ ------------ Issuance of 242,385 shares of common stock for cash and options for 14,816 shares under option plans............. $ -- $ -- $ 100,621 Issuance of 39,771 shares of common stock for cash under employee purchase plan.................................. -- -- 109,867 Issuance of 3,287 shares of common stock for services.......................... -- -- 9,861 Amortization of deferred compensation... 255,500 -- 255,500 Net loss................................ -- (3,318,091) (3,318,091) ------------- ------------ ------------ Balances, December 31, 1995............. (234,458) (20,517,265) 7,322,480
F-10 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1996
SERIES A SERIES B SERIES C SERIES D SERIES E ADDITIONAL PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED COMMON PAID-IN STOCK STOCK STOCK STOCK STOCK STOCK CAPITAL ----------- ----------- ----------- ----------- ----------- ----------- ---------- Issuance of 1,000,000 shares of common stock for cash(note 2) $ -- $ -- $ -- $ -- $ -- $ 1,000 $7,499,000 Issuance of 3,450,000 shares of common stock for cash, net of offering costs................................. -- -- -- -- -- 3,450 47,909,132 Issuance of 223,940 shares of common stock for cash and options for 5,746 shares under option plans............. -- -- -- -- -- 223 220,726 Issuance of 24,814 shares of common stock for services under option plans................................. -- -- -- -- -- 25 333,890 Issuance of 18,147 shares of common stock for cash under employee purchase plan.................................. -- -- -- -- -- 18 110,423 Issuance of 17,519 shares of common stock for warrants for 2,731 shares upon exercise of warrants............. -- -- -- -- -- 18 (18) Consulting expense related to the grant of stock options for services rendered (note 6) -- -- -- -- -- -- 130,000 Amortization of deferred compensation... -- -- -- -- -- -- -- Net income.............................. -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Balances, December 31, 1996............. $ -- $ -- $ -- $ -- $ -- $ 11,807 $84,270,283 ----------- ----------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- DEFICIT ACCUMULATED DURING NET DEFERRED DEVELOPMENT STOCKHOLDERS' COMPENSATION STAGE EQUITY ------------- ------------ ------------ Issuance of 1,000,000 shares of common stock for cash(note 2) $ -- $ -- $7,500,000 Issuance of 3,450,000 shares of common stock for cash, net of offering costs................................. -- -- 47,912,582 Issuance of 223,940 shares of common stock for cash and options for 5,746 shares under option plans............. -- -- 220,949 Issuance of 24,814 shares of common stock for services under option plans................................. -- -- 333,915 Issuance of 18,147 shares of common stock for cash under employee purchase plan.................................. -- -- 110,441 Issuance of 17,519 shares of common stock for warrants for 2,731 shares upon exercise of warrants............. -- -- -- Consulting expense related to the grant of stock options for services rendered (note 6) -- -- 130,000 Amortization of deferred compensation... 234,458 -- 234,458 Net income.............................. -- 6,104,687 6,104,687 ------------- ------------ ------------ Balances, December 31, 1996............. $ -- ($14,412,578) $69,869,512 ------------- ------------ ------------ ------------- ------------ ------------
See accompanying notes to financial statements. F-11 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS
OCTOBER 22, 1986 (INCEPTION) YEARS ENDED DECEMBER 31, THROUGH ---------------------------------------- DECEMBER 31, 1994 1995 1996 1996 ------------ ------------ ------------ ------------- Cash flows from operating activities: Net income (loss)............................... $ (6,756,333) $ (3,318,091) $ 6,104,687 $ (14,412,578) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization................. 596,842 674,039 773,213 3,186,241 Gain on sale of equipment..................... -- -- (1,189) (29,909) Issuance of common and preferred stock and options in lieu of cash for services........ 95,978 9,861 463,915 678,454 Amortization of deferred compensation........... 255,500 255,500 234,458 766,500 Decrease (increase) in operating assets: Accounts receivable........................... (226,788) 237,000 (392,208) (415,208) Other assets.................................. (21,553) 24,874 38,887 (6,867) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses......... 142,592 110,187 (285,381) 890,797 Income tax payable............................ -- -- 150,000 150,000 Deferred income............................... (3,400,000) 587,500 (87,500) 500,000 ------------ ------------ ------------ ------------- Net cash provided by (used in) operating activities.............................. (9,313,762) (1,419,130) 6,998,882 (8,692,570) Cash flows from investing activities: Net sale (purchase) of marketable investment securities.................................... (3,092,135) 3,092,135 -- -- Acquisition of equipment and leasehold improvements.................................. (1,048,020) (373,171) (1,350,974) (5,410,100) Proceeds from sale of equipment................. -- -- 27,137 1,075,621 ------------ ------------ ------------ ------------- Net cash provided by (used in) investing activities.............................. (4,140,155) 2,718,964 (1,323,837) (4,334,479) ------------ ------------ ------------ ------------- Cash flows from financing activities: Proceeds from note payable to bank.............. -- -- -- 123,855 Proceeds from issuance of preferred stock and collection of subscription receivable......... 4,000,000 -- -- 17,581,416 Proceeds from issuance of common stock.......... 9,558,775 210,488 55,743,972 65,555,720 Proceeds from long-term debt.................... -- 1,166,434 -- 1,166,434 Principal payments on note payable to bank...... -- -- -- (123,855) Principal payments under capital lease obligations................................... (287,539) (427,053) (440,605) (1,320,020) Principal payments on long-term debt............ -- (141,160) (356,273) (694,737) Repurchase of preferred stock................... -- -- -- (300,000) ------------ ------------ ------------ ------------- Net cash provided by financing activities.............................. 13,271,236 808,709 54,947,094 81,988,813 ------------ ------------ ------------ -------------
F-12 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS (CONTINUED)
OCTOBER 22, 1986 (INCEPTION) YEARS ENDED DECEMBER 31, THROUGH ---------------------------------------- DECEMBER 31, 1994 1995 1996 1996 ------------ ------------ ------------ ------------- Net increase (decrease) in cash and cash equivalents..................................... $ (182,681) $ 2,108,543 $ 60,622,139 $ 68,961,764 Cash and cash equivalents at beginning of period.......................................... 6,413,763 6,231,082 8,339,625 -- ------------ ------------ ------------ ------------- Cash and cash equivalents at end of period........ $ 6,231,082 $ 8,339,625 $ 68,961,764 $ 68,961,764 ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------- Supplemental Disclosures of Cash Flow Information Cash paid for interest............................ $ 149,013 $ 171,752 $ 141,705 $ 617,418 Cash paid for taxes............................... -- 500,000 200,000 700,000 Supplemental Schedule of Noncash Investing and Financing Activities Acquisition of equipment through incurrence of capital lease obligations....................... 25,669 62,945 32,248 1,400,654 Acquisition of leasehold improvements through incurrence of debt.............................. -- -- -- 197,304 Issuance of preferred stock for stock subscription receivable...................................... -- -- -- 4,000,000 Accrual of deferred offering costs................ -- -- -- 150,000
See accompanying notes to financial statements. F-13 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994, 1995, AND 1996 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NPS Pharmaceuticals, Inc. (the "Company"), a development stage enterprise, is engaged in the discovery and development of orally-active, small molecule drugs that target selected biological targets, including cell surface receptors and ion channels. Since inception, the Company's principal activities have been performing research and development, raising capital, and establishing research and license agreements. The following significant accounting policies are followed by the Company in preparing its financial statements: (a) CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents consist of commercial paper, money market funds, and debt securities of $5,731,206, $5,120,124 and $67,517,875 at December 31, 1994, 1995, and 1996, respectively. At December 31, 1994, 1995, and 1996, the book value of cash equivalents approximates fair value. (b) REVENUE RECOGNITION The Company recognizes revenue from its research agreements as related research costs are incurred and from its license fees and milestone payments as earned. Cash received in advance of the performance of the related research is recorded as deferred income. (c) PLANT AND EQUIPMENT Plant and equipment are stated at cost. Equipment under capital lease is stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value of the equipment at the inception of the lease. Depreciation and amortization of equipment (including equipment held under capital lease) are calculated on the straight-line method over their estimated useful lives of five years. Leasehold improvements are amortized using the straight-line method over the shorter of the life of the asset or remainder of the lease term. Amortization of assets held under capital lease is included with depreciation and amortization expense. (d) INCOME (LOSS) PER COMMON AND COMMON-EQUIVALENT SHARE Income (loss) per common and common-equivalent share have been computed based on the weighted average number of shares outstanding during the year, after giving effect, if necessary, to the assumption that all dilutive stock options were exercised at the beginning of the year or date of grant with the proceeds therefrom being used to acquire treasury shares. For periods prior to May 26, 1994, the date of the Company's initial public offering, upon which all outstanding shares of preferred stock were converted to shares of common stock, the loss presented is pro forma after giving retroactive effect to the conversion of Series C, D, and E preferred stock and the inclusion of common stock options issued for consideration below the initial public offering price during the twelve-month period prior to the date of the initial filing of the Registration Statement, even when antidilutive, pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, using the treasury-stock method. F-14 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (e) INCOME TAXES The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating loss, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (f) STOCK-BASED COMPENSATION Effective January 1, 1996, the Company adopted the footnote disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 123 encourages entities to adopt a fair-value based method of accounting for stock options or similar equity instruments. However, it also allows an entity to continue measuring compensation cost for stock-based compensation using the intrinsic-value method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25). The Company has elected to continue to apply the provisions of APB 25 and provide pro forma footnote disclosures required by SFAS No. 123. (g) USE OF ESTIMATES Management of the Company has made estimates and assumptions relating to reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (h) RECLASSIFICATIONS Certain amounts in 1994 and 1995 have been reclassified to conform with the 1996 presentation. (2) COLLABORATIVE RESEARCH AND LICENSE AGREEMENTS The Company is pursuing product development both on an independent basis and in collaboration with others. Following is a description of significant current collaborations and license agreements: (a) AMGEN INC. In March 1996 (effective as of December 1995), the Company entered into a development and license agreement with Amgen under which Amgen assumed full responsibility and control to develop and commercialize NPS R-568 and other compounds for the treatment of hyperparathyroidism and indications other than osteoporosis. Amgen agreed to pay to the Company a $10.0 million nonrefundable license fee, potential additional development milestone payments totaling $26.0 million, up to $400,000 per year for development support under the direction of Amgen and royalties on any future product sales. Amgen also agreed to purchase one million shares of the Company's common stock for F-15 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (2) COLLABORATIVE RESEARCH AND LICENSE AGREEMENTS (CONTINUED) $7.5 million. Amgen is required to pay all costs of developing and commercializing products. Amgen received exclusive worldwide rights (excluding Japan, China, Korea, and Taiwan). (b) KIRIN BREWERY COMPANY, LIMITED Effective June 30, 1995, NPS entered into a five year agreement with Kirin for exclusive rights to develop and commercialize NPS R-568 in Japan, China, Korea, and Taiwan. Kirin paid to NPS a $5.0 million license fee and has agreed to pay up to $7.0 million in research support, potential additional milestone payments totaling $13.0 million, and royalties on product sales. The Kirin research support payments are $500,000 per quarter through June 1997 and $250,000 per quarter over the remaining three years. Both parties will participate in a collaborative research program around NPS's parathyroid calcium receptor technology. The Company recognized the $5.0 million nonrefundable license fee in 1995. The Company recognized $1.0 million and $2.0 million in research support as revenue in 1995 and 1996, respectively. Additionally, the Company recognized as revenue a $2.0 million milestone payment related to this agreement during 1996. (c) SMITHKLINE BEECHAM CORPORATION Effective November 1, 1993, the Company entered into an agreement with SmithKline Beecham to collaborate on the discovery, development and marketing of drugs to treat osteoporosis and other bone metabolism disorders, excluding hyperparathyroidism. The agreement establishes a four year research collaboration between the parties and may be extended on mutual agreement. The Company granted SmithKline Beecham the exclusive license to develop and market worldwide compounds described under the agreement, subject to the Company's right to co-promote in the United States. Once compounds have been selected for development, SmithKline Beecham has agreed to conduct and fund all development of such products, including all human clinical trials and regulatory submissions. The Company will receive royalties on sales of such compounds by SmithKline Beecham and a share of the profits from co-promoted products. Under the agreement with SmithKline Beecham, the Company has recognized research and licensing revenue of $3.6 million, $3.4 million, and $2.7 million in 1994, 1995, and 1996, respectively. During 1996, the Company achieved its first milestone under the agreement and received a corresponding $3.0 million milestone payment which was recognized as revenue. The Company is also entitled to receive research support payments of approximately $475,000 per quarter through October 1997 and additional payments upon the achievement of specific development and regulatory milestones. S.R. One, Limited, an affiliate of SmithKline Beecham, is an equity investor in the Company. (d) IN-LICENSE AGREEMENTS The Company has entered into certain sponsored research and license agreements which obligate the Company to make research support payments to academic or research institutions. Additional payments may be required upon the accomplishment of research milestones by the institutions or as license fees or royalties to maintain the licenses. During 1994, 1995, and 1996, the Company paid to F-16 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (2) COLLABORATIVE RESEARCH AND LICENSE AGREEMENTS (CONTINUED) these institutions $321,121, $306,777, and $779,417, respectively, in sponsored research payments and license fees. As of December 31, 1996, the Company had a total commitment of approximately $1.0 million for future research support payments. (e) SMALL BUSINESS INNOVATION RESEARCH GRANTS The Company recognized revenue of $260,706, $126,444, and $15,768 during 1994, 1995, and 1996, respectively, under the terms of Small Business Innovation Research grants from three government agencies. Because the Company has granted exclusive development, commercialization, and marketing rights to Amgen, Kirin and SmithKline Beecham (Licensees) under the above described collaborative research and license agreements, the success of the programs is dependent upon the efforts of the Licensees. The Company has no control over the rate of progress or amount of effort the Licensees will dedicate to the programs. In addition, each of the programs may be terminated by the Licensee at any time. If any of the Licensees breaches or terminates its respective agreement, such breach or termination may have a material adverse effect on the Company's operations. (3) LEASES The Company is obligated under capital leases for equipment that expire at various dates during the next three years. The Company also has a noncancelable operating lease for office space that expires in September 1999. Rental expense for this operating lease was $413,552, $493,667, and $525,919 for 1994, 1995, and 1996, respectively. The present value of future minimum lease payments on capital leases and future lease payments under the noncancelable operating lease as of December 31, 1996 are:
CAPITAL OPERATING LEASES LEASE --------- ------------ Year ending December 31: 1997................................................................................... $ 56,186 $ 525,919 1998................................................................................... 17,190 525,919 1999................................................................................... 8,063 394,439 2000................................................................................... 2,688 -- --------- ------------ Total minimum lease payments..................................................... 84,127 $ 1,446,277 ------------ ------------ Less amounts representing interest (at rates ranging from 6% to 16%)..................... 3,493 --------- Present value of net minimum capital lease payments.............................. 80,634 Less current installments of obligations under capital leases............................ 53,339 --------- Obligations under capital leases, excluding current installments................. $ 27,295 --------- ---------
F-17 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (3) LEASES (CONTINUED) At December 31, 1995 and 1996, the gross amount of equipment and related accumulated amortization recorded under capital leases was as follows:
1995 1996 ------------ ------------ Equipment............................................................................. $ 1,212,699 $ 1,244,947 Less accumulated amortization......................................................... 748,881 964,520 ------------ ------------ Net equipment......................................................................... $ 463,818 $ 280,427 ------------ ------------ ------------ ------------
(4) LONG-TERM DEBT Long-term debt at December 31, 1995 and 1996, consists of the following notes payable to a financial institution:
1995 1996 ------------ ---------- 10% to 16% notes payable in monthly installments of $36,824 including interest, due June 1, 1998 through June 1, 1999; secured by certain equipment and leasehold improvements.......................................................................... $ 1,025,274 $ 669,001 Less, current installments.............................................................. 331,746 369,467 ------------ ---------- Long-term debt, excluding current installments........................................ $ 693,528 $ 299,534 ------------ ---------- ------------ ----------
The aggregate maturities of long-term debt for each of the years subsequent to December 31, 1996 are as follows: 1997, $369,467; 1998, $281,903; and 1999, $17,631. In connection with these notes payable, the Company granted the financial institution in 1995 a warrant to purchase 32,542 shares of common stock at $3.69 per share. The warrant expires in June 2002. (5) CAPITAL STOCK The Company is incorporated under the laws of the State of Delaware with authorized capital of 5,000,000 shares of preferred stock and 20,000,000 shares of common stock, all with a par value of $.001. No shares of preferred stock were issued or outstanding at December 31, 1995 and 1996. In December 1996, the Board of Directors approved the adoption of a Shareholders Rights Plan (the "Rights Plan"). The Rights Plan provides for the distribution of a preferred stock purchase right ("Right") as a dividend for each outstanding share of the Company's common stock. This Right entitles stockholders to acquire stock in the Company or in an acquirer of the Company at a discounted price in the event that a person or group acquires 20 percent or more of the Company's outstanding voting stock or announces a tender or exchange offer that would result in ownership of 20 percent or more of the Company's stock. Each right entitles the registered holder to purchase from the Company 1/100th of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share at a price of $50.00 per 1/100th of a preferred share, subject to adjustment. The Rights may only be exercised on the occurrence of certain events related to a hostile takeover of the Company as described above. The Rights will expire on December 31, 2001. The Rights may be redeemed by the Company at $0.01 per right at any time prior to F-18 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (5) CAPITAL STOCK (CONTINUED) expiration or the occurrence of an event triggering exercise. At December 31, 1996, the Rights were not exercisable (6) STOCK-BASED COMPENSATION PLANS The Company has three fixed stock option plans: the 1987 Stock Option Plan (the "1987 Plan"), the 1994 Equity Incentive Plan (the "1994 Plan"), and the 1994 NonEmployee Directors' Stock Option Plan (the "Directors' Plan"). An aggregate of 3,220,000 shares have been authorized for issuance under the three plans. As of December 31, 1996, there are no shares reserved for future grant under the 1987 Plan, there are 522,913 shares reserved for future grant under the 1994 Plan, and there are 91,000 shares reserved for future grant under the Directors' Plan. Under the Company's 1994 Plan, the exercise price of options granted is not less than the fair market value on the date of grant. The number of shares, terms, and exercise period are determined by the Board of Directors on an option-by-option basis, and the exercise period does not extend beyond ten years from the date of the grant. Under the Directors' Plan, each new director who is not an employee of the Company is initially granted options to purchase 15,000 shares of common stock. Additional options for 3,000 shares are granted on December 1 of each year of service. The exercise price of options granted is the fair market value on the date of grant. A summary of activity related to aggregate options under all three plans is indicated in the following table:
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------- 1995 1996 ----------------------- ----------------------- 1994 WEIGHTED- WEIGHTED- ------------------------- AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE ---------- ------------- ---------- ----------- ---------- ----------- Options outstanding at beginning of year............................... 1,192,875 $ 0.34 - 4.00 1,417,025 $ 1.58 1,530,924 $ 3.16 Options granted...................... 309,800 3.00 - 6.00 374,000 7.53 578,564 10.95 ---------- ---------- ---------- 1,502,675 1,791,025 2,109,488 ---------- ---------- ---------- Options exercised.................... 46,550 0.34 - 0.74 257,201 0.74 254,500 2.51 Options canceled..................... 39,100 0.34 - 4.00 2,900 2.55 19,654 5.35 ---------- ---------- ---------- 85,650 260,101 274,154 ---------- ---------- ---------- Options outstanding at end of year... 1,417,025 $ 0.34 - 6.00 1,530,924 $ 3.16 1,835,334 $ 5.68 ---------- ---------- ---------- ---------- ---------- ---------- Options exercisable at end of year... 717,985 $ 0.34 - 4.00 802,540 $ 1.40 952,782 $ 2.61 Weighted-average fair value of options granted during the year.... $ 5.12 $ 7.10
F-19 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (6) STOCK-BASED COMPENSATION PLANS (CONTINUED) The following table summarizes information about fixed stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING -------------------------------------- OPTIONS EXERCISABLE WEIGHTED- ------------------------- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE RANGE OF AT DECEMBER CONTRACTUAL EXERCISE AT DECEMBER EXERCISE EXERCISE PRICES 31, 1996 LIFE PRICE 31, 1996 PRICE - ------------------------------------------------ ------------ ----------- ----------- ------------ ----------- $ 0.34 - 0.81.................................. 330,942 5.2 yrs. $ 0.71 330,942 $ 0.71 2.00 - 3.00.................................. 588,462 7.4 2.46 474,078 2.33 3.50 - 6.00.................................. 55,060 7.6 3.89 41,290 3.91 7.13 - 10.75.................................. 736,870 9.5 9.34 86,472 8.24 11.25 - 16.63.................................. 124,000 9.3 13.17 20,000 13.37 ------------ ------------ 1,835,334 8.0 5.68 952,782 2.61 ------------ ------------ ------------ ------------
The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with FASB Statement No. 123, the Company's net income (loss) and income (loss) per share would have been reduced or increased, respectively, to the following pro forma amounts:
1995 1996 ------------- ------------ Net income (loss): As reported.................................................... $ (3,318,091) $ 6,104,687 Pro Forma...................................................... (3,379,223) 5,189,411 Primary EPS: As reported.................................................... $ (.48) $ .55 Pro Forma...................................................... (.49) .46
Pro forma net income (loss) reflects only options granted in 1995 and 1996. The effect that calculating compensation cost for stock-based compensation under SFAS No. 123 has on the pro forma net income (loss) as presented above may not be representative of the effects on reported net income or losses for future years. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1995 and 1996, respectively: risk free interest rates of 5.9 percent and 6.2 percent; expected dividend yields of 0 percent; expected lives of 5 years; and expected volatility of 80 percent. In 1996, the Company granted options to purchase 20,000 shares of common stock to nonemployees. These options have been recorded as a general and administrative expense at their estimated fair value of $130,000, as determined by SFAS No. 123. In November and December 1993, the Company issued options to purchase 378,750 and 4,500 shares of common stock, respectively, at an exercise price of $2.00 and $4.00 per share, respectively, to employees, officers, and directors of the Company. For financial statement presentation purposes, the Company has F-20 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (6) STOCK-BASED COMPENSATION PLANS (CONTINUED) recorded as deferred compensation expense the excess of the deemed value of the common stock at the date of grant over the exercise price. The compensation expense was amortized ratably over the three-year vesting period of the options totaling $766,500 for the three-year period. The Company also has an Employee Stock Purchase Plan (the "Purchase Plan") whereby qualified employees are allowed to purchase limited amounts of the Company's common stock at 85 percent of the current market price on the date of purchase. The Company has authorized 160,000 shares for purchase by employees. Employees purchased 39,771 and 18,147 shares under the Purchase Plan in the years ended December 31, 1995 and 1996, respectively, and 102,082 shares remain available for future purchase. Because the discount allowed to employees under the purchase plan approximates the Company's cost to issue equity instruments, the plan is not deemed to be compensatory and, therefore is excluded from the pro forma income (loss) shown above. (7) INCOME TAXES The Company has income tax expense of $500,000 and $350,000 for the years ended December 31, 1995 and 1996, respectively, consisting of current foreign taxes and alternative minimum taxes. Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to net income (loss) before income taxes as a result of the following:
1994 1995 1996 ------------- ------------ ------------- Computed expected tax expense (benefit)............................... $ (2,297,153) $ (958,150) $ 2,194,594 Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets allocated to income tax expense............. 2,376,354 1,279,785 (1,780,073) Foreign taxes net of federal income tax benefit....................... -- 330,000 132,000 Other................................................................. (79,201) (151,635) (196,521) ------------- ------------ ------------- $ -- $ 500,000 $ 350,000 ------------- ------------ ------------- ------------- ------------ -------------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 1995 and 1996 are presented below:
1995 1996 ------------ ------------ Deferred tax assets: Deferred revenue.................................................................... $ 220,000 $ 186,000 Equipment and leasehold improvements, principally due to differences in depreciation...................................................................... 159,000 122,000 Net operating loss carryforward..................................................... 6,873,000 4,120,000 Research activities credit carryforward............................................. 953,000 1,196,000 Minimum tax credit carryforward..................................................... -- 115,000 ------------ ------------ Total gross deferred tax assets............................................... 8,205,000 5,739,000 Less valuation allowance............................................................ 8,205,000 5,739,000 ------------ ------------ Net deferred tax assets....................................................... $ -- $ -- ------------ ------------ ------------ ------------
F-21 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (7) INCOME TAXES (CONTINUED) Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 1996 will be allocated as an income tax benefit to be reported in the statement of operations. The valuation allowance for deferred tax assets as of January 1, 1995 was $6.8 million. The net change in the Company's total valuation allowance for the years ended December 31, 1995 and 1996, was an increase of $1.4 million and a decrease of $2.4 million, respectively. At December 31, 1996, the Company had net operating loss and research credit carryforwards to offset future income for federal income tax purposes approximately as follows:
NET OPERATING NET OPERATING LOSS LOSS CARRYFORWARD CARRYFORWARD FOR RESEARCH FOR REGULAR ALTERNATIVE CREDIT INCOME TAX MINIMUM TAX CARRY- PURPOSES PURPOSES FORWARD ------------- ------------- ------------ Expiring 2002............................................................... $ -- $ -- $ -- 2003............................................................... -- -- -- 2004............................................................... -- -- -- 2005............................................................... -- -- -- 2006............................................................... 215,000 216,000 -- 2007............................................................... 285,000 330,000 37,000 2008............................................................... 1,138,000 1,245,000 335,000 2009............................................................... 6,480,000 6,480,000 317,000 2010............................................................... 2,928,000 3,051,000 166,000 2011............................................................... $ -- $ -- 341,000 ------------- ------------- ------------ $ 11,046,000 $ 11,322,000 $ 1,196,000 ------------- ------------- ------------ ------------- ------------- ------------
Under the rules of the Tax Reform Act of 1986, the Company has undergone a greater than 50 percent change of ownership since 1986. Consequently, use of the Company's net operating loss carryforward and research credit carryforward against future taxable income in any one year may be limited. The maximum amount of carryforwards available in a given year is limited to the product of the Company's fair market value on the date of ownership change and the federal long-term tax-exempt rate, plus any limited carryforward not utilized in prior years. Management does not believe that these rules will adversely impact the Company's ability to utilize the above losses and credit in the aggregate. (8) EMPLOYEE BENEFIT PLAN In October 1990, the Company adopted a tax-qualified employee savings and retirement plan (the "401(k) Plan") covering all of the Company's employees. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by the lesser of 15 percent of eligible compensation or the prescribed annual limit ($9,500 in 1996) and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, additional matching contributions to the 401(k) Plan by the Company on behalf of all participants. The Company has not made any such contributions to date. F-22 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (9) CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS A director of the Company is Vice President of Plexus Ventures, Inc. ("Plexus"). The Company had a consulting agreement with Plexus through December 31, 1995, whereunder Plexus assisted the Company with its effort to establish a collaboration for NPS R-568. During the years ended December 31, 1995, and 1996, the Company paid fees to Plexus totaling $84,500 and $400,000, respectively. Plexus may earn an additional $400,000 in fees as payments are received from Amgen. As described in note 6, the Company also granted Plexus options to purchase 20,000 shares of common stock. F-23 INDEX TO EXHIBITS
EXHIBIT PAGE NUMBER NUMBER - -------------- ----------- 3.1** Amended and Restated Certificate of Incorporation of the Registrant. 3.2** Amended and Restated Bylaws of the Registrant. 4.1++ Rights Agreement, dated as of December 4, 1996, between NPS Pharmaceuticals, Inc. and American Stock Transfer & Trust, Inc., with Exhibit A, Form of Certificate of Designation of Series A Junior Participating Preferred Stock; Exhibit B, Form of Right Certificate; and Exhibit C, Summary of Rights to Purchase Shares of Preferred Stock. 10.1** Stock Purchase Agreement between the Registrant and S.R. One, Limited, dated November 18, 1993. 10.2** Amended Agreement and Waiver, among the Registrant and the other parties thereto, dated November 18, 1993. 10.3** Form of Registrant's 1994 Non-Employee Directors' Stock Option Plan. 10.4** Form of Registrant's 1994 Equity Incentive Plan and Form of Stock Option Agreements. 10.5** Registrant's 1987 Stock Option Plan, as amended, and Form of Stock Option Agreement. 10.6** Form of Registrant's 1994 Employee Stock Purchase Plan and Form of Offering Document. 10.7** Master Lease Agreement between the Registrant and LINC Scientific Leasing, dated October 7, 1992, with related addenda. 10.8** Form of Indemnity Agreement entered into between the Registrant and its officers and directors. 10.9+** Collaborative Research and License Agreement between the Registrant and SmithKline Beecham Corporation, dated November 1, 1993. 10.10+** Patent Agreement Between the Registrant and The Brigham and Women's Hospital, Inc., dated February 19, 1993, with related amendment. 10.11+** Research Agreement between the Registrant and The Brigham and Women's Hospital, Inc., dated February 19, 1993, with related amendment. 10.15+**** Collaborative Research and License Agreement between the Registrant and Kirin Brewery Company, Ltd. dated June 29, 1995. 10.16+ Development and License Agreement between the Registrant and Amgen Inc., effective as of December 27, 1995. 10.17+ Stock Purchase Agreement between Registrant and Amgen Inc. dated March 18, 1996. 10.18* Lease Agreement with GATX dated June 1, 1995, with related addenda. 10.19* Office Lease between Salt Lake Research Park Associates and Registrant dated June 3, 1994, with related amendments. 10.20** Consultant Services Agreement between the Registrant and Thomas N. Parks, Ph.D., dated January 30, 1989. 10.21*** Consulting Agreement between the Registrant and Plexus Ventures, Inc. dated August 5, 1994, as amended. 10.22+***** Binding Letter of Intent between Amgen Inc. and the Registrant dated December 27, 1995.
EXHIBIT PAGE NUMBER NUMBER - -------------- ----------- 10.23+ Amendment effective February 7, 1996 to Research Agreement between the Registrant and The Brigham and Women's Hospital, Inc. dated February 19, 1993. 10.24+ Amendment effective February 7, 1996 to Patent Agreement between the Registrant and The Brigham and Women's Hospital, Inc., dated February 19, 1993. 10.25+ Amendment effective January 29, 1996 to the Collaborative Research and License Agreement between the Registrant and SmithKline Beecham Corporation, dated November 1, 1993. 10.26****** Form of Registrant's 1994 Employee Stock Purchase Plan and Form of Offering Document as amended and adopted by the Board of Directors dated December 1996. 10.27****** Form of Registrant's 1994 Non-Employee Directors' Stock Option Plan as amended and adopted by the Board of Directors dated December 1996. 10.28****** Form of Registrant's 1994 Equity Incentive Plan as amended and adopted by the Board of Directors dated December 1996. 10.29 Consulting Services Agreement between the Registrant and Donald E. Kuhla, Ph.D. dated November 1, 1996. 10.30+ Amendment Agreement between SmithKline Beecham Corporation and NPS Pharmaceuticals, Inc. dated October 28, 1996. 10.31 1997 Research Agreement Amendment between The Brigham and Women's Hospital, Inc. and NPS Pharmaceuticals, Inc............................................................. 11.1 Statement regarding calculation of net loss per share.................................. 23.1 Consent of KPMG Peat Marwick LLP, independent auditors.................................
- ------------------------ * Incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1995. ** Incorporated herein by reference to the Registrant's registration statement on Form S-1 filed January 21, 1994 (File No. 33-74318). *** Incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1994. **** Incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1994. ***** Incorporated herein by reference to the Registrant's Form 8-K dated February 29, 1996. ****** Incorporated hereby by reference to the Registrant's Form S-8 dated December 3, 1996. + Confidential treatment has been granted with respect to these exhibits. ++ Incorporated herein by reference to the Registrant's Form 8-K dated December 19, 1996.
EX-10.29 2 EXHIBIT 10.29 CONSULTING SERVICES AGREEMENT EXHIBIT NO. 10.29 CONSULTANT SERVICES AGREEMENT BETWEEN THE REGISTRANT AND DONALD E. KUHLA, PH.D. DATED NOVEMBER 1, 1997 NPS PHARMACEUTICALS, INC. CONFIDENTIAL Consultant: Donald E. Kuhla, Ph.D. Company's Representative: Hunter Jackson, Ph.D. Address: 66 Pine Mill Circle NPS Pharmaceuticals, Doylestown, Pennsylvania Inc. 18901 420 Chipeta Way Salt Lake City, Utah 84108 S.S.# or Employer I.D. #: ###-##-####
CONSULTANT SERVICES AGREEMENT EFFECTIVE DATE: NOVEMBER 1, 1996 This Consultant Services Agreement (hereinafter "Agreement") is entered into by the above-referenced party (hereinafter "Consultant") whose address is as shown above, and NPS PHARMACEUTICALS, INC., a Delaware corporation, (hereinafter the "Company"). Consultant and the Company are collectively designated herein as the "Parties" and the term "Party" shall mean either one of the Parties as the text may require. The "Effective Date" of this Agreement is as shown above. WHEREAS, Company requires a party such as Consultant to perform services as defined in Exhibit "A" hereto (the "Services"); WHEREAS, Consultant represents that he is qualified to perform said Services and desires to perform said Services for and on behalf of the Company on the terms and conditions set forth herein; NOW THEREFORE, for and in consideration of the foregoing recitals and the promises, covenants, terms, conditions, and obligations hereinafter set forth, the Parties agree as follows: I. REPRESENTATIVE AND NOTICE The Company's Representative for the purposes of this Agreement shall be as shown above. All notices from Consultant to the Company shall be directed to the attention of the Company Representative at the Company's address shown above. II. SCOPE OF SERVICES The Services to be performed by Consultant pursuant to the terms and conditions of this Agreement shall include, but are not limited to, the work, activities and services set forth in Exhibit "A" SERVICES. III. ASSIGNMENT AND DELEGATION The Parties agree that the Services as defined herein are unique personal services that are to be performed only by Consultant. IV. COMPENSATION AND EXPENSES Compensation for Services shall be as set forth in Exhibit "B." V. DURATION OF SERVICES 1. Consultant shall perform Services for the benefit of the Company from time to time or for such other period as shall be stated on Exhibit "A" hereto. 1 2. The Parties, by their mutual written consent, may extend the period for performing Services under this Agreement. 3. Either Party may terminate Consultant's performance of Services by giving thirty (30) days advance written notice to the other Party. 4. The Company's obligations under Section IV shall terminate upon expiration of the above period or upon termination by either Party of Consultant's performance of the Services as provided in this Section V. 5. Except for Consultant's obligation to perform Services, Consultant's obligations under this Agreement shall survive expiration of the above period and/or termination of Consultant's performance of Services. VI. COMPLIANCE WITH STATE AND FEDERAL LAWS Consultant shall comply with all requirements of any applicable federal, state, or local law, rule or regulation. Consultant represents that he has all licenses or other authorizations required to enable him to perform Services hereunder in the jurisdiction where the Services are to be performed. VII. INDEPENDENT CONTRACTOR Consultant is and shall be in the performance of Services hereunder as an independent contractor. Consultant shall be available as a qualified professional consultant in the field identified on Exhibit "A." VIII. PROFESSIONAL RESPONSIBILITY 1. Consultant agrees that he will provide in connection with performance of all Services under this Agreement the standards of care, skill and diligence normally provided by competent professionals in the performance of services similar to that contemplated by this Agreement. 2. Consultant represents that he has no conflicts of interest in rendering his professional services to the Company. Upon request from the Company, Consultant will disclose the general nature of previous work performed for others in the "Area of Technology of Possible Interest to Consultant or Others" defined in Exhibit "C" herein. IX. INSURANCE Insurance shall be provided as mutually agreed. X. DEFINITION OF CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY 1. "Confidential Information" shall mean: (a) any and all Intellectual Property or information whether business, financial, technical or otherwise, of any type whatsoever, in any form whatsoever, which is (I) proprietary to the Company; or (ii) submitted or disclosed to the Company by a third party. (b) Confidential Information (whether or not reduced to writing and in any and all stages of development) includes but is not limited to: discoveries, ideas, inventions, designs, formulas, test results, test procedures, protocols, concepts, drawings, specifications, techniques, models, data, software, research, processes, procedures, works of authorship, formulas, improvements, trade secrets, know-how, marketing plans and supplies, product plans, customer names (and other information relating to customers), supplier names (and other information relating to suppliers), and financial information. 2 (c) Confidential Information shall not include anything that is publicly known or generally employed by the trade at or after the effective date of this Agreement. 2. "Intellectual Property" shall mean, without limitation, all copyrights, discoveries, inventions, improvements (whether or not patentable), patents, patent applications, trademarks, service marks, trade secrets, know-how and all other Intellectual Property rights of any type whatsoever. XI. ASSIGNMENT OF RIGHTS IN INTELLECTUAL PROPERTY 1. Consultant hereby assigns to the Company all of Consultant's rights in all Intellectual Property rights which are made, discovered, developed, assembled, created, or conceived, in whole or in part, by Consultant: (a) during the course of and within the scope of Services; or (b) for the period ending one (1) year after termination of Services with the material aid or inclusion of Confidential Information. 2. All of Consultant's Intellectual Property assigned to the Company hereunder shall be deemed Confidential Information except for anything that is publicly known or generally employed by the trade, without the fault of Consultant, at or after the effective date of this Agreement. 3. Consultant hereby agrees to disclose promptly and fully to the Company anything which qualifies as Intellectual Property and/or Confidential Information hereunder. 4. Consultant shall, upon the Company's reasonable request, execute all documents and take such other action as may be necessary or desirable, to protect, enhance, exploit or vest in the Company any and all of Consultant's Intellectual Property rights assigned to Company hereunder. XII. CONFIDENTIALITY 1. Consultant understands that Confidential Information is confidential and secret and agrees to respect the confidentiality and secrecy of the same. Consultant also understands that all Confidential Information is the property of the Company or of a third party submitting the same to the Company. Consultant agrees to treat Confidential Information submitted to the Company by third parties as if confidential and proprietary to the Company. Consultant further understands and agrees that the relationship between Consultant and the Company is of a confidential nature and imposes an affirmative obligation upon Consultant to protect, foster and respect the confidentiality of Confidential Information. 2. Except as lawfully authorized or as may be required in the performance of Consultant's responsibilities for the Company, Consultant: (a) agrees not to directly or indirectly disclose, reveal, report, publish, or transfer possession of, or access to, any Confidential Information to any person or entity; (b) agrees, at the expense of the Company, promptly at all times hereafter to execute and deliver any and all acts and instruments as may be necessary or desirable to perfect and protect the Company's interest in the Confidential Information; and (c) agrees not to directly or indirectly use the Confidential Information except for the benefit of the Company in the performance of Consultant's responsibilities for the Company. 3. Upon and in accordance with the Company's instructions, Consultant shall return or dispose of all Confidential Information. Consultant shall, whenever requested by the Company, give a prompt and full accounting of all Confidential Information given to Consultant and all copies or reproductions thereof. Confidential Information shall remain the property of the Company even if Consultant is in possession thereof. 3 XIII. PREVIOUS WORK OR SERVICES 1. If Consultant has previously been exposed to proprietary information of the Company, such disclosure is deemed incorporated herein and controlled by the terms hereof, and if Consultant has executed an agreement regarding non-disclosure and non-competition, such agreement is continued and deemed incorporated herein by reference, except that any such agreement shall be deemed amended hereby to the extent the Company's rights hereunder extend beyond the Company's rights as specified therein. 2. Consultant represents to the Company that Consultant has not brought and has not used, and agrees not to bring to the Company and will not use in the performance of any Services for the Company, any information, materials or the like which are confidential and are proprietary to a third party without written authorization from said third party. XIV. AREAS OF TECHNOLOGY SUBJECT TO POSSIBLE INTEREST TO CONSULTANT OR OTHERS In the event and to the extent Consultant has previously performed services for another and to the extent Consultant has developed personal proprietary interests in areas of interest to the Company within the "Area of Technology of Possible Interest to Consultant or Others" identified on Exhibit "C" hereto, Consultant has advised the Company of the nature of such service, the general nature of the parties for whom such services were rendered, and the particular aspects of any facts supporting a claim that any of the "Area of Interest" is in the public domain or owned by Consultant or some other party, or under any obligation of confidence or non-use. XV. MISCELLANEOUS 1. This Agreement may only be amended in writing, signed by each Party hereto. The terms of this Agreement shall be interpreted under the laws of the State of Utah. This Agreement constitutes the entire Agreement between the Parties with respect to the subject matter hereof. 2. Consultant agrees to execute such additional documents and do such further acts and deeds as may be necessary or desirable to effectuate the purposes hereof or the perfection of the rights and interests of the Company expressed herein. 3. Consultant agrees that any breach of this contract or threatened breach hereof could subject the Company to substantial, immediate and irreparable damages and consents that the Company would be entitled to equitable relief in the event thereof. Consultant agrees that Utah law applies and that any adjudication of interests hereunder be proved in Utah courts. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written. CONSULTANT: NPS PHARMACEUTICALS, INC.: /S/ DONALD E. KUHLA By: /s/ HUNTER JACKSON - -------------------------------------------- ---------------------------------------- Donald E. Kuhla, Ph.D. Hunter Jackson, Ph.D. Date: March 4, 1997 Its: PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD Date: March 4, 1997
4 EXHIBIT "A" SERVICES Consultant shall perform for the benefit of the Company the following work, activities and services ("Services") for the period of time specified: Consultant Services on the Company's Research Review Committee and the Medicinal Chemistry Committee From time to time: /X/ Other: / / ------------------------ EXHIBIT "B" COMPENSATION AND EXPENSES (Arrangements for payment of "Compensation" and "Reimbursed Expenses") - Payment for Services for the Research Review Committee is four hundred (400) shares of the Company's common stock, issued under the Company's 1994 Equity Incentive Stock Plan, per semi-annual meeting attended (usually two days per meeting). - Payment for Services for the Medicinal Chemistry Committee is two hundred (200) shares of the Company's common stock, issued under the Company's 1994 Equity Incentive Stock Plan, per quarterly meeting attended (usually one day per meeting). ------------------------ EXHIBIT "C" AREA OF TECHNOLOGY OF POSSIBLE INTEREST TO CONSULTANT OR OTHERS For the purpose of the Agreement to which this Exhibit is attached, the "Area of Technology of Possible Interest to Consultant or Others" shall be: Consultant knows of no other activities, affiliations or intellectual property interests which may reasonably be expected to interfere with the Company's interests hereunder. /s/ DONALD E. KUHLA Date: March 4, 1997 ------------------------------------------ Donald E. Kuhla, Ph.D. 5 EX-10.31 3 EXHIBIT 10.31 1997 RESEARCH AGREEMENT AMENDMENT EXHIBIT 10.31 AMENDMENT AGREEMENT BETWEEN THE BRIGHAM AND WOMEN'S HOSPITAL, INC. AND NPS PHARMACEUTICALS, INC. 1997 RESEARCH AGREEMENT AMENDMENT BETWEEN THE BRIGHAM AND WOMEN'S HOSPITAL, INC. AND NPS PHARMACEUTICALS, INC. Effective March 1, 1997, The Brigham and Women's Hospital, Inc., a Massachusetts not-for-profit corporation having its principal offices at 75 Francis Street, Boston, Massachusetts 02115 (the "Hospital"), and NPS Pharmaceuticals, Inc., a Delaware corporation having its principal offices at 420 Chipeta Way, Salt Lake City, Utah 84108 (the "Company") agree as follows: XVI. BACKGROUND: The Hospital and the Company entered into a certain Research Agreement effective February 19, 1993 as amended by the Research Agreement Amendment effective December 10, 1993, and further amended by the 1996 Research Agreement Amendment effective February 7, 1996 (collectively the "Research Agreement"). The Hospital and the Company now wish to amend said Research Agreement pursuant to the terms of this 1997 Research Agreement Amendment (the "1997 Research Agreement Amendment"). Said 1997 Research Agreement Amendment to become effective the date first above written. Except as specifically amended hereby, the Research Agreement remains in full force and effect pursuant to the terms thereof. XVII. PAYMENTS: The level of funding during the second year of the Extended Performance Period shall be amended to provide for a level of funding of forty-one thousand two hundred fifty dollars ($41,250.00) per quarterly payment beginning March 1, 1997, such that each of the final four (4) scheduled quarterly payments beginning March 1, 1997 shall be forty-one thousand two hundred fifty dollars ($41,250.00).
APPLICABLE PORTION OF THE EXTENDED PAYMENT DATE PAYMENT AMOUNT PERFORMANCE PERIOD - ------------------------------------------------------------------------ ---------------- ---------------------- March 1, 1997........................................................... $ 41,250.00 03/01/97 to 05/31/97 June 1, 1997............................................................ $ 41,250.00 06/01/97 to 08/31/97 September 1, 1997....................................................... $ 41,250.00 09/01/97 to 11/30/97 December 1, 1997........................................................ $ 41,250.00 12/01/97 to 02/28/98 TOTAL:.............................................................. $ 165,000.00 03/01/97 to 02/28/98 ---------------- ----------------
XVIII. NOTICES: All notices of every kind and description whatsoever required or permitted under this Research Agreement shall be in writing and shall be deemed to have been received when personally delivered or when mailed through the U.S. Postal Service, postage prepaid, return receipt requested, or 1 when shipped by private express carrier, shipment charges prepaid, to the party to whom delivery shall be made at the respective addresses as set out below. HOSPITAL: [SAME AS IN THE ORIGINAL RESEARCH AGREEMENT] NPS (COMPANY): NPS Pharmaceuticals, Inc. Attn: Kimberly V. Rogers 420 Chipeta Way Salt Lake City, Utah 84108 with a copy to: NPS Pharmaceuticals, Inc. Attn: Senior Corporate Counsel 420 Chipeta Way Salt Lake City, Utah 84108
XIX. RESEARCH PLAN: The parties acknowledge that the Research Plan for Project Plan Year 5 for the period March 1, 1997 through February 29, 1998 shall be as attached to the fax message from Dr. Brown to Kimberly V. Rogers, Ph.D. of NPS dated February 20, 1997. The parties further acknowledge that Dr. Steve Hebert has separated or is to separate from the Hospital and effective March 1, 1997, he is no longer conducting research under the Brown/Hebert Funded Research Program. XX. RESEARCH AGREEMENT: Except as amended hereby, the Research Agreement remains in full force and effect pursuant to the terms thereof. EXECUTED by the respective duly authorized officers or agents of the Hospital and the Company to be effective as of the date and year first above written. NPS PHARMACEUTICALS, INC. THE BRIGHAM AND WOMEN'S HOSPITAL INC. BY: /S/ JAMES U. By: /s/ BRIAN N. JENSEN HICKS - ----------------------------------- ----------------------------------- James U. Jensen Brian N. Hicks Its: VICE Its: ACTING DIRECTOR, VENTURES PRESIDENT DEPARTMENT Acknowledged: /s/ EDWARD M. BROWN ---------------------------- Edward M. Brown 2 EX-11.1 4 EXHIBIT 11.1 STATEMENT REGARDING CALCULATION EXHIBIT 11.1 STATEMENT REGARDING CALCULATION OF NET LOSS PER SHARE EXHIBIT 11.1 NPS PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------ 1992 1993 1994 1995 1996 ------------- ------------- ------------ ------------- ------------- Net loss............................... $ (2,607,359) $ (7,158,581) $ 6,756,333 $ (3,318,091) $ 6,104,687 ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- ------------- Weighted average common shares outstanding during the period........ 1,076,500 1,208,100 5,977,300 6,924,400 10,335,298 Weighted average common stock equivalents outstanding during the period............................... -- -- -- -- 750,742 Weighted average preferred shares, as converted to common stock, outstanding during the period........ 1,466,200 2,339,600 -- -- -- Stock options treated in accordance with Staff Accounting Bulletin No. 83................................... 203,300 203,300 -- -- -- ------------- ------------- ------------ ------------- ------------- Shares used in Computation............. 2,746,000 3,751,000 5,977,300 6,924,400 11,086,040 ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- ------------- Net Loss per share..................... $ (0.95) $ (1.91) $ 1.13 $ (0.48) $ 0.55 ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- -------------
EX-23.1 5 EXHIBIT 23.1 CONSENT OF KPMG PEAT MARWICK EXHIBIT 23.1 CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS ACCOUNTANTS' CONSENT The Board of Directors NPS Pharmaceuticals, Inc.: We consent to incorporation by reference in Registration Statement No. 333-02564 on Form S-3 and registration statement No. 33-79622 on Form S-8 of NPS Pharmaceuticals, Inc. of our report dated February 21, 1997, relating to the balance sheets of NPS Pharmaceuticals, Inc. as of December 31, 1996 and 1995, and the related statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, and for the period from October 22, 1986 (inception) to December 31, 1996, which report appears in the December 31, 1996 Annual Report on Form 10-K of NPS Pharmaceuticals, Inc. KPMG Peat Marwick LLP Salt Lake City, Utah March 26, 1996 EX-27.1 6 FDS
5 YEAR DEC-31-1996 DEC-31-1996 68,961,764 0 415,208 0 0 69,376,972 5,257,370 2,477,665 72,159,944 1,963,603 0 0 0 11,807 69,857,705 72,159,944 0 20,342,330 0 0 16,437,695 0 141,705 6,454,687 350,000 6,104,687 0 0 0 6,104,687 0.55 0
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