10-K

 
                                 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, 1998

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

  For the Transition Period from                      to                     .
                                 --------------------    --------------------

                       Commission File Number   0-23272
                                               -----------

                           NPS PHARMACEUTICALS, INC.
             (Exact name of Registrant as specified in its charter)

                                           
              Delaware                                        87-0439579
     (State or other jurisdiction                  (I.R.S. Employer Identification No.)
   of incorporation or organization)

 420 Chipeta Way, Salt Lake City, Utah                         84108-1256
(Address of principal executive offices)                       (Zip Code)


                                 (801) 583-4939
                (Registrant's telephone number, including area code)

                                                              
Securities registered under Section 12(b) of the Act:           None
Securities registered pursuant to Section 12(g) of the Act:     Common Stock, $.001 Par Value
                                                                Preferred Stock Purchase Rights
 
 
  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. YES [X] NO [_]

  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [_]

  The approximate aggregate market value of the Common Stock held by non-
affiliates of the Registrant was $76,747,398 as of March 1, 1999, based upon the
closing price of $7.25 for the shares of common stock reported on The Nasdaq
Stock Market on such date./1/

  The number of shares of Common Stock outstanding as of March 1, 1999
was12,636,305.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Part III of this report on Form 10-K incorporates by reference portions of
the Registrant's definitive Proxy Statement for the Registrant's Annual Meeting
of Stockholders, to be held May 26, 1999, which will be filed with the
Securities and Exchange Commission.

- ------------------
/1/  Excludes 2,050,457 shares of Common Stock held by directors and officers as
of March 1, 1999. The determination of affiliate status is not a conclusive
determination for other purposes.

 
     This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities and Exchange Act of 1934. These
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to the differences include,
but are not limited to, those discussed in the Section entitled "Business--Risk
Factors," as well as other parts of this Annual Report. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. We undertake no obligation to publicly release
updates or revisions to these statements.

                                     PART I

ITEM 1.   Business.

General

     NPS Pharmaceuticals, Inc. is engaged in the discovery and development of
small molecule drugs that are intended to address a variety of important
diseases. Our most advanced programs focus on the development of small molecule
drugs for the treatment of hyperparathyroidism (HPT), for osteoporosis, for
neuroprotection in stroke and head trauma, and for epilepsy and bipolar
disorder. The HPT and osteoporosis programs arose from our pioneering work on a
cell surface receptor, termed the "calcium receptor" or the "calcium sensing
receptor." This receptor detects levels of extracellular calcium and is involved
in numerous physiological processes. The neuroprotection program is based on our
work on small molecules with novel activity at the NMDA (N-methyl-D-aspartate)
subtype of glutamate receptor-operated calcium channels. The epilepsy/bipolar
disorder program is based on our work on small molecules that belong to the same
chemical class as valproic acid, but are structurally distinct and have
significantly different biological properties. In addition, we are pursuing
several discovery programs that are extensions of our research on calcium
receptors and ion channels, and are actively considering other late-stage
development candidates for potential in-license or collaboration opportunities.

     In the field of HPT, we have established a research collaboration and
license arrangement with the Pharmaceutical Division of Kirin Brewery Company,
Ltd. and a development and license arrangement with Amgen Inc. In the field of
osteoporosis, we have established a research collaboration and license
arrangement with SmithKline Beecham Corporation. Kirin, Amgen, and SmithKline
Beecham are collectively referred to as the "licensees." Each of the licensees
are responsible for all costs of product development in their respective
territories and fields. They have paid an aggregate of $21.0 million in
nonrefundable license fees. Amgen, SmithKline Beecham, and S.R. One, Limited, an
affiliate of SmithKline Beecham, have paid $18.3 million for purchases of NPS
common stock. SmithKline Beecham is required to purchase an additional 249,000
shares on November 1, 1999 if the research agreement is not terminated earlier.
In addition, the licensees have agreed to make up to an aggregate of $56.0
million in contingent milestone payments, of which $7.0 million has been paid
through December 31, 1998. The licensees are also obligated to pay research
and/or development support payments under certain circumstances. Approximately
$14.6 million has been paid for this support through December 31, 1998. Each of
the licensees is obligated to pay royalties upon relevant product sales. See
"Risk Factors--We depend on collaborative partners for the development of
certain product candidates" and "Business--Collaborative Research, Development,
and License Agreements."

     HPT is typically characterized as being either primary or secondary.
Primary HPT is an age- and sex-related disorder that results from excessive
secretion of parathyroid hormone (PTH), which leads 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 the major symptoms of primary HPT. In fact,
surgery is the only effective treatment in severe cases. Secondary HPT results
from other disease states that are accompanied by an excessive secretion of PTH,
and is most often associated with renal dysfunction. Symptoms of secondary HPT
include excessive bone loss; bone pain; and chronic, severe itching. Current
drug treatments for symptoms of secondary HPT, such as phosphate binders and
calcitriol, have certain disadvantages that we believe our compounds will
overcome. See "Product Development Programs--Hyperparathyroidism Program."

                                       1

 
     Before entering into the arrangements with Kirin and Amgen, we initiated
and conducted four clinical trials in the United States with NPS R-568, our lead
drug candidate for the treatment of HPT. Under the Amgen agreement, on March 18,
1996, Amgen acquired full authority and assumed full responsibility for further
development and commercialization of a drug for the treatment of HPT in its
territory. In 1998, Amgen concluded dosing in a Phase II clinical trial using
NPS R-568 in secondary HPT patients (patients on kidney dialysis). Amgen has
since announced commencement of clinical trials with a second-generation
compound licensed from us. Amgen has indicated that this second generation
compound has more favorable metabolism and kinetic profiles than NPS R-568. In
addition, Amgen has announced that it has successfully completed a Phase I
safety trial with the second-generation compound, has begun a Phase II clinical
trial with the second-generation calcimimetic in secondary HPT in the second
quarter of 1998, and began a Phase II clinical trial in primary HPT in the third
quarter of 1998.

     While our HPT program is licensed to Amgen for most of the world, Kirin is
our licensee in Asia. Effective June 30, 1995, Kirin acquired full authority and
assumed full responsibility for the development of a calcimimetic drug program
for HPT in Japan, China, Hong Kong, North and South Korea, and Taiwan. Kirin
began a Phase II clinical trial of NPS R-568 in Japan in December 1997, for
which we earned a $2.0 million milestone payment. We believe that Kirin is
considering whether it will conduct clinical trials in Japan on the same second
generation compound which Amgen has taken into clinical development in the
United States. We are working with Amgen and Kirin to discover, identify, and
characterize additional backup and second generation compounds for the treatment
of HPT. There can be no assurance that the clinical trials will proceed as
indicated or that a drug for the treatment of HPT will prove safe and/or
effective, meet applicable regulatory standards, or be successfully marketed.
See "Risk Factors--Our product candidates may not succeed in the clinic or in
the marketplace" and "Risk Factors--We depend on collaborative partners for the
development of certain product candidates."

     In conjunction with SmithKline Beecham, we are applying calcium receptor
technology to discovering, identifying, and characterizing orally active
therapeutics for the treatment of osteoporosis. Osteoporosis is an age-related
disorder that affects more than 200 million people worldwide, and is
characterized by reduced bone density and an increased susceptibility to
fractures. Among the elderly in particular, osteoporosis is a major cause of
morbidity and mortality. Earlier, we pursued two approaches for the treatment of
osteoporosis: (1) the stimulation of bone formation, and (2) suppression of bone
resorption. Research is now focused solely on the stimulation of bone formation.
Most osteoporosis patients are diagnosed only after they have already lost
significant bone mass. As a result, 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 our collaboration with SmithKline
Beecham, research efforts are being conducted to find small molecules that will
stimulate bone formation. In January 1996, we received a milestone payment of
$3.0 million from SmithKline Beecham for progress made in this program. In
November 1997, the term of the research support obligation of SmithKline Beecham
was extended for an additional period of up to three years.

     We have conducted research on a new class of compounds that modulate
certain calcium channels. In this program we have selected a lead compound, NPS
1506, and have focused our initial clinical development on neuroprotection in
stroke and head trauma; other indications are being evaluated. 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. NPS 1506 and other compounds in this series antagonize NMDA
receptor-operated calcium channels thereby reducing the influx of calcium. These
compounds demonstrated neuroprotectant activity in preclinical animal models of
stroke and head trauma. It appears that NPS 1506 works through a novel mechanism
and exhibits potentially advantageous pharmacological properties. In July 1997,
we began a Phase I clinical trial for NPS 1506 in healthy male volunteers. This
Phase I trial was completed in the second quarter of 1998. Results of the trial
indicated that NPS 1506 was safe and well tolerated. A Phase Ib trial was
initiated in July 1998 to assess safety and tolerability in patients who had
recently suffered a stroke. The clinical phase of this trial has been completed
and we expect to complete the evaluation of the study data in the first half of
1999. We continue to formulate our clinical development plan. Future development
of NPS 1506 and related compounds will be determined in conjunction with our
efforts to find a partner to assist in the development of these compounds. There
can be no assurance that NPS 1506 will be pursued further for stroke, head
trauma, or other indications, or that any of the other compounds in this series
will advance through clinical development, that NPS 1506 or any other compound
from this series will prove safe and/or effective, meet applicable regulatory
standards, or be successfully marketed. See "Risk Factors--Our product
candidates may not succeed in the clinic or in the marketplace."

                                       2

 
     We have initiated clinical testing of a proprietary compound, NPS 1776,
proposed for the initial indications of epilepsy and bipolar disorder. We
believe that NPS 1776 may be effective in the treatment of diseases such as
epilepsy and bipolar disorder. "Epilepsy" refers to a family of more than 40
neurological conditions characterized by aberrant brain activity that results in
a variety of seizure types. It affects roughly 2.5 million Americans. Bipolar
disorder is characterized by the occurrence of both manic and depressive states,
usually in alteration. Bipolar disorder affects about 2.5 million people in the
United States. NPS 1776 is an orally active, small molecule drug that has
demonstrated significant anticonvulsant safety properties in preclinical
studies. In September 1998, we began clinical trials in the United Kingdom in
healthy male volunteers to evaluate the safety and pharmacokinetics of the
molecule. This trial was concluded in December 1998 and another trial was
commenced, also in the United Kingdom, to confirm safety and tolerability in
volunteers receiving multiple doses of the drug. Future development of NPS 1776
will be determined in conjunction with our efforts to find a partner to assist
in the development of this compound. There can be no assurance that NPS 1776
will advance through clinical development, will prove safe and/or effective,
meet applicable regulatory standards, or be successfully marketed. See "Risk
Factors--Our product candidates may not succeed in the clinic or in the
marketplace."

     We are also actively engaged in several discovery programs that seek to
identify molecular targets for the development of new drugs. Among these,
significant discoveries have been made with regard to novel forms of
metabotropic glutamate receptors (mGluRs). Small molecules active at these
receptors have been identified. Drugs acting at specific mGluRs may provide
relevant therapies for a number of neurological disorders. We are seeking a
partner to assist in the development of the mGluR program. There can be no
assurance that we will be successful in identifying lead compounds active at
mGluRs, and that development of these compounds will prove to be safe and/or
effective, meet applicable regulatory standards, or be successfully marketed.
See "Risk Factors--Our product candidates may not succeed in the clinic or in
the marketplace."

Product Development Programs

     The following chart summarizes the status of our product development
programs:


 
Development Program          Molecular Target               Compound/Status          Commercial Rights
- ----------------------   -------------------------   -----------------------------   -----------------
                                                                            
Hyperparathyroidism

   Primary HPT           Parathyroid calcium         NPS R-568/Phase II              Amgen, Kirin
                         receptor (calcimimetics)    completed;
                                                     Second-Generation
                                                     Compound/Phase II

   Secondary HPT         Parathyroid calcium         NPS R-568/Phase II              Amgen, Kirin
                         receptor (calcimimetics)    completed;
                                                     Second-Generation
                                                     Compound/Phase II
Osteoporosis

   Stimulation of bone   Parathyroid calcium         Preclinical Research            SmithKline
   formation             receptor (calcilytics)                                      Beecham, NPS

Neuroprotection

   Stroke, Head Trauma   NMDA receptor-              NPS 1506/Phase Ib               NPS
                         operated calcium channel
 
Epilepsy/Bipolar         unidentified                NPS 1776/Phase Ib               NPS
   Disorder


                                       3

 
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. Between 75,000 and
100,000 new patients are diagnosed with primary HPT in the United States each
year. There are currently no pharmaceutical therapies for the treatment of
primary HPT. In severe cases, surgical removal of the affected parathyroid
glands from the neck region is 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 shown that
secondary HPT develops early in the course of renal failure, before patients
start dialysis. Current treatments for secondary HPT address the disease
indirectly and involve drug therapy with phosphate binders and/or calcitriol. We
believe 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 preclinical and clinical trials conducted by us, Kirin, and
Amgen, have indicated that calcimimetic compounds could be effective in treating
both types of HPT. We have entered into agreements with Amgen and Kirin relating
to the development and commercialization of these calcimimetic compounds for
treating HPT. See "Business--Collaborative Research, Development, and License
Agreements."

     Development Status.   Before entering into the agreements with Amgen and
Kirin, we had begun clinical trials of our initial product candidate, NPS R-568,
in the United States. These trials included two Phase I safety and tolerance
studies, a multisite, Phase I/II study in women with mild primary HPT and a
pilot Phase I/II study in kidney dialysis patients with secondary HPT. In
October 1996, Kirin initiated clinical trials for NPS R-568 in Japan and has
also completed a Phase I/II study in dialysis patients with secondary HPT. Amgen
has concluded dosing in a Phase II study of NPS R-568 in dialysis patients. In
1998, Amgen completed a Phase I safety trial of a second-generation compound
also licensed from NPS. Amgen has said that this second-generation compound has
more favorable metabolism and kinetic profiles than NPS R-568 in the HPT patient
population. Phase II trials in primary and secondary HPT were begun by Amgen in
1998 with the second-generation compound. These trials are presently ongoing. We
are actively working with Amgen and Kirin to discover, identify, and
characterize other promising second-generation compounds. Each compound that
might be considered by Amgen and Kirin is subject to royalty and milestone
obligations. There can be no assurance that clinical trials will proceed as
indicated or that any compound for the treatment of HPT will prove safe and/or
effective, meet applicable regulatory standards, or be successfully marketed.
See "Risk Factors--Our product candidates may not succeed in the clinic or in
the marketplace." and "Risk Factors--We depend on collaborative partners for the
development of certain product candidates."

Osteoporosis Program

     Overview.   Osteoporosis is an age-related disorder that affects more than
200 million people worldwide and is characterized by reduced bone density and an
increased susceptibility to fractures. Osteoporosis is a major cause of
morbidity and mortality among the elderly.

     Throughout life, bone undergoes constant breakdown and building, or
remodeling, which involve anabolic processes that lead to bone formation and
catabolic processes that lead to bone resorption. The balance between these two
processes determines whether there is bone loss, bone formation, or no change.
In osteoporosis, the dominant process is bone resorption, resulting in bone
loss.

     Current therapies that have been approved for the treatment of osteoporosis
include estrogen, injectable calcitonin, and alendronate (a bisphosphonate).
These therapies are antiresorptive and act to suppress bone resorption. However,
each of these therapies has one or more disadvantage. For example, the use of
estrogen is believed to be associated with an increased risk of breast cancer,
calcitonin is expensive and cannot currently be 

                                       4

 
administered orally, and bisphosphonates have been associated with side effects
such as gastrointestinal distress. In contrast to bone resorption, anabolic
agents stimulate new bone formation. While no anabolic agents are currently
available for the treatment of osteoporosis, the Food and Drug Administration's
(FDA) Endocrinologic and Metabolic Drugs Advisory Committee has recommended that
slow release fluoride, an anabolic agent, be approved for the treatment of
osteoporosis in postmenopausal patients who have suffered a fracture.

     Most osteoporosis patients are diagnosed only after they have already lost
significant bone mass. As a result, 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 our collaboration with SmithKline
Beecham, preclinical research efforts are being conducted by us and SmithKline
Beecham to discover small molecules that will stimulate intermittent increases
in PTH secretion, leading to bone formation.

     Bone Formation.   Our primary approach to the treatment of osteoporosis
currently focuses on calcilytic compounds (calcium receptor antagonists) that,
in contrast to calcimimetic compounds, stimulate intermittent PTH secretion.
This novel approach, which is intended to manipulate the body's own PTH
reserves, could provide an effective anabolic therapy for osteoporosis by
stimulating new bone formation and replacing bone that has been lost to the
disease.

     While chronically high levels of PTH are known to cause bone loss, PTH
levels fluctuate daily and this is thought to play a key role in regulating the
balance between bone resorption and bone formation. Recent studies in animals,
and in humans by other organizations, have shown that frequent, usually daily,
injections of exogenous PTH are sufficient to cause a transient increase in
circulating PTH levels, resulting in significant stimulation of new bone
formation. Several published animal studies have evaluated the structural
integrity of this newly formed bone and have found that the increases in bone
mass achieved with PTH injections are accompanied by improvements in
biomechanical strength and in certain indices of bone structure thought to be
related to biomechanical strength.

     Although the anabolic effects of PTH on bone were first noted over sixty
years ago, evaluation of the therapeutic potential of PTH treatment has only
recently begun. Because of its potential as an effective anabolic therapy for
osteoporosis, certain other companies are currently conducting clinical trials
of injectable PTH or PTH analogs for treating osteoporosis. However, PTH is
expensive to manufacture and cannot be administered orally. We believe that
orally administered, calcilytic drugs that act on the parathyroid cell calcium
receptor to increase PTH release from the body's own PTH reserves could provide
a cost-effective means of intermittently increasing PTH levels. This could lead
to greater patient compliance and therefore greater acceptance in the medical
community.

     In in vivo animal studies, our scientists, together with SmithKline
Beecham, have demonstrated that intermittent increases in circulating levels of
PTH can be obtained through the use of proprietary small molecules which act in
vitro as calcimimetics. Increased levels of PTH achieved by this mechanism are
equivalent to levels of PTH achieved by an injection of PTH sufficient to cause
bone growth.

     Preclinical Research Status.   In January 1996, we received the first
milestone payment of $3.0 million from SmithKline Beecham for progress made in
our osteoporosis collaboration. Medicinal chemistry efforts are being applied to
various lead compounds with the goal of identifying clinical development
candidates. We have produced a cell line that expresses the human parathyroid
calcium receptor and serves as a proprietary tool for the high throughput
screening of compounds to identify new drug candidates. We continue to screen
SmithKline Beecham and NPS compound libraries to discover, identify, and
characterize additional compounds with calcilytic activity. NPS and SmithKline
Beecham are also involved in medicinal chemistry efforts to optimize compound
leads obtained from such screening activities. There can be no assurance that
lead compounds will be identified, that preclinical and clinical trials will
proceed, or that these candidates will prove safe and/or effective, meet
applicable regulatory standards, or be successfully marketed. See "Risk Factors-
- -Our product candidates may not succeed in the clinic or in the marketplace."

Neuroprotection Program

     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, which leads to inadequate blood supply to the brain 

                                       5

 
(ischemia). Many stroke victims survive and 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
stroke and is caused in part by the excessive release of glutamate and the
resultant influx of calcium into nerve cells. Published research in animals has
shown that much of this damage can be prevented by blocking the influx of
calcium into cells, in particular, the influx that results from activation of
NMDA receptor-operated calcium channels. Calcium influx resulting from the
activation of NMDA receptor-operated calcium channels also appears to cause the
neuronal damage associated with head trauma. Approximately two million traumatic
brain injuries occur each year in the United States, with 25% of these injuries
requiring hospitalization, and about 1% resulting in death.

     Certain medical procedures are associated with an increased risk of stroke.
For example, strokes occur in 3% to 7% of coronary artery bypass, carotid
endarterectomy, and heart valve replacement surgeries. Mild to severe central
nervous system dysfunction occurs in up to eighty percent of these procedures.
This is thought to result from multiple micro strokes caused by the release of
numerous tiny blood clots into the bloodstream. Our research indicates that it
might be possible to lessen the severity of neuronal damage and cognitive
impairment that occurs as a result of these procedures by using a prophylactic
treatment with neuroprotective compounds.

     NMDA receptor-operated calcium channels play critical roles in normal
excitatory neurotransmission and in events that lead to much of the neurological
damage associated with stroke and head trauma. Several pharmaceutical companies
have recognized the potential of NMDA receptor-operated calcium channels as
molecular targets. These companies have begun development of drugs to treat
neurological disorders and have identified various lead compounds. However, no
such drug has successfully completed clinical trials or been marketed. Work in
this field is all the more challenging because NMDA receptor-operated calcium
channels are also the site of action of phencyclidine (PCP or angel dust) and
most clinically tested compounds that target NMDA receptor-operated calcium
channels exhibit undesirable PCP-like side effects (inducing symptoms of
psychosis). There are currently no safe and/or effective neuroprotective
therapeutics available that slow or stop the progression of brain damage once a
stroke or head trauma has occurred.

     Systemic administration of our 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, our compounds have not exhibited PCP-like side effects in a
variety of in vitro and in vivo studies in animal models intended to identify
those effects.

     Development Status.  In July 1997, we began a Phase I clinical trial for
NPS 1506 in healthy male volunteers. This trial was completed in early 1998.
Results of the trial indicated that the drug was safe and well tolerated in
healthy male volunteers. In addition, we began a Phase Ib study in patients who
have suffered a stroke within a 48-hour period to assess safety and tolerability
of the drug in stroke patients. The clinical phase of this trial has been
completed and the data are being evaluated. We are actively searching for a
corporate partner to participate in the development of this program. Our ability
to secure a development partner for this program will affect our development
plan and time line for this program. There can be no assurance that NPS 1506 or
any other lead compounds will advance through clinical development, will prove
to be safe and/or effective, meet applicable regulatory standards, or be
successfully marketed. See "Risk Factors--Our product candidates may not succeed
in the clinic or in the marketplace."

Epilepsy and Bipolar Disorder

     Overview-Epilepsy.  Epilepsy is a term derived from the Greek work
"epilepsia," which means "to seize." In current usage, epilepsy refers to a host
of neurologic disorders that are characterized by recurrent seizures. The
Epilepsy Foundation of America estimates that nearly 2.5 million people in the
United State are epileptic. As early as 1873, Dr. John Hughlings Jackson, a
pioneer in the field of neurology, defined an epileptic seizure as a "disorderly
discharge of the nerve tissue." Modern confirmation of this description shows
that seizures result from the uncoordinated electrical activity of large numbers
of brain cells. In some cases, the chaotic firing of neurons is due to causes
such as traumatic or chemical brain injuries, infections of the brain, stroke,
tumors, extreme fevers, or genetic abnormalities. However, in nearly 70% of all
cases of recurrent seizures, no specific cause is ever found. 

                                       6

 
There is no known cure for this complex and variable disease. As a result,
current therapies focus on controlling seizures -- the symptom shared by all
forms of epilepsy.

     Many types of epileptic seizures have been medically defined. They range
from mild cases of nearly imperceptible behavior, such as staring into space, to
dramatic "grand mal" seizures where consciousness is lost and the body convulses
uncontrollably. In most cases of recurrent seizures, drugs are the treatment of
choice, although in some extreme instances, neurosurgery may be an option. The
most frequently used drug therapies include carbamazepine, phenytoin, valproate,
barbiturates, and benzodiazepines. Roughly half of all epilepsy patients can
control their seizures with available chemical therapies. However, other
patients achieve less than adequate control. An estimated 15% of all patients
are virtually resistant to drug treatment. Even when some level of seizure
control is achieved, it often comes with the disadvantage of serious side
effects.

     Overview-Bipolar Disorder.  Bipolar disorder is part of a class of diseases
referred to as affective illnesses or mood disorders. Affective illnesses
include all forms of depression, dysthmia (chronic, moderate depression) manic
disease, and bipolar disorder. The most responsive disease in this class of
illnesses is bipolar disorder. Until recently, bipolar disorder was known as
manic-depressive disorder. It is characterized by the occurrence of both manic
and depressive states, usually in alternation. Bipolar disorder, like other mood
disorders, is a lifetime illness with no known cure. As a result, the number of
bipolar patients continue to increase each year. In the United States,
approximately 17.5 million people have affective disorders. Of these,
approximately 2.2 million to 2.6 million people have been diagnosed as having
bipolar disorder.

     Development Status. Based on a long-running interest in anticonvulsant
research at NPS, our scientists have identified a lead compound for the
treatment of epilepsy. Studies of this small, organic molecule, designated NPS
1776, show that it is effective in a number of animal models of epilepsy and
that, importantly, there appears to be a wide margin between doses that control
seizures and doses that produce side effects.  The compound also exhibited a
high margin of safety in animal models when compared to standard epilepsy
treatments, including valproate, as measured by a lack of motor impairment side
effects following drug administration. Recent research studies have indicated
that the class of drugs normally used in seizure control can offer hope for many
bipolar disorder patients. Valproate has received FDA approval for the treatment
of manic episodes in bipolar disorder. Based on data generated by NPS and
relevant literature, we expect that NPS 1776 will be useful for the treatment of
affective mood disorders such as bipolar disorder and for the treatment of
epilepsy. NPS 1776 is a branched short-chain fatty acid/amide. Thus, it has some
structural similarities to valpromide. Although NPS 1776 and the
therapeutically-relevant valproic acid (Depakote(R)) are of the branched short-
chain fatty acid/amide class of compounds, significant structural distinctions
can be made. Based on these pharmacologically significant structural
distinctions, we believe that NPS 1776 will provide a better safety profile in
comparison to Depakote, such as the lack of teratogenic potential and
hepatotoxicity. Currently, we are conducting specific studies to address these
issues.

     A Phase I clinical trial in healthy male volunteers was completed in
December 1998 in the United Kingdom. The purpose of the trial was to evaluate
the safety and pharmacokinetics of NPS 1776. A preliminary analysis of the data
indicates that the drug was safe and well tolerated. A Phase Ib study was
commenced in the United Kingdom in December 1998 to confirm safety and
tolerability in volunteers receiving multiple doses of the drug. We expect to
file an IND with the FDA and begin clinical trials in the United States before
the end of 1999. We are actively seeking a partner to share in the development
of NPS 1776. Future development of NPS 1776 may be dependent on our ability to
find a development partner. There can be no assurance that NPS 1776 will advance
through clinical development, will prove safe and/or effective, meet applicable
regulatory standards, or be successfully marketed. See "Risk Factors--Our
product candidates may not succeed in the clinic or in the marketplace."

In-licensing and Product Acquisition

     Periodically, we evaluate alternatives for acquisition of late-stage
product opportunities. This evaluation includes the consideration of merger and
acquisition candidates and the search for in-licensing or joint venture
development candidates. To date, we have not entered into any such arrangement.
There can be no assurance that we will be able to negotiate acceptable licenses
and/or collaborative agreements in the future or that efforts under 

                                       7

 
any license and/or collaborative agreement will be successful. See
"Risk Factors--Difficulty of acquiring rights to external technologies,
programs, and development candidates."

Discovery Programs

     We are actively engaged in other discovery programs that seek to identify
molecular targets for the development of new drugs. These discovery programs are
extensions of our discoveries in calcium receptors and ion channels.

Metabotropic Glutamate Receptors

     Recent advances in the elucidation of the neurophysiological roles of
metabotropic glutamate receptors (mGluRs) have established these receptors as
promising drug targets in the therapy of acute and chronic neurological and
psychiatric disorders and diseases. Glutamate is the major excitatory
neurotransmitter in the mammalian central nervous system. Glutamate affects the
central neurons by binding to and thereby activating cell surface receptors.
mGluRs are G protein-coupled receptors that activate a variety of intracellular
messenger systems following the binding of glutamate. Our experience in the
discovery and development of drug candidates that act at the G protein-coupled
calcium receptor provides us with certain advantages in the mGluR field. Drugs
that target specific mGluRs may be useful in treating various neurological
disorders, including pain, epilepsy, neurodegenerative disorders such as
Alzheimer's disease, cognitive dysfunction, anxiety, and certain psychiatric
disorders.

     NPS scientists have cloned a novel mGluR and have developed a proprietary
screening technology for identifying small molecules active at mGluRs. Through
use of this screening technology, NPS scientists have discovered proprietary
small molecules that are active at mGluRs. Medicinal chemistry efforts with
these lead compounds are ongoing. This screening capability allows us to
identify compounds which act as allosteric modulators of mGluRs by binding
affinity for sites which are different from the usual binding site for
glutamate, the indigenous ligand. Additionally, this screening capability allows
us to identify compounds which are selective for the three classes of mGluRs.

Additional Calcium Receptor Therapeutics

     We are pursuing drug candidates that target calcium receptors in specific
tissues for the treatment of several disorders. In the kidney, for example, NPS
and its collaborators have shown that calcium receptors are abundantly expressed
in certain cells that regulate the excretion and reabsorption of calcium,
magnesium, and certain electrolytes. Calcium receptors are also expressed in
cells that regulate excretion and reabsorption of water in the kidney. These
calcium receptors appear to participate in the regulation of mineral,
electrolyte, and fluid balance in the body. Drugs that target calcium receptors
in the kidney may provide therapies for abnormal states of ion and water
retention. For example, these abnormal states occur in congestive heart failure
and in nephrolithiasis (kidney stone formation).

Drug Discovery Technologies

     Our approach to the discovery of novel drugs is to identify new drug
targets and small molecules that modulate the activities of these targets, or
the activities of previously identified targets, in ways that provide unique and
effective therapies. We have pioneered the use of various whole cell and tissue
functional screens in our drug discovery programs. These functional screens
substantially enhance our ability to discover new receptors and ion channels and
new drug candidates that modulate the activities of specific receptors or ion
channels through novel mechanisms. Functional screens were of critical
importance, for example, in our discovery of calcimimetic compounds that
modulate calcium receptor function.

                                       8

 
Collaborative Research, Development, and License Agreements

     We are pursuing research and product development both on an independent
basis and in collaboration with other companies. We currently have collaborative
research, development, and/or license agreements with Amgen, Kirin, SmithKline
Beecham, Systems Integration Drug Discovery Company, Inc. (SIDDCO) in Tucson,
Arizona, The Brigham and Women's Hospital, Inc. and AquaBio Products Sciences,
L.L.C. (APS) in Maine. See "Risk Factors--We depend on collaborative partners
for the development of certain product candidates."

     Amgen Inc.

     We entered into a development and license agreement with Amgen, effective
December 1995, which grants Amgen the exclusive right to develop and
commercialize drugs for the treatment of HPT and indications other than
osteoporosis worldwide, excluding Japan, China, Hong Kong, North and South
Korea, and Taiwan. The license includes the second-generation compound currently
in Phase II clinical trials at Amgen, and other compounds for treating HPT.
Under the terms of the Amgen agreement, we may receive up to an aggregate of
$43.5 million in license fees, equity purchases, and milestone payments, plus
royalties from any future product sales. Amgen has assumed full control,
authority, and responsibility for conducting, funding, and pursuing all aspects
of the development, submissions for regulatory approvals, manufacture and
commercialization of the compounds in its territory. This includes conducting
clinical trials and making regulatory submissions. Amgen paid NPS a license fee
of $10.0 million and purchased one million shares of common stock for an
aggregate purchase price of $7.5 million. The balance of the $43.5 million
includes up to $26.0 million payable to NPS upon the achievement of specific
development milestones. NPS has the option to participate under Amgen's
direction in the clinical development of a drug for primary HPT. Amgen is
required to reimburse us for our participation, limited to a total cost of
$400,000 per year for a maximum period of five years. Amgen may terminate the
agreement for any reason upon 90 days written notice. Termination of the
agreement will result in the reversion of our technology, patent, and
commercialization rights from Amgen. There can be no assurance that Amgen will
not terminate the agreement. In the event of termination of the license
agreement with Kirin, Amgen would receive worldwide rights to develop and
commercialize NPS R-568, the second generation compound in clinical trials at
Amgen, and other HPT compounds. We are actively working with Amgen and Kirin to
discover, identify, and characterize backup and second generation compounds. See
"Risk Factors--We depend on collaborative partners for the development of
certain product candidates."

     Kirin Brewery Company, Ltd.

     In June 1995, we entered into a five-year collaborative research and
license agreement with Kirin to develop and commercialize NPS R-568 and other
compounds for the treatment of HPT in Japan, China, Hong Kong, North and South
Korea, and Taiwan. Under the terms of the Kirin agreement, we may receive up to
an aggregate of $25.0 million in license fees, research support, and milestone
payments plus royalties from any future product sales in exchange for exclusive
rights to develop, manufacture, and sell NPS R-568, second-generation compounds,
and other compounds for the treatment of HPT in their territory. Kirin is
responsible for conducting clinical trials and obtaining regulatory approvals in
its territory. Kirin paid an initial license fee of $5.0 million and committed
$7.0 million in research payments for research concerning NPS R-568 and the
second-generation compounds over five years. The Kirin research support payments
were $500,000 per quarter through June 1997 and are $250,000 per quarter over
the remaining three years of the agreement. The remaining $13.0 million is
payable to us upon achievement of specific development milestones in the United
States and/or Kirin's territory. In October 1996, we earned our first milestone
payment from Kirin in the amount of $2.0 million for the start of clinical
trials in Japan. In December 1997, we received the second milestone payment from
Kirin in the amount of $2.0 million for the commencement in Japan of a Phase II
clinical trial for primary HPT. Kirin is required to pay all costs of developing
and commercializing products within its territory and will pay royalties on any
product sales. We are actively working with Kirin and Amgen to discover,
identify, and characterize second-generation compounds. Kirin may terminate the
Kirin agreement for any reason upon 90 days written notice. Termination of the
Kirin agreement will result in Amgen receiving worldwide rights to develop and
commercialize NPS R-568, the second-generation compounds including second-
generation compounds in clinical trials at Amgen, and other HPT compounds. There
can be no assurance that Kirin will not terminate the agreement. See "Risk
Factors--We depend on collaborative partners for the development of certain
product candidates."

                                       9

 
     SmithKline Beecham Corporation

     In November 1993, we entered into a three-year collaborative research and
license agreement with SmithKline Beecham 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 the worldwide development and marketing of any calcium
receptor-active compounds developed under this agreement that are useful for
treating osteoporosis and other bone metabolism disorders, excluding HPT. Once
compounds have been selected for development, SmithKline Beecham has agreed to
conduct and fund all product development including all human clinical trials and
regulatory submissions. We have the right to copromote any resulting products in
the United States. In 1992, S.R. One, an affiliate of SmithKline Beecham,
purchased $2.0 million of NPS preferred stock. In 1993, at the time we entered
into the SmithKline agreement, S.R. One purchased an additional $7.0 million in
equity of NPS and acquired $495,000 of NPS common stock in our initial public
offering. All NPS preferred stock was converted into common stock upon the
closing of our initial public offering.

     Under the terms of the SmithKline agreement, in addition to the $7.0
million equity purchase, SmithKline Beecham paid a $6.0 million license fee and
agreed to make additional payments upon the achievement of specific milestones.
A $3.0 million milestone payment was made in January 1996. In July 1995, we
began receiving payments from them to support our research efforts and have
recognized revenue of $8.4 million through 1998. In November 1997, the research
term of the SmithKline agreement was extended for an additional period of up to
three years. Concurrently with the execution of the extension agreement,
SmithKline Beecham purchased 160,000 shares of NPS common stock. In November
1998 SmithKline Beecham purchased 204,000 shares of NPS common stock. They have
agreed to purchase an additional 249,000 shares of NPS common stock on November
1, 1999 if the agreement is not terminated earlier. Research support payments
are expected to be approximately $437,500 per quarter through October 2000
unless terminated earlier by SmithKline Beecham. We are entitled to royalties on
sales of products for osteoporosis and other bone metabolism disorders developed
by SmithKline Beecham under this agreement and a share of the profits from any
copromotion of the products. The agreement may be terminated by SmithKline
Beecham upon 30 days written notice, and we will have the right to extend this
agreement for an additional period of time, provided that drug marketing has
commenced. Under certain circumstances, we have the right to terminate the
SmithKline agreement after October 2000. Termination of the SmithKline agreement
will result in the return of our technology, commercialization, and patent
rights in the licensed field of osteoporosis and other bone and mineral
disorders, as well as all additional technology developed in the course of the
collaboration. There can be no assurance that SmithKline Beecham will not
terminate the SmithKline agreement or that funded research will be extended upon
its termination in October 2000. See "Risk Factors--We depend on collaborative
partners for the development of certain product candidates."

     SIDDCO

     In July 1997, we entered into a research and development agreement with
SIDDCO. Under this agreement, we are working to develop combinatorial chemistry
databases, identify novel compounds, develop automated chemical synthesis
systems, and generate computational and analytical methods. We are obligated to
pay SIDDCO $1.2 million per year, on a quarterly basis, through June 2000.
Additionally, we have the right to extend the agreement for an additional two
years at an adjusted rate based on SIDDCO costs at that time.

     The Brigham and Women's Hospital, Inc.

     In February 1993, we entered into two agreements with The Brigham and
Women's Hospital, an affiliate of Harvard University Medical School: a sponsored
collaborative research agreement, and a patent license agreement. The patent
license agreement grants us an exclusive license to certain calcium receptor and
inorganic ion receptor technology covered by patents jointly owned by Brigham
and Women's and NPS. The research agreement grants us a right of first
negotiation for exclusive license rights to any patentable subject matter
arising out of research at Brigham and Women's that is sponsored by NPS. Brigham
and Women's is also entitled to a royalty on sales of certain products under the
patent license agreement, and we have committed to promote sales of any licensed
products for HPT for which we receive regulatory approval. In February 1996, we
reached an agreement with them to extend the research agreement for an
additional year. This agreement was further amended, effective March 1, 1997, to
extend the research agreement for an additional year and to update the amount of
research 

                                       10

 
support payments to be made by us for the final year of the agreement.
Effective March 1, 1998, the research agreement was extended for an additional
two years.

     AquaBio Products Sciences, L.L.C.

     In July 1997, we entered into an agreement with APS. Under this agreement,
we licensed certain rights in our calcium receptor technology to APS to be used
solely in the field of nonmammalian aquatic organisms. APS will use this
technology to explore innovative ways to improve aquaculture. In return for the
license, we will receive rights to technology identified by APS that may have
therapeutic value in mammalian organisms. In connection with this agreement, we
also made an equity investment in APS.


Patents and Proprietary Technology

     Our success will depend in part on our ability to obtain patents, maintain
trade secrets and operate without infringing on the proprietary rights of
others, both in the United States and other countries. Periodically, we file
patent applications to protect technology, inventions, and improvements that may
be important to the development of our business. We rely on trade secrets, know-
how, continuing technological innovations, and licensing opportunities to
develop and maintain our competitive position.

     We file patent applications in our own name, and when appropriate, have
filed and expect to continue to file, applications jointly with our
collaborators. These patent applications cover compositions of matter, methods
of treatment, methods of discovery, use of novel compounds and novel modes of
action, and recombinantly expressed receptors and gene sequences that are
important in our research and development activities. Some of our principal
proprietary rights related to processes, compounds, uses, and techniques related
to calcium receptor science are now protected by issued United States patents.
Few of our principal proprietary rights, including rights in processes,
compounds, uses, and techniques related to calcium receptor science, and NMDA
receptor-operated calcium channel technology, are protected by issued patents in
our principal markets. We believe that we receive a competitive advantage from
our pending patent applications in the fields of calcium receptors, inorganic
ion receptors, mGluRs, chimeric receptors using components of mGluRs and our
calcium receptor technology, NMDA receptor-operated calcium channels, and
compounds active at the same receptors give us a competitive advantage. We
intend to file additional patent applications relating to our technology and to
specific products as appropriate.

     The patent positions of pharmaceutical and biotechnology firms are
uncertain and involve complex legal and factual questions. In addition, the
scope of the claims in a patent application can be significantly modified during
prosecution before the patent is issued. Consequently, we cannot know whether
pending applications will result in the issuance of patents or, if any patents
are issued, whether they will provide significant proprietary protection or will
be circumvented or invalidated. Generally, patent applications in the United
States are maintained in secrecy until patents issue and publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries. In addition, no assurance can be given that, even if published, we
will be aware of all such literature. Accordingly, we cannot be certain that the
named inventors were the first to invent or that we were the first to pursue
patent coverage for the inventions. Moreover, we 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, even if the eventual outcome is favorable to us. There can be no assurance
that our pending patent applications, if issued, would be held valid. An adverse
outcome could subject us to significant liabilities to third parties, could
require disputed rights to be licensed from third parties, or require us to
cease or modify our use of the technology. Additionally, many of our foreign
patent applications have been published as part of the patent prosecution
process in such countries. Protection of the rights revealed in published patent
applications can be complex, costly, and uncertain. See "Risk Factors--Our
success depends on the scope of our intellectual property rights and not
infringing the intellectual property rights of others."

     Patent applications for therapeutic products in our areas of research are
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 our applications and could result
in a significant reduction in the coverage of the patents, if issued.

                                       11

 
     We also rely on trade secrets and contractual arrangements to protect our
trade secrets. There can be no assurance that these agreements will be adequate,
that they will not be breached, that we would have adequate remedies for any
breach, or that our trade secrets will not otherwise become known or be
independently discovered by competitors.

     Much of the know-how important to our 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 our rights to know-how and technology, we require all
employees, consultants, advisors, and collaborators to enter into
confidentiality agreements that prohibit the unauthorized use of and restrict
the disclosure of confidential information, and require disclosure and
assignment to NPS of ideas, developments, discoveries, and inventions made by
them. There can be no assurance that these agreements will effectively prevent
disclosure of confidential information or will provide meaningful protection for
our 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 research in the field of calcium and other ion
receptors, we have sponsored research at various university and government
laboratories. For example, we have executed license and research agreements
regarding research in the area of calcium and other ion receptors with The
Brigham and Women's Hospital. See "Collaborative Research, Development, and
Licensing Agreements--The Brigham and Women's Hospital, Inc."

     We have also sponsored work at other government and academic laboratories
for various evaluations, assays, screenings, and other tests of our natural
products library and lead compounds in the central nervous system field.
Generally, under these agreements, we fund the work of investigators in exchange
for the results of the specified work and the right or option to a license to
any patentable inventions that may result in certain designated areas. If the
sponsored work produces patentable subject matter, we generally have the first
right to negotiate for license rights therein. Any resulting license would be
expected to require us to pay royalties on net sales of licensed products. There
can be no assurance that any inventions will arise, that any patent applications
on them will be filed or, if filed, that any patents will issue, that any
license can be negotiated, or that any license agreement would give us valuable
rights.

Manufacturing

     We anticipate that all products from our current programs will be made by
synthetic chemical manufacturing techniques. As such, we believe the compounds
can be precisely defined and characterized and should have relatively low
manufacturing costs compared to current pharmaceutical industry costs and
compared to recombinant proteins that are produced by the fermentation methods
common to currently available biotechnology products.

     We have no manufacturing facilities. Under the Amgen, Kirin, and SmithKline
Beecham agreements, each licensee is responsible for the manufacture of the
applicable product. We rely on other manufacturers to produce the proprietary
compounds for research and development activities and in sufficient quantities
for preclinical and clinical purposes. The proposed pharmaceutical products
under development have never been manufactured on a commercial scale, and there
can be no assurance that the products can be manufactured at a cost or in
quantities to make them commercially viable. If we were unable to contract for a
sufficient supply of compounds on acceptable terms, or if we should encounter
delays or difficulties in relationships with manufacturers, our preclinical and
clinical testing schedule would be delayed. That delay might postpone the
submission of products for regulatory approval or the market introduction and
subsequent sales of the products, which would have a materially adverse effect
on our operations. Moreover, contract manufacturers that we may use must adhere
to Quality System Regulations (QSR) of the FDA, which incorporate the FDA's
former Good Manufacturing Practices.

Government Regulation

     Research, preclinical development, clinical trials, manufacturing, and
marketing activities are subject to regulation for safety, efficacy, and quality
by numerous governmental authorities in the United States and other 

                                       12

 
countries. In the United States, drugs are subject to rigorous FDA regulation.
The Federal Food, Drug and Cosmetic Act and other federal and state statutes and
regulations govern, among other things, the testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising, and
promotion of our products. Product development and approval within this
regulatory framework take a number of years and involve the expenditure of
substantial resources.

     The steps required before a pharmaceutical agent may be marketed in the
United States include:

     .    preclinical laboratory tests, animal pharmacology and toxicology
          studies and formulation studies;
     .    the submission of an Investigational New Drug (IND) application to the
          FDA for human clinical testing, which must become effective before
          human clinical trials commence;
     .    adequate and well-controlled human clinical trials to establish the
          safety and efficacy of the drug;
     .    the submission of a New Drug Application (NDA) to the FDA; and
     .    FDA approval of the NDA before any commercial sale or shipment of the
          drug. In addition to obtaining FDA approval for each product, each
          domestic drug manufacturing establishment must be registered with, and
          approved by, the FDA's QSR regulations.

     Domestic drug manufacturing establishments are subject to regular
inspections by the FDA and must comply with QSR regulations. To supply products
for use in the United States, foreign manufacturing establishments must comply
with QSR regulations and are subject to periodic inspection by the FDA or by
corresponding regulatory agencies in their home countries, under reciprocal
agreements with the FDA.

     Preclinical studies include the laboratory evaluation of in vitro
pharmacology, product chemistry and formulation, as well as animal studies to
assess the potential safety and efficacy of the product. Compounds must be
formulated according to QSR, and preclinical safety tests must be conducted by
laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of the preclinical tests are submitted to the FDA as part
of an IND and are reviewed by the FDA before the commencement of human clinical
trials. Unless the FDA objects to an IND, the IND will usually become effective
30 days following receipt by the FDA. There can be no assurance that submission
of an IND will result in FDA authorization to commence clinical trials.

     Clinical trials involve the administration of the investigational new drug
to healthy volunteers and to patients under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety, and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Furthermore, each clinical study must be conducted under the auspices of an
Institutional Review Board (IRB) at the institution where the study will be
conducted. The IRB will consider, among other things, ethical factors, the
safety of the 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:

     .    determine the efficacy of the drug for specific, targeted indications;
     .    determine dosage tolerance and optimal dosage; and
     .    identify possible adverse effects and safety risks.

     When a compound is found to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to evaluate
further clinical efficacy and to test for safety within an expanded patient
population at geographically dispersed clinical study sites. There can be no
assurance that Phase I, Phase II, or Phase III testing will be completed
successfully within any specific time period, if at all, with respect to any of
our products subject to this testing, including NPS R-568 and second-generation
compounds in our HPT program, NPS 1506 in the neuroprotection program, and NPS
1776 for epilepsy and bipolar disorder. Furthermore, NPS, our collaborators,
licensees, or the FDA may suspend clinical trials at any time if they feel that
the subjects or patients 

                                       13

 
are being exposed to an unacceptable health risk. See "Risk Factors--We are
subject to extensive government regulation; new drugs may not be approved."

     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, may
require additional testing or information, or may require postmarketing testing
and surveillance to monitor the safety of our products if the NDA is not viewed
as containing adequate evidence of the safety and efficacy of the drug.
Notwithstanding the submission of the 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, approval may entail limitations on
the indicated uses for which it may be marketed. Finally, product approvals may
be withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.

     Among the conditions for NDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to QSR, which must be followed at all times. In complying with standards shown
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--We are subject to extensive government
regulation; new drugs may not be approved."

     In addition to regulations enforced by the FDA, we are 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.
Our research and development activities involve the controlled use of hazardous
materials, chemicals, and various radioactive compounds. Although we believe
that our safety procedures for handling and disposing of these materials comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of an accident, we could be liable for any damages that
result, and any liability could exceed our resources. See "Risk Factors--We face
product liability risks and may not be able to obtain adequate insurance." and
"Risk Factors--Our operations involve hazardous materials."

     Outside the United States, our ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authority. This foreign regulatory approval process includes all of the risks
associated with FDA approval described above.

Competition

     NPS and our licensees are pursuing areas of product development in which we
believe there is a potential for extensive technological innovation in
relatively short periods of time. We operate in a field in which new discoveries
occur at a rapid pace. Competitors may succeed in developing technologies or
products that are more effective than ours or in obtaining regulatory approvals
for their drugs more rapidly than we are able to, which could render our
products obsolete or noncompetitive. Competition in the pharmaceutical industry
is intense and is expected to continue to increase. Many competitors, including
biotechnology and pharmaceutical companies, are actively engaged in the research
and development of products in similar areas, including the fields of HPT,
osteoporosis, neuroprotection, and neurological disorders. Many of our
competitors have substantially greater financial, technical, marketing, and
personnel resources. In addition, some of them have considerable experience in
preclinical testing, human clinical trials, and other regulatory approval
procedures. Moreover, certain academic institutions, governmental agencies, and
other research organizations are conducting research in the same areas in which
we are working. These institutions are becoming increasingly aware of the
commercial value of their findings and are more actively seeking patent
protection and licensing arrangements to collect royalties for the technology
that they have developed. These institutions may also market competitive
commercial products on their own or through joint ventures and will compete with
us in recruiting highly qualified scientific personnel. 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--We face intense competition
and technological change."

                                       14

 
Environmental Liability

     On November 29, 1995, the Environmental Protection Agency (EPA) notified us
that we 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, we identified the waste and 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 these actions are difficult to
estimate. Based upon its inspection of the site, the barrels containing the
waste disposed of by us were determined to be neither leaking nor damaged.
Although we were a small contributor to the site and we believe that there are a
number of other financially responsible contributors, there can be no assurance
that we 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--We
face product liability risks and may not be able to obtain adequate insurance."
and "Risk Factors--Our operations involve hazardous materials."

Employees

     As of December 31, 1998, we employed 101 individuals full-time, 21 of whom
hold Ph.D. degrees, and 23 of whom hold other advanced degrees. A total of 75
full-time employees are engaged in research, development, and supporting
activities, including a variety of disciplines within the areas of molecular
biology, pharmacology, medicinal chemistry, computer sciences, and clinical
development. A total of 26 full-time employees are employed in finance, legal,
and human resources, market research, corporate development, and general
administrative activities. None of our employees are 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. Our anticipated growth
and expansion may require the hiring of additional management, research and
development, and administrative personnel.

Risk Factors

     We have a history of operating losses and may require additional financing.
We have not been profitable since our inception in 1986. As of December 31, 1998
we had an accumulated deficit of approximately $43.3 million. We expect to
continue to incur losses for the next several years. We may never realize
significant revenues or be profitable. Factors that will influence the timing
and amount of our profitability include:

     .    the success of our product candidates placed with Amgen, Kirin, and
          SmithKline Beecham,
     .    the development and commercialization of additional products,
     .    our ability to secure corporate partners to share the expense of
          development of our non-partnered programs,
     .    timing and difficulty of obtaining regulatory approvals, and
     .    competition.

     Most of our funding has come from research and development fees and the
sale of stock. No material revenues have been generated from product sales. We
may have to raise additional funds through collaborative relationships or public
and private financings. Additional financing may not be available on favorable
terms, or at all. If we raise additional funds by selling equity securities, the
share ownership of our existing investors could be diluted or the new equity
purchasers may obtain terms that are better than those of our existing
investors. Lack of financing may delay, reduce or eliminate some of our programs
or force us to relinquish rights to technology, product candidates or products.

     Our product candidates may not succeed in the clinic or in the marketplace.
Extensive and costly clinical trials must be conducted to demonstrate safety and
efficacy for a pharmaceutical product before it can be approved by the FDA or
other regulatory authorities. A product candidate that appears to be safe and/or
effective in 

                                       15

 
preclinical in vivo tests and early clinical trials may not ultimately prove to
be safe and/or effective when tested in a larger number of patients. NPS R-568,
NPS 1506, NPS 1776, and a second-generation HPT compound are our only product
candidates in the clinic. All of these product candidates could prove to be
unsafe and/or ineffective. The failure of one or more of our product candidates
could postpone profitability indefinitely. We may also encounter problems in a
clinical trial that might significantly delay or cause us to terminate the
clinical trial program. Any adverse clinical event could cause delays or prevent
us from commercializing additional products. This would have a substantial
adverse effect on the operations of our business. Additionally, those product
candidates that are successful in the clinic and obtain FDA approval may not be
as effective as other products on the market.

     We depend on collaborative partners for the development of certain product
candidates.  Amgen and Kirin have full control of the development and
commercialization of a calcimimetic drug therapy for the treatment of HPT in
their territories. SmithKline Beecham has full control over research and
development in osteoporosis. Because we have granted exclusive development,
commercialization, and marketing rights to these licensees, the success of the
programs are dependent upon their efforts. If the licensees do not
satisfactorily perform under the agreements, our financial condition will be
materially and adversely affected. Our licensees could terminate these
agreements or these agreements could expire before related lead candidates are
identified or any related candidate drugs are developed. If our licensees were
to terminate their respective agreements, we might not have the financial
resources necessary to continue development of those programs. The termination
or expiration of any or all of these agreements could have a material adverse
effect on our business. Much of the revenue that we may receive under these
partnerships depends upon our partners' successful development and
commercialization of the compounds. Our partners may develop alternative
technologies or products outside of their partnerships with us, and the
technologies or products may be used to develop treatments for the diseases
targeted by our partnerships. This could have a material adverse effect on our
business.

     We will need to find corporate partners for new product candidates.  Our
strategy for the development, clinical testing, manufacturing and
commercialization of our products requires that we enter into various
collaborations with partners, licensors, licensees, and others. There can be no
assurance that we will be able to negotiate further collaborative arrangements
on acceptable terms, if at all, or that current or future collaborative
arrangements will be successful. If we are not able to establish such
arrangements, we would experience increased capital requirements to undertake
the activities at our own expense. In addition, we may encounter significant
delays in introducing our products into certain markets or find that the
development, manufacture or sale of our products in certain markets is adversely
affected by the absence of collaborative agreements. To the extent we enter into
co-promotion or other licensing arrangements, revenues received by us will
depend upon the efforts of third parties, and there can be no assurance that
such parties will devote such efforts or that such efforts will be successful.

     Difficulty of acquiring rights to external technologies, programs, and
development candidates. We are actively evaluating product acquisition
opportunities in order to establish and maintain an appropriate portfolio or
pipeline of product candidates. We seek optimum diversity of materials,
timetables, development costs, applicability to current medical needs, and other
select criteria. We may be unsuccessful in our efforts to identify, acquire and
exploit third-party technologies or product opportunities. There can be no
assurance that we will be able to negotiate acceptable license and/or
collaborative agreements in the future or that efforts under those agreements
will be successful. If we choose to and are successful in entering into future
agreements, we will also experience increased capital requirements to undertake
research, development, and marketing of any in-licensed technologies, programs,
and development candidates. In addition, significant delays may be encountered
in introducing any in-licensed product candidates into certain markets or we may
find that the development, manufacture and sale of these product candidates are
adversely affected by competition from others.

     We are subject to extensive government regulation; new drugs may not be
approved.  Our research and development activities and the investigation,
manufacture, distribution, and marketing of drug products are subject to
extensive regulation by governmental authorities in the United States 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. Receipt of such regulatory approval involves, among other things,
satisfying the FDA that the product is both safe and/or effective. Typically,
this process takes several years depending upon the type, complexity and novelty
of the product and the nature of the disease or other indication to be treated.
The process also requires an expenditure of 

                                       16

 
substantial resources. Preclinical studies must be conducted in accordance with
the FDA's Good Laboratory Practice regulations. Clinical testing is also subject
to FDA regulations and must meet requirements for Institutional Review Board
oversight and informed consent by clinical trial subjects and patients. Clinical
trials may require large numbers of test subjects. We or the FDA may suspend
clinical trials at any time if either believes that clinical trial subjects are
being exposed to unacceptable health risks, including undesirable or unintended
side effects.

     Before receiving FDA approval to market a product, we may have to
demonstrate that the product represents an improved form of treatment when
compared to existing therapies. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations that could delay, limit,
or prevent regulatory approvals. In addition, delays or rejections may be
encountered based upon additional government regulation from future legislation,
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 regulatory approval is obtained, a marketed product,
its manufacturer, and its manufacturing facilities are subject to continual
review and periodic inspections. The QSR standards will be applicable to us or
our manufacturers and suppliers. The discovery of previously unknown problems
with a product, manufacturer, or facility may result in restrictions on that
product or manufacturer, including costly recalls or withdrawal of the product
from the market. There can be no assurance that any compound developed by us
alone or in conjunction with others will prove to be safe and/or effective in
clinical trials and will meet all of the applicable regulatory requirements
needed for marketing approval.

     We face intense competition and technological change.  Existing and future
products, therapies, technological approaches and delivery systems will compete
directly with our products. Competing products may provide greater therapeutic
benefits for a specific indication, or may offer comparable performance at a
lower cost.

     We compete with fully integrated pharmaceutical companies, smaller
companies that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have drug products already approved or
in development and operate large, well-funded research and development programs
in these fields. Our competitors may develop safer or more effective drugs and
achieve faster or broader regulatory approval, wider availability of supply,
more effective marketing and sales or superior proprietary positions. Any
products that we develop may become obsolete before we recover any expenses
incurred in connection with development of these products.

     Our success depends on the scope of our intellectual property rights and
not infringing the intellectual property rights of others.  Our success will
depend, in part, on our ability to obtain and protect patents, maintain trade
secrets and operate without infringing the proprietary rights of others. Our
patents or patent applications may be challenged, invalidated or circumvented by
our competitors. These patents may also fail to provide meaningful competitive
advantages to us.

     Intellectual property rights are uncertain and involve complex legal and
factual questions. 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.
Accordingly, we cannot be certain that the inventors named in our patent
applications were the first to invent, or that we were the first to pursue
patent coverage for those inventions. We may unknowingly infringe the
proprietary rights of others and may be liable for that infringement, which
could result in significant liability for us. We could be forced to either seek
a license to intellectual property rights of others or alter our products or
processes so that they no longer infringe the proprietary rights of others. A
license could be very expensive to obtain, or may not be available at all.

     Similarly, changing our products or processes to avoid infringing the
rights of others may be costly or impractical. If we were to become involved in
a dispute regarding intellectual property, whether ours or that of another
company, we may have to participate in interference proceedings declared by the
U.S. Patent and Trademark Office to determine who had the claimed rights first.
We may also be forced to seek a judicial determination concerning the rights in
question. These types of proceedings may be costly and time consuming for us,
even if we eventually prevail. If we do not prevail, we might be forced to pay
significant damages, obtain a license or stop making a certain product.

                                       17

 
     We also rely on trade secrets, proprietary know-how, and confidentiality
provisions in agreements with collaborative partners, employees, and consultants
to protect our intellectual property. Other parties may not comply with the
terms of their agreements with us and we might not be able to adequately enforce
our rights against these people.

     We do not have the capability to manufacture, so we must rely on third
parties.  We do not have any internal manufacturing capacity and we rely on
third-party manufacturers for the manufacture of all of our clinical trial
material. If we were unable to contract for a sufficient supply of our compounds
on acceptable terms, or if delays and difficulties in our relationships with
manufacturers are encountered, our preclinical and human clinical testing
schedule would be delayed. Such delay would adversely affect the schedule for
submission of products for regulatory approval, the market introduction, and
subsequent sales of these products, which would have a materially adverse effect
on our business. We will need to expand our existing relationships or to
establish relationships with additional third-party manufacturers for products
that we successfully develop. We may be unable to establish or maintain
relationships with third-party manufacturers on acceptable terms, and third-
party manufacturers may be unable to manufacture products in commercial
quantities on a cost effective basis. Our dependence upon third parties  may
adversely affect our profit margins and our ability to develop and commercialize
products on a timely and competitive basis. Furthermore, third-party
manufacturers may encounter manufacturing or quality control problems in
connection with the manufacture of our products and they may be unable to
maintain the necessary governmental licenses and approvals to continue
manufacturing our products. Our business could be adversely affected if we fail
to establish or maintain relationships with third parties for our manufacturing
requirements on acceptable terms.

     Also, our corporate collaborators, licensees, or contract manufacturers may
be unable to manufacture any developed compounds on a commercial scale, or that
any collaborator, licensee or manufacturer will be able to manufacture products
in quantities, or at prices that will be commercially viable or beneficial to
us. The licensees are responsible for manufacturing any products developed under
their respective agreements. If we or our collaborators and licensees encounter
difficulty in obtaining third-party manufacturing on commercially acceptable
terms, their ability to commercialize products may be delayed or foreclosed.

     We will need additional capital to complete development of our unlicensed
product candidates. Substantial expenditures will be required to continue
existing and planned research and development activities, preclinical and
clinical trials, to manufacture or have products manufactured, and to market
products from current research and development efforts. Our current resources
are inadequate to finance all of the work planned and needed to continue
development of our current programs. If we are unable to find licensees or
collaborators for one or more of these efforts, we will be required to suspend
activities or to raise additional equity capital. There can be no assurances
that we can succeed in such efforts.

     We do not have the capability to market and sell products; we must rely on
third parties.  We will have to develop a sales force or rely on arrangements
with third parties for the marketing, distribution, and sale of any products we
develop. We currently lack sales, marketing, and distribution capability. In
order to market any products directly, it would be necessary to develop a
marketing and sales force with technical expertise and supporting distribution
capability. We might not be able to establish in-house sales and distribution
capabilities, relationships with third parties for these tasks, or we may be
unsuccessful in gaining market acceptance for our products. Additionally, our
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 us, under certain circumstances,
including termination of any agreements.

     Uncertainty of pharmaceutical pricing, reimbursement, and healthcare reform
measures may result in our being unable to sell our products profitably.  The
availability of reimbursement by governmental and other third-party payors
affects the market for any pharmaceutical product. These third-party payors
continually attempt to contain or reduce the costs of healthcare. There have
been a number of legislative and regulatory proposals to change the healthcare
system, and further proposals are likely. Under current guidelines, Medicare
does not reimburse patients for self-administered drugs. This 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 

                                       18

 
exists with the reimbursement status of newly approved health care products. We
might not be able to sell our products profitably if reimbursement is
unavailable or limited in scope.

     We need to attract and retain key employees and consultants and manage
growth.  We are highly dependent on the principal members of our scientific and
management staff. Loss of any of these persons could adversely affect our
operations. Nonetheless, we do not have long-term employment contracts. Our
future success will also depend in large part upon our continued ability to
attract and retain highly qualified scientific and management personnel. We face
competition for personnel from other companies, academic institutions,
government entities, and other organizations. 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 will place increased demands on our resources.
These demands may require the addition of new management; research and
development, and administrative personnel; and the development of additional
expertise by existing management personnel. The failure to acquire such services
or develop such expertise could adversely affect prospects for success. Certain
of these anticipated future needs are expected to be met through agreements with
the licensees and potential additional corporate collaborations, but there can
be no assurance that any services provided by them will be sufficient to meet
our personnel or management needs.

     We face product liability risks and may not be able to obtain adequate
insurance.  The testing and commercial use of human therapeutic products entail
significant risks. If we succeed in developing products, the use of the products
in clinical trials and the sale of products, following regulatory approval, may
expose us to liability claims allegedly resulting from use of these products.
These claims might be made directly by consumers or others. We have obtained
limited product liability insurance coverage for our human clinical trials. This
coverage may be insufficient to protect against damages for liability. We might
not be able to obtain or maintain product liability insurance in the future on
acceptable terms or in sufficient amounts to protect us against damages for
liability. Agreements with our licensees provide for indemnification against
damage claims, but claims arising from products sold by a collaborative partner
or licensee may also include claims directly against us and may not be
indemnifiable under the agreement.

     Our operations involve hazardous materials.  Our research and development
activities involve the controlled use of hazardous materials, radioactive
compounds, and other potentially dangerous chemicals and biological agents.
Although we believe that our safety procedures for these materials comply with
governmental standards, we cannot eliminate the risk of accidental contamination
or injury from these materials. If an accident or environmental discharge
occurs, we could be held liable for any resulting damages, which could exceed
our financial resources.

     Volatile stock price and low demand.  We experience lack of attention by
securities analysts and imbalance between supply and demand for our stock. We
also experience volatility in our stock price. The market price of our common
stock has been highly volatile and is likely to continue to be volatile. Factors
affecting our stock price include:

     .    fluctuations in our operating results.
     .    announcements of technological innovations or new commercial
          therapeutic products by us or our competitors,
     .    published reports by securities analysts or the lack thereof,
     .    progress with clinical trials,
     .    governmental regulation.
     .    changes in reimbursement policies.
     .    developments in patent or other proprietary rights.
     .    publicity, or the lack thereof, concerning the discovery and clinical
          development activities by our licensees,
     .    public concern as to the safety and efficacy of drugs developed by us
          and our competitors, and
     .    general market conditions.

     Issuance of shares under employee stock incentive plans will dilute current
stockholders.  We maintain stock incentive plans whereby employees, directors,
and consultants can acquire shares of NPS common stock through the exercise of
stock options, grants, and purchases.

                                       19

 
     Antitakeover provisions in our articles, bylaws, Delaware Law, and
shareholders rights plan may adversely effect a potential takeover.  Certain
provisions of our Certificate of Incorporation and Bylaws and Section 203 of the
Delaware General Corporation Law could discourage potential acquisition
proposals and could delay or prevent a change in control of the Company. Such
provisions could diminish the opportunities for a stockholder to participate in
tender offers, including those at a price above the then current market value of
the common stock. These 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 delay or prevent a change in control of NPS as well
as adversely affecting the voting power of the holders of common stock,
including the loss of control to others. In addition, the Board of Directors has
adopted a Shareholder Rights Plan, commonly known as a "poison pill," that may
have the effect of delaying or preventing a change in control.

     Year 2000 issues could cause interruption or failure of our computer
systems.  We use a significant number of computer systems and software programs
in our operations, including applications used in support of research and
development activities, accounting, and various administrative functions.
Although we believe that our internal systems and software applications are
compliant and will be able to interpret appropriately the dates following
December 31, 1999, our failure to make or obtain necessary modifications to our
systems and software could result in systems interruptions or failures that
could have a material adverse effect on our business. Unanticipated costs
necessary to avoid potential systems interruptions could exceed our present
expectations and consequently have a material adverse effect on our business. In
addition, if our key supply and service providers fail to make their respective
computer software programs and operating systems Year 2000 compliant, it could
have a material adverse effect on our business.

     Absence of dividends.  We intend to retain any future earnings to finance
the growth and development of our business and we do not plan to pay cash
dividends in the foreseeable future.

ITEM 2.   Properties.

     We currently rent approximately 54,000 square feet of laboratory, support,
and administrative space in the University of Utah's Research Park. We pay
approximately $875,000 annually under a facilities lease that expires in
September 2004. We anticipate that we will not need to acquire additional space
in order to meet our needs over the next three years.

ITEM 3.   Legal Proceedings.

     We are 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
1998.

                                       20

 
Executive Officers of the Registrant.

     The executive officers of and their ages as of December 31, 1998 are as
follows:


 
                Name                    Age                     Position                          
                ----                    ---                     --------                          
                                                                                         
        Hunter Jackson, Ph.D.            48           Chief Executive Officer, President and      
                                                      Chairman of the Board                       

        N. Patricia Freston, Ph.D.       59           Vice President, Human Resources             

        James U. Jensen, J.D.            54           Vice President, Corporate Development and   
                                                      Legal Affairs, Secretary and Director       

        Thomas B. Marriott, Ph.D.        51           Vice President, Development Research        

        Robert K. Merrell                43           Vice President, Finance, Chief Financial    
                                                      Officer and Treasurer                       

        Edward F. Nemeth, Ph.D.          46           Vice President and Chief Scientific Officer  
- -------------------------


     Hunter Jackson, Ph.D., has been Chief Executive Officer and Chairman of the
Board since founding NPS in 1986. He was appointed to the additional position of
President in January 1994. Before founding NPS, he was an Associate Professor in
the Department of Anatomy at the University of Utah School of Medicine. Dr.
Jackson received a B.A. in English from the University of Illinois and a Ph.D.
in Psychobiology from Yale University. He received postdoctoral training in the
Department of Neurosurgery, University of Virginia Medical School.

     N. Patricia Freston, Ph.D., has been Vice President, Human Resources since
March 1997. From 1980 to February 1997, she served as Manager of Personnel
Services, Questar Corporation a public integrated energy company. From 1977 to
1980, Dr. Freston was Assistant Director of Training for Mountain Fuel Supply, a
subsidiary of Questar. From 1971 to 1977, she was Director of Academic
Programming for the Division of Continuing Education, University of Utah. Dr.
Freston received a B.A. in English from Weber State University, an M.A. in
English from Utah State University, an M.S. in Education from the University of
Texas and a Ph.D. in Industrial Psychology from the University of Utah.

     James U. Jensen, J.D., has been Vice President, Corporate Development and
Legal Affairs and Secretary since August 1991. He has been Secretary and a
director of NPS since 1987. From 1986 to July 1991, he was a partner in the law
firm of Woodbury, Jensen, Kesler & Swinton, P.C., or its predecessor firm,
concentrating on technology transfer and licensing and corporate finance. From
July 1985 until October 1986, he served as Chief Financial Officer of Cericor, a
software company, and from 1983 to July 1985, as its outside general counsel.
From 1980 to 1983, he served as General Counsel and Secretary of Dictaphone
Corporation, a subsidiary of Pitney Bowes Inc. He serves as a director of
Wasatch Funds, Inc., a registered investment company, and of Interwest Home
Medical, Inc., a public home use medical equipment distributor. Mr. Jensen
received a B.A. in English/Linguistics from the University of Utah and a J.D.
and an M.B.A. from Columbia University.

     Thomas B. Marriott, Ph.D., has been Vice President, Development Research
since August 1993. From February 1990 to July 1993, he served as Director,
Clinical Investigations for McNeil Pharmaceutical, a subsidiary of Johnson &
Johnson with responsibility for developing and implementing clinical trial
strategies for a number of products. From 1986 until 1990, Dr. Marriott was
Director, Drug Metabolism for McNeil Pharmaceutical with the responsibility for
planning, initiating, and completing bioanalytical drug disposition and clinical
biopharmaceutics and pharmacokinetics research required for INDs and NDAs. In
this position, he participated in the preparation of several INDs and NDAs with
responsibility for preparing or supervising the preparation of the IND
preclinical drug metabolism section and the NDA preclinical and clinical
metabolism and biopharmaceutics sections, and was responsible for integrating
the pharmacology, toxicology and clinical sections of INDs and NDAs. He received
a B.A. in Chemistry from Carleton College and a Ph.D. in Chemistry from the
Institute of Molecular Biology at the University of Oregon.

                                       21

 
     Robert K. Merrell has been Vice President, Finance, Chief Financial
Officer, and Treasurer since January 1995 and served as Director of Finance and
Administration and Treasurer from December 1993 to December 1994. He joined NPS
as Controller/Treasurer in September 1988. Prior to that time, he was a Senior
Manager at KPMG Peat Marwick LLP. Mr. Merrell has been a licensed C.P.A. since
1980. He received a B.A. in Accounting from the University of Utah and an M.M.
from Kellogg Graduate School of Management at Northwestern University.

     Edward F. Nemeth, Ph.D., has been a Vice President of NPS since January
1994 and was appointed Chief Scientific Officer in July 1997. He joined NPS as
Director of Pharmacology in March 1990. From 1986 until joining NPS, Dr. Nemeth
was an Assistant Professor in the Department of Physiology and Biophysics at
Case Western Reserve University School of Medicine. He holds a B.A. in Chemistry
and Psychology from Lawrence University and a Ph.D. in Pharmacology from Yale
University.

                                    PART II

ITEM 5.   Market for Registrant's Common Stock and Related Stockholder Matters.

     Our common stock is quoted on The Nasdaq National Market under "NPSP." The
following table sets forth the quarterly high and low closing sales prices for
NPS common stock for each quarter in the two most recent fiscal years as
reported by The Nasdaq National Market:



                                                   High      Low
                                                  -------   ------
                                                     

           1997
             First Quarter........................$12.250   $9.500
             Second Quarter.......................$11.000   $8.250
             Third Quarter........................$10.750   $8.125
             Fourth Quarter.......................$10.063   $7.500
           1998
             First Quarter........................$ 8.500   $7.375
             Second Quarter.......................$ 8.250   $6.750
             Third Quarter........................$ 9.313   $6.375
             Fourth Quarter.......................$ 7.938   $5.500


     On March 1, 1999, there were approximately 1,500 beneficial holders of NPS
common stock.

     We have never declared or paid cash dividends on capital stock. We intend
to retain any future earnings to finance growth and development and therefore do
not anticipate paying cash dividends in the foreseeable future.

Recent Sales of Unregistered Securities

     On November 2, 1998, we sold 204,000 shares of NPS common stock, par value
$.001, to SmithKline Beecham for an aggregate purchase price of $1,809,276 in
reliance on Section 4(2) of the Securities Act of 1933. The sale of these shares
was made in conjunction with a collaborative research and license agreement.

                                       22

 
ITEM 6.   Selected Financial Data.

     The selected financial data presented below are for each fiscal year in the
five-year period ended December 31, 1998, and for the period from October 22,
1986 (inception) through December 31, 1998. These data have been derived from
our financial statements, which have been audited by KPMG LLP, independent
certified public accountants, and are qualified by reference to the Financial
Statements and Notes thereto. NPS 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
                                        1998         1997        1996       1995        1994    December 31, 1998
                                     ----------  -----------  ----------  ---------  ----------     ----------
                                               (in thousands, except per share data)
                                                                                   
Statement of Operations Data:
  Revenues from research and
     license agreements.............  $  3,568     $  5,842     $20,342    $ 9,562     $ 3,861        $ 52,068
Operating expenses:
  Research and development..........    17,856       15,090      11,326      8,727       7,765          74,632
  General and administrative........     5,546        5,587       5,111      3,975       3,122          29,033
                                     ----------  -----------  ----------  ---------  ----------     ----------
  Total operating
       expenses.....................    23,402       20,677      16,437     12,702      10,887         103,665
                                     ----------  -----------  ----------  ---------  ----------     ----------

     Operating income (loss)........   (19,834)     (14,835)      3,905     (3,140)     (7,026)        (51,597)
Other income (expense), net.........     2,672        3,308       2,550        322         270           9,346
                                     ----------  -----------  ----------  ---------  ----------     ----------
Income (loss) before income
  tax expense.......................   (17,162)     (11,527)      6,455     (2,818)     (6,756)        (42,251)
Income tax expense..................       ---          167         350        500         ---           1,018
                                     ----------  -----------  ----------  ---------  ----------     ----------

Net income (loss)...................  $(17,162)    $(11,694)    $ 6,105    $(3,318)    $(6,756)       $(43,269)
                                     ==========  ===========  ==========  =========  ==========     ==========
Diluted net income (loss)
  per share (1).....................    $(1.39)      $(0.98)      $0.55     $(0.48)     $(1.13)
                                     ==========  ===========  ==========  =========  ==========
Diluted weighted average shares
  outstanding (1)...................    12,337       11,956      11,086      6,924       5,977




                                                        December 31,
                                 -----------------------------------------------------------
                                      1998        1997        1996        1995        1994
                                 ------------  ----------  ----------  ----------  ---------
                                                       (in thousands)
                                                                     
Balance Sheet Data:
  Cash, cash equivalents, and
     marketable securities..........$ 43,444    $ 57,942    $ 68,962    $  8,340    $  9,323
  Working capital...................  40,767      56,365      67,413       5,832       8,104
  Total assets......................  48,111      62,634      72,160      10,600      12,084
  Long-term portion of capital
     leases and long-term debt......      32          65         327         747         440
  Deficit accumulated during
     development stage.............. (43,269)    (26,107)    (14,413)    (20,517)    (17,199)
  Stockholders' equity..............  45,146      62,634      69,870       7,322      10,165


- --------------------
(1)   See Note 1 of Notes to Financial Statements for information concerning the
computation of net income (loss) per share.

                                       23

 
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 should be read in conjunction with the Financial Statements and Notes
thereto included elsewhere in this report.

Overview

     Substantially all of our resources are devoted to our research and
development programs. To date, we have not completed development of any
pharmaceutical product for sale. We have incurred cumulative losses through
December 31, 1998 of $43.3 million, net of cumulative revenues from research and
license agreements of $52.1 million. We expect to incur significant operating
losses over at least the next several years as we continue to expand our
research and development activities and our preclinical and clinical testing
activities. Substantially all revenues are derived from license fees, milestone
payments, and research and development support payments from licensees and these
revenues fluctuate from quarter to quarter. Accordingly, we expect that income
or loss will fluctuate from quarter to quarter, that the fluctuations may be
substantial, and that results from prior quarters may not be indicative of
future operating results. Profitability will depend in part on our ability and
the ability of our licensees, to complete product development, to obtain the
required regulatory approvals, and to manufacture and market products. We cannot
assure that these events will occur.

Results of Operations

     Most of our revenues of $3.6 million in 1998, $5.8 million in 1997, and
$20.3 million in 1996, were derived from research and license agreements. We
recognized revenue from these agreements as follows:

     .    Under our agreement with SmithKline Beecham we recognized $2.2 million
          in 1998, $1.9 million in 1997, and $5.7 million in 1996;

     .    Under our agreement with Kirin we recognized $1.0 million in 1998,
          $3.5 million in 1997, and $4.0 million in 1996; and

     .    Under our agreement with Amgen we recognized $400,000 in 1998 and
          1997, and $10.6 million in 1996.

     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 that may be earned under these agreements. See
"Liquidity and Capital Resources" below for further discussion of payments that
may be received in the future under these agreements.

     Research and development expenses increased to $17.9 million in 1998, from
$15.1 million in 1997, and $11.3 million in 1996. The increases in research and
development expenses were principally due to commencement of clinical trials for
NPS 1506 in mid-1997 and the commencement of clinical trials for NPS 1776 in
mid-1998. We expect that research and development expenses will continue to
increase in the future if we conduct increasingly expensive later-stage clinical
trials and if we start clinical trials for new product candidates.

     General and administrative expenses increased over the three years with
expenses of $5.5 million in 1998, $5.6 million in 1997, and $5.1 million in
1996. We expect that general and administrative expenses will increase modestly
in the future as necessary to support research and development activities.

     Interest income and gain on the sale of marketable investment securities
were $2.7 million in 1998, $3.4 million in 1997, and $2.7 million in 1996. The
increase in 1997 was primarily due to a higher average cash balance resulting
from the net proceeds of the follow-on offering of NPS common stock in May 1996.
We anticipate that interest income will decrease in the future as cash is
utilized for operations.

                                       24

 
     Income tax expense of $168,000 in 1997 and $350,000 in 1996 resulted from a
10% Japanese tax withheld on the license fee and milestone payments by Kirin,
and from United States alternative minimum tax of $118,000 incurred on net
income in 1996 and paid in 1997. Any future milestone and royalty payments from
Kirin will be subject to the same 10% tax.

     As of December 31, 1998, we had a federal income tax net operating loss
carryforward of approximately $39.5 million and a federal income tax research
credit carryforward of approximately $3.1 million. Our 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 8 of Notes to Financial Statements.

Liquidity and Capital Resources

     We have financed operations since inception primarily through collaborative
research and license agreements and the private and public placement of equity
securities. As of December 31, 1998, we had recognized $52.1 million of
cumulative revenues from research and license agreements and $88.3 million in
consideration for the sale of equity securities for cash and services. Our
principal sources of liquidity are cash, cash equivalents, and marketable
investment securities which totaled $43.4 million at December 31, 1998.

     We receive quarterly research and/or development support payments under our
agreements with Amgen, Kirin, and SmithKline Beecham. The payments are scheduled
to aggregate $5.5 million through the scheduled expiration dates of the
agreements, respectively, in December, June, and October 2000. In addition,
SmithKline Beecham will purchase 249,000 shares of NPS common stock on November
1, 1999, at a premium to the market price, if the research agreement is not
terminated early.

     We could receive future payments of up to $49.0 million in the aggregate
from Amgen, Kirin, and SmithKline Beecham upon the accomplishment of specified
research and/or development milestones under the respective agreements. However,
we do not control the subject matter, timing, or resources applied by our
licensees under their respective development programs. Thus, potential receipt
of milestone payments from these licensees is largely beyond our control.
Progress under these agreements is subject to risk and each of these agreements
may be terminated before its scheduled expiration date by the respective
licensee. We cannot assure that our licensees will make any future payments,
whether as research or development milestone payments or support payments.

     We have entered into sponsored research and license agreements that
obligate us to make research support payments to academic and/or commercial
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, 1998, we had a total
commitment of approximately $2.1 million for future research support payments.
We expect to enter into additional sponsored research and license agreements in
the future.

     As of December 31, 1998, our investment in leasehold improvements,
equipment, and furnishings was $4.4 million, net of accumulated depreciation and
amortization. Additional equipment and facilities may be needed if we increase
our internal research and development activities, a portion of which may be
financed with debt or leases.

     We expect that our existing capital resources, including interest earned
thereon, and expected research and development support payments and equity
purchases from licensees, will be sufficient to enable us to maintain our
current and planned operations for at least 24 months. However, actual needs are
dependent on numerous factors, including our progress toward developing and
commercializing products. Furthermore, in the event we in-license or otherwise
acquire a product candidate, substantial expenditures for developing and
commercializing the product candidate would be required. In addition, if any
licensee terminates its agreement, we might not have sufficient capital to
complete the development and commercialization of a product in the respective
territory. A reduction in the expected amount of research and development
support payments or equity purchases may shorten the period during which we
could maintain our operations or require us to reduce operations.

     It may also become necessary to raise additional funds to support our
development and commercialization programs. We are presently seeking additional
funding for certain current programs through corporate 

                                       25

 
collaborations and licensing agreements. We may also seek additional funding
through public or private financing which could be dilutive to current
shareholders. We cannot assure that additional funding will be available on
acceptable terms, if at all. If adequate funds are not available, we may modify
plans for some of our research and development programs.

Year 2000 Assessment

     We continue to assess impact of the year 2000 on our operations and
systems. We have developed assessment procedures and a plan to address
identified issues. A Y2K Task Force was assembled in the beginning of 1998 to
evaluate the potential impact of the so called "Year 2000 millennium bug" on our
operations. Since formation, the task force has monitored the evaluation of
financial, accounting, information managements, scientific equipment, and
building systems. To date financial, accounting, and information management
systems review has been completed. Those systems which were not compliant have
been replaced. We continue to assess the impact of the year 2000 on our other
systems and equipment. We expect to have identified and replaced or updated all
internal systems and equipment which are not year 2000 compliant before the year
2000 to the extent necessary to enable us to continue operations. We do not
expect the cost of repair or replacement to be material to our operations. We
are also seeking assurance from primary third-party service and goods suppliers,
including financial institutions, suppliers, CROs and other collaborative
parties that they do not expect the year 2000 matter to materially impact their
dealings with us. To date, we are not aware of any critical third-party
suppliers that will not be able to meet our needs in order to maintain
operations. We cannot assure that these third parties are using systems that are
year 2000 compliant or will address any year 2000 issues in a timely fashion.
Any year 2000 compliance problems of our suppliers, clinical research
organizations, or our licensees could have a material adverse effect on our
business, operating results, and financial condition.

Certain Business Risks

     We are currently in the early stage of product development. NPS 1506, NPS
1776, and compounds for the treatment of HPT are the only product candidates in
clinical development by us or our licensees. There is no guarantee that NPS
1506, NPS 1776, or any compound for HPT will prove to be safe or effective or
that back-up or later generation compounds will be identified or taken into
clinical trials or if so identified and so tested, that the compounds will be
found to be safe, effective, or marketable. All of our remaining technologies
are in preclinical stages and will require significant additional research and
development efforts before any commercial use. Because we have granted exclusive
development, commercialization, and marketing rights in the fields of HPT and
osteoporosis, the success of these programs is primarily dependent upon the
efforts of Amgen, Kirin, and SmithKline Beecham.

     Other business risks include our lack of product sales, a history of
operating losses, the uncertainty of regulatory approvals, rapid technological
change and competition, the uncertainty of protection of our patents and
proprietary technology, our dependence on third parties for manufacturing,
future capital needs and the uncertainty of additional funding, our lack of
marketing capabilities, the uncertainty of third-party reimbursement, the
uncertainty of in-licensing efforts, our dependence on key personnel and our
ability to manage growth. A more detailed discussion of factors that could cause
actual results to differ materially from those in forward-looking statements is
contained in Item 1, "Business -- Risk Factors."

ITEM 8.   Financial Statements and Supplementary Data.

     Financial Statements and notes thereto appear on pages F-1 to F-23 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.

                                       26

 
                                    PART III

ITEM 10.  Directors and Executive Officers of the Registrant.

     Certain of the information required by this item will be contained in our
definitive Proxy Statement with respect to our Annual Meeting of Stockholders,
to be held on May 26, 1999, under the captions "Election of Directors," and
"Compliance with Section 16(a) of the Exchange Act" 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 our
definitive Proxy Statement with respect to our Annual Meeting of Stockholders,
to be held on May 26, 1999, 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.

ITEM 12.  Security Ownership of Certain Beneficial Owners and Management.

     Information required by this item will be contained in our definitive Proxy
Statement with respect to our Annual Meeting of Stockholders, to be held May 26,
1999, under the caption "Security Ownership of Certain Beneficial Owners and
Management," and is incorporated by reference herein.

ITEM 13.  Certain Relationships and Related Transactions.

     Information required by this item will be contained in our definitive Proxy
Statement with respect to our Annual Meeting of Stockholders, to be held May 26,
1999, under the caption "Certain Transactions," and is incorporated by reference
herein.

                                    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 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-9
         Notes to Financial Statements...............................  F-10


     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.

                                       27

 


     3.   Exhibits.
       
 
Exhibit           Exhibit
Number            -------
- -------
3.1       Amended and Restated Certificate of Incorporation of the Registrant.(1)

3.2       Amended and Restated Bylaws of the Registrant.(1)

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.(6)

10.1      Stock Purchase Agreement between the Registrant and S.R. One, Limited, dated November 18,
          1993.(1)

10.2      Amended Agreement and Waiver, among the Registrant and the other parties thereto, dated November
          18, 1993.(1)

10.3      Form of Registrant's 1994 Non-Employee Directors' Stock Option Plan.(1)

10.4      Form of Registrant's 1994 Equity Incentive Plan and Form of Stock Option Agreements.(1)

10.5      Registrant's 1987 Stock Option Plan, as amended, and Form of Stock Option Agreement.(1)

10.6      Form of Registrant's 1994 Employee Stock Purchase Plan and Form of Offering Document.(1)

10.7      Master Lease Agreement between the Registrant and LINC Scientific Leasing, dated October 7, 1992,
          with related addenda.(1)

10.8      Form of Indemnity Agreement entered into between the Registrant and its officers and directors.(1)

10.9*     Collaborative Research and License Agreement between the Registrant and SmithKline Beecham
          Corporation, dated November 1, 1993.(1)

10.10*    Patent Agreement Between the Registrant and The Brigham and Women's Hospital, Inc., dated
          February 19, 1993, with related amendment.(1)

10.11*    Research Agreement between the Registrant and The Brigham and Women's Hospital, Inc., dated
          February 19, 1993, with related amendment.(1)

10.15*    Collaborative Research and License Agreement between the Registrant and Kirin Brewery Company,
          Ltd. dated June 29, 1995.(3)

10.16*    Development and License Agreement between the Registrant and Amgen Inc. effective as of
          December 27, 1995.(7)

10.17*    Stock Purchase Agreement between Registrant and Amgen Inc. dated March 18, 1996.(7)

10.18     Lease Agreement with GATX dated June 1, 1995, with related addenda.(3)

10.19     Office Lease between Salt Lake Research Park Associates and Registrant dated June 3, 1994, with
          related amendments.(3)

10.20     Consultant Services Agreement between the Registrant and Thomas N. Parks, Ph.D., dated January 30,
          1989.(1)

10.21     Consulting Agreement between the Registrant and Plexus Ventures, Inc. dated August 5, 1994, as
          amended.(2)

10.22*    Binding Letter of Intent between Amgen Inc. and the Registrant dated December 27, 1995.(4)

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.(7)

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.(7)
 

                                       28

 
        
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.(7)

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.(5)

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.(5)

10.28     Form of Registrant's 1994 Equity Incentive Plan as amended and adopted by the Board of Directors
          dated December 1996.(5)

10.29     Consulting Services Agreement between the Registrant and Donald E. Kuhla, Ph.D. dated November 1,
          1996.(7)

10.30*    Amendment Agreement between SmithKline Beecham Corporation and NPS Pharmaceuticals, Inc.
          dated October 28, 1996.(6)

10.31     1997 Research Agreement Amendment between The Brigham and Women's Hospital, Inc. and NPS
          Pharmaceuticals, Inc., effective March 1, 1997.(7)

10.32     Research and Development Agreement between Systems Integration Drug Discovery Company, Inc.
          (doing business as SIDDCO, Inc.) and NPS Pharmaceuticals, Inc., dated July 16, 1997.(8)

10.33     Amendment Agreement between SmithKline Beecham Corporation and NPS Pharmaceuticals, Inc.,
          dated October 24, 1997.(9)

10.34     Amendment Agreement between SmithKline Beecham Corporation and NPS Pharmaceuticals, Inc.,
          dated October 27, 1997.(9)

10.35*    Amendment to the Collaborative Research and License Agreement between SmithKline Beecham
          Corporation and NPS Pharmaceuticals, Inc., dated November 26, 1997.(9)

10.36     Stock Purchase Agreement between SmithKline Beecham Corporation and NPS Pharmaceuticals, Inc.,
          dated November 26, 1997.(9)

10.37     First Amendment to the Research & Development Agreement between SIDDCO, INC. and NPS
          Pharmaceuticals, Inc.

23.1      Consent of KPMG LLP, independent auditors.

24.1      Power of Attorney (incorporated in the signature page of this Form 10-K).

27.1      Financial Data Schedule (attached to EDGAR filing only).

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


* Confidential Treatment has been granted.
(1) Incorporated herein by reference to the Company's Registration Statement on
    Form S-1 filed January 21, 1994 (Commission File No. 33-74318).
(2) Incorporated herein by reference to the Company's Form 10-K for the fiscal
    year ended December 31, 1994.
(3) Incorporated herein by reference to the Company's Form 10-K for the fiscal
    year ended December 31, 1995.
(4) Incorporated herein by reference to the Company's Form 8-K dated February
    29, 1996.
(5) Incorporated herein by reference to the Company's Form S-8 dated December 9,
    1996.
(6) Incorporated herein by reference to the Company's Form 8-K dated December
    19, 1996.
(7) Incorporated herein by reference to the Company's Form 10-K for the fiscal
    year ended December 31, 1996.
(8) Incorporated herein by reference to the Company's Form 10-Q for the
    quarterly period ended June 30, 1997.
(9) Incorporated herein by reference to the Company's Form 8-K dated January 27,
    1998.

        (b)  Reports on Form 8-K: None

        (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).

                                       29

 
                                  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 26/th/ day of March, 1999.

                                         NPS Pharmaceuticals, Inc.
 
                                         By: /s/ Hunter Jackson
                                             -------------------------------
                                                 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 to this Annual Report on
Form 10-K 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 Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons in the
capacities and on the dates indicated.


 
Name                        Title                                      Date
- ----                        -----                                      --------------
 
                                                                 
/s/ Hunter Jackson          President and Chief Executive Officer      March 26, 1999
- -------------------------   (Principal Executive Officer) and
Hunter Jackson, Ph.D.       Chairman of the Board
 
/s/ Robert K. Merrell       Vice President, Finance, Chief             March 26, 1999
- -------------------------   Financial
Robert K. Merrell           Officer and Treasurer (Principal
                            Financial and Accounting Officer)
 
/s/ James U. Jensen         Vice President, Corporate Development      March 26, 1999
- -------------------------   and Legal Affairs, Director
James U. Jensen

/s/ Santo J. Costa          Director                                   March 26, 1999
- -------------------------
Santo J. Costa
 

                                       30

 
                                                                   

/s/ James G. Groninger      Director                                   March 26, 1999
- -------------------------
James G. Groninger
 
/s/ Joseph Klein, III       Director                                   March 26, 1999
- -------------------------
Joseph Klein, III
 
/s/ Donald E. Kuhla         Director                                   March 26, 1999
- -------------------------
Donald E. Kuhla, Ph.D.
 
/s/ Thomas N. Parks         Director                                   March 26, 1999
- -------------------------
Thomas N. Parks, Ph.D.
 
/s/ Peter G. Tombros        Director                                   March 26, 1999
- -------------------------
Peter G. Tombros
 


                                       31

 
                         INDEX TO FINANCIAL STATEMENTS

                                                                
Report of KPMG 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-9

Notes to Financial Statements......................................F-10



                                      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, 1998 and 1997, and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998, and for the period from
October 22, 1986 (inception) to December 31, 1998. 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, 1998 and 1997, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1998, and for the period from October 22, 1986
(inception) to December 31, 1998, in conformity with generally accepted
accounting principles.

                              KPMG LLP

Salt Lake City, Utah
January 28, 1999

                                      F-2

 
                           NPS PHARMACEUTICALS, INC.
                        (A Development Stage Enterprise)

                                 BALANCE SHEETS



                                                                                                    December 31,
                                                                                        ---------------------------------
                                  Assets                                                       1998               1997
                                  ------                                                --------------     --------------
                                                                                                    
Current assets:
  Cash and cash equivalents...........................................................  $   23,615,225     $   36,103,533
  Marketable investment securities (note 3)...........................................      19,829,253         21,838,568
  Accounts receivable.................................................................         100,000            391,667
  Prepaid expenses....................................................................         156,250            281,250
                                                                                        --------------     --------------

     Total current assets.............................................................     43,700,728         58,615,018
                                                                                        --------------     --------------

Plant and equipment (note 4):
  Equipment...........................................................................       6,325,455          4,965,521
  Leasehold improvements..............................................................       2,885,400          2,738,432
                                                                                        --------------     --------------
                                                                                             9,210,855          7,703,953
  Less accumulated depreciation and amortization......................................       4,804,228          3,687,915
                                                                                        --------------     --------------
     Net plant and equipment..........................................................       4,406,627          4,016,038
Other assets, at cost.................................................................           3,267              3,267
                                                                                        --------------     --------------
                                                                                        $   48,110,622     $   62,634,323
                                                                                        ==============     ==============
                     Liabilities and Stockholders' Equity
                     ------------------------------------
Current liabilities:
  Current installments of obligations under capital leases (note 4)...................  $       26,291     $       35,764
  Current installments on long-term debt (note 5).....................................           8,567            291,098
  Accounts payable....................................................................       1,872,610            999,476
  Accrued expenses....................................................................         350,853            340,172
  Deferred income (note 2)............................................................         675,000            583,333
                                                                                        --------------     --------------

     Total current liabilities........................................................       2,933,321          2,249,843

Obligations under capital leases, excluding current installments (note 4).............          31,517             56,908
Long-term debt, excluding current installments (note 5)...............................             ---              8,436
                                                                                        --------------     --------------

     Total liabilities................................................................       2,964,838          2,315,187
                                                                                        --------------     --------------
Commitments and contingencies (notes 2 and 4)
Stockholders' equity (notes 6 and 7):
  Preferred stock, $.001 par value.  Authorized 5,000,000 shares; none issued and.....             ---                ---
     outstanding
  Common stock, $.001 par value.  Authorized 20,000,000 shares; issued and
     outstanding 12,586,336 shares at December 31, 1998, and 12,208,576 at
     December 31, 1997................................................................          12,586             12,209
  Accumulated other comprehensive income - net unrealized gain on marketable
     investment securities............................................................         110,352                ---
  Additional paid-in capital..........................................................      88,291,872         86,413,846
  Deficit accumulated during development stage........................................     (43,269,026)       (26,106,919)
                                                                                        --------------     --------------

     Net stockholders' equity.........................................................      45,145,784         60,319,136
                                                                                        --------------     --------------
                                                                                        $   48,110,622     $   62,634,323
                                                                                        ==============     ==============

                See accompanying notes to financial statements.

                                      F-3

 
                           NPS PHARMACEUTICALS, INC.
                        (A Development Stage Enterprise)

                            STATEMENTS OF OPERATIONS



                                                                                                          October 22,
                                                                                                              1986   
                                                                                                          (inception)
                                                                                                            through  
                                                               Year ended December 31,                    December 31,
                                              ------------------------------------------------------     --------------
                                                    1998                1997               1996               1998
                                              ---------------     ---------------     --------------     --------------
                                                                                            

Revenues from research and license
 agreements................................. $      3,568,333    $      5,841,667    $    20,342,330    $    52,068,179

Operating expenses:
  Research and development..................       17,856,501          15,089,746         11,326,044         74,632,481
  General and administrative................        5,546,092           5,586,837          5,111,651         29,033,025
                                              ---------------     ---------------     --------------     --------------

     Total operating expenses...............       23,402,593          20,676,583         16,437,695        103,665,506
                                              ---------------     ---------------     --------------     --------------

     Operating income (loss)................      (19,834,260)        (14,834,916)         3,904,635        (51,597,327)

Other income (expense):
  Interest income...........................        2,365,214           3,257,571          2,690,568          9,893,617
  Gain on sale of marketable investment
    securities..............................          323,420             118,686                ---            118,686
  Interest expense..........................          (16,481)            (67,917)          (141,705)          (701,816)
  Other.....................................              ---                 ---              1,189             35,579
                                              ---------------     ---------------     --------------     --------------

     Total other income.....................        2,672,153           3,308,340          2,550,052          9,346,066
                                              ---------------     ---------------     --------------     --------------

     Income (loss) before income tax
      expense...............................      (17,162,107)        (11,526,576)         6,454,687        (42,251,261)

Income tax expense (note 8).................              ---             167,765            350,000          1,017,765
                                              ---------------     ---------------     --------------     --------------

  Net income (loss)......................... $    (17,162,107)   $    (11,694,341)   $     6,104,687    $   (43,269,026)
                                              ===============     ===============     ==============     ==============

Net income (loss) per common and common
 equivalent share (note 1):

     Basic..................................           $(1.39)              $(.98)              $.59
     Diluted................................           $(1.39)              $(.98)              $.55
                                              ===============     ===============     ==============

Weighted average common and
 common-equivalent
  shares outstanding during the year
   (note 1):
     Basic..................................       12,337,200          11,956,396         10,335,298
     Diluted................................       12,337,200          11,956,396         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, 1998


                                                                                                              Accum-     
                                                                                                Deficit      ulated
                                                                                              accumulated     other
                                               Compre-               Additional   Deferred      during       compre-       Net
                                 Preferred     hensive     Common     paid-in      compen-    development    hensive   stockholders'
                                   stock       income      stock      capital      sation        stage       income       equity
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------
                                                                                               
Balances, December 31, 1985     $            $            $          $            $           $             $          $
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           ---             ---        ---       15,000

Net loss........................      ---         ---         ---        ---           ---         (12,477)       ---      (12,477)
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------
Balances, December 31, 1986           ---         ---       1,125     13,875           ---         (12,477)       ---        2,523
Repurchase of 375,000 shares
   of common stock..............      ---         ---        (375)    (4,625)          ---             ---        ---       (5,000)
Issuance of 82,500 shares of
   common stock for services....      ---         ---          83      1,017           ---             ---        ---        1,100

Net income......................      ---         ---         ---        ---           ---         121,274        ---      121,274
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------

Balances, December 31, 1987.....      ---         ---         883     10,267           ---         108,797        ---      119,897
Issuance of 55,556 shares of
   preferred stock for cash.....    5,556         ---         ---    294,446           ---             ---        ---      300,002
Issuance of 11,448 shares of
   common stock for cash
   under option plan............      ---         ---          11      1,516           ---             ---        ---        1,527
Issuance of 97,500 shares of
   common stock for services
   under option plan............      ---         ---          98     32,402           ---             ---        ---       32,500

Net loss........................      ---         ---         ---        ---           ---        (105,643)       ---     (105,643)
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------
Balances, December 31, 1988.....    5,556         ---         942    338,631           ---           3,154        ---      348,283
Issuance of 37,037 shares of
   preferred stock for cash.....    3,704         ---         ---    336,296           ---             ---        ---      340,000
Issuance of 7,500 shares of
   common stock for services....
   under option plan............      ---         ---           7      2,493           ---             ---        ---        2,500

Net loss........................      ---         ---         ---        ---           ---          (5,025)       ---       (5,025)
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------
Balances, December 31, 1989.....    9,260         ---         949    677,420           ---          (1,871)       ---      685,758
Issuance of 37,037 shares of
   preferred stock for cash.....    3,703         ---         ---    336,297           ---             ---        ---      340,000
Issuance of 2,475 shares of
   common stock for cash under
   the option plan..............      ---         ---           2        898           ---             ---        ---          900

Net loss........................      ---         ---         ---        ---           ---        (212,976)       ---     (212,976)
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------
 
                See accompanying notes to financial statements.

                                      F-5

 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)
 
                STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
 
            October 22, 1986 (inception) through December 31, 1998



                                                                                                              Accum-
                                                                                                Deficit      ulated
                                                                                              accumulated     other
                                               Compre-               Additional   Deferred      during       compre-       Net
                                 Preferred     hensive     Common     paid-in      compen-    development    hensive   stockholders'
                                   stock       income      stock      capital      sation        stage       income       equity
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------
                                                                                               
                                $            $            $          $            $           $             $          $

Balances, December 31, 1990...     12,963            ---      951    1,014,615          ---      (214,847)       ---        813,682
Issuance of 4,500 shares of
   common stock for cash
   under the option plan......        ---            ---        5        2,245          ---           ---        ---          2,250

Net loss......................        ---            ---      ---          ---          ---      (462,054)       ---       (462,054)

                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------
Balances, December 31, 1991...     12,963            ---      956    1,016,860          ---      (676,901)       ---        353,878
Issuance of 3,675 shares of
   common stock for cash
   under the option plan......        ---            ---        4        2,221          ---           ---        ---          2,225
Issuance of 230,334 shares of
   common stock upon
   conversion of 129,630
   shares of preferred stock..    (12,963)           ---      230       12,733          ---           ---        ---            ---
Repurchase and cancellation
   of 83,334 shares of common
   stock for cash.............        ---            ---      (83)    (299,917)         ---           ---        ---       (300,000)

Issuance of 781,250 shares of
   preferred stock for cash,
   net of offering costs......        781            ---      ---    4,937,462          ---           ---        ---      4,938,243
Issuance of 678,573 shares of
   preferred stock for cash,
   net of offering costs......        679            ---      ---    4,693,794          ---           ---        ---      4,694,473
Issuance of 101,452 shares of
   common stock for services
   related to preferred
   stock offering.............        ---            ---      101         (101)         ---           ---        ---            ---

Net loss......................        ---            ---      ---          ---          ---    (2,607,359)       ---     (2,607,359)

                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------
Balances, December 31, 1992...      1,460            ---    1,208   10,363,052          ---    (3,284,260)       ---      7,081,460
Issuance of 37,524 shares of
   common stock for cash
   under the option plan......        ---            ---       38       25,545          ---           ---        ---         25,583
Issuance of 583,334 shares of
   preferred stock for cash,
   net of offering costs......        583            ---      ---    6,968,115          ---           ---       ---      6,968,698
Issuance of 6,050 shares of
   preferred stock for
   services...................          6            ---      ---       72,594          ---           ---       ---         72,600
Deferred compensation related
   to grant of stock options,
   net of current year
   expense....................        ---            ---      ---      766,500     (745,458)          ---       ---         21,042

Net loss......................        ---            ---      ---          ---          ---    (7,158,581)      ---     (7,158,581)
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------

                See accompanying notes to financial statements.

                                      F-6

 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)
 
                STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
 
            October 22, 1986 (inception) through December 31, 1998



                                                                                                              Accum-
                                                                                                Deficit      ulated
                                                                                              accumulated     other
                                               Compre-               Additional   Deferred      during       compre-       Net
                                 Preferred     hensive     Common     paid-in      compen-    development    hensive   stockholders'
                                   stock       income      stock      capital      sation        stage       income       equity
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------
                                                                                               
                                $            $            $          $            $           $             $          $

Balances, December 31, 1993...      2,049           ---     1,246    18,195,806    (745,458)  (10,442,841)        ---    7,010,802
Issuance of 3,475,666 shares
   of common stock upon
   conversion of 2,049,207
   shares of preferred stock..     (2,049)          ---     3,475        (1,426)        ---           ---         ---          ---
Issuance of 2,000,000 shares
   of common stock for cash,
   net of offering costs......        ---           ---     2,000     9,530,252         ---           ---         ---    9,532,252
Issuance of 20,000 shares of
   common stock for services..        ---           ---        20        95,958         ---           ---         ---       95,978
Issuance of 46,118 shares of
   common stock for cash and
   options for 432 shares
   under option plans.........        ---           ---        46        26,477         ---           ---         ---       26,523
Amortization of deferred
   compensation...............        ---           ---       ---           ---     255,500           ---         ---      255,500

Net loss......................        ---           ---       ---           ---         ---    (6,756,333)        ---   (6,756,333)
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------

Balances, December 31, 1994...        ---           ---     6,787    27,847,067    (489,958)  (17,199,174)        ---   10,164,722
Issuance of 242,385 shares of
   common stock for cash and
   options for 14,816 shares
   under option plans.........        ---           ---       243       100,378         ---           ---         ---      100,621
Issuance of 39,771 shares of
   common stock for cash
   under employee purchase
   plan.......................        ---           ---        40       109,827         ---           ---         ---      109,867
Issuance of 3,287 shares of
   common stock for services..        ---           ---         3         9,858         ---           ---         ---        9,861
Amortization of deferred
   compensation...............        ---           ---       ---           ---     255,500           ---         ---      255,500

Net loss......................        ---           ---       ---           ---         ---    (3,318,091)        ---   (3,318,091)
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------

Balances, December 31, 1995...        ---           ---     7,073    28,067,130    (234,458)  (20,517,265)        ---    7,322,480
Issuance of 1,000,000 shares
   of common stock for cash
   (note 2)...................        ---           ---     1,000     7,499,000         ---           ---         ---    7,500,000
Issuance of 3,450,000 shares
   of common stock for cash,
   net of offering costs......        ---           ---     3,450    47,909,132         ---           ---         ---   47,912,582
Issuance of 223,940 shares of
   common stock for cash and
   options for 5,746 shares
   under option plans.........        ---           ---       223       220,726         ---           ---         ---      220,949
Issuance of 24,814 shares of
   common stock for services
   under option plans.........        ---           ---        25       333,890         ---           ---         ---      333,915
Issuance of 18,147 shares of
   common stock for cash under
   employee purchase plan.....        ---           ---        18       110,423         ---           ---         ---      110,441

                See accompanying notes to financial statements.

                                      F-7

 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)
 
                STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
 
            October 22, 1986 (inception) through December 31, 1998



                                                                                                              Accum-
                                                                                                Deficit      ulated
                                                                                              accumulated     other
                                               Compre-               Additional   Deferred      during       compre-       Net
                                 Preferred     hensive     Common     paid-in      compen-    development    hensive   stockholders'
                                   stock       income      stock      capital      sation        stage       income       equity
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------
                                                                                               
                                $            $            $          $            $           $             $          $

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        ---            ---        ---       130,000
Amortization of deferred
   compensation...............         ---          ---        ---           ---    234,458            ---        ---       234,458

Net income....................         ---          ---        ---           ---        ---      6,104,687        ---     6,104,687
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------
Balances, December 31, 1996...         ---          ---     11,807    84,270,283        ---    (14,412,578)       ---    69,869,512
Issuance of 160,000 shares of
   common stock for cash
   (note 2)...................         ---          ---        160     1,553,840        ---            ---        ---     1,554,000
Issuance of 211,554 shares of
   common stock for cash and
   11,864 shares under option
   plans......................         ---          ---        211       301,868        ---            ---        ---       302,079
Issuance of 11,200 shares of
   common stock for services
   under option plans.........         ---          ---         11       128,089        ---            ---        ---       128,100
Issuance of 20,343 shares of
   common stock for cash under
   employee purchase plan.....         ---          ---         20       159,766        ---            ---        ---       159,786

Net loss......................         ---          ---        ---           ---        ---    (11,694,341)       ---   (11,694,341)

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

Balances, December 31, 1997...         ---          ---     12,209    86,413,846        ---    (26,106,919)       ---    60,319,136
Issuance of 204,000 shares of
   common stock for cash
   (note 2)...................         ---          ---        204     1,299,072        ---            ---        ---     1,299,276
Issuance of 124,252 shares of
   common stock for cash
   under option plans.........         ---          ---        124       242,504        ---            ---        ---       242,628
Issuance of 16,097 shares of
   common stock for services
   under option plans.........         ---          ---         17       121,133        ---            ---        ---       121,150
Issuance of 31,669 shares of
   common stock for cash under
   employee purchase plan.....         ---          ---         32       215,317        ---            ---        ---       215,349

Net loss......................         ---  (17,162,107)       ---           ---        ---    (17,162,107)       ---   (17,162,107)

Unrealized gains on marketable
   investment securities......         ---      110,352        ---           ---        ---            ---    110,352       110,352

Comprehensive Income..........         ---  (17,051,755)       ---           ---        ---            ---        ---           ---
                                 ---------   ----------   --------   ----------   ---------   -----------   ---------  ------------

Balances, December 31, 1998...         ---                $ 12,586   $88,291,872  $     ---   $(43,269,026)  $110,352  $ 45,145,784
                                 =========   ==========   ========   ===========  =========    ===========   ========  ============

                                                                                
                See accompanying notes to financial statements.

                                      F-8

                           NPS PHARMACEUTICALS, INC.
                        (A Development Stage Enterprise)

                            STATEMENTS OF CASH FLOWS


                                                                                                          10/22/86                  
                                                            Years ended December 31,                    (inception)
                                          -------------------------------------------------------         through 
                                                   1998               1997              1996             12/31/98 
                                          -------------------------------------------------------     ---------------
                                                                                         
Cash flows from operating activities:
   Net income (loss).......................   $  (17,162,107)    $  (11,694,341)    $   6,104,687        (43,269,026)
   Adjustments to reconcile net income.....
      (loss) to net cash (provided by) 
      used in operating activities:
         Depreciation and amortization.....        1,116,313          1,210,250           903,213          5,512,804
         Gain on sale of equipment.........              ---                ---            (1,189)           (29,909)
         Issuance of common and preferred     
         stock in lieu of cash for services          121,150            128,100           333,915            927,704
         Amortization of deferred             
         compensation......................              ---                ---           234,458            766,500
         Decrease (increase) in operating
         assets:
           Accounts receivable.............          291,667             23,541          (392,208)          (100,000)
           Prepaid expenses................          125,000           (281,250)              ---           (156,250)
           Other assets....................              ---                ---            38,887             (6,867)
         Increase (decrease) in operating
         liabilities:
           Accounts payable and accrued  
           expenses........................          883,815            448,851          (285,381)         2,223,463
           Deferred income.................           91,667             83,333           (87,500)           675,000
           Income tax payable..............              ---           (150,000)          150,000                ---
                                              --------------     --------------     -------------     --------------
               Net cash provided by (used 
               in) operating activities....      (14,532,495)       (10,231,516)        6,998,882        (33,456,581)
                                              --------------     --------------     -------------     --------------
Cash flows from investing activities:
   Net sale (purchase) of marketable   
   investment securities...................        2,119,667        (21,838,568)              ---        (19,718,901)
   Acquisition of equipment and leasehold
   improvements............................       (1,506,902)        (2,369,428)       (1,350,974)        (9,286,430)
   Proceeds from sale of equipment.........              ---                ---            27,137          1,075,621
                                              --------------     --------------     -------------     --------------
            Net cash provided by (used in) 
            investing activities...........          612,765        (24,207,996)       (1,323,837)       (27,929,710)
                                              --------------     --------------     -------------     --------------
Cash flows from financing activities:
   Proceeds from note payable to bank......              ---                ---               ---            123,855
   Proceeds from issuance of preferred stock             ---                ---               ---         17,581,416
   Proceeds from issuance of common stock..        1,757,253          2,015,865        55,743,972         69,328,838
   Proceeds from long-term debt............              ---                ---               ---          1,166,434
   Principal payments on note payable to bank            ---                ---               ---           (123,855)
   Principal payments under capital lease
      obligations..........................          (34,864)           (65,117)         (440,605)        (1,420,001)
   Principal payments on long-term debt....         (290,967)          (369,467)         (356,273)        (1,355,171)
   Repurchase of preferred stock...........              ---                ---               ---           (300,000)
                                              --------------     --------------     -------------     --------------
            Net cash provided by financing 
            activities.....................        1,431,422          1,581,281        54,947,094         85,001,516
                                              --------------     --------------     -------------     --------------
Net increase (decrease) in cash and cash  
   equivalents.............................      (12,488,308)       (32,858,231)       60,622,139         23,615,225
Cash and cash equivalents at beginning of 
   period..................................       36,103,533         68,961,764         8,339,625                ---
                                              --------------     --------------     -------------     --------------
Cash and cash equivalents at end of period.   $   23,615,225     $   36,103,533     $  68,961,764     $   23,615,225
                                              ==============     ==============     =============     ==============
Supplemental Disclosures of 
- ---------------------------
   Cash Flow Information
   ---------------------
Cash paid for interest.....................   $       16,481     $       67,917     $     141,705     $      701,816
Cash paid for taxes........................              ---            317,765           200,000            887,765
Supplemental Schedule of Noncash
- --------------------------------
   Investing and Financing Activities
   ----------------------------------
Acquisition of equipment through
   incurrence of capital lease
   obligations.............................   $          ---     $       77,155     $      32,248     $    1,477,809
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
Unrealized gain on marketable investment
   securities..............................          110,352                ---               ---            110,352


                See accompanying notes to financial statements


                                      F-9

 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)

                         NOTES TO FINANCIAL STATEMENTS
                       December 31, 1996, 1997, and 1998

(1)  Organization and Summary of Significant Accounting Policies

     NPS Pharmaceuticals, Inc. (the "Company"), a development stage enterprise,
is engaged in the discovery and commercial development of novel pharmaceutical
products, primarily small molecule drugs that target 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 $21,533,494 and $31,100,862 at December 31, 1998 and 1997,
     respectively.  At December 31, 1998 and 1997, 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)  Net Income (Loss) Per Common and Common-Equivalent Share

          In February 1997, the Financial Accounting Standards Board issued
     Statement of Financial Accounting Standards No. 128, Earnings per Share
     (SFAS 128).  SFAS 128 became effective for financial statements with
     interim and annual periods ending after December 15, 1997.  Accordingly,
     the Company has adopted SFAS 128.

          SFAS 128 establishes a different method of computing net income (loss)
     per common and common-equivalent share than was previously required under
     the provisions of Accounting Principles Board Opinion No. 15.  SFAS 128
     requires the presentation of basic and diluted income (loss) per share.
     Basic is the amount of net income (loss) for the period available to each
     share of common stock outstanding during the reporting period.  Diluted
     earnings per share is the amount of net income (loss) for the period
     available to each share of common stock outstanding during the reporting
     period and to each share that would have been outstanding assuming the
     issuance of common shares for all dilutive potential common 

                                      F-10

 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)

                   NOTES TO FINANCIAL STATEMENTS (continued)
                       December 31, 1996, 1997, and 1998

     shares outstanding during the period. Prior periods have been restated for
     presentation in accordance with SFAS 128.

       In calculating income (loss) per common and common-equivalent share the
     net income (loss) was the same for both the basic and diluted calculation.
     Additionally, the weighted average common and common-equivalent shares
     outstanding for purposes of calculating income (loss) per share were the
     same for all years presented except 1996.  Below is a reconciliation
     between the basic and diluted weighted average common and common-equivalent
     shares for 1996:

                                                                            
                Basic (weighted average common shares outstanding during the year).     10,335,298
                Weighted average common stock options outstanding during the year..        750,702
                                                                                     -------------
                Diluted.............................................................    11,086,000
                                                                                     ============= 

                

     (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

       The Company employs 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) Marketable Investment Securities

       The Company classifies its marketable debt and equity securities as
     available-for-sale.  Available-for-sale securities are recorded at fair
     value.  Unrealized holding gains and losses, net of the related tax effect,
     are excluded from earnings and are reported as a separate component of
     stockholders' equity until realized.  A decline in the market value below
     cost that is deemed other than temporary is charged to results of
     operations resulting in the establishment of a new cost basis for the
     security.  Dividend income is 

                                      F-11

 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)

                   NOTES TO FINANCIAL STATEMENTS (continued)
                       December 31, 1996, 1997, and 1998

     recognized when earned. Realized gains and losses from the sale of
     securities are included in results of operations and are determined on the
     specific-identification basis.

     (i)  Reclassifications

     Certain amounts in 1997 and 1996 have been reclassified to conform with the
     1998 presentation.

(2)  Collaborative 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.

          Effective December 1995, the Company entered into a development and
     license agreement with Amgen Inc. ("Amgen") to develop and commercialize
     compounds for the treatment of hyperparathyroidism and indications other
     than osteoporosis. Amgen paid the Company a $10.0 million nonrefundable
     license fee and agreed to pay up to $400,000 per year in development
     support for five years, potential additional development milestone payments
     totaling $26.0 million, and royalties on any future product sales. Amgen is
     required to pay all costs of developing and commercializing products. Amgen
     received exclusive worldwide rights excluding Japan, China, Korea, and
     Taiwan. Amgen is an equity investor in the Company.

     (b)  Kirin Brewery Company, Limited

          Effective June 30, 1995, NPS entered into a five year agreement with
     the pharmaceutical division of Kirin Brewery Company, Limited (a Japanese
     company), to develop and commercialize compounds for the treatment
     hyperparathyroidism in Japan, China, Korea, and Taiwan. Kirin paid the
     Company a $5.0 million license fee and agreed to pay up to $7.0 million in
     research support, potential additional milestone payments totaling $13.0
     million, and royalties on product sales. Kirin research support payments
     were $500,000 per quarter through June 1997 and are $250,000 per quarter
     over the remaining three years of the agreement. Additionally, at December
     31, 1998 the Company has deferred income of approximately $250,000 related
     to its research agreement with Kirin. Kirin received exclusive rights to
     develop and sell products within its territory. The parties participate in
     a collaborative research program utilizing NPS's parathyroid calcium
     receptor technology.

          The Company recognized $1.0 million, $1.5 million, and $2.0 million in
     research support as revenue in 1998, 1997, and 1996, respectively.
     Additionally, the Company recognized as revenue a $2.0 million milestone
     payment related to this agreement during 1996 and a $2 million milestone
     payment during 1997.  No milestone payments were received in 1998.

     (c)  SmithKline Beecham Corporation

          Effective November 1, 1993, the Company entered into the SmithKline
     Beecham Agreement ("SB Agreement") to collaborate on the discovery,
     development and marketing of drugs to treat osteoporosis and other bone
     metabolism disorders, excluding hyperparathyroidism. The SB Agreement
     established a three year research collaboration between the parties, which
     has been extended through October 2000.  As part of 

                                      F-12

 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)

                   NOTES TO FINANCIAL STATEMENTS (continued)
                       December 31, 1996, 1997, and 1998

     extending this agreement SmithKline Beecham purchased 364,000 shares of the
     Company's common stock and agreed to purchase up to 249,000 additional
     shares and to pay research support payments of approximately $437,500 per
     quarter through October 2000 unless the agreement is terminated earlier.
     Under the SB Agreement, the Company granted SmithKline Beecham the
     exclusive license to develop and market worldwide compounds described under
     the SB 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.

          Under the SB Agreement, the Company has recognized research and
     licensing revenue of $2.2 million, $1.9 million, and $2.7 million in 1998,
     1997, and 1996, respectively. Additionally, at December 31, 1998 the
     Company has deferred income of approximately $425,000 related to its
     research agreement with SmithKline Beecham. During 1996, the Company
     achieved its first milestone under the agreement and received a
     corresponding $3.0 million milestone payment that was recognized as
     revenue. The Company is also entitled to receive additional payments upon
     the achievement of specific development and regulatory milestones. The
     Company will receive royalties on sales of such compounds by SmithKline
     Beecham and a share of the profits from co-promoted products.

          SmithKline Beecham and S.R. One, Limited, an affiliate of SmithKline
     Beecham, are equity investors in the Company.

     (d)  In-license Agreements

          The Company has entered into certain sponsored research and license
     agreements that require the Company to make research support payments to
     academic or research institutions when the research is performed.
     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 1998, 1997, and 1996, the Company paid to these
     institutions $1.5 million, $1.2 million, and $779,417, respectively, in
     sponsored research payments and license fees.  As of December 31, 1998, the
     Company had a total commitment of approximately $2.1 million for future
     research support payments.

     (e) Small Business Innovation Research Grants

         The Company recognized revenue of $15,768 during 1996 under the terms
     of a Small Business Innovation Research grant from the federal government.
     No such revenues were earned or recognized in 1998 or 1997.

         Because the Company has granted exclusive development,
     commercialization, and marketing rights to each party (Licensees) under the
     above described collaborative and license agreements, the success of the
     programs, as explained above, is dependent upon the efforts of the
     Licensees. Each of the above agreements may be terminated early. If any of
     the Licensees terminates the above agreements, such termination may have a
     material adverse effect on the Company's operation.

                                     F-13


 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)

                   NOTES TO FINANCIAL STATEMENTS (continued)
                       December 31, 1996, 1997, and 1998


(3)  Marketable Investment Securities

  The amortized cost gross, unrealized holding gains and losses, and fair value
of securities by major type and class at December 31, 1998 are summarized as
follows:



                                                    Gross         Gross
                                                 unrealized    unrealized
                                    Amortized     holding       holding
                                      cost         gains         losses      Fair value
                                 -------------   -----------   -----------   ----------
                                                                 
          Treasury.............  $   7,591,077        54,088           ---    7,645,166
          Corporate............      9,174,994        35,054           ---    9,210,048
          Commercial Paper.....      2,952,829        21,210           ---    2,974,039
                                 -------------   -----------   -----------   ----------
                                 $  19,718,900       110,352           ---   19,829,253
                                 =============   ===========   ===========   ========== 


       Maturities of Investment Securities are as follows at December 31, 1998:



                                                         Fair value
                                                      -------------
                                                  
          Due within one year......................   $   5,351,040
          Due after one year through five years....      12,360,949
          Due between five and ten years...........       2,117,264
                                                      -------------
                                                      $  19,829,253
                                                      ============= 


       For the year ended December 31, 1998 purchases and sales of marketable
     investment securities were $202.7 million and $172.0 million, respectively.

       The fair value for securities by major type and class at December 31,
     1997 are summarized as follows:



                                                        Fair value
                                                     -------------
                                                 
          U.S. Government Securities                 $  15,100,192
          Foreign bank certificates of deposit           2,026,698
          Asset backed securities                        1,004,606
          Federal agency obligations                     1,667,346
          Corporate notes                                1,025,802
          Certificates of deposit                        1,013,924
                                                     -------------
                                                     $  21,838,568
                                                     ============= 


       Gross unrealized holding gains and losses at December 31, 1997 were not
material.

(4)  Leases

     The Company is obligated under capital leases for equipment that expire at
various dates during the next four years. The Company also has a noncancelable
operating lease for office and laboratory space that expires in September 2004.
Rental expense for this operating lease was $671,809, $530,953, and $525,919 for
1998, 1997,

                                      F-14






 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)

                   NOTES TO FINANCIAL STATEMENTS (continued)
                       December 31, 1996, 1997, and 1998


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, 1998 are:



                                                                 Capital       Operating  
            Year ending December 31:                             leases         lease
                                                              ----------    ------------
                                                                     
               1999........................................   $   26,291         569,277
               2000........................................       18,002         603,023
               2001........................................        9,540         619,607
               2002........................................        3,975         636,646
               2003........................................          ---         654,154
               Thereafter..................................          ---         500,665
                                                               ----------   ------------
                   Present value of minimum capital lease
                         payments and total minimum operating
                         lease payments....................       57,808    $  3,583,372
                                                                            ============
           Less, current installments of obligations
                under capital leases                              26,291             ---
                Obligations under capital leases,             ----------
                     excluding current installments........   $   31,517             ---
                                                              ==========


  At December 31, 1998, there is no interest being charged on capital leases.
At December 31, 1998 and 1997, the gross amount of equipment and related
accumulated amortization recorded under capital leases was as follows:



                                                    1998              1997  
                                              -------------     -------------
                                                         
          Equipment.........................  $   1,322,102     $   1,322,102
          Less accumulated amortization.....     (1,241,549)       (1,153,016
                                              -------------     -------------
          Net equipment.....................  $      80,553     $     169,086
                                              =============     =============


(5)  Long-term Debt

  Long-term debt at December 31, 1998 and 1997, consists of the following notes
payable to a financial institution:



                                                                                  1998         1997  
                                                                               --------    ----------
                                                                                    
          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....................................................  $  8,567    $  299,534
          Less current installments..........................................     8,567       291,098
                                                                               --------    ----------
                   Long-term debt, excluding current installments............  $    ---    $    8,436
                                                                               ========    ========== 


  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.

                                      F-15


 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)

                   NOTES TO FINANCIAL STATEMENTS (continued)
                       December 31, 1996, 1997, and 1998


(6)  Capital Stock

     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 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.  In any
event, 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 expiration or the
occurrence of an event triggering exercise.  At December 31, 1998, the Rights
were not exercisable.


(7)  Stock-Based Compensation Plans

     As of December 31, 1998, the Company has four stock option plans: the 1987
Stock Option Plan (the "1987 Plan"), the 1994 Equity Incentive Plan (the "1994
Plan"), the 1994 NonEmployee Directors' Stock Option Plan (the "Directors'
Plan"), and the 1998 Stock Option Plan (the "1998 Plan").  An aggregate of
4,220,000 shares are authorized for issuance under the three plans.

     As of December 31, 1998, there are no shares reserved for future grant
under the 1987 Plan, there are 190,671 shares reserved for future grant under
the 1994 Plan, there are 35,530 shares reserved for future grant under the
Directors' Plan, and there are 542,500 shares reserved for future grant under
the 1998 Plan. Under the Company's 1994 Plan and the 1998 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.

                                      F-16


 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)

                   NOTES TO FINANCIAL STATEMENTS (continued)
                       December 31, 1996, 1997, and 1998

  A summary of activity related to aggregate options under all three plans is
indicated in the following table:



                                                            Years ended December 31,
                                   ------------------------------------------------------------------------
                                              1998                    1997                    1996
                                   ------------------------- ----------------------- -----------------------
                                                  Weighted-               Weighted-               Weighted-  
                                       Number      average     Number      average     Number      average
                                         of       exercise       of       exercise       of       exercise
                                       shares       price      shares       price      shares       price
                                   -------------  ----------  ----------  ----------  ----------  ----------
                                                                                 
Options outstanding at the
  beginning of the year............   2,057,776      $ 7.04   1,822,969       $5.68   1,530,924      $ 3.16
Options granted....................     531,097        6.71     500,950        9.91     578,564       10.95
                                      ---------              ----------               ---------
                                      2,588,873               2,323,919               2,109,488
                                      ---------              ----------               ---------
Options exercised..................     140,349        2.81     234,618        2.33     254,500        2.51
Options canceled...................     142,870       10.17      31,525        9.09      32,019        5.50
                                      ---------              ----------               ---------
                                        283,219                 266,143                 286,519
                                      ---------              ----------               ---------
Options outstanding at the end
  of the year......................   2,305,654      $ 7.01   2,057,776       $7.04   1,822,969      $ 5.68
                                      =========               =========               =========
Options exercisable at the end
  of the year......................   1,362,536      $ 6.20   1,111,378       $4.59     952,782      $ 2.61
Weighted-average fair value of
  options granted during the
   year (see below for method of
   estimating fair value)..........                  $ 3.95                   $5.65                  $ 7.10


  The following table summarizes information about stock options outstanding at
December 31, 1998:



                                                    Options Outstanding                         Options Exercisable
                                     -------------------------------------------------
                                                         Weighted-    
                                                          Average     
                                                         Remaining        Weighted-       Exercisable          Weighted-  
             Range of                  Outstanding      Contractual        Average             as               Averag    
          Excercise Prices           as of 12/31/98        Life        Exercise Price     of 12/31/98       Exercise Price 
    ----------------------------   -----------------   ------------   ----------------   ---------------   ---------------
                                                                                                 
$       0.00            1.66             166,768           3.1               $ 0.71           166,768           $ 0.71   
        1.67            3.33             432,679           5.3                 2.43           432,679             2.43   
        3.34            4.99              25,750           5.4                 4.00            25,750             3.96   
        5.00            6.65             471,250           9.9                 6.62               ---              ---   
        6.66            8.31             318,277           7.2                 8.13           274,527             8.25   
        8.32            9.98             404,000           8.8                 9.73           120,920             9.71   
        9.99           11.64             381,430           7.7                10.20           254,167            10.20   
       11.65            13.3              79,500           7.5                12.66            62,280            12.75   
        13.4           14.96              24,500           7.5                13.51            24,170            13.50   
       14.97           16.63               1,500           7.3                16.63             1,275            16.63   
                                     -----------                                          -----------                    
                                       2,305,654           7.5               $ 7.01         1,362,536           $ 6.20   
                                     ===========                                           ===========                    


                                      F-17


 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)

                   NOTES TO FINANCIAL STATEMENTS (continued)
                       December 31, 1996, 1997, and 1998


  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 SFAS No. 123, the Company's net income (loss)
and net income (loss) per share would have been reduced or, increased,
respectively, to the following pro forma amounts:



                                                  1998             1997           1996    
                                          -----------------  ---------------  ------------
                                                                      
            Net income (loss):                                                            
              As reported.................    $(17,162,107)    $(11,694,341)    $6,104,687
              Pro Forma...................    $(19,866,974)    $(13,793,637)    $5,189,411
            Net income (loss) per share
              As reported:
                 Basic....................    $      (1.39)    $      (0.98)    $     0.59
                 Diluted..................    $      (1.39)    $      (0.98)    $     0.55
              Pro Forma:                                                                  
                 Basic....................    $      (1.61)    $      (1.15)    $     0.50
                 Diluted..................    $      (1.61)    $      (1.15)    $     0.47 


  Pursuant to SFAS No. 123, the Company has estimated the fair value of each
option grant on the date of the grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants in 1998,
1997,  and 1996, respectively:  risk free interest rates of 5.0 percent, 6.0
percent, and 6.2 percent; expected dividend yields of 0 percent; expected lives
of 5 years;  and expected volatility of 65 percent for 1998, 60 percent for
1997, and 80 percent for 1996.

  In 1996, the Company granted 20,000 options to purchase common stock to
nonemployees under the 1994 Plan. 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.

  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 31,669 and 20,343 shares under the Purchase Plan in the
years ended December 31, 1998 and 1997, respectively, and 50,070 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,
this plan is not deemed to be compensatory and, therefore is excluded from the
pro forma net income (loss) shown above.

  The Company has granted options to acquire 160,000 shares of the Company's
common stock to Company officers contingent upon the accomplishment of certain
events.


(8)  Income Taxes

  The Company has no income tax expense for the year ended December 31, 1998 and
income tax expense of $167,765 and $350,000 for the years ended December 31,
1997 and 1996, respectively, consisting of current foreign taxes and alternative
minimum taxes.

                                      F-18


 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)

                   NOTES TO FINANCIAL STATEMENTS (continued)
                       December 31, 1996, 1997, and 1998


  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:



                                                               1998              1997              1996
                                                         -------------     -------------     -------------
                                                                                   
Computed expected tax expense (benefit)...............  $   (5,835,116)   $   (3,919,036)   $    2,194,594
Change in the beginning-of-the-year balance of the
  valuation allowance for deferred tax assets
   allocated to income tax expense....................       7,131,000         4,870,061        (1,867,473)
Research credits......................................        (683,300)         (558,200)         (237,600)
Foreign taxes net of federal income tax effect........             ---           132,000           132,000
State taxes net of federal income tax effect..........        (566,300)         (380,300)          213,000
Alternative minimum tax...............................             ---               ---           112,000
Other.................................................         (46,284)           23,240          (196,521)
                                                         -------------     -------------     -------------
                                                        $          ---    $      167,765    $      350,000
                                                         =============     =============     =============



  The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1998 and 1997 are presented
below:



                                                                1998             1997
                                                          -------------  ------------------
                                                                    
Deferred tax assets:
  Deferred revenue.....................................  $      252,000   $      218,000
  Equipment and leasehold improvements,
     principally due to differences in depreciation....         215,000          248,000
  Net operating loss carryforward......................      14,734,000        8,639,000
  Research activities credit carryforward..............       3,107,000        2,072,000
  Minimum tax credit carryforward......................         112,000          112,000
                                                            -----------      -----------
    Total gross deferred tax assets....................      18,420,000       11,289,000
Less valuation allowance...............................      18,420,000       11,289,000
                                                            -----------      -----------
     Net deferred tax assets...........................  $          ---   $          ---
                                                          =============    =============


  Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 1998 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, 1998 and 1997
was $11.2 million and $5.7 million, respectively. The net change in the
Company's total valuation allowance for the years ended December 31, 1998 and
1997, was an increase of $7.2 and $5.5 million, respectively.

                                      F-19


 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)

                   NOTES TO FINANCIAL STATEMENTS (continued)
                       December 31, 1996, 1997, and 1998


  At December 31, 1998, the Company had net operating loss and research credit
carryforwards to offset future income for federal income tax purposes
approximately as follows:



                                    Net                   Net                            
                                 operating          operating loss                       
                                    loss             carryforward                        
                               carryforward               for                           
                                for regular           alternative       Research        
                                income tax           minimum tax        credit carry-   
                                 purposes              purposes         forward         
                              ----------------  --------------------  ------------------
                                                             
             Expiring
                 2005.........   $    247,000         $     157,000          $       ---
                 2006.........        244,000               334,000                  ---
                 2007.........            ---                   ---               49,000
                 2008.........      2,452,000             2,896,000              334,000
                 2009.........      6,342,000             7,574,000              317,000
                 2010.........      2,928,000             3,051,000              166,000
                 2011.........         58,000                   ---              360,000
                 2012.........     10,890,000            11,700,000              846,000
                 2018.........     16,340,000            17,241,000            1,035,000
                                 ------------         -------------          -----------
                                 $ 39,501,000         $  42,953,000          $ 3,107,000
                                 ============         =============          =========== 


  Of the total net operating losses, $2,335,000 is attributable to deductions
related to stock options.  When the net operating losses are utilized this will
result in a credit to paid-in capital of approximately $871,000 instead of a
credit to income tax expense.

  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.


(9)  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 ($10,000 in 1998) 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 as of December
31, 1998.

                                      F-20


 
                           NPS PHARMACEUTICALS, INC.
                       (A Development Stage Enterprise)

                   NOTES TO FINANCIAL STATEMENTS (continued)
                       December 31, 1996, 1997, and 1998


(10) Prospective Accounting Pronouncements

Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use

  In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use.  SOP 98-1 identifies the characteristics
of internal-use software and provides examples to assist in determining when
computer software is for internal use.  SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. Management does
not expect that adoption of SOP 98-1 will have a material impact on the
Company's financial position, results of operations, or liquidity.


(11) Operating Segments

          The Company is engaged in the discovery and development of
prescription drugs and in its current state of development considers its
operations to be a single reportable segment.  Financial results of this
reportable segment are presented in the accompanying financial statements.

                                      F-21


 
                                 EXHIBIT INDEX


 
Exhibit
- -------
Number              Exhibit
- -------             -------
       
3.1       Amended and Restated Certificate of Incorporation of the Registrant.(1)

3.2       Amended and Restated Bylaws of the Registrant.(1)

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.(6)

10.1      Stock Purchase Agreement between the Registrant and S.R. One, Limited, dated November 18, 1993.(1)

10.2      Amended Agreement and Waiver, among the Registrant and the other parties thereto, dated November 18,
          1993.(1)

10.3      Form of Registrant's 1994 Non-Employee Directors' Stock Option Plan.(1)

10.4      Form of Registrant's 1994 Equity Incentive Plan and Form of Stock Option Agreements.(1)

10.5      Registrant's 1987 Stock Option Plan, as amended, and Form of Stock Option Agreement.(1)

10.6      Form of Registrant's 1994 Employee Stock Purchase Plan and Form of Offering Document.(1)

10.7      Master Lease Agreement between the Registrant and LINC Scientific Leasing, dated October 7, 1992, with
          related addenda.(1)

10.8      Form of Indemnity Agreement entered into between the Registrant and its officers and directors.(1)

10.9*     Collaborative Research and License Agreement between the Registrant and SmithKline Beecham
          Corporation, dated November 1, 1993.(1)

10.10*    Patent Agreement Between the Registrant and The Brigham and Women's Hospital, Inc., dated February
          19, 1993, with related amendment.(1)

10.11*    Research Agreement between the Registrant and The Brigham and Women's Hospital, Inc., dated February
          19, 1993, with related amendment.(1)

10.15*    Collaborative Research and License Agreement between the Registrant and Kirin Brewery Company, Ltd.
          dated June 29, 1995.(3)

10.16*    Development and License Agreement between the Registrant and Amgen Inc. effective as of
          December 27, 1995.(7)

10.17*    Stock Purchase Agreement between Registrant and Amgen Inc. dated March 18, 1996.(7)

10.18     Lease Agreement with GATX dated June 1, 1995, with related addenda.(3)

10.19     Office Lease between Salt Lake Research Park Associates and Registrant dated June 3, 1994, with related
          amendments.(3)

10.20     Consultant Services Agreement between the Registrant and Thomas N. Parks, Ph.D., dated January 30,
          1989.(1)

10.21     Consulting Agreement between the Registrant and Plexus Ventures, Inc. dated August 5, 1994, as
          amended.(2)

10.22*    Binding Letter of Intent between Amgen Inc. and the Registrant dated December 27, 1995.(4)

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.(7)

                                       1

 


       
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.(7)

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.(7)

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.(5)

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.(5)

10.28     Form of Registrant's 1994 Equity Incentive Plan as amended and adopted by the Board of Directors dated
          December 1996.(5)

10.29     Consulting Services Agreement between the Registrant and Donald E. Kuhla, Ph.D. dated November 1,
          1996.(7)

10.30*    Amendment Agreement between SmithKline Beecham Corporation and NPS Pharmaceuticals, Inc. dated
          October 28, 1996.(6)

10.31     1997 Research Agreement Amendment between The Brigham and Women's Hospital, Inc. and NPS
          Pharmaceuticals, Inc., effective March 1, 1997.(7)

10.32*    Research and Development Agreement between Systems Integration Drug Discovery Company, Inc. (doing
          business as SIDDCO, Inc.) and NPS Pharmaceuticals, Inc., dated July 16, 1997.(8)

10.33     Amendment Agreement between SmithKline Beecham Corporation and NPS Pharmaceuticals, Inc., dated
          October 24, 1997.(9)

10.34     Amendment Agreement between SmithKline Beecham Corporation and NPS Pharmaceuticals, Inc., dated
          October 27, 1997.(9)

10.35*    Amendment to the Collaborative Research and License Agreement between SmithKline Beecham
          Corporation and NPS Pharmaceuticals, Inc., dated November 26, 1997.(9)

10.36     Stock Purchase Agreement between SmithKline Beecham Corporation and NPS Pharmaceuticals, Inc.,
          dated November 26, 1997.(9)

10.37     First Amendment to the Research & Development Agreement between SIDDCO, INC. and NPS
          Pharmaceuticals, Inc.

23.1      Consent of KPMG LLP, independent auditors.

24.1      Power of Attorney (incorporated in the signature page of this Form 10-K).

27.1      Financial Data Schedule (attached to EDGAR filing only).



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

* Confidential Treatment has been granted.

(1)  Incorporated herein by reference to the Company's Registration Statement on
     Form S-1 filed January 21, 1994 (Commission File No. 33-74318).
(2)  Incorporated herein by reference to the Company's Form 10-K for the fiscal
     year ended December 31, 1994.
(3)  Incorporated herein by reference to the Company's Form 10-K for the fiscal
     year ended December 31, 1995.
(4)  Incorporated herein by reference to the Company's Form 8-K dated 
     February 29, 1996.
(5)  Incorporated herein by reference to the Company's Form S-8 dated 
     December 9, 1996.
(6)  Incorporated herein by reference to the Company's Form 8-K dated 
     December 19, 1996.
(7)  Incorporated herein by reference to the Company's Form 10-K for the fiscal
     year ended December 31, 1996.
(8)  Incorporated herein by reference to the Company's Form 10-Q for the 
     quarterly period ended June 30, 1997.
(9)  Incorporated herein by reference to the Company's Form 8-K dated 
     January 27, 1998.

                                       2

EX-23.1

 
                                                                    EXHIBIT 23.1




              Consent of Independent Certified Public Accountants


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 January 28, 1999, relating to the
balance sheets of NPS Pharmaceuticals, Inc. as of December 31, 1998 and 1997,
and the related statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998, and for
the period of October 22, 1986 (inception) to December 31, 1998, which report
appears in the December 31, 1998, Annual Report on Form 10-K of NPS
Pharmaceuticals, Inc.



                                          KPMG LLP


Salt Lake City, Utah
March 26, 1999

EX-27.1

 


 
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