<PAGE>
PROSPECTUS
3,000,000 SHARES
[NPS LOGO]
COMMON STOCK
All of the 3,000,000 shares of Common Stock offered hereby are being sold by
NPS Pharmaceuticals, Inc. ("NPS" or the "Company"). The Company's Common Stock
is quoted on the Nasdaq National Market under the symbol "NPSP." On May 2, 1996,
the last reported sale price for the Common Stock was $16.00 per share. See
"Price Range of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.............................. $15.00 $0.975 $14.025
Total(3)............................... $45,000,000 $2,925,000 $42,075,000
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $300,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock on the same terms and conditions
set forth above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $51,750,000, $3,363,750 and
$48,386,250, respectively. See "Underwriting."
------------------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made at the
offices of the agent of Vector Securities International, Inc., in New York, New
York, on or about May 8, 1996.
---------------------
Vector Securities International, Inc.
Salomon Brothers Inc
UBS Securities LLC
MAY 3, 1996
<PAGE>
NPS-TM-, Norcalcin-TM- and Araxin-TM- are trademarks of the Company. The NPS
logo and NPS Pharmaceuticals-Registered Trademark- are registered trademarks of
the Company. This Prospectus also contains trademarks of other companies.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS, INCLUDING INFORMATION UNDER "RISK FACTORS." EXCEPT AS OTHERWISE
NOTED, ALL INFORMATION IN THIS PROSPECTUS, INCLUDING FINANCIAL INFORMATION,
SHARE AND PER SHARE DATA, ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. SEE "UNDERWRITING."
THE COMPANY
NPS Pharmaceuticals is engaged in the discovery and development of orally
active, small molecule drugs that target cell surface receptors and ion
channels. The Company's most advanced product candidate, Norcalcin-TM- for the
treatment of hyperparathyroidism ("HPT"), arose from the Company's pioneering
work on a new class of cell surface receptors which detect levels of
extracellular calcium involved in numerous bodily functions. To date, the
Company has conducted two Phase I and two Phase I/II clinical trials of
Norcalcin to test its safety and initial efficacy. The Company is also applying
its calcium receptor technology to the development of therapies for
osteoporosis. The Company's other main programs involve the development of
orally active, small molecule drugs which have neuroprotectant properties and
target certain calcium channels in order to provide treatments for stroke, head
trauma, chronic pain and epilepsy. Additionally, the Company is pursuing several
discovery programs which are extensions of its discoveries in calcium receptors
and ion channels.
NPS has established research collaborations and license arrangements with
the pharmaceutical division of Kirin Brewery Company, Limited ("Kirin") and
SmithKline Beecham Corporation ("SmithKline Beecham") in the fields of HPT and
osteoporosis, respectively, and has established a license arrangement with Amgen
Inc. ("Amgen") in the field of HPT. Kirin, SmithKline Beecham and Amgen are
referred to herein as the "Licensees." The Licensees are responsible for all
costs of product development in their respective territories and fields. As part
of these arrangements, the Licensees have paid to NPS an aggregate of $21.0
million in non-refundable license fees and Amgen and an affiliate of SmithKline
Beecham have purchased $14.5 million of the Company's Common Stock. The shares
of Common Stock purchased by Amgen are being registered with the Securities and
Exchange Commission by the Company for resale. Amgen has agreed not to sell any
of these shares for a period of 90 days after the date of this Prospectus. In
addition, the Licensees have agreed to make up to $56.0 million in milestone
payments, of which $3.0 million has been paid to the Company to date under the
SmithKline Beecham agreement. SmithKline Beecham and Kirin are also obligated to
pay an aggregate of approximately $11.3 million in research support payments.
Each of the Licensees is obligated to pay royalties to NPS on any product sales.
See "Risk Factors -- Dependence on Collaborative Research and License
Relationships" and "Business -- Collaborative Research and License Agreements."
HPT is a growing medical concern and is typically characterized as being
either primary or secondary. Primary HPT is an age-related disorder that results
from excessive secretion of parathyroid hormone ("PTH"), leading to elevated
levels of calcium in the blood. Symptoms may include bone loss, muscle weakness,
depression and cognitive dysfunction. Approximately 100,000 new patients are
diagnosed with primary HPT in the United States each year. There are currently
no pharmaceutical therapies for the treatment of primary HPT, with surgery being
the only effective treatment. Secondary HPT results from other disease states
and is most often associated with renal dysfunction. Symptoms of secondary HPT
include excessive bone loss, bone pain, and chronic, severe itching. It is
estimated that approximately 80% of the patients in the United States who rely
on kidney dialysis, or approximately 140,000 patients, suffer from the effects
of secondary HPT. The Company believes that current drug therapy treatments for
secondary HPT, such as phosphate binders and calcitriol, have certain
disadvantages.
The Company's preliminary analysis of the data from its four clinical trials
of Norcalcin indicates that Norcalcin was safe and well tolerated in these
studies and that the administration of Norcalcin resulted in an expected
dose-dependent decrease in the level of PTH in the blood. The higher doses used
in the Phase I studies and in the Phase I/II dialysis study resulted in a
decrease in the level of calcium in the blood. The Company expects to complete
the formal analysis from all four trials and to report its findings in
appropriate forums during the latter half of 1996. Amgen is currently
formalizing its clinical
3
<PAGE>
strategy for the continued development of Norcalcin, and the Company believes
Kirin will begin Phase I clinical trials of Norcalcin in Japan in 1996. There
can be no assurance that the clinical trials will proceed as indicated or that
Norcalcin will prove safe and effective, meet applicable regulatory standards or
be successfully marketed. See "Risk Factors -- Early Stage of Product
Development; Dependence on Norcalcin" and " -- Dependence on Collaborative
Research and License Relationships."
In conjunction with SmithKline Beecham, NPS is also applying its calcium
receptor technology to the development of orally active therapeutics for the
treatment of osteoporosis. Osteoporosis is an age-related disorder affecting
more than 200 million people worldwide and is characterized by reduced bone
density and an increased susceptibility to fractures. Among the elderly in
particular, osteoporosis is a major cause of morbidity and mortality. The
Company is pursuing two approaches for the treatment of osteoporosis,
stimulation of bone formation and suppression of bone resorption. Most
osteoporosis patients are first diagnosed only after they have already lost
significant bone mass. As a result, the Company believes that a therapy that not
only halts further bone loss, but also builds new bone, would constitute a
significant advancement in the treatment of osteoporosis. Under its
collaboration with SmithKline Beecham, research efforts are being conducted by
NPS concurrently on both approaches to osteoporosis. In January 1996, the
Company received a milestone payment of $3.0 million from SmithKline Beecham for
progress made in its osteoporosis program.
The Company is developing a new class of orally active compounds which
modulate certain calcium channels for neuroprotection in stroke and head trauma
and also for chronic pain and epilepsy. 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, and also
to certain types of chronic pain and epilepsy. The Company's proprietary
compounds antagonize the NMDA (N-methyl-D-aspartate) subtype of glutamate
receptor-operated calcium channels ("NMDA receptor-channels"), thereby reducing
the influx of calcium. The Company believes that these compounds work through a
novel mechanism and exhibit potentially advantageous pharmacological properties.
These compounds demonstrated neuroprotectant activity in preclinical animal
models of stroke and head trauma and palliative activity in animal models of
chronic pain and epilepsy. The Company has designated one of these compounds,
NPS 1506, for preclinical development on a time line which currently anticipates
an Investigational New Drug ("IND") filing with the United States Food and Drug
Administration (the "FDA") in the first half of 1997. However, there can be no
assurance that the IND will be filed in this time frame.
The Company is actively engaged in several discovery programs which seek to
identify molecular targets for the development of new drugs. Among these, the
Company believes it has made significant discoveries with regard to metabotropic
glutamate receptors ("mGluRs"), having identified small molecules active at
these receptors. The Company believes that drugs acting at specific mGluRs may
provide relevant therapies for a number of neurological disorders.
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The Company is currently in the early stage of product
development and Norcalcin is the only product candidate currently under
development by the Company or its Licensees that is in human clinical trials. In
addition, because the Company has granted exclusive development,
commercialization and marketing rights to its Licensees in the fields of HPT and
osteoporosis, the success of its existing HPT and osteoporosis programs is
dependent upon the efforts of its Licensees. Other risk factors include the
Company's lack of product sales, a history of operating losses, the uncertainty
of regulatory approvals, rapid technological change and competition, the
uncertainty of protection of the Company's patents and proprietary technology,
the Company's dependence on third parties for manufacturing, the Company's
future capital needs and the uncertainty of additional funding, the Company's
lack of marketing capabilities, the uncertainty of third-party reimbursement,
the Company's dependence on key personnel and the Company's ability to manage
growth. See "Risk Factors."
NPS was incorporated in Utah in 1986 and reincorporated in Delaware in 1992.
The Company's executive offices are located at 420 Chipeta Way, Salt Lake City,
Utah 84108-1256, and its telephone number is (801) 583-4939.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............................ 3,000,000 shares
Common Stock to be outstanding after the 11,187,232 shares (1)
Offering.......................................
Use of proceeds................................. To fund research and development, capital
expenditures and for working capital and
other general corporate purposes.
Nasdaq National Market symbol................... NPSP
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 22,
1986
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
----------------------------------------------------- DECEMBER 31,
1991 1992 1993 1994 1995 1995
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from research and license
agreements................................. $ 1,885 $ 1,259 $ 868 $ 3,861 $ 9,562 $ 22,316
Operating expenses:
Research and development.................. 1,609 2,722 6,021 7,765 8,727 30,360
General and administrative................ 754 1,283 2,004 3,122 3,975 12,789
--------- --------- --------- --------- --------- -------------
Total operating expenses................ 2,363 4,005 8,025 10,887 12,702 43,149
--------- --------- --------- --------- --------- -------------
Operating loss.............................. (478) (2,746) (7,157) (7,026) (3,140) (20,833)
Net loss.................................... $ (462) $ (2,607) $ (7,159) $ (6,756) $ (3,318) $ (20,517)
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
Net loss per share (2)...................... $ (.33) $ (.95) $ (1.91) $ (1.13) $ (.48)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding (2)..... 1,386 2,746 3,751 5,977 6,924
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA (3) ADJUSTED (3)(4)
--------- ------------- -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable investment securities....... $ 8,340 $ 25,840 $ 67,615
Working capital................................................... 5,832 23,172 64,947
Total assets...................................................... 10,600 28,100 69,875
Long-term portion of capital leases and long-term debt............ 747 747 747
Deficit accumulated during development stage...................... (20,517) (10,677) (10,677)
Stockholders' equity.............................................. 7,322 24,662 66,437
</TABLE>
- - ------------------
(1) Based upon shares outstanding as of March 31, 1996. Excludes: (i) 1,459,331
shares which were subject to outstanding options as of March 31, 1996, at
exercise prices ranging from $0.34 to $14.50 per share, with a weighted
average exercise price of $3.29 per share, and (ii) 32,542 shares issuable
upon exercise of outstanding warrants with an exercise price of $3.69 per
share. See "Management -- Directors' Compensation," "-- 1987 Stock Option
Plan," "-- 1994 Equity Incentive Plan," "Description of Capital Stock --
Warrant" and Note 6 of Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for information concerning the
computation of net loss per share.
(3) Pro forma balance sheet data reflects the receipt from Amgen of a $10.0
million non-refundable license fee in March 1996, net of applicable taxes,
and the sale of 1,000,000 shares of Common Stock to Amgen for $7.5 million
also received in March 1996. See "Business -- Collaborative Research and
License Agreements."
(4) As further adjusted to give effect to the sale of 3,000,000 shares of Common
Stock offered by the Company hereby, after deducting underwriting discounts
and commissions and the estimated expenses of the Offering. See "Use of
Proceeds" and "Capitalization."
------------------
THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS OR EXPERIENCE COULD DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL INVESTORS IN EVALUATING AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
EARLY STAGE OF PRODUCT DEVELOPMENT; DEPENDENCE ON NORCALCIN. The Company
was founded in 1986, and has not completed development of any drugs and does not
expect that any drugs resulting from its or its Licensees' research and
development efforts will be commercially available for several years, if at all.
Norcalcin is the only product candidate currently under development by the
Company and its Licensees that is in human clinical trials. No other compound
under development by NPS or its Licensees has been scheduled for clinical
testing. Clinical trials in humans are necessary to determine whether or not a
compound will be a safe, commercially attractive or effective drug. Results
obtained in preclinical trials are not necessarily indicative of results that
will be obtained in later stages of preclinical development or in human clinical
testing. All product candidates developed by the Company or its Licensees,
including Norcalcin, will require extensive research, development and
preclinical and clinical testing prior to submission of any regulatory
application, as well as a lengthy regulatory approval process. Preclinical and
clinical testing of safety and efficacy takes several years, and the time
required to commercialize new drugs cannot be predicted with accuracy. Product
development of new pharmaceuticals is highly uncertain, and unanticipated
developments, clinical or regulatory delays, unexpected adverse side effects or
inadequate therapeutic efficacy could slow or prevent the product development
efforts of the Company and its Licensees, and have a materially adverse effect
on the Company's operations. There can be no assurance that the Company's
current product candidates, including Norcalcin, or any future product
candidates, will advance to clinical trials, prove safe and effective, meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable cost or be successfully marketed. Also, there can be no
assurance that a pharmacological method for the treatment of diseases targeted
by the Company, including HPT, will prove to be superior to non-pharmacological
treatments. See "Business -- Product Development Programs" and "Risk Factors --
Government Regulation; No Assurance of Regulatory Approval."
DEPENDENCE ON COLLABORATIVE RESEARCH AND LICENSE RELATIONSHIPS. The
Company's strategy for the development, clinical testing and manufacturing and
commercialization of certain of its product candidates and the research and
development of new product candidates includes entering into various research,
development and license agreements with corporate partners, licensees and
others. The Company has entered into a license agreement with Amgen pursuant to
which Amgen has assumed control of the development and commercialization of
Norcalcin in its territory, a collaborative research and license agreement with
Kirin for the development of Norcalcin in Kirin's territory and a collaborative
research and license agreement with SmithKline Beecham for research and
development in osteoporosis. The Licensees each have received from NPS certain
exclusive rights to commercialize products developed under their respective
agreements, have paid license fees to NPS and have committed to make milestone
payments to NPS upon achievement of specified goals. The Licensees have agreed
to fund the research or development efforts in HPT and osteoporosis, conduct
human clinical testing of lead compounds, prepare and file submissions for
regulatory approval and pay royalties on any resulting products. Because the
Company has granted exclusive development, commercialization and marketing
rights to the Licensees in the fields of HPT and osteoporosis, the success of
its existing HPT and osteoporosis programs is dependent upon the efforts of the
Licensees. There can be no assurance that the Licensees will perform their
obligations under their respective agreements, that they will successfully
develop or proceed to market any products under these agreements, or that the
Company will ever receive any royalties or milestone or research support
payments under these agreements, any of which could have a material adverse
effect on the business of the Company. Furthermore, there can be no assurance
that business conflicts will not arise between the Licensees over rights to
existing compounds or future compounds with respect to certain indications. The
Company's collaborative research and license agreements, including the
agreements with the Licensees, generally provide that they may be terminated
under a variety of circumstances upon prior written notice. If any of the
Licensees terminates or breaches its agreement, such termination or breach may
have a material adverse effect on the
6
<PAGE>
Company's operations. Furthermore, there can be no assurance that present or
future collaborators will not pursue existing or alternative technologies in
preference to treatments being developed in collaboration with the Company.
NPS also intends to seek additional collaborative or license arrangements to
develop and commercialize other product candidates. Many of the Company's
competitors are similarly seeking to develop or expand their collaborative and
license arrangements with pharmaceutical companies. The success of these efforts
by the Company's competitors could have an adverse impact on the Company's
ability to form future collaborative arrangements and maintain existing ones.
There can be no assurance that the Company will be able to negotiate acceptable
collaborative agreements in the future or that efforts under any such
collaborative agreements will be successful. To the extent that the Company
chooses not to or is unable to enter into future collaborative agreements, it
would experience increased capital requirements to undertake research,
development and marketing of its product candidates at its own expense. In
addition, the Company may encounter significant delays in introducing its
product candidates into certain markets or find that the development,
manufacture or sale of its product candidates in such markets is adversely
affected by the absence of such collaborative agreements. See "Business --
Product Development Programs," "-- Collaborative Research and License
Agreements" and "--Manufacturing."
LACK OF PRODUCT SALES; HISTORY OF OPERATING LOSSES. Substantially all of
the Company's revenues to date have come from collaborative research and license
agreements with the Licensees. Aside from the incidental revenues from the sale
of research chemicals, no revenues have been generated from product sales. Other
working capital has come from equity and debt financings. NPS has incurred
cumulative losses through December 31, 1995 of $20.5 million, net of cumulative
revenues from research and license agreements of $22.3 million. The Company
expects to incur significant operating losses over at least the next several
years as the Company continues and expands its research and development and
preclinical and clinical testing activities. The Company expects that losses
will fluctuate from quarter to quarter and that such fluctuations may be
substantial. The Company's ability to achieve profitability depends in part upon
its ability, alone or with others, to complete development of Norcalcin and
other product candidates, obtain required regulatory approvals and manufacture
and successfully market such products, of which there can be no assurance. As
such, there can be no assurance that the Company will be able to achieve
profitability on a sustained basis, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Product Development Programs."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL. The research
and development activities of the Company, as well as the investigation,
manufacture, distribution and marketing of therapeutic products, are subject to
extensive regulation by numerous governmental authorities in the United States
and other countries. Prior to marketing in the United States, a drug must
undergo rigorous preclinical and clinical testing and an extensive regulatory
approval process implemented by the FDA under federal law, including the Federal
Food, Drug and Cosmetic Act, as amended. Receipt of such regulatory approval
involves, among other things, satisfying the FDA that the product is both safe
and effective. Typically, this process takes several years or more depending
upon the type, complexity and novelty of the product and the nature of the
disease or other indication to be treated and requires the expenditure of
substantial resources. Preclinical studies must be conducted in conformance with
the FDA's Good Laboratory Practice regulations. Clinical testing must meet
requirements for Institutional Review Board oversight and informed consent by
clinical trial subjects and patients, as well as FDA prior review, oversight and
the FDA's Good Clinical Practice requirements. Clinical trials may require large
numbers of test subjects. Furthermore, the Company or the FDA may suspend
clinical trials at any time if either believes that the subjects participating
in such trials are being exposed to unacceptable health risks, including
undesirable or unintended side effects. While certain of the Company's employees
have some experience in conducting and managing the clinical testing necessary
to obtain regulatory approval, the Company has conducted only limited clinical
trials of one of its product candidates to date and anticipates that it will
need to either rely on its collaborative partners, licensees and outside
consultants or attract and retain additional employees with expertise in this
area.
7
<PAGE>
Before receiving FDA approval to market a product, NPS may have to
demonstrate that such product represents an improved form of treatment compared
to existing therapies. Data obtained from preclinical and clinical activities
are susceptible to varying interpretations which could delay, limit or prevent
regulatory approvals. In addition, delays or rejections may be encountered based
upon additional government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review. If regulatory approval of a product
is granted, such approval will be limited to those disease states and conditions
for which the product is useful, as demonstrated through clinical studies.
Furthermore, approval may entail ongoing requirements for post-marketing
studies. Even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections. The regulatory standards for current Good
Manufacturing Practices ("cGMP") are currently being applied stringently by the
FDA. Discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer, including
costly recalls or even withdrawal of the product from the market. There can be
no assurance that any compound developed by the Company alone or in conjunction
with others will prove to be safe and effective in clinical trials and will meet
all of the applicable regulatory requirements needed to receive marketing
approval.
RAPID TECHNOLOGICAL CHANGE; INTENSE COMPETITION. NPS is pursuing areas of
product development in which the Company believes there is a potential for
extensive technological innovation in relatively short periods of time. The
Company operates in a field in which new discoveries occur and are expected to
occur at a rapid pace. The Company's competitors may succeed in developing
technologies or products that are more effective than those of the Company or in
obtaining regulatory approvals of their drugs more rapidly than the Company and
its collaborative partners and licensees, and such success could render the
Company's products obsolete or non-competitive and have a material adverse
effect on the Company. Competition in the pharmaceutical and biotechnology
industry is intense and is expected to continue to increase. Many of the
Company's competitors, including biotechnology and pharmaceutical companies, are
actively engaged in the research and development of products in the Company's
targeted areas, including the fields of HPT, osteoporosis, neuroprotection,
chronic pain and epilepsy. Many of the Company's competitors have substantially
greater financial, technical, marketing and personnel resources than the Company
as well as considerable experience in preclinical testing, human clinical trials
and other regulatory approval procedures. Moreover, certain academic
institutions, governmental agencies and other research organizations are
conducting research in areas in which the Company is working. These institutions
are becoming increasingly aware of the commercial value of their findings and
are becoming more active in seeking patent protection and licensing arrangements
to collect royalties for use of technology that they have developed. These
institutions may also market competitive commercial products on their own or
through joint ventures and will compete with the Company in recruiting highly
qualified scientific personnel. See "Business -- Product Development Programs,"
"-- Patents and Proprietary Technology" and "-- Competition."
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY TECHNOLOGY. The
Company's success depends, in part, on its ability to obtain patents, maintain
trade secret protection and operate without infringing on the proprietary rights
of third parties. Because the patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and frequently involve complex
legal and factual questions, the breadth of claims allowed in biotechnology and
pharmaceutical patents or their enforceability cannot be predicted.
None of the Company's principal proprietary rights, including rights related
to process, compounds, use and technique related to its calcium receptor science
and NMDA receptor-channel technology, are protected by issued patents in the
Company's principal potential markets. No assurance can be given that patents
will issue from any of the Company's current or anticipated patent applications
or that such patent applications will allow the Company to preclude others from
practicing some or all of the art described in the publicly available versions
of these pending patent applications either before such patent applications
issue as patents or after such patent applications issue as patents. Generally,
8
<PAGE>
patent applications in the United States are maintained in secrecy until patents
issue and publication of discoveries in scientific or patent literature often
lag behind actual discoveries. No assurance can be given that, even if
published, the Company is aware of all such literature. Accordingly, the Company
cannot be certain that the named inventors in its patent applications were the
first to invent, or that the Company is the first to pursue patent coverage for
such inventions. If patents do issue, there can be no assurance that the claims
allowed will be sufficiently broad to protect the Company's technology or to
prevent competition. No assurance can be given that any patents issued to the
Company will not be challenged, invalidated or circumvented or that rights
granted thereunder will provide competitive advantages to NPS. Moreover, the
Company may have to participate in interference proceedings declared by the
United States Patent and Trademark Office to determine priority of invention,
which could result in substantial cost to the Company, even if the eventual
outcome is favorable to the Company. If certain of the Company's patent
applications fail to issue or are successfully challenged, particularly those
related to its calcium receptor science and NMDA receptor-channel technology, it
may have a material adverse effect on the Company's operations or its ability to
maintain or establish collaborations. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate any of
the Company's products or design around the patented products or technology
developed by NPS. There can also be no assurance that any products developed by
NPS will not be found to infringe patents held by third parties, or that, in
such cases, licenses from such third parties would be available on commercially
attractive terms, if at all. If NPS does not obtain such licenses, it could
encounter delays in product market introductions or could find that it is unable
to develop, manufacture or sell its products requiring such licenses. In
addition, the Company could incur substantial costs in defending lawsuits
brought against NPS on such patents or in prosecuting lawsuits by NPS against
another party. Additionally, many of the Company's foreign patent applications
have been published as part of the patent prosecution process in such countries.
Protection of the rights revealed in such published patent applications can be
complex, costly and uncertain.
The development of therapeutic products for applications in the Company's
product fields is intensely competitive. A number of pharmaceutical companies,
biotechnology companies, universities and research institutions have filed
patent applications or received patents in these and related fields. Some of
these applications or patents may limit or preclude the Company's applications
and could result in a significant reduction of the coverage of the Company's
patents, if issued.
NPS also relies on trade secrets and proprietary know-how, which it seeks to
protect, in part, by confidentiality agreements with its corporate
collaborators, licensees, employees and consultants. NPS expects to continue to
rely on trade secrets and know-how to protect certain aspects of its
technologies. The Company believes it has, and can maintain, a competitive
advantage through its use of written confidential disclosure agreements and
invention assignment provisions with its employees, consultants, advisors and
potential and actual collaborators and licensees. Nonetheless, no assurance can
be given that these agreements will provide meaningful protection for the
Company's trade secrets or proprietary know-how as a result of an unauthorized
use or disclosure in the public domain. There can be no assurance that these
agreements will not be breached, that NPS would have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known or
be independently discovered by competitors. See "Business -- Patents and
Proprietary Technology."
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING. To be successful, the
Company's products, if successfully developed, must be manufactured in
commercial quantities in accordance with regulations prescribed by the FDA and
at acceptable costs. NPS does not have the capability to manufacture products
under cGMP regulations prescribed by the FDA and does not intend to develop such
a capability in the near future. Accordingly, the Company anticipates that, for
the foreseeable future, it will pursue a strategy of seeking production
capability from corporate collaborators, licensees or contract manufacturers.
There can be no assurance that the Company's current or prospective corporate
collaborators, licensees or contract manufacturers will be able to manufacture
any developed compounds on a commercial scale or that any collaborator, licensee
or manufacturer will be able to manufacture products in quantities or at prices
which will be commercially viable or beneficial for the Company. The Licensees
are
9
<PAGE>
responsible for manufacturing any products developed under their respective
agreements with the Company. If the Company or its collaborators and licensees
encounter difficulty in obtaining third-party manufacturing on commercially
acceptable terms, their ability to commercialize products may be delayed or
foreclosed. Moreover, any manufacturer of the Company's products must adhere to
cGMP regulations enforced by the FDA through its facilities inspection program.
If these facilities cannot pass a pre-approval or periodic plant inspection, FDA
approval of the product will not be granted or sale of the product may be
barred.
Presently, the Company relies on contract manufacturers to produce its
proprietary compounds for development activities and in sufficient quantities
for preclinical and clinical purposes. If the Company were unable to contract
for sufficient supply of its compounds on acceptable terms, or if it should
encounter delays or difficulties in its relationships with manufacturers, the
Company's preclinical and human clinical testing schedule would be delayed. Such
delay would adversely affect the schedule for submission of products for
regulatory approval and the market introduction and subsequent sales of such
products, which would have a materially adverse effect on the Company.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company has
incurred negative cash flows from operations since its inception. Substantial
expenditures will be required to enable NPS to conduct existing and planned
preclinical studies and clinical trials, to manufacture or to have manufactured
and to market products from current research and development efforts, and to
continue research and development activities. The Company anticipates that its
existing capital resources, including research and development support payments
from existing collaborations, together with the net proceeds of the Offering and
interest earned thereon, will be sufficient to enable it to maintain its current
and planned operations through at least 1997. However, the Company's future
capital needs will be dependent upon many factors, including progress in its
research and development activities, the magnitude and scope of these
activities, progress with preclinical and clinical trials, the cost of
preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights, competing technological and market
developments, changes in or terminations of existing collaborative arrangements
and license arrangements, the establishment of additional collaborative and
license arrangements, and the cost of manufacturing scale-up and development of
marketing activities, if undertaken by the Company. If Amgen terminates its
agreement to develop Norcalcin in the Amgen territory, the Company may not have
the resources necessary to complete the development and commercialization of
Norcalcin in the Amgen territory. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Collaborative
Research and License Agreements," and "Use of Proceeds."
Depending on the factors described above, NPS may need to raise substantial
additional funds to support its long-term product development and
commercialization programs. The Company intends to seek additional funding
through corporate collaborations and license agreements. There can be no
assurance the Company will be able to negotiate such agreements in the future on
acceptable terms, or at all. The Company may also seek additional funding
through public or private financings. If additional funds are raised by issuing
equity securities, further dilution to stockholders will result. If adequate
funds are not available, the Company may be required to delay, reduce the scope
of or eliminate one or more of its research and development programs or to
obtain funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates or products that the Company may otherwise seek to develop or
commercialize on its own, any one of which could have a material adverse effect
on the Company's operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
LACK OF MARKETING CAPABILITIES. The Licensees currently have marketing and
distribution rights with respect to products under development for the treatment
of HPT and osteoporosis; however, such commercialization rights may revert to
NPS, under certain circumstances, including upon termination of any of the
related agreements. NPS may retain commercialization rights to other products
developed in the future. The Company currently lacks sales, marketing and
distribution capability. In order to market any of its products directly, the
Company would have to develop a marketing and sales force with
10
<PAGE>
technical expertise and with supporting distribution capability. There can be no
assurance that the Company will be able to establish in-house sales and
distribution capabilities or relationships with third parties, or that it will
be successful in gaining market acceptance for its products.
Outside the United States, the Company's ability to market a product is
contingent upon receiving marketing authorization from the appropriate foreign
regulatory authorities. The requirements governing the conduct of clinical
trials, marketing authorization, pricing and reimbursement vary widely from
country to country. This foreign regulatory approval process includes all of the
risks associated with FDA approval set forth above. See "Business -- Government
Regulation."
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. There is significant national
concern today about the availability and rising cost of health care in the
United States. It is anticipated that new federal and/or state legislation will
be passed and regulations adopted to attempt to provide broader and better
health care and to manage and contain its cost. While NPS cannot predict whether
any such legislative or regulatory proposals will be adopted or the effect such
proposals may have on its business, the pendency of such proposals could have a
material adverse effect on the Company's ability to raise capital, and the
adoption of such proposals could have a material adverse effect on the Company
in general.
In both domestic and foreign markets, sales of the Company's product
candidates will depend in part on the availability of reimbursement from
third-party payors such as government health administration authorities, private
health insurers and other organizations. Under current guidelines, Medicare does
not reimburse patients for self-administered drugs. Such policy may adversely
affect the market for products designed to treat patients with age-related
disorders, such as HPT and osteoporosis. In addition, third-party payors are
increasingly challenging the price and cost-effectiveness of medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products. There can be no assurance that the
Company's product candidates will be considered cost-effective or that adequate
third-party reimbursement will be available to enable NPS to maintain price
levels sufficient to realize an appropriate return on its investment in product
development. Failure to achieve sufficient price levels for its drugs could
adversely affect the Company's business. Legislation and regulations affecting
the pricing of pharmaceuticals may change before any of the Company's product
candidates are approved for marketing. Adoption of such legislation or
regulations could further limit reimbursement for medical products and services.
Furthermore, the Company's ability to commercialize its potential product
portfolio may be adversely affected to the extent that such legislation has a
material adverse effect on the business, financial condition and profitability
of other companies that are current or future collaborators for certain of the
Company's product candidates.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO MANAGE GROWTH. The Company is
highly dependent on the principal members of its scientific and management
staff. Loss of any of these persons could adversely affect the Company's
business. The Company does not have employment contracts. The Company's future
success will also depend in large part upon its continued ability to attract and
retain other highly qualified scientific and management personnel. The Company
faces competition for personnel from other companies, academic institutions,
government entities and other organizations. There can be no assurance that NPS
will be successful in hiring or retaining personnel. In addition, the Company's
anticipated growth and expansion into areas and activities requiring additional
expertise, such as clinical trials, government approvals, production and
marketing and general pharmaceutical company management are expected to place
increased demands on the Company's resources. These demands are expected to
require the addition of new management, research and development and
administrative personnel, and the development of additional expertise by
existing management personnel. The failure to acquire such services or to
develop such expertise could materially adversely affect prospects for the
Company's success. Certain of these anticipated future needs are expected to be
met through the agreements with the Licensees and potential additional corporate
collaborations, but there can be no assurance that any services provided by the
Licensees or other potential corporate collaborators will be sufficient to meet
the Company's personnel or management needs. See "Business -- Employees" and
"Management."
11
<PAGE>
RISK OF PRODUCT LIABILITY; USE OF HAZARDOUS MATERIALS. The testing,
marketing and sale of human therapeutic products entail significant risks. If
the Company succeeds in developing products under its product development
programs, use of such products in clinical trials and the sale of such products
following regulatory approval may expose the Company to liability claims
allegedly resulting from use of such products. These claims might be made
directly by consumers or others. NPS currently has an aggregate of $5 million
insurance for the clinical trials of Norcalcin. There can be no assurance that
NPS will be able to maintain such insurance or obtain similar insurance for any
of its future clinical trials or that coverage will be in sufficient amount to
protect against damages for liability that could have a material adverse effect
on NPS. There can also be no assurance that NPS will be able to obtain or
maintain product liability insurance in the future on acceptable terms or in
sufficient amounts to protect the Company against damages for liability that
could have a material adverse effect on the Company. The agreements with the
Licensees each provide for certain indemnification against such claims, but
there can be no assurance that any claim arising from products sold by a
collaborative partner or licensee would not also include claims directly against
NPS or that any such claim would be indemnifiable under such agreement.
In addition, the Company's research and development activities involve the
controlled use of hazardous materials, radioactive compounds and other
chemicals. The Company is required to comply with complex local, state and
federal regulations involving the use, storage and handling of these materials
and may incur certain costs in complying therewith. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by local, state and federal regulations,
the possibility of unintended non-compliance with such regulations or the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result, and any such liability could exceed the resources
of the Company. The Company may incur substantial costs to comply with
environmental regulations.
The Company contracts with third parties to remove biohazardous waste
generated by the Company. The disposal of such waste, third-party waste disposal
companies contracted by the Company, and their disposal sites are regulated by
the Environmental Protection Agency ("EPA"). The EPA has initiated cleanup of a
site where a waste disposal firm contracted by the Company disposed of certain
waste generated by the Company. The Company has not accrued any liability with
respect to this matter. Although the Company was a small contributor to the site
and the Company believes that there are a number of other financially
responsible contributors, there can be no assurance that the Company will not be
held liable for all or a portion of the cleanup cost or any other costs or
damages associated with this disposal site. See "Business -- Environmental
Liability."
VOLATILE STOCK PRICE. The market price of the shares of Common Stock, like
that of the common stock of many other biotechnology and biopharmaceutical
companies, has been and is likely to continue to be highly volatile. Factors
such as fluctuations in the Company's operating results, announcements of
technological innovations or new commercial products by the Company or its
competitors, progress with clinical trials, governmental regulation, changes in
reimbursement policies, developments in patent or other proprietary rights,
developments in the Company's relationships with current or future collaborative
partners, public concern as to the safety and efficacy of drugs developed by the
Company and its competitors, and general market conditions for biotechnology or
pharmaceutical stocks could have a significant adverse effect on the future
price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of Common Stock
in the public market following the Offering or the perception that such sales
could occur could have an adverse effect on the price of the Common Stock. Upon
completion of the Offering, the Company will have 11,187,232 shares of Common
Stock outstanding (assuming no exercise of the Underwriters' over-allotment
option). Of these shares, the 3,000,000 shares sold in the Offering, the
1,000,000 shares sold to Amgen in March 1996, and, as of March 31, 1996,
approximately 3,449,616 additional shares of Common Stock are freely tradeable
without restriction under the Securities Act. The remaining 3,737,616
outstanding shares of Common Stock are restricted shares ("Restricted Shares")
under the Securities Act and may only be sold
12
<PAGE>
if they are registered or qualify for an exemption from registration under Rule
144 or Rule 701 of the Securities Act. The Company's directors and executive
officers and certain stockholders, including Amgen, who immediately after this
Offering will hold in the aggregate 4,145,345 shares of Common Stock (of which
2,968,634 are Restricted Shares) have agreed not to sell any of these shares for
90 days after the date of this Prospectus without the prior written consent of
Vector Securities International, Inc. Commencing 91 days from the date of this
Prospectus, 1,835,196 of the Restricted Shares subject to such agreements will
be available for immediate sale in the public market, subject to certain volume,
manner of sale and other limitations under Rule 144, and 1,133,438 of the
Restricted Shares will be available for immediate sale without limitation under
Rule 144(k). Of the 768,982 remaining Restricted Shares not subject to such
agreements, 730,745 shares will be available for immediate sale in the public
market under Rule 144(k) and 14,950 shares will be available for immediate sale,
subject to the limitations provided in Rule 144. In addition, following the
closing of this Offering, the holders of 3,129,781 Restricted Shares (including
32,542 shares issuable upon exercise of an outstanding warrant) will be entitled
to certain rights with respect to registration of such shares for sale in the
public market. See "Description of Capital Stock -- Registration Rights."
CONTROL BY EXISTING STOCKHOLDERS; ANTITAKEOVER EFFECTS OF CERTAIN CHARTER
AND BYLAW PROVISIONS. The present directors, executive officers and principal
stockholders of the Company and their affiliates will beneficially own
approximately 33% of the shares of Common Stock outstanding following the
Offering (approximately 32% if the Underwriters exercise their over-allotment
option in full). Exercise of stock options by executive officers and directors
may further impact voting control of the Company. Accordingly, they will have
the ability to control the election of the Company's directors and most other
stockholders' actions. Certain provisions of the Company's Certificate of
Incorporation and Bylaws and Section 203 of the Delaware General Corporation Law
could also discourage potential acquisition proposals and could delay or prevent
a change in control of the Company. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the Common
Stock. Such provisions may also inhibit fluctuations in the market price of the
Common Stock that could result from takeover attempts. In addition, the Board of
Directors, without further stockholder approval, may issue Preferred Stock that
could have the effect of delaying or preventing a change in control of the
Company as well as adversely affecting the voting power of the holders of Common
Stock, including the loss of voting control to others. See "Management,"
"Principal Stockholders" and "Description of Capital Stock -- Preferred Stock"
and "-- Delaware Anti-Takeover Law."
DILUTION. The Offering price will be substantially higher than the book
value per share of Common Stock. Investors purchasing shares of Common Stock in
the Offering will therefore incur immediate and substantial dilution of $9.00
per share. To the extent that outstanding options and warrants are exercised,
there will be further dilution to new investors. See "Dilution."
ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends and
does not anticipate paying cash dividends in the foreseeable future. See
"Dividend Policy."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $41.8 million
($48.1 million if the Underwriters' over-allotment option is exercised in full),
after deducting underwriting discounts and commissions and the estimated
expenses of the Offering.
NPS expects to use the net proceeds of the Offering: (i) to fund its
research and development programs not already sponsored by its Licensees,
including its programs for the treatment of stroke, head trauma, chronic pain
and epilepsy, for which approximately $7 million is budgeted for the next two
years; (ii) to fund its discovery programs, for which approximately $6 million
is budgeted for the next two years; and (iii) for general corporate purposes,
including capital expenditures and working capital. The amount and timing of
expenditures will depend upon numerous factors, including the progress of the
Company's research and development programs, the magnitude and scope of these
activities, progress with preclinical and clinical trials, the cost of
preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights, competing technological and market
developments, changes in or terminations of existing collaborative or license
arrangements, the establishment of additional collaborative arrangements and the
cost of manufacturing scale-up and development of marketing activities, if
undertaken by the Company. Furthermore, the net proceeds of the Offering may be
used to acquire other companies, technologies or products that complement the
business of the Company, although no such transactions are being planned or
negotiated as of the date hereof. Pending such application, the Company intends
to invest such net proceeds in short-term, interest-bearing investment grade
securities.
14
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company completed its initial public offering on May 26, 1994. The
Company's Common Stock is quoted on the Nasdaq National Market under the symbol
"NPSP." On May 2, 1996, the last reported sale price for the Company's Common
Stock on the Nasdaq National Market was $16.00 per share. The following table
sets forth the quarterly high and low closing sales prices for the Company's
Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1994
Second Quarter (from May 26, 1994) $ 6.25 $ 4.38
Third Quarter 5.25 3.75
Fourth Quarter 4.25 3.00
1995
First Quarter $ 4.25 $ 3.25
Second Quarter 5.00 2.88
Third Quarter 8.75 4.50
Fourth Quarter 18.50 6.13
1996
First Quarter $ 17.25 $ 12.50
Second Quarter (through May 2, 1996) 16.63 11.75
</TABLE>
On March 31, 1996, there were approximately 160 holders of record of the
Company's Common Stock.
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock. The
Company currently intends to retain any future earnings to finance the growth
and development of its business and therefore does not anticipate paying any
cash dividends in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1995: (i) the
capitalization of the Company; (ii) such capitalization adjusted to give pro
forma effect to receipt from Amgen of a $10.0 million nonrefundable license fee
in March 1996, net of applicable taxes, and the sale of 1,000,000 shares of
Common Stock to Amgen for $7.5 million also received in March 1996 (the "Amgen
Investment"); and (iii) such pro forma capitalization as further adjusted to
give effect to the sale of 3,000,000 shares of Common Stock offered by the
Company hereby and the receipt of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term portion of capital leases and long-term debt (1)................... $ 747 $ 747 $ 747
--------- ----------- -----------
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares
issued and outstanding.................................................... -- -- --
Common stock, $.001 par value; 20,000,000 shares authorized; 7,072,801
shares issued and outstanding, actual; 8,072,801 shares issued and
outstanding, pro forma; and 11,072,801 shares issued and outstanding, pro
forma as adjusted (2)..................................................... 7 8 11
Additional paid-in capital................................................. 28,067 35,566 77,338
Deferred compensation...................................................... (235) (235) (235)
Deficit accumulated during the development stage........................... (20,517) (10,677) (10,677)
--------- ----------- -----------
Net stockholders' equity................................................. 7,322 24,662 66,437
--------- ----------- -----------
Total capitalization................................................... $ 8,069 $ 25,409 $ 67,184
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- - --------------
(1) See Notes 4 and 5 of Notes to Financial Statements for a description of the
Company's lease commitments and long-term debt obligations.
(2) Excludes: (i) 1,530,924 shares which were subject to outstanding options as
of December 31, 1995, at exercise prices ranging from $0.34 to $8.25 per
share, with a weighted average exercise price of $3.16 per share, and (ii)
52,792 shares issuable upon exercise of warrants outstanding as of December
31, 1995, with a weighted average exercise price of $4.07 per share. See
"Management -- Directors' Compensation," "-- 1987 Stock Option Plan," "--
1994 Equity Incentive Plan," "Description of Capital Stock -- Warrant" and
Note 6 of Notes to Financial Statements.
16
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at December 31, 1995
was $24.7 million, or $3.06 per share. Pro forma net tangible book value per
share is equal to the Company's net tangible assets (tangible assets of the
Company less total liabilities) divided by the number of shares of Common Stock
outstanding on a pro forma basis, after giving effect to the Amgen Investment.
Without taking into account any other changes in pro forma net tangible book
value after December 31, 1995 other than to give effect to the sale of the
3,000,000 shares of Common Stock by the Company in the Offering and the receipt
of the estimated net proceeds therefrom, the pro forma net tangible book value
of the Company as of December 31, 1995 would have been $66.4 million, or $6.00
per share. This represents an immediate increase in pro forma net tangible book
value of $2.94 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $9.00 per share to new investors. The
following table sets forth the per share dilution to new investors in the
Offering:
<TABLE>
<S> <C> <C>
Offering price per share............................................. $ 15.00
Pro forma net tangible book value per share as of December 31,
1995.............................................................. $ 3.06
Increase per share attributable to new investors................... 2.94
-----
Pro forma net tangible book value per share after the Offering....... 6.00
---------
Dilution per share to new investors.................................. $ 9.00
---------
---------
</TABLE>
The foregoing computations exclude: (i) 1,530,924 shares which were subject
to outstanding options as of December 31, 1995, at exercise prices ranging from
$0.34 to $8.25 per share, with a weighted average exercise price of $3.16 per
share, and (ii) 52,792 shares issuable upon exercise of warrants outstanding as
of December 31, 1995, with a weighted average exercise price of $4.07 per share.
To the extent that such options and warrants are exercised, there will be
further dilution to new investors. See "Management -- Directors' Compensation,"
"-- 1987 Stock Option Plan," "-- 1994 Equity Incentive Plan," "Description of
Capital Stock -- Warrant" and Note 6 of Notes to Financial Statements.
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for each fiscal year in the
five-year period ended December 31, 1995 and the period from October 22, 1986
(inception) through December 31, 1995 have been derived from the Company's
financial statements, which have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, and are qualified by reference to such
Financial Statements and Notes thereto. The Company is considered a development
stage company as described in Note 1 of Notes to Financial Statements.
<TABLE>
<CAPTION>
OCTOBER 22,
1986
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
----------------------------------------------------- DECEMBER 31,
1991 1992 1993 1994 1995 1995
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from research and license agreements... $ 1,885 $ 1,259 $ 868 $ 3,861 $ 9,562 $ 22,316
Operating expenses:
Research and development...................... 1,609 2,722 6,021 7,765 8,727 30,360
General and administrative.................... 754 1,283 2,004 3,122 3,975 12,789
--------- --------- --------- --------- --------- -------------
Total operating expenses.................... 2,363 4,005 8,025 10,887 12,702 43,149
--------- --------- --------- --------- --------- -------------
Operating loss.................................. (478) (2,746) (7,157) (7,026) (3,140) (20,833)
Other income (expense), net..................... 16 139 (2) 270 322 816
--------- --------- --------- --------- --------- -------------
Loss before income tax expense.................. (462) (2,607) (7,159) (6,756) (2,818) (20,017)
Income tax expense.............................. -- -- -- -- 500 500
--------- --------- --------- --------- --------- -------------
Net loss........................................ $ (462) $ (2,607) $ (7,159) $ (6,756) $ (3,318) $ (20,517)
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
Net loss per share (1).......................... $ (.33) $ (.95) $ (1.91) $ (1.13) $ (.48)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding (1)......... 1,386 2,746 3,751 5,977 6,924
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable investment securities...... $ 119 $ 6,779 $ 6,414 $ 9,323 $ 8,340
Working capital.................................................. (27) 6,363 5,839 8,104 5,832
Total assets..................................................... 544 8,101 12,599 12,084 10,600
Long-term portion of capital leases and long-term debt........... 37 473 830 440 747
Deficit accumulated during development stage..................... (677) (3,284) (10,443) (17,199) (20,517)
Stockholders' equity............................................. 354 7,081 7,011 10,165 7,322
</TABLE>
- - ------------------
(1) See Note 1 of Notes to Financial Statements for information concerning the
computation of net loss per share.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of NPS should be read in conjunction with the Financial Statements and
Notes thereto included elsewhere in this Prospectus.
OVERVIEW
Since its inception in 1986, NPS has devoted substantially all of its
resources to its research and development programs. To date, the Company has not
developed any pharmaceutical products for sale and has incurred substantial
losses. NPS has incurred cumulative losses through December 31, 1995 of $20.5
million, net of cumulative revenues from collaborative research and license
agreements of $22.3 million. The Company expects to incur significant operating
losses over at least the next several years as the Company continues and expands
its research and development and preclinical and clinical testing activities.
Because substantially all of the Company's revenues are derived from license
fees, milestone payments and research support payments from its Licensees, which
fluctuate from quarter to quarter, the Company expects that losses will
fluctuate from quarter to quarter and that such fluctuations may be substantial.
The Company's ability to achieve profitability depends in part on its ability,
alone and/or with others, to complete development of its product candidates,
including Norcalcin, to obtain required regulatory approvals and to manufacture
and market such products, of which there can be no assurance.
RECENT FINANCIAL RESULTS
The Company's revenues and net income for the three months ended March 31,
1996 were $14.5 million and $9.8 million, respectively, compared to revenues of
$924,000 and a net loss of $1.7 million, for the three months ended March 31,
1995. The increase in revenues and net income is primarily due to the receipt by
NPS of a $10 million non-refundable license fee from Amgen following the
execution and closing of a definitive agreement for Amgen to develop and
commercialize NPS's Norcalcin and other compounds for the treatment of
hyperparathyroidism. Revenues and net income also increased in the first quarter
of 1996 due to the receipt by the Company of a $3.0 million payment under the
terms of the SmithKline Agreement. While the Company experienced net income in
the quarter due to the non-recurring license fee and milestone payment, the
Company expects to incur significant operating losses over at least the next
several years as it continues to expand its research and development activities
and preclinical and clinical activities.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Substantially all of the Company's revenues were derived from collaborative
research and license agreements with the Licensees. Revenues from such
agreements were $600,000 in 1993, $3.6 million in 1994, and $9.4 million in
1995. All of the revenues in 1993 and 1994 and $1.8 million in 1995 were from
license fees received under the collaborative agreement with SmithKline Beecham
and recognized for accounting purposes as the related research expenses were
incurred. In 1995, the Company received and recognized a $5.0 million license
fee and $1.0 million in research support from Kirin, and $1.6 million in
research support from SmithKline Beecham.
Research and development expenses increased from $6.0 million in 1993 to
$7.8 million in 1994 and to $8.7 million in 1995. The increases in research and
development expenses were principally due to the conducting of clinical trials
for Norcalcin in 1994 and 1995, increased activity in each of the Company's
principal research and development projects, the associated expansion in
staffing and increased
19
<PAGE>
purchases of laboratory supplies and consulting services. Research and
development expenses are expected to increase significantly in the future as NPS
conducts clinical trials for other product candidates and as more research and
development personnel are hired.
General and administrative expenses increased from $2.0 million in 1993 to
$3.1 million in 1994 and to $4.0 million in 1995. The increase in 1995 was
primarily due to costs incurred for advisory services in connection with the
consummation of the Amgen and Kirin agreements, and the increased costs
associated with operating a public company for a full year. The increase in 1994
was primarily due to expansion of facilities, the addition of management and
administrative personnel, and the costs associated with becoming a public
company. The Company expects that general and administrative expenses will
continue to increase in the future as a result of increased activity by the
Company in corporate development, investor relations, and legal affairs, and as
more personnel and facilities are needed to support research and development
activities.
Interest income increased from $110,000 in 1993 to $398,000 in 1994 and to
$480,000 in 1995 as a result of increases in the Company's cash balances from
the net proceeds of the initial public offering in 1994 and the Kirin license
fee in 1995. The Company anticipates that interest income will fluctuate in the
future as the Company's cash balance and short-term interest rates fluctuate.
Interest expense increased from $112,000 in 1993 to $128,000 in 1994 and to
$158,000 in 1995, primarily due to the acquisition of equipment through capital
leases and completion of a $1.0 million debt financing of existing equipment and
leasehold improvements in 1995.
Income tax expense of $500,000 in 1995 consisted entirely of a 10% Japanese
tax withheld on the license fee paid by Kirin. Future license, milestone and
royalty payments from Kirin will be subject to the same 10% tax.
As of December 31, 1995, the Company had a federal income tax net operating
loss carryforward of approximately $18.4 million and a federal income tax
research credit carryforward of approximately $953,000. The Company's ability to
utilize these operating loss and research credit carryforwards against future
taxable income will be subject to annual limitations in future periods pursuant
to the "change in ownership rules" under Section 382 of the Internal Revenue
Code of 1986, as amended. See Note 7 of Notes to Financial Statements.
The Company has adopted Financial Accounting Standards Board Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
adoption of the statement did not have a material effect on the Company's
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
collaborative research and license agreements and the private and public
placement of equity securities. As of December 31, 1995, the Company had
recognized approximately $22.3 million of cumulative revenues from collaborative
research and license agreements and approximately $28.1 million in consideration
for the sale of equity securities. The Company's principal sources of liquidity
are its cash, cash equivalents and marketable investment securities which
totaled $8.3 million at December 31, 1995. Also, in connection with the
establishment of the Amgen agreement, Amgen paid $7.5 million to NPS for
1,000,000 shares of Common Stock and a non-refundable license fee of $10.0
million in March 1996.
The Company receives quarterly payments under the Kirin and SmithKline
Beecham agreements to support the Company's research efforts in HPT and
osteoporosis, respectively. The Kirin payments are $500,000 per quarter through
June 1996 and a total of $5.0 million over the remaining four years of the
research term of the agreement. The SmithKline Beecham payments are estimated to
be an aggregate of $4.3 million through the scheduled expiration of the
agreement in October 1996, of which $1.6 million had been received by December
31, 1995. Amgen will reimburse the Company up to $400,000 per year for a period
not to exceed five years for certain costs which may be incurred by the Company
in the
20
<PAGE>
development of Norcalcin in the Amgen territory, with such participation
occuring under the direction of Amgen. The Company could receive additional
payments of up to $56.0 million from the Licensees upon the accomplishment of
specified research and/or development milestones. Each of these agreements may
be terminated before the scheduled expiration date by the respective Licensee
and, therefore, no assurance can be given that any future milestone or research
or development support payments will be received thereunder.
Under its agreement with the Brigham and Women's Hospital, Inc. ("Brigham
and Women's"), the Company is obligated to pay an aggregate of $810,000 to
Brigham and Women's from February 1996 through February 1998. Additional
payments may be required upon the accomplishment of certain research milestones
by Brigham and Women's.
As of December 31, 1995, the Company's net investment in leasehold
improvements, equipment and furnishings was approximately $2.2 million. The
Company has financed a portion of such expenditures through capital leases and
long-term debt with a total principal obligation of approximately $1.5 million
as of December 31, 1995. Additional equipment and facilities will be needed as
the Company increases its research and development activities, a portion of
which may be financed with debt. Equipment and leasehold improvements subject to
the capital leases and the long-term debt have been pledged in support of the
leasehold obligations.
The Company anticipates that its existing capital resources, including
research and development support payments from existing collaborations, as well
as the net proceeds of the Offering and the interest earned thereon, will be
sufficient to enable it to maintain its current and planned operations through
at least 1997. However, actual needs are dependent on numerous factors,
including the progress of the Company's research and development programs, the
magnitude and scope of these activities, progress with preclinical and clinical
trials, the cost of preparing, filing, prosecuting, maintaining and enforcing
patent claims and other intellectual property rights, competing technological
and market developments, changes in or terminations of existing collaborative
research or license arrangements, the establishment of additional collaborative
arrangements and the cost of manufacturing scale-up and development of marketing
activities, if undertaken by the Company. Substantial expenditures will be
required to conduct preclinical studies and clinical trials, manufacture or have
manufactured and market products other than Norcalcin from current research and
development efforts and perform research and development activities in
additional areas. In addition, if Amgen terminates its agreement to develop and
commercialize Norcalcin in its territory, the Company may not have sufficient
capital to complete the development and commercialization of Norcalcin in
Amgen's territory.
NPS will need to raise substantial additional funds to support its long-term
product development and commercialization programs. The Company also intends to
seek additional funding through corporate collaborations and licensing
agreements and the Company may seek additional funding through public or private
financing. There can be no assurance that additional financing will be available
on acceptable terms, if at all. If adequate funds are not available, the Company
may be required to delay, reduce the scope of or eliminate one or more of its
research and development programs or to obtain funds through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates or products that the
Company may otherwise seek to develop or commercialize on its own.
21
<PAGE>
BUSINESS
GENERAL
NPS Pharmaceuticals is engaged in the discovery and development of orally
active, small molecule drugs that target cell surface receptors and ion
channels. The Company's most advanced product candidate, Norcalcin-TM- for the
treatment of hyperparathyroidism ("HPT"), arose from the Company's pioneering
work on a new class of cell surface receptors which detect levels of
extracellular calcium involved in numerous bodily functions. To date, the
Company has conducted two Phase I and two Phase I/II clinical trials of
Norcalcin to test its safety and initial efficacy. The Company is also applying
its calcium receptor technology to the development of therapies for
osteoporosis. The Company's other main programs involve the development of
orally active, small molecule drugs which have neuroprotectant properties and
target certain calcium channels in order to provide treatments for stroke, head
trauma, chronic pain and epilepsy. Additionally, the Company is pursuing several
discovery programs which are extensions of its discoveries in calcium receptors
and ion channels.
NPS has established research collaborations and license arrangements with
the pharmaceutical division of Kirin Brewery Company, Limited ("Kirin") and
SmithKline Beecham Corporation ("SmithKline Beecham") in the fields of HPT and
osteoporosis, respectively, and has established a license arrangement with Amgen
Inc. ("Amgen") in the field of HPT. Kirin, SmithKline Beecham and Amgen are
referred to herein as the "Licensees." The Licensees are responsible for all
costs of product development in their respective territories and fields. As part
of these arrangements, the Licensees have paid to NPS an aggregate of $21.0
million in non-refundable license fees and Amgen and an affiliate of SmithKline
Beecham have purchased $14.5 million of the Company's Common Stock. In addition,
the Licensees have agreed to make up to $56.0 million in milestone payments, of
which $3.0 million has been paid to the Company to date under the SmithKline
Beecham agreement. SmithKline Beecham and Kirin are also obligated to pay an
aggregate of approximately $11.3 million in research support payments. Each of
the Licensees is obligated to pay royalties to NPS on any product sales. See
"Risk Factors -- Dependence on Collaborative Research and License Relationships"
and "Business -- Collaborative Research and License Agreements."
HPT is a growing medical concern and is typically characterized as being
either primary or secondary. Primary HPT is an age-related disorder that results
from excessive secretion of parathyroid hormone ("PTH"), leading to elevated
levels of calcium in the blood. Symptoms may include bone loss, muscle weakness,
depression and cognitive dysfunction. Approximately 100,000 new patients are
diagnosed with primary HPT in the United States each year. There are currently
no pharmaceutical therapies for the treatment of primary HPT, with surgery being
the only effective treatment. Secondary HPT results from other disease states
and is most often associated with renal dysfunction. Symptoms of secondary HPT
include excessive bone loss, bone pain, and chronic, severe itching. It is
estimated that approximately 80% of the patients in the United States who rely
on kidney dialysis, or approximately 140,000 patients, suffer from the effects
of secondary HPT. The Company believes that current drug therapy treatments for
secondary HPT, such as phosphate binders and calcitriol have certain
disadvantages.
The Company's preliminary analysis of the data from its four clinical trials
of Norcalcin indicates that Norcalcin was safe and well tolerated in these
studies and that the administration of Norcalcin resulted in an expected
dose-dependent decrease in the level of PTH in the blood. The higher doses used
in the Phase I studies and in the Phase I/II dialysis study resulted in a
decrease in the level of calcium in the blood. The Company expects to complete
the formal analysis from all four trials and to report its findings in
appropriate forums during the latter half of 1996. Amgen is currently
formalizing its clinical strategy for the continued development of Norcalcin,
and the Company believes Kirin will begin Phase I clinical trials of Norcalcin
in Japan in 1996. There can be no assurance that the clinical trials will
proceed as indicated or that Norcalcin will prove safe and effective, meet
applicable regulatory standards or be successfully marketed. See "Risk Factors
- - -- Early Stage of Product Development; Dependence on Norcalcin" and " --
Dependence on Collaborative Research and License Relationships."
22
<PAGE>
In conjunction with SmithKline Beecham, NPS is also applying its calcium
receptor technology to the development of orally active therapeutics for the
treatment of osteoporosis. Osteoporosis is an age-related disorder affecting
more than 200 million people worldwide and is characterized by reduced bone
density and an increased susceptibility to fractures. Among the elderly in
particular, osteoporosis is a major cause of morbidity and mortality. The
Company is pursuing two approaches for the treatment of osteoporosis,
stimulation of bone formation and suppression of bone resorption. Most
osteoporosis patients are first diagnosed only after they have already lost
significant bone mass. As a result, the Company believes that a therapy that not
only halts further bone loss, but also builds new bone, would constitute a
significant advancement in the treatment of osteoporosis. Under its
collaboration with SmithKline Beecham, research efforts are being conducted by
NPS concurrently on both approaches to osteoporosis. In January 1996, the
Company received a milestone payment of $3.0 million from SmithKline Beecham for
progress made in its osteoporosis program.
The Company is developing a new class of orally active compounds which
modulate certain calcium channels for neuroprotection in stroke and head trauma
and also for chronic pain and epilepsy. 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, and also
to certain types of chronic pain and epilepsy. The Company's proprietary
compounds antagonize the NMDA (N-methyl-D-aspartate) subtype of glutamate
receptor-operated calcium channels ("NMDA receptor-channels"), thereby reducing
the influx of calcium. The Company believes that these compounds work through a
novel mechanism and exhibit potentially advantageous pharmacological properties.
These compounds demonstrated neuroprotectant activity in preclinical animal
models of stroke and head trauma and palliative activity in animal models of
chronic pain and epilepsy. The Company has designated one of these compounds,
NPS 1506, for preclinical development on a time line which currently anticipates
an Investigational New Drug ("IND") filing with the United States Food and Drug
Administration ("FDA") in the first half of 1997. However, there can be no
assurance that the IND will be filed in this time frame.
The Company is actively engaged in several discovery programs which seek to
identify molecular targets for the development of new drugs. Among these, the
Company believes it has made significant discoveries with regard to metabotropic
glutamate receptors ("mGluRs"), having identified small molecules active at
these receptors. The Company believes that drugs acting at specific mGluRs may
provide relevant therapies for a number of neurological disorders.
STRATEGY
The Company's strategy is to utilize its proprietary technologies and
expertise in cell surface receptors and ion channels to develop and
commercialize small molecule therapeutics. Currently, the Company is focused on
product development programs for HPT, osteoporosis, stroke, head trauma, pain
and epilepsy. Key elements of the Company's strategy include the following:
-THROUGH AMGEN AND KIRIN, CONFIRM SAFETY AND ESTABLISH CLINICAL EFFICACY AND
COMMERCIALIZATION OF NORCALCIN FOR THE TREATMENT OF HPT. The Company has
granted Amgen an exclusive license to complete the development of and to
manufacture and commercialize Norcalcin and certain related compounds
worldwide, excluding the territories covered by the Kirin license. The
Company has granted a similar license to Kirin in Japan, China, Korea and
Taiwan. Amgen is currently formalizing its clinical strategy for the
continued development of Norcalcin, and the Company believes that Kirin
will begin Phase I clinical trials in Japan in 1996.
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<PAGE>
-IDENTIFY CLINICAL CANDIDATES FOR THE TREATMENT OF OSTEOPOROSIS AND ADVANCE
ONE OR MORE LEAD COMPOUNDS INTO CLINICAL TRIALS IN CONJUNCTION WITH ITS
COLLABORATOR, SMITHKLINE BEECHAM. In conjunction with SmithKline Beecham,
the Company is pursuing two approaches for the treatment of osteoporosis,
stimulation of bone formation and suppression of bone resorption. In
January 1996, the Company received a $3.0 million milestone from SmithKline
Beecham as part of its collaboration.
-INITIATE CLINICAL TRIALS OF NPS 1506 FOR NEUROPROTECTION. NPS is developing
a new class of proprietary small molecule NMDA receptor-channel antagonists
which the Company believes may be effective neuroprotectants as well as
effective in the treatment of chronic pain and epilepsy. NPS has
demonstrated neuroprotectant activity with these compounds in preclinical
animal models of stroke and head trauma, and palliative activity in animal
models of chronic pain and epilepsy. The Company has identified NPS 1506 as
a lead compound for neuroprotection and estimates that it will file an IND
for NPS 1506 in the first half of 1997.
-CONTINUE DISCOVERY AND DEVELOPMENT ACTIVITIES TO EXPAND THE COMPANY'S
PRODUCT PIPELINE. The Company is actively engaged in several discovery
programs which seek to identify new molecular targets for the development
of new drugs. Among these, the Company believes it has made significant
discoveries with regard to mGluRs, which may lead to relevant therapies for
a number of neurological disorders.
-ESTABLISH COLLABORATIONS WHICH PROVIDE ENHANCED OPPORTUNITIES FOR DRUG
DEVELOPMENT AND COMMERCIALIZATION. The Company generally has conducted the
development of its product candidates at least through the preclinical
research phase and has used collaborations to supplement its internal
research, preclinical and clinical development resources. The Company has
established alliances with pharmaceutical companies to conduct clinical
trials, prepare regulatory submissions and market and sell the Company's
products in exchange for license fees, milestone payments, research support
payments and royalties. Under future collaborations, the Company expects to
retain strategically important development, manufacturing or marketing
rights in order to enhance the value of its drug development opportunities.
PRODUCT DEVELOPMENT PROGRAMS
The Company is currently developing orally active compounds that target
calcium receptors as drug therapies for HPT and osteoporosis. The Company is
also developing orally active compounds that target NMDA receptor-channels as
neuroprotectants to reduce neurological damage associated with stroke and head
trauma and additionally for the treatment of chronic pain and epilepsy.
Calcium levels in the blood are tightly regulated, and a modest increase or
decrease in circulating calcium can be life-threatening. Calcium receptors are
the basis of a newly discovered mechanism by which certain cells detect and
respond to small changes in extracellular calcium. One key role of calcium
receptors is to regulate circulating levels of PTH and calcitonin, two hormones
which play opposing roles in bone and mineral metabolism. The Company believes
that manipulation of PTH and calcitonin levels could be beneficial in the
treatment of various bone and mineral-related disorders, such as HPT and
osteporosis. The Company has utilized its expertise in certain functional
screening technologies and its proprietary recombinant cell lines to discover
and develop orally active compounds which are novel in that they can directly
manipulate the levels of PTH and calcitonin by modulating the activities of
calcium receptors. Compounds which mimic the effect of calcium at calcium
receptors are referred to as "calcimimetics" (agonists) while those which block
the effect of calcium are referred to as "calcilytics" (antagonists).
NMDA receptor-channels play critical roles in normal excitatory
neurotransmission and are also recognized for their major role in events which
lead to much of the neurological damage associated with stroke and head trauma.
Several pharmaceutical companies have recognized the potential of NMDA
receptor-channels as molecular targets for the development of drugs to treat
neurological disorders and
24
<PAGE>
have identified various lead compounds. Unfortunately, NMDA receptor-channels
are also the site of action of phencyclidine ("PCP"), and most compounds which
target NMDA receptor-channels exhibit undesirable PCP-like side effects such as
inducing symptoms of psychosis. The Company has utilized its expertise in
certain functional screening technologies to discover and develop orally active
compounds which antagonize NMDA receptor-channels by binding to a novel site,
distinct from the PCP binding site. The Company's compounds have not exhibited
PCP-like effects in a variety of IN VITRO and IN VIVO studies in animals
intended to identify PCP-like effects.
The following chart summarizes the Company's product development programs:
<TABLE>
<CAPTION>
DEVELOPMENT PROGRAM MOLECULAR TARGET COMPOUND/STATUS COMMERCIAL RIGHTS
- - -------------------- -------------------- -------------------- --------------------
HYPERPARATHYROIDISM
<S> <C> <C> <C>
Primary HPT Parathyroid Norcalcin-TM-/Phase Amgen, Kirin
calcium receptor I/II(1)
Secondary HPT Parathyroid Norcalcin-TM-/Phase Amgen, Kirin
calcium receptor I/II(1)
OSTEOPOROSIS
Stimulation of Parathyroid Preclinical SmithKline
bone formation calcium receptor Research(2) Beecham(4)
Suppression of C-cell and Preclinical SmithKline
bone resorption osteoclast calcium Research(2) Beecham(4)
receptors
NEUROPROTECTION
Stroke, Head NMDA NPS 1506/Preclinical NPS
Trauma receptor-channel
Development(3)
CHRONIC PAIN NMDA Preclinical NPS
receptor-channel Research(2)
EPILEPSY NMDA Preclinical NPS
receptor-channel Research(2)
- - ------------------
(1) See "Business -- Hyperparathyroidism Program -- Norcalcin-TM- -- Status of
Clinical Trials."
(2) "Preclinical Research" refers to one or more active compounds or series of
related active compounds which have met predetermined activity criteria in
various IN VITRO and/or IN VIVO models. More extensive evaluation of the lead
compounds is undertaken to determine if they have the requisite properties to
enter preclinical development.
(3) "Preclinical Development" refers to ongoing research in the areas of efficacy,
pharmacology and toxicology studies in animal models necessary to support an
application to the FDA to commence human clinical testing.
(4) NPS has certain co-promotion rights in the United States. See "Business --
Collaborative Research and License Agreements -- SmithKline Beecham Corporation."
</TABLE>
HYPERPARATHYROIDISM PROGRAM -- NORCALCIN-TM-
OVERVIEW. HPT is a growing medical concern and is typically characterized
as being either primary or secondary. Primary HPT is an age-related disorder
that results from excessive secretion of parathyroid hormone, leading to
elevated calcium levels in the blood. Symptoms may include bone loss, muscle
weakness, depression and cognitive dysfunction. Approximately 100,000 new
patients are diagnosed with primary HPT in the United States each year. There
are currently no pharmaceutical therapies for the treatment of primary HPT, with
surgery to remove the affected parathyroid gland(s) from the neck region being
the only effective treatment.
Secondary HPT results from other disease states and is most often associated
with renal dysfunction. Symptoms of secondary HPT include excessive bone loss,
bone pain, and chronic, severe itching. It is estimated that approximately 80%
of the patients in the United States who rely on kidney dialysis, or
approximately 140,000 patients, suffer the effects of secondary HPT. Studies
have also shown that there is a correlation between kidney dysfunction among
patients not on dialysis and elevated PTH levels in the blood. Accordingly, the
Company believes that some of these patients may also suffer from secondary
25
<PAGE>
HPT. Current treatments for secondary HPT involve drug therapy with phosphate
binders and/or calcitriol. The Company believes that these therapies have
certain disadvantages. For example, phosphate binders are not well tolerated 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 part of the parathyroid glands.
Based on its research and preclinical and clinical trials to date, the
Company believes that Norcalcin could prove to be effective in treating both
types of HPT. PTH secretion is normally regulated by changes in the circulating
level of calcium. The parathyroid glands secrete PTH which triggers metabolic
changes in bone and the kidney that increase calcium levels in the blood.
Increased levels of circulating calcium activate the parathyroid cell calcium
receptor, which then suppresses the secretion of PTH. In HPT, however, PTH
levels remain elevated. Norcalcin is a calcimimetic (a calcium receptor
agonist), which mimics the action of calcium at the calcium receptor on
parathyroid cells, thereby reducing the secretion of PTH. The Company has
entered into agreements with Amgen and Kirin relating to the development and
commercialization of Norcalcin. See "Business -- Collaborative Research and
License Agreements."
[DIAGRAM]
<TABLE>
<S> <C>
IN HPT, EXCESS PTH TRIGGERS PATHOLOGICAL CALCIMIMETIC DRUGS, SUCH AS NORCALCIN,
CHANGES IN BONE AND IN THE KIDNEY, THEREBY ACTIVATE CALCIUM RECEPTORS LEADING TO
INCREASING THE LEVEL OF CALCIUM IN THE BLOOD. SUPPRESSION OF PTH SECRETION. IN PATIENTS
WITH HPT, CALCIMIMETIC DRUGS ARE EXPECTED TO
AMELIORATE SYMPTOMS CAUSED BY EXCESS PTH AND
HIGH CALCIUM LEVELS.
</TABLE>
The Company's studies in animals have shown that Norcalcin offers a novel
and direct means of regulating PTH secretion. In animal tests conducted by the
Company, orally administered Norcalcin reduced circulating levels of PTH in a
dose-dependent manner. This reduction of PTH further resulted in decreases in
levels of calcium in the blood. The Company has also completed, and is
continuing to analyze the data from, a six-month toxicology study of Norcalcin
in rats and a 12-month toxicology study in dogs.
26
<PAGE>
STATUS OF CLINICAL TRIALS. The chart below summarizes the Company's
Norcalcin clinical trials conducted to date:
<TABLE>
<CAPTION>
PRELIMINARY
ANALYSIS OF
RESULTS NUMBER OF
CLINICAL TRIAL PROTOCOL DAILY DOSE ANNOUNCED SUBJECTS
- - ---------------- ---------------- ---------------- --------------- ----------------
Phase I Placebo-controlled, 10-400 June 1994 18 healthy,
(single-site) double blinded, milligrams post- menopausal
single dose, women over the
dose escalation age of 40
<S> <C> <C> <C> <C>
Phase I Placebo-controlled, 20-400 January 1996 48 healthy men
(single-site) double blinded, milligrams and women over
multiple dose, the age of 40
dose escalation
PhaseI/II Placebo-controlled, 4-160 milligrams January 1996 20 women with
(multi-site) double blinded, mild, primary
single dose, HPT
dose escalation
Phase I/II Open label, 40-200 April 1996 8 male dialysis
(single-site) single dose, milligrams patients with
dose escalation, secondary HPT
on and off
dialysis
</TABLE>
Since filing its IND for Norcalcin in December 1993, the Company has
conducted four clinical trials of Norcalcin. As indicated in the table above,
these include two Phase I safety and tolerance studies, a multi-site, Phase I/II
study in women with mild, primary HPT and a Phase I/II study in kidney dialysis
patients with secondary HPT. The Company's preliminary analysis of the data from
these studies indicates that Norcalcin was safe and well tolerated in these
studies and that the administration of Norcalcin resulted in an expected
dose-dependent decrease in the level of PTH in the blood. The higher doses used
in the Phase I studies and in the Phase I/II dialysis study resulted in a
decrease in the level of calcium in the blood. The observed adverse events in
these trials were consistent with the underlying diseases and the Company
believes that the adverse events are unrelated to Norcalcin. Blood and urine
samples collected from each of the four clinical trials are currently being
analyzed in a pharmacokinetic study. The Company expects to complete the formal
analysis of the data from all four trials and to report its findings in
appropriate forums during the latter half of 1996. Amgen is currently
formalizing its clinical strategy for continued development of Norcalcin, and
the Company believes Kirin will begin Phase I clinical trials in Japan in 1996.
There can be no assurance that clinical trials will proceed as indicated or that
Norcalcin will prove safe and effective, meet applicable regulatory standards or
be successfully marketed. See "Risk Factors -- Early Stage of Product
Development; Dependence on Norcalcin" and "-- Dependence on Collaborative
Research and License Relationships."
OSTEOPOROSIS PROGRAM
OVERVIEW. Osteoporosis is an age-related disorder which affects more than
200 million people worldwide and is characterized by reduced bone density and an
increased susceptibility to fractures. Osteoporosis is a major cause of
morbidity and mortality among the elderly. It has been estimated that the United
States market for osteoporosis treatments will more than triple by the end of
the decade.
Throughout life, bone undergoes constant remodeling involving anabolic
processes leading to bone formation and catabolic processes leading to bone
resorption. The balance between these two processes determines whether there is
net bone loss, net bone formation or no net change. In osteoporosis, this
balance has shifted in favor of bone resorption, resulting in net bone loss.
27
<PAGE>
Current drugs approved for the treatment of osteoporosis include estrogen,
injectable calcitonin, and alendronate (a bisphosphonate). These drugs are
anti-resorptives and act to suppress bone resorption. The Company believes that
each of these therapies presents one or more disadvantages. For example, use of
estrogen is believed to be associated with increased risk of breast cancer,
calcitonin is expensive and cannot currently be administered orally and
bisphosphonates have been associated with side effects such as gastrointestinal
distress. Moreover, long-term studies on bisphosphonates have not yet been
performed. In contrast, anabolic agents stimulate new bone formation. While no
anabolic agents are currently available for the treatment of osteoporosis, the
FDA's Endocrinologic and Metabolic Drugs Advisory Committee has recently
recommended that slow-release fluoride, an anabolic agent, be approved for the
treatment of osteoporosis in post-menopausal patients who have suffered a
fracture.
Most osteoporosis patients are first diagnosed after they have already lost
significant bone mass. As a result, the Company believes that a therapy that not
only halts further bone loss but also builds new bone would constitute a
significant advancement in the treatment of osteoporosis. Under its
collaboration with SmithKline Beecham, research efforts are being conducted by
NPS concurrently on both stimulation of bone formation and suppression of bone
resorption. Both of these approaches are focused on the development of orally
active molecules that are particularly suitable for long-term therapy.
BONE FORMATION. NPS's primary approach to the treatment of osteoporosis is
currently focused on calcilytic compounds (calcium receptor antagonists) which
block the action of calcium at calcium receptors and thus are expected to have
effects opposite to those of calcimimetic compounds. The Company believes that
this novel approach, which is intended to manipulate the body's own PTH
reserves, could provide an effective anabolic therapy for osteoporosis,
stimulating new bone formation to replace bone which has already been lost to
the disease.
While chronically high levels of PTH are known to cause bone loss as in HPT,
PTH levels fluctuate daily and this is thought to play a key role in regulating
the normal balance between bone resorption and bone formation. Recent studies in
animals and in humans have shown that frequent (usually daily) injections of
exogenous PTH sufficient to cause intermittent increases in circulating PTH
levels result in significant stimulation of new bone formation. Several
published animal studies have evaluated the structure of the newly formed bone
and have found that the increases in bone mass achieved with PTH injections are
accompanied by improvements in biomechanical strength and in certain indices of
bone structure thought to be related to biomechanical strength.
Although the anabolic effects of PTH on bone were first noted over 60 years
ago, evaluation of the therapeutic potential of PTH treatment has only recently
begun. Because of its potential as an effective anabolic therapy for
osteoporosis, certain other companies are currently conducting clinical trials
of injectible PTH or PTH analogs for osteoporosis. However, PTH is currently
expensive to manufacture and cannot be administered orally. The Company believes
that orally administered, calcilytic drugs acting on the parathyroid cell
calcium receptor to increase PTH release from the body's own PTH reserves could
provide a cost-effective means of intermittently increasing PTH levels and could
lead to greater patient compliance and therefore greater acceptance.
28
<PAGE>
[DIAGRAM]
THE COMPANY IS WORKING IN COLLABORATION WITH SMITHKLINE BEECHAM TO
DEVELOP CALCILYTIC DRUGS THAT, BY BLOCKING THE PARATHYROID CELL
CALCIUM RECEPTOR, WOULD STIMULATE LOW-LEVEL, INTERMITTENT SECRETION OF
PARATHYROID HORMONE, THEREBY STIMULATING NEW BONE FORMATION.
The Company has demonstrated in IN VIVO animal studies that intermittent
increases in circulating levels of PTH can be obtained by regulating the
activity of calcium receptors on the parathyroid cells. Increased levels of PTH
achieved by this mechanism are equivalent to levels of PTH achieved by an
injection of PTH sufficient to cause bone growth. These studies provide support
for the underlying premise that the body's own internal reserves of releasable
PTH are sufficient to cause bone growth.
SUPPRESSION OF BONE RESORPTION. Bone resorption is the function of
specialized bone cells called osteoclasts. NPS is pursuing new anti-resorptive
therapies which involve calcimimetic drugs acting either directly on osteoclasts
or indirectly via C-cells of the thyroid. The Company believes that orally
active calcimimetic drugs could provide cost-effective alternatives to current
anti-resorptive drugs and could potentially lead to greater patient compliance.
When bone is broken down by the osteoclast, calcium is released and
accumulates in very high concentrations near the osteoclast. High concentrations
of extracellular calcium inhibit further bone resorption by the osteoclast. NPS
believes that the effect of extracellular calcium may be mediated by a cell
surface calcium receptor on the osteoclast. NPS scientists are currently working
to identify this receptor and to develop compounds that mimic the effects of
extracellular calcium to directly suppress osteoclastic bone resorption.
[DIAGRAM]
IN RESORBING BONE, OSTEOCLASTS ATTACH TIGHTLY TO THE SURFACE OF BONE AND
SECRETE ENZYMES AND PROTONS. THE ENZYMES DEGRADE THE ORGANIC MATRIX OF
BONE (MOSTLY COLLAGEN), AND THE PROTONS CREATE AN ACIDIC ENVIRONMENT
THAT DISSOLVES THE INORGANIC MATRIX OF BONE. AS THE MINERALIZED MATRIX
IS DISSOLVED, CALCIUM ACCUMULATES TO VERY HIGH LEVELS NEAR THE
OSTEOCLAST.
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C-cells of the thyroid produce the protein hormone, calcitonin. Osteoclasts
are known to possess cell membrane receptors for calcitonin which acts to
suppress osteoclastic bone resorption. Studies in animals and in humans have
shown that repetitive injections of calcitonin (usually daily) are effective at
inhibiting bone resorption, and injectable calcitonin is currently used in some
countries as a therapy for osteoporosis. The Company's novel approach is to
develop orally active drugs which can be used to manipulate the body's own
internal reserves of calcitonin in order to achieve a similar effect.
NPS and its collaborators at Brigham and Women's have confirmed that calcium
receptors are present on C-cells of the thyroid and that activation of C-cell
calcium receptors induces calcitonin secretion. In animal studies, the Company
has demonstrated that oral administration of calcimimetic compounds stimulates
secretion of calcitonin and can lead to increased circulating calcitonin levels.
Further IN VIVO studies are necessary to determine if this approach will result
in a significant decrease in bone resorption.
[DIAGRAM]
CALCIMIMETIC DRUGS THAT ACTIVATE C-CELL CALCIUM RECEPTORS INCREASE
CALCITONIN LEVELS IN THE BLOOD. CALCITONIN ACTS DIRECTLY ON OSTEOCLAST
CALCITONIN RECEPTORS TO SUPPRESS BONE RESORPTION ACTIVITY. CALCIMIMETIC
DRUGS ACTING ON A DISTINCT OSTEOCLAST CALCIUM RECEPTOR THAT NPS IS
WORKING TO IDENTIFY WOULD MIMIC THE EFFECT OF EXTRACELLULAR CALCIUM,
DIRECTLY SUPPRESSING BONE RESORPTION ACTIVITY.
PRECLINICAL RESEARCH STATUS. NPS has made significant progress on both of
its approaches to osteoporosis. In January 1996, the Company received the first
milestone payment of $3.0 million from SmithKline Beecham for progress made in
its osteoporosis program. Medicinal chemistry efforts at NPS are being applied
to various lead compounds with the goal of identifying proprietary clinical
development candidates. NPS has produced a human cell line that expresses the
parathyroid and C-cell calcium receptors and serves as a proprietary tool for
the high throughput screening of compounds to identify new drug candidates. The
Company continues to screen SmithKline Beecham and NPS compound libraries to
identify additional compounds with calcilytic or calcimimetic activity. There
can be no assurance that lead compounds will be identified as proprietary
clinical development candidates, that
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preclinical and clinical trials will proceed as indicated or that such
candidates will prove safe and effective, meet applicable regulatory standards
or be successfully marketed. See "Risk Factors -- Early Stage of Product
Development; Dependence on Norcalcin."
NEUROPROTECTION PROGRAM -- NPS 1506
OVERVIEW. Stroke is the third leading cause of death in the United States,
with over 500,000 cases reported each year. In stroke, a blood vessel becomes
blocked, leading to inadequate blood supply (ischemia) to the brain. While many
stroke victims survive, approximately 100,000 to 150,000 per year are left
severely and permanently disabled by nerve damage resulting from stroke. Much of
this damage occurs within the first 24 to 48 hours after the incident and is
caused by the excessive release of glutamate and the resultant influx of calcium
into nerve cells. Published research in animals has shown that much of this
damage can be prevented by blocking the influx of calcium into cells, especially
the influx which results from the activation of NMDA receptor-channels. Calcium
influx resulting from the activation of NMDA receptor-channels also appears to
cause neuronal damage associated with head trauma. Approximately two million
traumatic brain injuries occur each year in the United States, with 25% of such
injuries requiring hospitalization and about one percent resulting in death.
Certain medical procedures are associated with an increased risk of stroke.
For example, strokes occur in three to seven percent of coronary artery bypass,
carotid endarterectomy and heart valve replacement surgeries. Mild to severe
central nervous system dysfunction occurs in up to 80% of such procedures. This
is thought to result from multiple micro-strokes caused by the release into the
circulation of numerous tiny blood clots. The Company believes that it might be
possible to lessen the severity of neuronal damage and cognitive dysfunction
occurring as a result of such procedures by prophylactic treatment with certain
of the Company's neuroprotective compounds.
Because of the importance of glutamate receptor-operated calcium influx in
various neurological disorders, a number of companies are attempting to develop
antagonists of NMDA receptor-channels as therapeutics. Most of these compounds
have been associated with significant adverse side effects such as symptoms of
psychosis. There are currently no effective neuroprotective therapeutics
available that act to slow or stop the progression of brain damage once a stroke
or head trauma has occurred.
PRECLINICAL DEVELOPMENT STATUS. Systemic administration of the Company's
proprietary class of lead compounds, particularly NPS 1506, has demonstrated
significant neuroprotectant activity in certain animal models of ischemic stroke
and head trauma. In these animal studies, significant neuroprotectant activity
was still observed when administration of the compound was delayed for two hours
following the ischemic event. In addition, the Company's compounds have not
exhibited PCP-like effects in a variety of IN VITRO and IN VIVO animal studies
intended to identify PCP-like effects. The Company is currently conducting
preclinical efficacy, pharmacology and toxicology studies and estimates that it
will file an IND for NPS 1506 in the first half of 1997. There can be no
assurance that the IND will be filed, or that NPS 1506 or any of the other lead
compounds, will prove safe and effective, meet applicable regulatory standards
or be successfully marketed. See "Risk Factors -- Early Stage of Product
Development; Dependence on Norcalcin."
CHRONIC PAIN PROGRAM
It is estimated that up to 30% of the populations of industrialized
countries experience some degree of recurring or chronic pain. Chronic pain can
be defined as that pain which persists a month or longer past the normal time of
healing or which recurs at intervals for months or years. Although chronic pain
often results secondarily from a cause of acute pain, such as an injury, the
underlying mechanisms
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causing chronic pain are believed to be different from those causing acute pain.
The majority of medications used currently to treat chronic pain are the same as
those used to treat acute pain: conventional analgesics, including narcotic
analgesics such as morphine. Tricyclic antidepressants and anticonvulsant drugs
are also sometimes used to treat chronic pain. Many of the more effective of
these drugs have been associated with undesirable side effects including
drowsiness, constipation, cognitive changes and potential addiction.
Glutamate receptor-operated calcium channels, particularly NMDA
receptor-channels, have been shown in published studies to play a major role in
transmitting neuronal activity associated with chronic pain. The Company has
tested certain of its NMDA receptor-channel antagonist compounds in several
widely used animal models of pain. These compounds have demonstrated palliative
activity, specifically in animal models of chronic pain. In preclinical animal
studies of the Company's NMDA receptor-channel antagonists, the compounds did
not exhibit the PCP-like side effects which are often associated with many other
NMDA receptor-channel antagonists. The Company is conducting preclinical
research with its lead compounds with the goal of identifying a candidate for
preclinical development. There can be no assurance that lead compounds will be
identified as proprietary clinical development candidates, that preclinical and
clinical trials will be conducted, or that such candidates will prove safe and
effective, meet applicable regulatory standards or be successfully marketed. See
"Risk Factors -- Early Stage of Product Development; Dependence on Norcalcin."
EPILEPSY PROGRAM
Approximately 2.5 million Americans have been diagnosed with epilepsy. It
has been estimated that at least 25% of all patients with epilepsy are not
controlled adequately by existing medications. In addition, severe side effects
are commonly associated with currently available drugs, including drowsiness,
depression, memory loss and a decrease in mental acuity.
Glutamate, which is the major excitatory transmitter in the brain, has long
been suspected to play a major role in seizure activity and to contribute to
epilepsy. Preclinical studies conducted by the Company have demonstrated that
the systemic administration of certain of its proprietary NMDA receptor-channel
antagonists provides significant anticonvulsant activity in a variety of animal
models of epilepsy. In addition these compounds are active following oral
administration, as would be required for an anticonvulsant drug being utilized
on a chronic basis. Similarly, in these preclinical animal studies, the NPS
compounds did not exhibit PCP-like side effects typically associated with other
NMDA receptor-channel antagonists. NPS is conducting preclinical research with
its lead compounds with the goal of identifying a candidate for preclinical
development. There can be no assurance that lead compounds will be identified as
proprietary clinical development candidates, that preclinical and clinical
trials will be conducted, or that such candidates will prove safe and effective,
meet applicable regulatory standards or be successfully marketed. See "Risk
Factors -- Early Stage of Product Development; Dependence on Norcalcin."
DISCOVERY PROGRAMS
The Company is actively engaged in several other discovery programs which
seek to identify new molecular targets for the development of new drugs. These
discovery programs are extensions of the Company's discoveries in calcium
receptors and ion channels.
METABOTROPIC GLUTAMATE RECEPTORS
Metabotropic glutamate receptors ("mGluRs") are distinct from glutamate
receptor-operated calcium channels and are uniquely related in structure and
function to the parathyroid cell calcium
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receptor. The Company believes that its experience in the discovery and
development of drug candidates which act at calcium receptors provides the
Company with certain advantages in the mGluR field. mGluRs are involved in the
regulation of a number of important brain functions, and the Company believes
that drugs which target specific mGluRs may be useful in treating various
neurological disorders, including neurodegenerative disorders such as
Alzheimer's disease, cognitive dysfunction, anxiety and certain psychiatric
disorders.
NPS scientists have discovered proprietary small molecules which are active
at mGluRs. In addition, NPS scientists have cloned a novel mGluR and have
developed proprietary assays, cell lines and chimeric receptors for use in the
Company's mGluR program. The Company's compounds have substantially different
structures than existing compounds active at mGluRs which the Company believes
could allow them to reach the brain more efficiently. Medicinal chemistry
efforts with these lead compounds are ongoing at the Company.
ADDITIONAL CALCIUM RECEPTOR THERAPEUTICS
The Company has established that it is possible to preferentially target
calcium receptors in distinct tissues. Norcalcin, for example, has been shown in
animals to be about 40 times more potent at affecting PTH secretion than at
affecting calcitonin secretion. Norcalcin thus acts preferentially at the
parathyroid as compared to the C-cells of the thyroid. The Company has further
established that calcium receptors are not only present on parathyroid cells and
on C-cells but are also present on several other cell types, including certain
cells in the kidney, intestine, pituitary gland, pancreas and brain. Calcium
receptors on such cells represent potential drug targets for the treatment of
diseases other than HPT and osteoporosis.
The Company is actively pursuing drug candidates which target calcium
receptors in distinct tissues for the treatment of several disorders. In the
kidney, for example, NPS and its collaborators at Brigham and Women's have shown
that calcium receptors are abundantly expressed in certain cells which regulate
the excretion and reabsorption of calcium, magnesium and certain electrolytes.
Calcium receptors are also expressed in cells that regulate excretion and
reabsorption of water in the kidney. The Company believes that these calcium
receptors participate in the regulation of mineral, electrolyte and fluid
balance in the body and that drugs which target calcium receptors in the kidney
may provide therapies for abnormal states of ion and water retention. Such
abnormal states occur in congestive heart failure, for example, and in
nephrolithiasis (kidney stone formation).
INORGANIC ION RECEPTORS
The Company believes that calcium receptors are representative of a new and
important class of cell surface receptors, receptors that are able to detect and
respond to changes in the concentration of inorganic ions such as sodium,
chloride, potassium and phosphate. It has been known for some time that many
different tissues respond to changes in the level of such ions. For example,
Vitamin D synthesis and certain critical kidney functions are regulated in part
by changes in circulating phosphate ion concentrations. Similarly, certain
functions of the adrenal gland are affected by changes in potassium levels, and
the maintenance of fluid concentrations by the brain may depend on the
activation of sodium receptors. Therapeutic agents that act directly on
receptors for other ions could provide effective treatments for many disease
states. As a result, inorganic ion receptors are attractive targets for the
development of novel therapeutic agents. The Company's scientists and its
collaborators at Brigham and Women's are actively engaged in research to clone
new inorganic ion receptors, to determine their roles in human physiology, and
to discover new drug candidates which act selectively on such inorganic ion
receptors.
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NEURONAL ION CHANNELS
The Company has isolated, from its unique library of arthropod venoms,
various peptides that target neuronal ion channels, in particular, certain
calcium channels and certain potassium channels. The Company believes that its
discoveries of such peptide leads provide the Company with opportunities for the
discovery of drugs to treat various neurological disorders. For example, one
such peptide modulates a particular neuronal potassium channel by binding at a
previously unknown site on this channel. Blocking this potassium channel in
nerve cells is known to enhance specific neural activities, especially the
prolongation of neuronal signals that may have a potential palliative effect in
disorders such as Parkinson's disease, Alzheimer's disease and multiple
sclerosis.
DRUG DISCOVERY TECHNOLOGIES
The Company's approach to the discovery of novel drugs is to identify new
drug targets and to identify small molecules which modulate the activities of
these targets (or of previously identified targets) in ways that provide unique
and effective therapies. NPS has pioneered the use of various whole cell and
tissue functional screens in its drug discovery programs. The Company believes
that its functional screens substantially enhance its abilities to discover new
receptors and ion channels and new drug candidates which modulate the activities
of specific receptors or ion channels through novel mechanisms. Functional
screens were of critical importance, for example, in the Company's discovery of
Norcalcin and related molecules that modulate calcium receptor function by an
unusual mechanism.
In its drug discovery programs, the Company utilizes a unique library of
invertebrate venoms. These venoms are isolated from a wide variety of species of
spiders, scorpions, centipedes, parasitic wasps and other invertebrates
collected from around the world. Lead molecules from this library have been
useful in the discovery phases of many of the Company's programs. Examples
include the first-generation, small molecule Araxin-TM- ("arachnid toxin")
compounds which identified a novel site on NMDA receptor-channels, peptide leads
being used in the Company's ion channel discovery efforts, and early calcium
receptor agonist leads. The Company believes this library represents a
collection of compounds with unusual biological activities and is a significant
resource to the Company.
COLLABORATIVE RESEARCH AND LICENSE AGREEMENTS
NPS is pursuing research and product development both on an independent
basis and in collaboration with others. NPS currently has collaborative research
and/or license agreements with Amgen, Kirin, SmithKline Beecham and with Brigham
and Women's. See "Risk Factors -- Dependence on Collaborative Research and
License Relationships."
AMGEN INC.
In March 1996, the Company entered into a development and license agreement
with Amgen effective December 1995 (the "Amgen Agreement") which grants Amgen
the exclusive right to develop and commercialize Norcalcin and certain other
compounds for the treatment of HPT and indications other than osteoporosis
worldwide, excluding Japan, China, Korea and Taiwan (the "Kirin Territory").
Under the terms of the Amgen Agreement, NPS may receive from Amgen up to an
aggregate of $43.5 million and royalties from any future product sales in
exchange for exclusive rights to develop, manufacture and sell Norcalcin and
certain other compounds for the treatment of HPT worldwide, excluding the Kirin
Territory. Amgen has assumed full control, authority and responsibility for
conducting, funding and pursuing all aspects of the development, submissions for
regulatory approvals, manufacture and commercialization of Norcalcin and certain
related compounds in the Amgen Territory, including conducting clinical trials
and making regulatory submissions. Amgen has paid NPS an initial non-refundable
license fee of $10.0 million and purchased one million shares of Common Stock at
the
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price of the Company's Common Stock in November 1995 when the Amgen Agreement
was negotiated for an aggregate purchase price of $7.5 million. The balance of
the $43.5 million includes up to $26.0 million payable to NPS upon the
achievement of specific development milestones. NPS has the option to
participate with Amgen, under the direction of Amgen, in the development of
Norcalcin for HPT, and Amgen is required to reimburse NPS for such participation
which is limited to a total cost of $400,000 per year for a maximum time period
of five years. Amgen may terminate the Amgen Agreement for any reason upon 90
days written notice. Termination of the Amgen Agreement will result in the
reversion to NPS of its technology, patent and commercialization rights in the
Amgen Territory. There can be no assurance that Amgen will not terminate the
Amgen Agreement. Upon a termination of the license agreement with Kirin, Amgen
would receive worldwide rights to develop and commercialize Norcalin. See "Risk
Factors -- Dependence on Collaborative Research and License Relationships."
KIRIN BREWERY COMPANY, LIMITED
In June 1995, the Company entered into a five-year collaborative research
and license agreement with Kirin (the "Kirin Agreement") to develop and
commercialize Norcalcin and other compounds for the treatment of HPT in the
Kirin Territory. Under the terms of the Kirin Agreement, NPS may receive from
Kirin up to an aggregate of $25.0 million and royalties from any future product
sales in exchange for exclusive rights to develop, manufacture and sell
Norcalcin and certain other compounds for the treatment of HPT in the Kirin
Territory. Kirin is responsible for conducting clinical trials and obtaining
regulatory approvals of Norcalcin in the Kirin Territory. Kirin has paid NPS an
initial, non-refundable license fee of $5.0 million and committed to make $7.0
million in research payments for the development of back-up compounds over the
next five years. Of this $7.0 million, a total of $2.0 million is payable by the
end of the first year of the Kirin Agreement. The remaining $13.0 million will
be payable to NPS upon achievement of specific development milestones in the
United States and the Kirin Territory. Kirin is required to pay all costs of
developing and commercializing products within the Kirin Territory and will pay
royalties to NPS on any product sales. Kirin may terminate the Kirin Agreement
after June 1996 for any reason upon 90 days written notice. Termination of the
Kirin Agreement will result in the reversion to NPS of its technology, patent
and commercialization rights in the Kirin Territory. There can be no assurance
that Kirin will not terminate the Kirin Agreement. See "Risk Factors --
Dependence on Collaborative Research and License Relationships."
SMITHKLINE BEECHAM CORPORATION
In November 1993, NPS entered into a three-year collaborative research and
license agreement with SmithKline Beecham (the "SmithKline Agreement") to
collaborate on the discovery, development and marketing of drugs to treat
osteoporosis and other bone metabolism disorders. Under the SmithKline
Agreement, SmithKline Beecham has the exclusive license to develop and market
worldwide any calcium receptor-active compounds developed under the SmithKline
Agreement that are useful for treating osteoporosis and other bone metabolism
disorders, excluding HPT. In addition, SmithKline Beecham has a six-month right
of first negotiation of a research and license agreement with NPS with respect
to any compounds relating to osteoporosis not covered under the SmithKline
Agreement. Once compounds have been selected for development, SmithKline Beecham
has agreed to conduct and fund all development of such products, including all
human clinical trials and regulatory submissions. NPS has the right to
co-promote (up to 20% in the United States territory) with SmithKline Beecham
any resulting products in the United States. In 1992, S.R. One, an affiliate of
SmithKline Beecham, purchased $2.0 million of the Company's Preferred Stock. In
1993, at the time NPS entered into the SmithKline Agreement, S.R. One purchased
an additional $7.0 million in equity of the Company, and it acquired $495,000 of
Common Stock in the Company's initial public offering. All of the Preferred
Stock was converted into Common Stock upon the closing of the Company's initial
public offering.
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Under the terms of the SmithKline Agreement, in addition to the $7.0 million
equity purchase, SmithKline Beecham paid the Company a $6.0 million
non-refundable license fee and agreed to make additional payments to the Company
upon the achievement of specific milestones. A $3.0 million milestone payment
was made in January 1996. In July 1995, the Company began receiving payments
from SmithKline Beecham to support the Company's research efforts, and such
payments are expected to be approximately $4.3 million through the scheduled
expiration of the research term in October 1996. NPS is entitled to royalties on
sales of products for osteoporosis and other bone metabolism disorders developed
by SmithKline Beecham under the SmithKline Agreement and a share of the profits
from any co-promotion of such products. The SmithKline Agreement may be
terminated by SmithKline Beecham upon 30 days written notice, with NPS having
the right to extend the SmithKline Agreement for an additional period of time,
provided that drug marketing has commenced. Funded research under the SmithKline
Agreement will terminate in October 1996. Under certain circumstances, NPS has
the right to terminate the SmithKline Agreement after October 1997. Termination
of the SmithKline Agreement will result in reversion to NPS of its technology,
commercialization and patent rights in the licensed field of osteoporosis and
other bone and mineral disorders as well as all additional technology developed
in the course of the collaboration. There can be no assurance that SmithKline
Beecham will not terminate the SmithKline Agreement or that funded research will
be extended upon its termination in October 1996. See "Risk Factors --
Dependence on Collaborative Research and License Relationships."
THE BRIGHAM AND WOMEN'S HOSPITAL, INC.
In February 1993, NPS entered into two agreements with Brigham and Women's,
a sponsored collaborative research agreement (the "Brigham Research Agreement")
and a patent license agreement (the "Brigham License Agreement"). Brigham and
Women's, an affiliate of Harvard University Medical School, is a leading
research group in the area of calcium receptors. During the three-year period
from February 1993 through January 1996, NPS paid license fees and made research
support and milestone payments to Brigham and Women's totaling approximately
$1.0 million. In February 1996, the Company reached an agreement with Brigham
and Women's to extend the Brigham Research Agreement. Under the terms of the
extension, NPS has agreed to continue funding research on calcium receptors and
other inorganic ion receptors at Brigham and Women's for an additional two
years. The extended Brigham Research Agreement calls for NPS to make research
support and advance royalty payments of $810,000 to Brigham and Women's during
the period from February 1996 through February 1998. Of this, a $100,000 prepaid
royalty was paid in February 1996 incident to the agreed extension. The Brigham
License Agreement grants NPS an exclusive license to calcium receptor and
inorganic ion receptor technology arising under the Brigham Research Agreement.
The Brigham Research Agreement also grants NPS a right of first negotiation for
exclusive license rights to any other patentable subject matter arising out of
the sponsored research. NPS also has agreed to pay Brigham and Women's a royalty
on sales of any products covered by an issued patent under the Brigham License
Agreement and to promote sales of any licensed products for HPT for which the
Company receives regulatory approval.
PATENTS AND PROPRIETARY TECHNOLOGY
Periodically the Company files patent applications to protect technology,
inventions and improvements which the Company believes are important to the
development of its business. The Company also relies on trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain its competitive position.
The Company files patent applications in its own name, and when appropriate,
it has filed, and expects to continue to file, applications jointly with its
collaborators. These patent applications cover compositions of matter, methods
of treatment, methods of discovery, use of novel compounds and novel modes of
action, and recombinantly expressed receptors and gene sequences which are
believed by the Company to be important in its research and development
activities. None of the Company's principal proprietary rights, including rights
related to process, compounds, use and technique related to its
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calcium receptor science and NMDA receptor-channel technology, are protected by
issued patents in the Company's principal markets. The Company believes that its
pending patent applications in the fields of calcium receptors, inorganic ion
receptors, mGluRs and NMDA receptor-channels and compounds active at the same
give the Company a competitive advantage. The Company intends to file additional
patent applications as appropriate relating to its technology and to specific
products of the Company.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions. In
addition, the scope of the claims in a patent application can be significantly
modified during prosecution before the patent is issued. Consequently, the
Company does not know whether any of its applications will result in the
issuance of patents or, if any patents are issued, whether they will provide
significant proprietary protection or will be circumvented or invalidated.
Generally, patent applications in the United States are maintained in secrecy
until patents issue and publication of discoveries in the scientific or patent
literature often lag behind actual discoveries. In addition, no assurance can be
given that, even if published, the Company is aware of all such literature.
Accordingly, the Company cannot be certain that the named inventors were the
first to invent or that the Company is the first to pursue patent coverage for
such inventions. Moreover, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office to
determine priority of invention, which could result in substantial cost to the
Company, even if the eventual outcome is favorable to the Company. There can be
no assurance that the Company's pending patent applications, if issued, would be
held valid. An adverse outcome could subject the Company to significant
liabilities to third parties, could require disputed rights to be licensed from
third parties or require the Company to cease or modify its use of such
technology. Additionally, many of the Company's foreign patent applications have
been published as part of the patent prosecution process in such countries.
Protection of the rights revealed in such published patent applications can be
complex, costly and uncertain. See "Risk Factors -- Uncertainty of Protection of
Patents and Proprietary Technology."
The development of therapeutic products for applications in the Company's
product fields is intensely competitive. A number of pharmaceutical companies,
biotechnology companies, universities and research institutions have filed
patent applications or received patents in these and related fields. Some of
these applications or patents may limit or preclude the Company's applications
and could result in a significant reduction of the coverage of the Company's
patents, if issued.
NPS also relies on trade secrets and contractual arrangements to protect its
trade secrets. There can be no assurance that these agreements will be adequate,
that they will not be breached, that the Company would have adequate remedies
for any breach or that the Company's trade secrets will not otherwise become
known or be independently discovered by competitors.
Much of the know-how important to the Company's technology and many of its
processes are dependent upon the knowledge, experience and skills of key
scientific and technical personnel and are not the subject of pending patent
applications or issued patents. To protect its rights to its know-how and
technology, the Company requires all employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the
unauthorized use and restrict the disclosure of confidential information, and
require disclosure and assignment to the Company of ideas, developments,
discoveries and inventions made by them. There can be no assurance that these
agreements will effectively prevent disclosure of the Company's confidential
information or will provide meaningful protection for the Company's confidential
information if there is unauthorized use or disclosure. It must also be
recognized that competitors may develop substantially equivalent know-how and
technology.
In connection with certain research in the field of calcium and other ion
receptors, NPS has sponsored research by various university and government
laboratories. For example, the Company has executed a license agreement and a
research agreement regarding research in the area of calcium and other ion
receptors with Brigham and Women's. See "Collaborative Research and Licensing
Agreements -- The Brigham and Women's Hospital, Inc."
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The Company has also sponsored work at other government and academic
laboratories for various evaluations, assays, screenings and tests of its
natural products library and lead compounds in the central nervous system field.
Generally, under these agreements the Company funds the work of investigators in
exchange for the results of the specified works and the right or option to a
license to any patentable inventions that may result in designated areas.
Generally, if the sponsored work produces patentable subject matter, the Company
has the first right to negotiate for license rights therein. Any resulting
license would be expected to require the Company to pay royalties on net sales
of licensed products. There can be no assurance that any such inventions will
arise, that any patent applications thereon will be filed or, if filed, that any
patents will issue, that any license thereon can be negotiated, or that any
license agreement would give the Company valuable rights.
MANUFACTURING
NPS anticipates that all of its products will be made by synthetic chemical
manufacturing techniques. As such, the Company believes the compounds can be
precisely defined and characterized and should generally have relatively low
manufacturing costs compared to recombinant proteins produced by the
fermentation methods common to currently available biotechnology products.
NPS has no manufacturing facilities. Under the Amgen, Kirin and SmithKline
Agreements, each of such Licensee is responsible for the manufacture of the
applicable product. The Company relies on other manufacturers to produce its
proprietary compounds for research and development activities and in sufficient
quantities for preclinical and clinical purposes. The proposed pharmaceutical
products under development by the Company have never been manufactured on a
commercial scale, and there can be no assurance that such products can be
manufactured at a cost or in quantities to make them commercially viable. If the
Company were unable to contract for sufficient supply of its compounds on
acceptable terms, or if it should encounter delays or difficulties in its
relationships with manufacturers, the Company's preclinical and human clinical
testing schedule would be delayed. Such delay might postpone the submission of
products for regulatory approval or the market introduction and subsequent sales
of such products, which would have a materially adverse effect on the Company.
Moreover, contract manufacturers that the Company may use must adhere to cGMP
regulations enforced by the FDA through its facilities inspection program.
GOVERNMENT REGULATION
The production and marketing of the Company's product candidates and its
research and development activities are subject to regulation for safety,
efficacy and quality by numerous governmental authorities in the United States
and other countries. In the United States, drugs are subject to rigorous FDA
regulation. The Federal Food, Drug and Cosmetic Act, as amended, and the
regulations promulgated thereunder, and other federal and state statutes and
regulations govern, among other things, the testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising and promotion
of the Company's products. Product development and approval within this
regulatory framework take a number of years and involve the expenditure of
substantial resources.
The steps required before a pharmaceutical agent may be marketed in the
United States include: (i) preclinical laboratory tests, animal pharmacology and
toxicology studies and formulation studies; (ii) the submission to the FDA of an
IND for human clinical testing, which must become effective before human
clinical trials commence; (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug; (iv) the submission of
a New Drug Application ("NDA") to the FDA; and (v) FDA approval of the NDA prior
to any commercial sale or shipment of the drug. In addition to obtaining FDA
approval for each product, each domestic drug manufacturing establishment must
be registered with, and approved by, the FDA under cGMP regulations. Domestic
drug manufacturing establishments are subject to regular inspections by the FDA
and must comply with cGMP regulations.
38
<PAGE>
To supply products for use in the United States, foreign manufacturing
establishments must comply with cGMP regulations and are subject to periodic
inspection by the FDA or by corresponding regulatory agencies in their home
countries under reciprocal agreements with the FDA.
Preclinical studies include the laboratory evaluation of IN VITRO
pharmacology product chemistry and formulation, as well as animal studies to
assess the potential safety and efficacy of the product. Compounds must be
formulated according to cGMP, and preclinical safety tests must be conducted by
laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of the preclinical tests are submitted to the FDA as part
of an IND and are reviewed by the FDA prior to the commencement of human
clinical trials. Unless the FDA objects to an IND, the IND will usually become
effective 30 days following its receipt by the FDA. There can be no assurance
that submission of an IND will result in FDA authorization to commence clinical
trials.
Clinical trials involve the administration of the investigational new drug
to healthy volunteers and to patients under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be conducted under the auspices of an Internal
Review Board ("IRB") at the institution at which the study will be conducted.
The IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution.
Clinical trials typically are conducted in three sequential phases, which
phases may overlap. In Phase I, the initial introduction of the drug into
healthy subjects, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical
pharmacology). Phase II involves studies in a limited patient population to: (i)
determine the efficacy of the drug for specific, targeted indications; (ii)
determine dosage tolerance and optimal dosage; and (iii) identify possible
adverse effects and safety risks. When a compound is found to be effective and
to have an acceptable safety profile in Phase II evaluations, Phase III trials
are undertaken to evaluate further clinical efficacy and to test further for
safety within an expanded patient population at geographically dispersed
clinical study sites. There can be no assurance that Phase I, Phase II or Phase
III testing will be completed successfully within any specific time period, if
at all, with respect to any of the Company's products subject to such testing,
including Norcalcin. Furthermore, the Company, its collaborators, Licensees or
the FDA may suspend clinical trials at any time if they feel that the subjects
or patients are being exposed to an unacceptable health risk. See "Risk Factors
- - -- Government Regulation; No Assurance of Regulatory Approval."
The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the drug. The testing and approval
process is likely to require substantial time and effort, and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
FDA may deny an NDA if applicable regulatory criteria are not satisfied, require
additional testing or information, or require post-marketing testing and
surveillance to monitor the safety of the Company's products if the FDA does not
view the NDA as containing adequate evidence of the safety and efficacy of the
drug. Notwithstanding the submission of such data, the FDA may ultimately decide
that the application does not satisfy its regulatory criteria for approval.
Moreover, if regulatory approval of a drug is granted, such approval may entail
limitations on the indicated uses for which it may be marketed. Finally, product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to cGMP, which must be followed at all times. In complying with standards set
forth in these regulations, manufacturers must continue to expend time, money
and effort in the area of production and quality control to ensure full
technical compliance. See "Risk Factors -- Government Regulation; No Assurance
of Regulatory Approval."
39
<PAGE>
In addition to regulations enforced by the FDA, the Company is also subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and future federal, state or local regulations.
The Company's research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result, and any such liability could exceed the
resources of the Company. See "Risk Factors -- Risk of Product Liability; Use of
Hazardous Materials."
Outside the United States, the Company's ability to market a product is
contingent upon receiving a marketing authorization from the appropriate
regulatory authority. This foreign regulatory approval process includes all of
the risks associated with FDA approval set forth above.
COMPETITION
NPS is pursuing areas of product development in which the Company believes
there is a potential for extensive technological innovation in relatively short
periods of time. The Company operates in a field in which new discoveries occur
and are expected to occur at a rapid pace. The Company's competitors may succeed
in developing technologies or products that are more effective than those of the
Company or in obtaining regulatory approvals of their drugs more rapidly than
the Company and its collaborative partners, and could render the Company's
products obsolete or noncompetitive. Competition in the pharmaceutical industry
is intense and is expected to continue to increase. Many of the Company's
competitors, including biotechnology and pharmaceutical companies, are actively
engaged in the research and development of products in the Company's targeted
areas, including the fields of HPT, osteoporosis, neuroprotection, chronic pain
and epilepsy. Many of the Company's competitors have substantially greater
financial, technical, marketing and personnel resources than the Company. In
addition, some of them have considerable experience in preclinical testing,
human clinical trials and other regulatory approval procedures. Moreover,
certain academic institutions, governmental agencies and other research
organizations are conducting research in areas in which the Company is working.
These institutions are becoming increasingly aware of the commercial value of
their findings and are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they have
developed. These institutions may also market competitive commercial products on
their own or through joint ventures and will compete with the Company in
recruiting highly qualified scientific personnel. There can be no assurance that
a pharmacological method of treatment for certain diseases, such as HPT, will
prove to be superior to existing or newly discovered approaches to the treatment
of those diseases. See "Risk Factors -- Rapid Technological Change; Intense
Competition."
ENVIRONMENTAL LIABILITY
On November 29, 1995, the Company received a letter from the EPA notifying
the Company that it may have incurred liability under section 107(a) of the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, for two barrels of radioactive waste taken by a third party contractor
to a hazardous and radioactive waste storage, treatment and disposal facility in
Denver, Colorado. Upon the EPA's request, the Company has identified the waste
and has verified that the barrels containing the waste have been removed from
the Denver, Colorado facility. Removal of wastes from the facility and
remediation of soil and groundwater at this site is currently underway. To date,
the EPA has spent $2.1 million to clean up this facility. However, the ultimate
cost of removal and remediation actions and the length of time for such actions
are difficult to estimate. Based upon its inspection of the site, the Company is
of the belief that the barrels containing the waste disposed of by the Company
were neither leaking nor damaged. Although the Company was a small contributor
to the site and the
40
<PAGE>
Company believes that there are a number of other financially responsible
contributors, there can be no assurance that the Company will not be held liable
for all or a portion of the cleanup cost or any other costs or damages
associated with this disposal site. See "Risk Factors -- Risk of Product
Liability; Use of Hazardous Materials."
EMPLOYEES
As of March 31, 1996, NPS employed 79 individuals full-time, 21 of whom hold
Ph.D. or M.D. degrees and 16 of whom hold other advanced degrees. Approximately
60 full-time employees are engaged in research and development activities,
including a variety of disciplines within the areas of molecular biology,
pharmacology, medicinal chemistry, computer sciences and clinical development.
Approximately 19 full-time employees are employed in finance, legal and
regulatory affairs, market research, corporate development and general
administrative activities. None of the Company's employees is covered by
collective bargaining agreements, and management considers relations with its
employees to be good. Additionally, NPS augments its full-time staff through
consulting arrangements with experienced scientists and managers. The Company's
anticipated growth and expansion will require the hiring of additional
management, research and development, and administrative personnel.
FACILITIES
NPS currently occupies approximately 34,000 square feet of leased
laboratory, support and administrative space in the University of Utah Research
Park and has an option for an additional 10,000 square feet. The Company pays
approximately $525,000 annually under its facilities lease. The lease on these
facilities expires in September 1999. The Company believes that these facilities
should be sufficient to meet the Company's needs through September 1999.
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Hunter Jackson, Ph.D......................... 45 Chief Executive Officer, President and Chairman of the Board
James U. Jensen, J.D......................... 51 Vice President, Corporate Development and Legal Affairs,
Secretary and Director
Thomas B. Marriott, Ph.D..................... 47 Vice President, Development Research
Robert K. Merrell............................ 40 Vice President, Finance, Chief Financial Officer and
Treasurer
Edward F. Nemeth, Ph.D....................... 43 Vice President, Research
Doug Reed, M.D............................... 41 Vice President, Business Development and Director
Santo J. Costa, J.D.......................... 49 Director
James G. Groninger (1)(2).................... 51 Director
Donald E. Kuhla, Ph.D........................ 52 Director
Thomas N. Parks, Ph.D........................ 45 Director
Timothy J. Rink, M.D., Sc.D. (1)............. 50 Director
Jesse I. Treu, Ph.D. (1)(2).................. 48 Director
</TABLE>
- - --------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
HUNTER JACKSON, PH.D., has been Chief Executive Officer and Chairman of the
Board since founding the Company in 1986. He was appointed to the additional
position of President in January 1994. Prior to founding the Company, he was an
Associate Professor in the Department of Anatomy at the University of Utah
School of Medicine. Dr. Jackson received a B.A. in English from the University
of Illinois and a Ph.D. in Psychobiology from Yale University. He received
postdoctoral training in the Department of Neurosurgery, University of Virginia
Medical School.
JAMES U. JENSEN, J.D., has been Vice President, Corporate Development and
Legal Affairs since August 1991. He has been Secretary and a director of the
Company since 1987. From 1986 to July 1991, he was a partner in the law firm of
Woodbury, Jensen, Kesler & Swinton, P.C. (or its predecessor firm) concentrating
on technology transfer and licensing and corporate finance. Currently, he also
serves as counsel to Woodbury & Kesler, P.C. From July 1985 until October 1986,
he served as chief financial officer of Cericor, a software company, and from
1983 to July 1985, as outside general counsel. From 1980 to 1983, he served as
General Counsel and Secretary of Dictaphone Corporation, a subsidiary of Pitney
Bowes Inc. He serves as a director of Wasatch Funds, Inc., a registered
investment company, and of Interwest Home Medical, Inc., a public home use
medical equipment distributor. Mr. Jensen received a B.A. in English/Linguistics
from the University of Utah and a J.D. and an M.B.A. from Columbia University.
THOMAS B. MARRIOTT, PH.D., has been Vice President, Development Research
since August 1993. From February 1990 to July 1993, he served as Director,
Clinical Investigations for McNeil Pharmaceutical, a subsidiary of Johnson &
Johnson, with responsibility for developing and implementing clinical trial
strategies for a number of products. From 1986 until 1990, Dr. Marriott was
Director, Drug Metabolism for McNeil Pharmaceutical with responsibility for
planning, initiating and completing bioanalytical drug disposition and clinical
biopharmaceutics and pharmacokinetics research required for INDs and NDAs.
42
<PAGE>
In this position, he participated in the preparation of several INDs and NDAs
with responsibility for preparing or supervising the preparation of the IND
preclinical drug metabolism section and the NDA preclinical and clinical
metabolism and biopharmaceutics sections, and was responsible for integrating
the pharmacology, toxicology and clinical sections of INDs and NDAs. He received
a B.S. in Chemistry from Carleton College and a Ph.D. in Chemistry from the
Institute of Molecular Biology at the University of Oregon.
ROBERT K. MERRELL has been Vice President, Finance, Chief Financial Officer
and Treasurer since January 1995 and previously was Director of Finance and
Administration and Treasurer from December 1993 to December 1994. He joined the
Company as Controller/Treasurer in September 1988. Prior to that time, he was a
Senior Manager at KPMG Peat Marwick LLP. Mr. Merrell has been a licensed C.P.A.
since 1980. He received a B.A. in Accounting from the University of Utah and an
M.M. from Northwestern University.
EDWARD F. NEMETH, PH.D., has been Vice President, Research since January
1994. He joined the Company as Director of Pharmacology in March 1990. From 1986
until joining the Company, Dr. Nemeth was an Assistant Professor in the
Department of Physiology and Biophysics at Case Western Reserve University
School of Medicine. He holds a B.A. in Chemistry and Psychology from Lawrence
University and a Ph.D. in Pharmacology from Yale University. Dr. Nemeth was a
postdoctoral fellow in Neurobiology at the National Institutes of Health.
DOUG REED, M.D., has been Vice President, Business Development since April
1996 and has been a director of the Company since 1992. Prior to becoming an
officer of the Company, Dr. Reed was a member of the Audit and Compensation
Committees from 1994 to 1996. From May 1989 until joining the Company, Dr. Reed
was a Vice President of S.R. One, a venture capital firm. From 1985 to 1987, he
was Assistant Professor at Yale University School of Medicine. He is a director
of IBAH, Inc., a clinical research and pharmaceutical formulation development
company as well as several private companies. Dr. Reed received an M.D. from the
University of Missouri and an M.B.A. from the Wharton School at the University
of Pennsylvania.
SANTO J. COSTA, J.D., has served as a director since January 1995. Mr. Costa
has served as President, Chief Operating Officer and a director of Quintiles
Transnational Corporation, a publicly held global contract research
organization, since April 1994. From 1986 to 1993, he was employed by Glaxo,
Inc. where he served as Senior Vice President, Administration and General
Counsel and was a member of that company's Board of Directors. From 1977 to 1986
he was employed by Merrell Dow Pharmaceuticals (now Hoechst Marion Roussel)
where he served as U.S. Area Counsel and from 1971 to 1977 as Food & Drug
Counsel for Norwich/Eaton Pharmaceuticals. Mr. Costa received his B.S. in
Pharmacy and his J.D. from St. John's University.
JAMES G. GRONINGER has served as a director since 1988 and as a member of
the Audit and Compensation Committees since 1994. Mr. Groninger founded in
January 1995 and is President of The Bay South Company, a Richmond,
Virginia-based provider of financial advisory and investment banking services.
From 1988 through 1994, he served as a Managing Director, Investment Banking
Division, of PaineWebber Incorporated. Currently he serves on the Board of
Directors of Designs, Inc., a specialty retailer, and Cygne Designs, Inc., a
manufacturer of apparel. Mr. Groninger received a B.S. in Industrial
Administration from Yale University and an M.B.A. from Harvard Business School.
DONALD E. KUHLA, PH.D., has been a director of the Company since 1991. Since
1994, he has been Vice President of Plexus Ventures, Inc. ("Plexus"), a
biotechnology investment and consulting firm. From 1990 to 1994, Dr. Kuhla held
senior management positions with two venture capital backed, biotechnology
start-up companies. His early career was spent in research and development and
operations management positions with Pfizer Inc. and Rorer Group, Inc., his last
position at Rorer being Senior Vice President of Operations. Dr. Kuhla received
a B.A. in Chemistry from New York University and a Ph.D. in Organic Chemistry
from Ohio State University.
43
<PAGE>
THOMAS N. PARKS, PH.D., has been a director of the Company since its
founding in 1986. Dr. Parks also serves as a scientific consultant to NPS. He is
currently the George and Lorna Winder Professor of Neuroscience and Chairman of
the Department of Neurobiology and Anatomy at the University of Utah Medical
School. In 1978, Dr. Parks joined the faculty at the University of Utah Medical
School as an assistant professor. Dr. Parks received a B.S. in Biology from the
University of California at Irvine and a Ph.D. in Psychobiology from Yale
University. He was a postdoctoral fellow in Development Neurology at the
University of Virginia Medical School.
TIMOTHY J. RINK, M.D., SC.D., has been a director of the Company since 1991
and a member of the Compensation Committee since 1994. Dr. Rink also serves as a
scientific consultant to the Company. Since February 1996, Dr. Rink has been
Chairman, Chief Executive Officer and President of Aurora Biosciences
Corporation, a biotechnology company focused on ultra high throughput drug
screening. From 1990 through 1995 he was President, Chief Technical Officer and
director of Amylin Pharmaceuticals, Inc., a biotechnology company. He is also a
director of CoCensys, Inc., a publicly held biotechnology company. Dr. Rink is
an adjunct Professor of Pharmacology at the University of California at San
Diego and was a lecturer in physiology at the University of Cambridge, United
Kingdom, from 1978 to 1984. From 1984 to 1990, he was Vice President of Research
at SmithKline Beecham, plc. Dr. Rink received an M.D. and an Sc.D. from the
University of Cambridge.
JESSE I. TREU, PH.D., has been a director of the Company since 1992 and a
member of the Audit and Compensation Committees since 1994. He is a general
partner of Domain Associates, a venture capital firm specializing in life
sciences. Dr. Treu is a director of DNX Corporation, a pharmaceutical testing
company, Geltex Pharmaceuticals, Inc., a developer of polymer based
pharmaceuticals, and Lumisys, Inc., an electro-optical systems company. Before
joining Domain Associates in 1986, he was a principal of Channing, Weinberg and
Company, Inc. and its venture capital spin-off CW Ventures, and was a director
of several development-stage companies. From 1977 to 1982, Dr. Treu was a
technical director of Technicon Corporation responsible for marketing strategy
and new product development in immunology and histopathology and previously held
research and development management and corporate staff positions at General
Electric Company. Dr. Treu received a Ph.D. in Physics from Princeton
University.
Several of the Company's directors also serve as officers or directors of
other biotechnology companies, and areas of interest to the Company may from
time to time overlap with the interest of other companies for which the
Company's directors also serve as directors. Notwithstanding provisions of the
Company's Certificate of Incorporation and Bylaws eliminating monetary liability
and providing for indemnification of directors generally, the Company's
directors have a duty of loyalty to the Company under Delaware law. See "--
Limitation of Liability and Indemnification Matters." The Company believes that
its directors are sophisticated in their understanding of fiduciary duties. Such
directors typically have their own counsel to provide guidance with respect to
any issues that may arise with respect to such duties. It is the Company's
belief that, in most cases, there is no actual or potential conflict of interest
because other companies for which the Company's directors serve as directors are
engaged in unrelated or otherwise distinct areas of research and development. To
date, service by its directors on the boards of directors or as officers of
other biotechnology companies has not presented any significant issues for the
Company. Should any such issues arise, the Company will institute appropriate
procedures, which may include having a particular director recuse himself, or
otherwise limiting dissemination of information regarding particular product
programs that overlap with areas of interest of another company for which such
director also serves as a director.
COMMITTEES
The Audit Committee consists of Mr. Groninger and Dr. Treu. The Audit
Committee makes recommendations to the Board regarding the selection of
independent auditors, reviews the results and scope of audits and other services
provided by the Company's independent auditors and reviews and evaluates the
Company's internal audit controls.
44
<PAGE>
The Compensation Committee consists of Mr. Groninger, Dr. Rink and Dr. Treu.
The Compensation Committee makes recommendations to the Board concerning cash
and long-term incentive compensation for employees of the Company. The
Compensation Committee also makes recommendations to the Board regarding the
number of shares that should be subject to options, the timing of grants of
options under the Company's 1987 Stock Option Plan and 1994 Equity Incentive
Plan and the number of shares and the timing of offerings of such shares to
employees under the Employee Stock Purchase Plan.
DIRECTORS' COMPENSATION
The Company's directors do not currently receive any cash compensation for
service on the Board or any Committee thereof. Directors may be reimbursed for
certain expenses in connection with attendance at Board and Committee meetings.
Directors are eligible to receive stock options and stock bonuses under the
stock plans described below.
In January 1994, the Board adopted, and the stockholders subsequently
approved, the 1994 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"). Under the Directors' Plan, non-employee directors of the Company are
eligible to receive options. Options granted under the Directors' Plan are
non-discretionary and do not qualify as Incentive Stock Options ("ISOs") under
the Internal Revenue Code of 1986, as amended (the "Code"). Pursuant to the
terms of the Directors' Plan, each person who is elected for the first time to
be a director of the Company and who is not otherwise employed by the Company or
an affiliate of the Company (a "Non-Employee Director") will automatically be
granted an option to purchase 15,000 shares of Common Stock (subject to
adjustment as provided in the Directors' Plan) upon the date of his or her
election to the Board. On December 1 of each year, beginning in 1994, each
person who is then a Non-Employee Director and has been a Non-Employee Director
for at least three months will automatically be granted an option to purchase
3,000 shares of Common Stock (subject to adjustment as provided in the
Directors' Plan) pursuant to the Directors' Plan. A total of 90,000 shares of
Common Stock has been reserved for issuance under the Directors' Plan.
No option granted under the Directors' Plan may be exercised after the
expiration of ten years from the date such option was granted. Options granted
under the Directors' Plan vest at a rate of 28% of the shares subject to the
option one year after date of grant and 3% of the shares become exercisable each
month thereafter, provided that the optionee has, during the entire period prior
to such vesting date, continuously served as a Non-Employee Director. If the
optionee's service as a Non-Employee Director terminates for any reason other
than death, the option will remain exercisable for 12 months after the date of
termination, or until the option's expiration date, if earlier. If the optionee
dies, the option will remain exercisable for 18 months following the date of
death or until the expiration date of the option, whichever is earlier. The
exercise price of options granted under the Directors' Plan is 100% of the fair
market value of the Common Stock on the date of grant. Options granted under the
Directors' Plan are generally non-transferable. Unless otherwise terminated by
the Board, the Directors' Plan automatically terminates in January 2004.
As of December 31, 1995, options to purchase a total of 54,000 shares of
Common Stock had been granted under the Directors' Plan at exercise prices from
$3.00 to $8.25 per share, and a weighted average exercise price of $5.04 per
share. As of that date, no options had been exercised under the Directors' Plan.
Prior to the adoption of the Directors' Plan, the Company granted options to
directors under the 1987 Stock Option Plan.
In December 1994, the Board adopted the Non-Employee Directors' Stock Bonus
Program under the 1994 Equity Incentive Plan (the "Stock Bonus Program"). Under
the Stock Bonus Program, Non-Employee Directors are eligible to receive grants
of shares of Common Stock for attendance at Board and Committee meetings. The
Stock Bonus Program provides each Non-Employee Director of the Company with a
non-discretionary award of 200 shares of Common Stock for each Board and/or
Committee meeting attended by such Non-Employee Director. A total of 12,400
shares was granted under the Stock Bonus Program for meetings attended in 1995.
45
<PAGE>
The right to receive awards under the Stock Bonus Program is generally
non-transferable. The stock awards are made at the end of each calendar year.
Non-Employee Directors entitled to stock bonus awards shall not possess any
rights of a stockholder of the Company until such shares are delivered to the
Non-Employee Director. Unless otherwise terminated by the Board, the Stock Bonus
Program terminates in January 2004.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Groninger and Drs. Reed, Rink and Treu served on the Compensation
Committee in fiscal 1995. Upon becoming an officer of the Company in April 1996,
Dr. Reed resigned as a member of the Compensation and Audit Committees. No
officer or employee of the Company sits on the Compensation Committee. No member
of the Compensation Committee has at any time been an officer or employee of the
Company.
Dr. Treu, a director of the Company since 1992, is a general partner of
Domain Associates, which is the United States venture capital advisor to
Biotechnology Investments Limited ("BIL") pursuant to a contractual arrangement,
and a general partner of One Palmer Square Associates II, L.P., which is the
general partner of Domain Partners II, L.P. In the Company's initial public
offering in May 1994, Domain Partners II, L.P. and BIL purchased 180,000 and
50,000 shares of Common Stock, respectively.
Dr. Reed, a director of the Company since 1992, is a Vice President of S.R.
One. In November 1993, the Company 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. In 1992, S.R. One, an affiliate of SmithKline
Beecham, purchased $2.0 million of the Company's Preferred Stock. In November
1993, at the time NPS entered into the SmithKline Agreement, S.R. One purchased
an additional $7.0 million of Preferred Stock, and it acquired $495,000 of
Common Stock (90,000 shares) in the Company's initial public offering. The
869,049 shares of Preferred Stock purchased by S.R. One converted into 1,701,301
shares of Common Stock upon the closing of the Company's initial public offering
in May 1994. SmithKline Beecham has paid license fees of $6.0 million to the
Company under the SmithKline Agreement and may be required to make additional
payments upon the occurrence of certain milestones (of which $3.0 million was
paid to NPS in January 1996). In addition, SmithKline Beecham is scheduled to
fund all clinical development under the SmithKline Agreement, has dedicated a
scientific team to the program, and since July 1, 1995 has supported the
Company's research efforts in osteoporosis and will continue to do so through
the scheduled expiration of the research term in October 1996, if not previously
terminated. SmithKline Beecham is required to pay NPS royalties on sales of any
products for treating osteoporosis and other bone metabolism disorders developed
under the SmithKline Agreement. See "Business -- Collaborative Research and
License Agreements."
Dr. Kuhla, a director of the Company since 1991, is Vice President of
Plexus. The Company had a consulting agreement with Plexus through December 31,
1995, whereunder Plexus assisted the Company with its effort to establish a
collaboration for Norcalcin in Europe. During the years ended December 31, 1994
and 1995, the Company paid fees to Plexus totaling $34,000 and $84,500,
respectively. Plexus will earn an additional fee as payments are received from
Amgen. Under the agreement the maximum additional fee is $500,000, but the
Company and Plexus have agreed to negotiate in good faith for an increase in the
maximum because of the non-European territory licensed to Amgen.
Mr. Groninger is a brother-in-law of Dr. Jackson, the Company's Chief
Executive Officer, President and Chairman of the Board.
46
<PAGE>
EXECUTIVE COMPENSATION
The following table shows for the fiscal years ended December 31, 1995,
December 31, 1994 and December 31, 1993, certain compensation awarded or paid
to, or earned by, the Company's Chief Executive Officer and its other four most
highly compensated executive officers (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
CASH COMPENSATION LONG-TERM
COMPENSATION AWARDS
--------------------- -------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) STOCK OPTIONS GRANTED(#)
- - -------------------------------------------------------------------- --------- ---------- -------------------------
<S> <C> <C> <C>
Hunter Jackson, Ph.D................................................ 1995 189,033 45,000
Chief Executive Officer, President and 1994 180,000 45,000
Chairman of the Board 1993 145,511 75,000
James U. Jensen, J.D................................................ 1995 147,072 25,000
Vice President, Corporate Development and 1994 140,000 15,000
Legal Affairs and Secretary 1993 125,000 18,000
Thomas B. Marriott, Ph.D............................................ 1995 157,629 25,000
Vice President, Development Research 1994 150,000 30,000
1993 86,923 63,000
Robert K. Merrell................................................... 1995 110,422 20,000
Vice President, Finance, Chief Financial 1994 105,000 15,000
Officer and Treasurer 1993 93,000 15,000
Edward F. Nemeth, Ph.D.............................................. 1995 136,603 30,000
Vice President, Research 1994 130,000 30,000
1993 98,000 45,000
</TABLE>
1987 STOCK OPTION PLAN
The 1987 Stock Option Plan (the "1987 Plan") was adopted in June 1987. The
purposes of the 1987 Plan were to attract and retain qualified personnel, to
provide additional incentives to employees, officers, advisors, directors and
consultants of the Company and to promote the success of the Company's business.
No options have been granted under the 1987 Plan since December 1993, and the
Company will not make any future grants under the 1987 Plan. As of March 31,
1996, options to purchase a total of 535,493 shares of Common Stock had been
exercised for cash and services under the 1987 Plan at a weighted average
exercise price of $0.64 per share. As of March 31, 1996, options to purchase a
total of 782,604 shares of Common Stock were outstanding, with exercise prices
ranging from $0.34 to $4.00 per share and a weighted average exercise price per
share of $1.30.
Options granted under the 1987 Plan generally became exercisable at a rate
of one-third of the shares subject to the option on the first anniversary of the
option grant and one-third of the remaining shares subject to the option on each
of the second and third anniversary of the option grant. The maximum term of a
stock option under the 1987 Plan was 10 years; however, if the optionee at the
time of grant had voting power over more than 10% of the Company's outstanding
capital stock (a "10% Holder"), the maximum term of any incentive stock option
granted under the 1987 Plan was five years. The aggregate fair market value of
the stock with respect to which incentive stock options are exercisable for the
first time by an optionee in any calendar year may not exceed $100,000. The
exercise prices of incentive stock options granted under the 1987 Plan were at
least equal to 100%, 110% with respect to 10% Holders, of the fair market value
of the stock subject to the option on the date of grant. Although no minimum
exercise price of non-qualified stock options was required under the 1987 Plan,
the exercise price of non-qualified stock options previously granted under the
1987 Plan generally has been at least
47
<PAGE>
equal to the fair market value of the stock subject to the option on the date of
the grant. Any option that is exercisable at the time of grant and which expires
no sooner than three years from the grant date is subject to an option exercise
price equal to the fair market value of the option on the grant date.
1994 EQUITY INCENTIVE PLAN
In January 1994, the Board adopted the 1994 Equity Incentive Plan (the "1994
Plan"), which was subsequently approved by the stockholders in February 1994,
and an amendment to increase the number of shares available for grant under the
1994 Plan from 442,503 shares to 942,503 shares was approved by the stockholders
in May 1995. A total of 942,503 shares of Common Stock has been reserved for
issuance under the 1994 Plan. The purposes of the 1994 Plan are to attract and
retain qualified personnel, to provide additional incentives to employees,
officers, directors and consultants of the Company and its affiliates and to
promote the success of the Company's business. Under the 1994 Plan, the Company
may grant non-qualified stock options to employees, officers, directors and
consultants to the Company and its affiliates and may grant incentive stock
options to employees of the Company and its affiliates. As of March 31, 1996,
options to purchase a total of 19,873 shares of Common Stock had been exercised
for cash and services under the 1994 Plan at a weighted average exercise price
of $13.85 per share. As of March 31, 1996, options to purchase 622,727 shares of
Common Stock with exercise prices ranging from $3.00 to $14.50 per share, and a
weighted average exercise price per share of $5.61, were outstanding.
Options granted under the 1994 Plan generally become exercisable at a rate
of 28% of the shares subject to the option at the end of the first year and 3%
of the shares subject to the option at the end of each calendar month
thereafter. The maximum term of a stock option under the 1994 Plan is 10 years;
however, if the optionee who is granted an incentive stock option at the time of
grant is a 10% Holder, the maximum term of any incentive stock option granted
under the 1994 Plan is five years. If an optionee terminates his or her service
to the Company, the optionee may exercise only those option shares vested as of
the date of termination and must effect such exercise within three months of
termination of service for any reason other than death or disability, one year
after termination due to disability, and 18 months after termination due to
death. The aggregate fair market value with respect to which incentive stock
options are exercisable for the first time by an optionee in any calendar year
may not exceed $100,000. The exercise price of incentive stock options granted
under the 1994 Plan must be at least 100%, 110% with respect to 10% Holders, of
the fair market value of the Common Stock of the Company on the date of grant.
Upon completion of this Offering, no employee will be a 10% Holder. The exercise
price of non-qualified stock options granted under the 1994 Plan is the fair
market value of the Company's Common Stock on the date of grant or such other
exercise price as is set by the Board at the date of grant. Payment of the
exercise price may be made in cash or by shares of the Company's Common Stock
valued at the fair market value of such shares on the date of exercise or in any
other form acceptable to the Board. The 1994 Plan also allows the Company to
grant stock bonuses, reload options, rights to purchase restricted stock and
stock appreciation rights.
The 1994 Plan may be amended at any time by the Board, although certain
amendments require stockholder approval. The 1994 Plan will terminate in January
2004, unless earlier terminated by the Board.
48
<PAGE>
The following table sets forth each grant of options to purchase Common
Stock made during the year ended December 31, 1995 to each of the Named
Executive Officers. Grants of options to each of the Named Executive Officers
were made under the 1994 Plan:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE OR PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES BASE PRICE OPTION TERM($)(4)
OPTIONS IN FISCAL PER SHARE EXPIRATION ----------------------
NAME GRANTED(#)(1) YEAR(2) ($/SH) DATE(3) 5% 10%
- - ------------------------------------ ------------- ----------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Hunter Jackson...................... 45,000 12.03% $ 8.25 12/14/05 $ 233,477 $ 591,677
James U. Jensen..................... 25,000 6.68 8.25 12/14/05 129,710 328,709
Thomas B. Marriott.................. 25,000 6.68 8.25 12/14/05 129,710 328,709
Robert K. Merrell................... 20,000 5.35 8.25 12/14/05 103,768 262,968
Edward F. Nemeth.................... 30,000 8.02 8.25 12/14/05 155,651 394,451
</TABLE>
- - --------------
(1) Options granted under the 1994 Plan become exercisable at the rate of 28% of
the shares subject to the option one year after the date of grant and 3% of
the shares subject to the option each month thereafter.
(2) Based on an aggregate of 374,000 options granted under the 1994 Plan to
employees of the Company, including the Named Executive Officers.
(3) These options have a 10-year term, subject to earlier termination upon
death, disability or termination of employment.
(4) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years). It is calculated by assuming that the stock
price on the date of grant appreciates at the indicated annual rate
compounded annually for the entire term of the option and that the option is
exercised and sold on the last day of its term for the appreciated stock
price. No gain to the optionee is possible unless the stock price increases
over the option term, which will benefit all stockholders.
The following table sets forth information with respect to (i) the exercise
of stock options by the Named Executive Officers during the fiscal year ended
December 31, 1995; (ii) the number of unexercised options held by the Named
Executive Officers as of December 31, 1995; and (iii) the value as of December
31, 1995 of unexercised in-the-money options.
OPTION EXERCISES IN 1995 AND YEAR-END VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS(#) OPTIONS($)(2)
SHARES ACQUIRED VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) ($)(1) UNEXERCISABLE UNEXERCISABLE
- - ------------------------------ ----------------- -------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Hunter Jackson................ 67,800 $ 494,478 107,600/102,400 $ 1,681,850/1,247,950
James U. Jensen............... 64,400 157,477 28,700/41,800 449,225/470,400
Thomas B. Marriott............ 3,000 16,155 47,400/67,600 748,470/871,950
Robert K. Merrell............. 18,643 113,758 69,057/35,800 1,119,779/410,510
Edward F. Nemeth.............. 30,000 88,650 83,400/66,600 1,320,150/806,550
</TABLE>
- - --------------
(1) Value realized is based on the fair market value of the Company's Common
Stock on the date of exercise (the closing sales price reported on the
Nasdaq National Market on such date) minus the exercise price, and does not
necessarily indicate that the optionee sold such stock.
(2) Represents the difference between the option exercise price and the closing
price of the Company's Common Stock as reported on the Nasdaq National
Market on December 31, 1995 ($17.25) times the corresponding number of
shares.
49
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
In January 1994, the Board adopted the Employee Stock Purchase Plan (the
"Purchase Plan"), which was subsequently approved by the stockholders in
February 1994. The Purchase Plan provides a means by which employees may
purchase Common Stock of the Company through payroll deductions. The Purchase
Plan is implemented by offerings of rights to eligible employees. Generally,
each offering is of 24 months' duration with purchases occurring every six
months. Common Stock is purchased for accounts of employees participating in the
Purchase Plan at a price per share equal to the lower of (i) 85% of the fair
market value of a share of Common Stock on the date of commencement of
participation in the offering, or (ii) 85% of the fair market value of a share
of Common Stock on the date of purchase. Generally, all employees, including
executive officers, who work at least 20 hours per week and are customarily
employed by the Company or an affiliate of the Company for at least five months
per calendar year may participate in the Purchase Plan and may authorize payroll
deductions of up to 15% of their base compensation for the purchase of Common
Stock under the Purchase Plan. A total of 90,000 shares of Common Stock has been
reserved for issuance under the Purchase Plan. As of March 31, 1996, a total of
51,362 shares of Common Stock had been purchased under the Purchase Plan at
prices from $2.76 to $5.42 per Share with a weighted average price of $3.20 per
share. The Purchase Plan will terminate in January 2004.
401(K) PLAN
In October 1990, the Company adopted the Employee 401(k) Profit Sharing 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 up to
the lesser of 15% of eligible compensation or the statutorily prescribed annual
limit ($9,500 in 1996) and have the amount of such reduction contributed to the
401(k) Plan. The 401(k) Plan permits, but does not require, additional matching
contributions to the 401(k) Plan by the Company on behalf of all participants.
The Company has not made any such contributions to date. The 401(k) Plan is
intended to qualify under Section 401 of the Code so that contributions by
employees or by the Company to the 401(k) Plan, and income earned on plan
contributions, are not taxable to employees until withdrawn, and contributions
by the Company, if any, will be deductible by the Company when made.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company shall indemnify its directors
and officers and may indemnify its employees and other agents to the fullest
extent permitted by Delaware law. The Company has entered into indemnification
contracts with its directors and officers and has purchased directors and
officers' insurance.
In addition, the Company's Certificate of Incorporation provides that the
Company's directors will not be liable for monetary damages for breach of the
directors' fiduciary duty of care to the Company and its stockholders. This
provision in the Certificate of Incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as an injunction
or other forms of non-monetary relief would remain available under Delaware law.
Each director will continue to be subject to liability for breach of the
director's duty of loyalty to the Company, for acts or omissions not in good
faith or involving intentional misconduct or knowing violations of law, for any
transaction from which the director derived an improper personal benefit and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Kuhla, a director of the Company, is a Vice President of Plexus, a
consulting firm, which assisted the Company with its effort to establish a
collaboration for Norcalcin in Europe. See "Management -- Compensation Committee
Interlocks and Insider Participation."
James U. Jensen is currently "of counsel" to the law firm of Woodbury &
Kesler, P.C. which provided legal services to the Company during the last fiscal
year. The dollar amount of fees paid to that law firm did not exceed five
percent of the law firm's gross revenues for its last full fiscal year.
S.R. One, an affiliate of SmithKline Beecham, is a stockholder of the
Company and has entered into various stockholder agreements with the Company.
See "Management -- Compensation Committee Interlocks and Insider Participation."
In May 1994, BIL and Domain Partners II, L.P. purchased 50,000 and 180,000
shares of Common Stock, respectively. Dr. Treu, a director of the Company since
1992, is a general partner of Domain Associates which is the U.S. venture
capital advisor to BIL pursuant to a contractual arrangement. Dr. Treu is a
general partner of One Palmer Square Associates II, L.P., which is the general
partner of Domain Partners II, L.P.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of March 31, 1996 as adjusted to reflect the
sale of the 3,000,000 shares of Common Stock being offered hereby (assuming no
exercise of the Underwriters' over-allotment option), by (i) each person or
entity who is known by the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each director and Named Executive Officer of the
Company, and (iii) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
NUMBER OF OWNED(2)
SHARES --------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER (1) OWNED(2) OFFERING OFFERING
- - ------------------------------------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
S. R. One, Limited (3) ........................................................ 1,797,091 21.93% 16.05%
Bay Colony Executive Park
565 East Swedesford Road, Suite 315
Wayne, PA 08542
Amgen Inc. .................................................................... 1,000,000 12.21 8.94
1840 DeHavilland Drive
Thousand Oaks, CA 91320-1789
State of Wisconsin Investment Board ........................................... 645,000 7.88 5.77
P.O. Box 7842
Madison, WI 53707
Biotechnology Investments Limited (4) ......................................... 635,938 7.77 5.68
P.O. Box 58
St. Julian's Court
St. Peter Port, Guernsey, Channel Islands
Domain Partners II, L.P. (5) .................................................. 575,938 7.03 5.15
One Palmer Square
Princeton, NJ 08542
Doug Reed, M.D. (6)............................................................ 1,798,891 21.96 16.07
Jesse I. Treu, Ph.D. (7)....................................................... 584,798 7.14 5.23
Hunter Jackson, Ph.D. (8)...................................................... 509,528 6.14 4.51
Thomas N. Parks, Ph.D. (9)..................................................... 355,090 4.33 3.17
James G. Groninger (10)........................................................ 171,852 2.09 1.53
Edward F. Nemeth, Ph.D. (11)................................................... 121,856 1.47 1.08
James U. Jensen, J.D. (12)..................................................... 111,369 1.35 *
Robert K. Merrell (13)......................................................... 67,807 * *
Thomas B. Marriott, Ph.D. (14)................................................. 51,138 * *
Donald E. Kuhla, Ph.D. (15).................................................... 36,840 * *
Timothy J. Rink, M.D., Sc.D. (16).............................................. 36,640 * *
Santo J. Costa, J.D. (17)...................................................... 7,650 * *
3,853,459 44.75 33.19
All directors and executive officers as a group (12 persons) (18)..............
</TABLE>
- - ------------------
* Less than 1 percent.
(1) Except as set forth herein, the address of the persons set forth above is
the address of the Company appearing elsewhere in this Prospectus.
(2) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "Commission"). Beneficial ownership is
determined in accordance with the rules of the Commission and generally
includes voting or investment power with respect to securities. Except as
indicated by footnotes and subject to community property laws, where
applicable, the persons named above have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them. Beneficial ownership also includes shares of stock subject to options
and warrants exercisable or convertible within 60 days.
(3) Includes 5,790 shares subject to options exercisable within 60 days of
March 31, 1996 by Dr. Reed, who on March 31, 1996 was a Vice President of
S.R. One. Upon exercise, such shares will be transferred to and held by
S.R. One. Dr. Reed shares voting and
52
<PAGE>
investment power with the other officers of S.R. One. Those officers are:
Peter A. Sears, President, Brenda D. Gavin, Vice President, Donald F.
Parman, Vice President and Secretary, and William J. Shulby, Treasurer. Dr.
Reed disclaims beneficial ownership of the shares held by S.R. One, except
to the extent of his pro rata interest therein. See footnote (6) below.
(4) Excludes shares subject to options exercisable within 60 days of March 31,
1996 by Dr. Treu, a general partner of Domain Associates, which is the
United States venture capital advisor to BIL pursuant to a contractual
arrangement. Domain Associates has no voting or investment power over
shares owned by BIL. BIL disclaims beneficial ownership of the shares
issuable to Dr. Treu upon exercise of options. BIL is a publicly held,
Guernsey, Channel Islands corporation whose shares are traded on the London
Stock Exchange. The directors of BIL who share voting and investment power
with respect to the shares held by BIL are as follows: Lord Armstrong of
Ilminster, GCB, CVO (Chairman); Dr. John Bradfield, CBE (Deputy Chairman);
Simon Chandler, FCA; William Lane, QC; Air Chief Marshal Sir Peter Le
Cheminant, GBE, KCB, DFC; Alan Le Page, FCIB; Geoffrey Robinson, ASCA; and
Robert Sinclair, FCA. See footnotes (5) and (7) below.
(5) Excludes (i) 2,790 shares subject to options exercisable within 60 days of
March 31, 1996 by Dr. Treu, a general partner of One Palmer Square
Associates II, L.P. ("Palmer Square II"), which is the general partner of
Domain Partners II, L.P. ("Domain II") and (ii) 1,250 shares beneficially
owned by Palmer Square II. Domain II disclaims beneficial ownership of the
shares issuable to Dr. Treu upon exercise of options and of the shares held
by Palmer Square II. Dr. Treu shares voting and investment power with the
other general partners of Palmer Square II, James C. Blair, Richard S.
Schneider and Brian H. Dovey, with respect to the shares held by Domain II.
See footnotes (4) and (7).
(6) Includes 1,791,301 shares beneficially owned by S.R. One. Dr. Reed is Vice
President of S.R. One. Also includes 5,790 shares subject to options
exercisable within 60 days of March 31, 1996. Upon exercise, such shares
will be transferred to, and be held by, S.R. One. With respect to the
shares held by S.R. One, Dr. Reed shares voting and investment power with
the other officers of S.R. One. Dr. Reed disclaims beneficial ownership of
the shares held by S.R. One. On April 15, 1996, Dr. Reed became a full-time
employee and Vice President, Business Development of the Company. See
footnote (3) above.
(7) Includes 575,938 shares beneficially owned by Domain II and 1,250 shares
beneficially owned by Palmer Square II. Dr. Treu is a general partner of
Palmer Square II, which is the general partner of Domain II. See footnote
(5) above. Does not include the shares beneficially owned by BIL. Dr. Treu
is a general partner of Domain Associates, which is the United States
venture capital advisor to BIL pursuant to a contractual arrangement.
Domain Associates has no voting or investment power over the shares owned
by BIL. See footnote (4) above. Also includes 2,790 shares subject to
options exercisable within 60 days of March 31, 1996. Dr. Treu's address is
the address of Domain II above.
(8) Includes 75,000 shares held in a trust and 2 shares held by Dr. Jackson's
children, of which he disclaims beneficial ownership. Also includes 106,350
shares subject to options exercisable within 60 days of March 31, 1996.
(9) Includes 5,790 shares subject to options exercisable within 60 days of
March 31, 1996.
(10) Includes 63,450 shares held by Mr. Groninger's children, of which he
disclaims beneficial ownership. Also includes 16,290 shares subject to
options exercisable within 60 days of March 31, 1996.
(11) Includes 87,900 shares subject to options exercisable within 60 days of
March 31, 1996.
(12) Includes 31,250 shares held by a trust. Also includes 30,950 shares subject
to options exercisable within 60 days of March 31, 1996.
(13) Includes 64,307 shares subject to options exercisable within 60 days of
March 31, 1996.
(14) Includes 41,297 shares subject to options exercisable within 60 days of
March 31, 1996.
(15) Includes 20,040 shares subject to options exercisable within 60 days of
March 31, 1996.
(16) Includes 35,040 shares subject to options exercisable within 60 days of
March 31, 1996.
(17) Includes 6,450 shares subject to options exercisable within 60 days of
March 31, 1996.
(18) Includes an aggregate of 422,994 shares subject to options exercisable
within 60 days of March 31, 1996. See footnotes (6) through (17) above.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation provides that the authorized
capital stock of the Company is 20,000,000 shares of Common Stock, $.001 par
value, and 5,000,000 shares of Preferred Stock, $.001 par value. Upon completion
of the Offering, 11,187,232 shares of Common Stock (including the shares of
Common Stock offered hereby) and no shares of Preferred Stock will be
outstanding. As of March 31, 1996, there were approximately 160 holders of
record of the Company's Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors and, as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board out of funds legally available therefor. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, holders of the Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preference of
any then outstanding Preferred Stock. Holders of Common Stock have no preemptive
rights and no right to convert their Common Stock into any other securities.
There are no redemption or sinking fund provisions applicable to the Common
Stock. All outstanding shares of Common Stock are, and all shares of Common
Stock to be outstanding upon completion of the Offering will be, fully paid and
nonassessable.
PREFERRED STOCK
The Board has the authority, without further action by the stockholders, to
issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designation of such series. The issuance of Preferred Stock could
adversely affect the voting power of holders of Common Stock and the likelihood
that such holders will receive dividend payments and payments upon liquidation
and could have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has no present plan to issue any shares of
Preferred Stock.
REGISTRATION RIGHTS
Pursuant to agreements with the Company, holders of an aggregate of
2,097,239 outstanding shares of Common Stock (the "Registrable Shares") are
entitled to certain registration rights ("Registration Rights"). Such holders
may, subject to certain limitations, require the Company to register at least
20% of their Registrable Shares for public resale at the Company's expense. In
addition, these holders have the right to include their Registrable Shares,
subject to certain limitations, in any registration of shares of Common Stock by
the Company under the Securities Act. These holders also have the right to
request up to two registrations on Form S-3 in any 12-month period. The Company
is required to bear all registration expenses, other than underwriters'
discounts and commissions, for all Company-initiated registrations and for the
first registration on Form S-3.
The Company has filed a registration statement on Form S-3 for the resale of
the 1,000,000 shares of Common Stock sold to Amgen (the "Amgen Shares") pursuant
to its obligations under the related stock purchase agreement. The Company has
agreed to keep the registration statement effective for a period of three years
or until all such shares are sold. Amgen also has the right, subject to certain
limitations, to include such shares in any registration of Common Stock by the
Company under the Securities Act. The Company is required to bear all
registration expenses with respect to the registration of the Amgen
54
<PAGE>
Shares on Form S-3 and is required to bear all registration expenses, other than
underwriters' discounts and commissions, with respect to any future
Company-initiated registration in which Amgen may have the right to include its
shares. Amgen has waived its registration rights with respect to this Offering.
In addition, the holder of a warrant to purchase 32,542 shares of Common
Stock is entitled to include such shares in any registration effected by the
Company under the Securities Act which is initiated by the holders of
Registrable Shares, but only to the extent the inclusion of such shares would
not reduce the number of Registrable Shares to be included in such registration.
The holder of such warrant to purchase Registrable Shares is also entitled,
subject to certain limitations, to participate in a registration initiated by
the Company.
The holders of Registrable Shares and the warrantholder have waived all
registration rights with respect to this Offering.
WARRANT
The Company has issued to an equipment financing company a warrant to
purchase 32,542 shares of Common Stock at $3.69 per share. The warrant expires
in June 2002.
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Securities Transfer, Incorporated.
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters (the "Underwriters") named below, for whom Vector Securities
International, Inc., Salomon Brothers Inc and UBS Securities LLC are acting as
representatives (the "Representatives"), have severally agreed to purchase,
subject to the terms and conditions of the Underwriting Agreement, and the
Company has agreed to sell to the Underwriters, the following respective number
of shares of Common Stock.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- - ------------------------------------------------------------------------------------- -----------------
<S> <C>
Vector Securities International, Inc................................................. 589,000
Salomon Brothers Inc................................................................. 588,000
UBS Securities LLC................................................................... 588,000
Bear, Stearns & Co. Inc.............................................................. 65,000
Alex. Brown & Sons Incorporated...................................................... 65,000
CS First Boston Corporation.......................................................... 65,000
Donaldson, Lufkin & Jenrette Securities Corporation.................................. 65,000
A.G. Edwards & Sons, Inc............................................................. 65,000
Lehman Brothers Inc.................................................................. 65,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................................... 65,000
Montgomery Securities................................................................ 65,000
Morgan Stanley & Co. Incorporated.................................................... 65,000
Oppenheimer & Co., Inc............................................................... 65,000
Prudential Securities Incorporated................................................... 65,000
Allen & Company Incorporated......................................................... 65,000
Cowen & Company...................................................................... 35,000
Crowell, Weedon & Co................................................................. 35,000
Duff & Phelps, Inc................................................................... 35,000
Jefferies & Company, Inc............................................................. 35,000
Ladenburg, Thalmann & Co. Inc........................................................ 35,000
McDonald & Company Securities, Inc................................................... 35,000
Needham & Company, Inc............................................................... 35,000
Rauscher Pierce Refsnes, Inc......................................................... 35,000
Raymond James & Associates, Inc...................................................... 35,000
Starr Securities, Inc................................................................ 35,000
Sutro & Co. Incorporated............................................................. 35,000
Van Kasper & Company................................................................. 35,000
Yamaichi International (America), Inc................................................ 35,000
--------
Total.............................................................................. 3,000,000
--------
--------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The nature
of the Underwriters' obligation is such that they are committed to purchase all
shares of Common Stock offered hereby if any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $.58 per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $.10 per share to certain other dealers. After the
public offering of the shares of Common Stock, the offering price and other
selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable at any
time during the 30-day period after the date of this Prospectus, to purchase up
to an additional 450,000 shares of Common Stock at the public offering price set
forth on the cover page of this Prospectus, less underwriting discounts and
56
<PAGE>
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with the Offering. To the extent
such option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares of Common Stock set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
listed in the table.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of this Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The executive officers, directors and certain other stockholders of the
Company have agreed that they will not, without the prior written consent of
Vector Securities International, Inc., offer, sell or otherwise dispose of any
shares of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock owned by
them for a period of 90 days after the date of this Prospectus. The Company has
agreed that it will not, without the prior written consent of Vector Securities
International, Inc., offer, sell or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock for a period of 90
days after the date of this Prospectus, except that the Company may grant
additional options under its stock option plans, or issue shares upon the
exercise of outstanding stock options or warrants.
In connection with this Offering, certain Underwriters and selling group
members (if any) who are qualifying registered market makers on the Nasdaq
National Market may engage in passive market-making transactions in the Common
Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the
Securities Exchange Act of 1934 during the two business day period before
commencement of sales in this Offering. The passive market making transactions
must comply with applicable volume and price limits and be identified as such.
In general, a passive market maker may display its bid at a price not in excess
of the highest independent bid for the security. If all independent bids are
lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded. Net purchases by a passive
market maker on each day are generally limited to a specified percentage of the
passive market making average daily trading volume in the Common Stock during a
price period and must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Common Stock at a level above that
which might otherwise prevail, and, if commenced, may be discontinued at any
time.
57
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Pillsbury Madison & Sutro LLP, San Francisco and Menlo
Park, California. Certain legal matters in connection with the sale of shares of
Common Stock in this Offering will be passed upon for the Underwriters by
Skadden, Arps, Slate, Meagher & Flom, Chicago, Illinois.
EXPERTS
The financial statements of NPS, a development stage company, as of December
31, 1994 and 1995, and for each of the years in the three-year period ending
December 31, 1995, and for the period from October 22, 1986 (inception) through
December 31, 1995, included herein and elsewhere in the Registration Statement,
have been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The statements in this Prospectus under the captions "Risk Factors --
Uncertainty of Protection of Patents and Proprietary Technology" and "Business
- - -- Patents and Proprietary Technology," insofar as they constitute matters of
patent law, have been reviewed by Lyon & Lyon, and are subject to an opinion to
be rendered to the Underwriters.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to such Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement. The
Registration Statement, together with the exhibits and schedules thereto, may be
inspected without charge at the offices of the Commission at 450 Fifth Street,
N.W., Washington, DC 20549 or at its regional offices located at 500 West
Madison Street, Chicago, Illinois 60661 and 14th Floor, 75 Park Place, New York,
New York 10007. Copies of such material may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, DC
20549 at prescribed rates.
The Company is subject to the information requirements of the Securities and
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, DC 20549; and at the Commission's regional offices at Northwestern
Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and
14th Floor, 75 Park Place, New York, New York 10007. Copies of such material can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, DC 20549 at prescribed rates. The Company's Common
Stock is quoted on the Nasdaq National Market, and such reports, proxy
statements, and other information concerning the Company can be inspected at the
Public Reference Section of the Nasdaq National Market at 1735 K Street, N.W.,
Washington, D.C. 20006.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors................................. F-2
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statements of Stockholders' Equity.................................................... F-5
Statements of Cash Flows.............................................................. F-8
Notes to Financial Statements......................................................... F-10
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NPS Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of NPS Pharmaceuticals, Inc.
(a development stage company) as of December 31, 1994 and 1995, and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1995, and for the period from
October 22, 1986 (inception) through December 31, 1995. 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 company) as of December 31, 1994 and 1995, and the results of
its operations and its cash flows for each of the years in the three-year period
ended December 31, 1995, and for the period from October 22, 1986 (inception)
through December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Salt Lake City, Utah
February 7, 1996, except as to note 11
which is as of March 18, 1996
F-2
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, (NOTE 11)
---------------------------- DECEMBER 31,
1994 1995 1995
------------- ------------- -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 5,931,082 $ 8,039,625 $25,539,625
Marketable investment securities (note 2).......................... 3,392,135 300,000 300,000
Accounts receivable................................................ 260,000 23,000 23,000
------------- ------------- -------------
Total current assets............................................. 9,583,217 8,362,625 25,862,625
------------- ------------- -------------
Plant and equipment (note 4):
Equipment.......................................................... 2,039,441 2,272,006 2,272,006
Leasehold improvements............................................. 1,603,424 1,635,189 1,635,189
------------- ------------- -------------
3,642,865 3,907,195 3,907,195
Less accumulated depreciation and amortization..................... 1,209,298 1,711,551 1,711,551
------------- ------------- -------------
Net plant and equipment.......................................... 2,433,567 2,195,644 2,195,644
Other assets, at cost................................................ 67,028 42,154 42,154
------------- ------------- -------------
$ 12,083,812 $ 10,600,423 $28,100,423
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of obligation under capital leases (note 4)... $ 413,001 $ 435,230 $ 435,230
Current installments on long-term debt (note 5).................... -- 331,746 331,746
Accounts payable................................................... 924,480 1,036,464 1,036,464
Accrued expenses................................................... 141,511 139,714 139,714
Deferred income.................................................... -- 587,500 587,500
Income tax payable (note 7)........................................ -- -- 160,000
------------- ------------- -------------
Total current liabilities........................................ 1,478,992 2,530,654 2,690,654
Obligations under capital leases, excluding current installments
(note 4)............................................................ 440,098 53,761 53,761
Long-term debt, excluding current installments (note 5).............. -- 693,528 693,528
------------- ------------- -------------
Total liabilities................................................ 1,919,090 3,277,943 3,437,943
------------- ------------- -------------
Commitments and contingencies (notes 3, 4, 9 and 12).................
Stockholders' equity (note 6):.......................................
Preferred stock, $.001 par value; 5,000,000 shares authorized; no
shares issued and outstanding..................................... -- -- --
Common Stock, $.001 par value; 20,000,000 shares authorized; issued
and outstanding 6,787,358 shares at December 31, 1994, 7,072,801
shares at December 31, 1995, and 8,072,801 shares pro forma....... 6,787 7,073 8,073
Additional paid-in capital......................................... 27,847,067 28,067,130 35,566,130
Deferred compensation.............................................. (489,958) (234,458) (234,458)
Deficit accumulated during development stage....................... (17,199,174) (20,517,265) (10,677,265)
------------- ------------- -------------
Net stockholders' equity......................................... 10,164,722 7,322,480 24,662,480
------------- ------------- -------------
$ 12,083,812 $ 10,600,423 $28,100,423
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
OCTOBER 22,
1986
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
----------------------------------------- DECEMBER 31,
1993 1994 1995 1995
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
Revenues from research and license agreements........ $ 867,568 $ 3,860,706 $ 9,562,319 $ 22,315,849
Operating expenses:
Research and development........................... 6,021,126 7,765,326 8,727,316 30,360,190
General and administrative......................... 2,003,699 3,121,688 3,975,379 12,788,445
------------ ------------ ------------- --------------
Total operating expenses......................... 8,024,825 10,887,014 12,702,695 43,148,635
------------ ------------ ------------- --------------
Operating loss................................... (7,157,257) (7,026,308) (3,140,376) (20,832,786)
Other income (expense):
Interest income.................................... 110,314 398,388 480,029 1,256,844
Interest expense................................... (111,638) (128,413) (157,744) (475,713)
Other.............................................. -- -- -- 34,390
------------ ------------ ------------- --------------
Total other income (expense)..................... (1,324) 269,975 322,285 815,521
------------ ------------ ------------- --------------
Loss before income tax expense................... (7,158,581) (6,756,333) (2,818,091) (20,017,265)
Income tax expense (note 7).......................... -- -- 500,000 500,000
------------ ------------ ------------- --------------
Net loss............................................. $ (7,158,581) $ (6,756,333) $ (3,318,091) $ (20,517,265)
------------ ------------ ------------- --------------
------------ ------------ ------------- --------------
Net loss per common share (note 1)................... $ (1.91) $ (1.13) $ (.48)
------------ ------------ -------------
------------ ------------ -------------
Weighted average shares outstanding (note 1)......... 3,751,000 5,977,300 6,924,400
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK STOCK STOCK
----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of 1,125,000 shares of common stock for cash and
equipment valued at fair value upon incorporation at
October 22, 1986........................................ $ -- $ -- $ -- $ -- $ --
Net loss................................................. -- -- -- -- --
----------- ----------- --- --- ---
Balances, December 31, 1986.............................. -- -- -- -- --
Repurchase of 375,000 shares of common stock............. -- -- -- -- --
Issuance of 82,500 shares of common stock for services... -- -- -- -- --
Net income............................................... -- -- -- -- --
----------- ----------- --- --- ---
Balances, December 31, 1987.............................. -- -- -- -- --
Issuance of 55,556 shares of preferred stock for cash.... 5,556 -- -- -- --
Issuance of 11,448 shares of common stock for cash upon
exercise of stock options............................... -- -- -- -- --
Issuance of 97,500 shares of common stock for services... -- -- -- -- --
Net loss................................................. -- -- -- -- --
----------- ----------- --- --- ---
Balances, December 31, 1988.............................. 5,556 -- -- -- --
Issuance of 37,037 shares of preferred stock for cash.... -- 3,704 -- -- --
Issuance of 7,500 shares of common stock for services.... -- -- -- -- --
Net loss................................................. -- -- -- -- --
----------- ----------- --- --- ---
Balances, December 31, 1989.............................. 5,556 3,704 -- -- --
Issuance of 37,037 shares of preferred stock for cash.... -- 3,703 -- -- --
Issuance of 2,475 shares of common stock for cash upon
exercise of stock options............................... -- -- -- -- --
Net loss................................................. -- -- -- -- --
----------- ----------- --- --- ---
Balances, December 31, 1990.............................. 5,556 7,407 -- -- --
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DEFERRED DURING NET
COMMON PAID-IN COMPEN- DEVELOPMENT STOCKHOLDERS'
STOCK CAPITAL SATION STAGE EQUITY
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
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.............................. 833 10,267 -- 108,797 119,897
Issuance of 55,556 shares of preferred stock for cash.... -- 294,446 -- -- 300,002
Issuance of 11,448 shares of common stock for cash upon
exercise of stock options............................... 11 1,516 -- -- 1,527
Issuance of 97,500 shares of common stock for services... 98 32,402 -- -- 32,500
Net loss................................................. -- -- -- (105,643) (105,643)
----------- ----------- ----------- ------------ -------------
Balances, December 31, 1988.............................. 942 338,631 -- 3,154 348,283
Issuance of 37,037 shares of preferred stock for cash.... -- 336,296 -- -- 340,000
Issuance of 7,500 shares of common stock for services.... 7 2,493 -- -- 2,500
Net loss................................................. -- -- -- (5,025) (5,025)
----------- ----------- ----------- ------------ -------------
Balances, December 31, 1989.............................. 949 677,420 -- (1,871) 685,758
Issuance of 37,037 shares of preferred stock for cash.... -- 336,297 -- -- 340,000
Issuance of 2,475 shares of common stock for cash upon
exercise of stock options............................... 2 898 -- -- 900
Net loss................................................. -- -- -- (212,976) (212,976)
----------- ----------- ----------- ------------ -------------
Balances, December 31, 1990.............................. 951 1,014,615 -- (214,847) 813,682
</TABLE>
F-5
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK STOCK STOCK
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of 4,500 shares of common stock for cash upon
exercise of stock options............................... $ -- $ -- $ -- $ -- $ --
Net loss................................................. -- -- -- -- --
----------- ----------- ----- ----- -----
Balances, December 31, 1991.............................. 5,556 7,407 -- -- --
Issuance of 3,675 shares of common stock for cash upon
exercise of stock options............................... -- -- -- -- --
Issuance of 230,334 shares of common stock upon
conversion of 129,630 shares of preferred stock......... (5,556) (7,407) -- -- --
Repurchase and cancellation of 83,334 shares of common
stock for cash.......................................... -- -- -- -- --
Issuance of 781,250 shares of preferred stock for cash,
net of offering costs................................... -- -- 781 -- --
Issuance of 678,573 shares of preferred stock for cash,
net of offering costs................................... -- -- -- 679 --
Issuance of 101,452 shares of common stock for services
related to preferred stock offering..................... -- -- -- -- --
Net loss................................................. -- -- -- -- --
----------- ----------- ----- ----- -----
Balances, December 31, 1992.............................. -- -- 781 679
Issuance of 37,524 shares of common stock for cash upon
exercise of stock options............................... -- -- -- -- --
Issuance of 583,334 shares of preferred stock for cash,
net of offering costs................................... -- -- -- -- 583
Issuance of 6,050 shares of preferred stock for
services................................................ -- -- -- -- 6
Deferred compensation related to grant of stock
options................................................. -- -- -- -- --
Net loss................................................. -- -- -- -- --
----------- ----------- ----- ----- -----
Balances, December 31, 1993.............................. -- -- 781 679 589
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DEFERRED DURING NET
COMMON PAID-IN COMPEN- DEVELOPMENT STOCKHOLDERS'
STOCK CAPITAL SATION STAGE EQUITY
----------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Issuance of 4,500 shares of common stock for cash upon
exercise of stock options............................... $ 5 $ 2,245 $ -- $ -- $ 2,250
Net loss................................................. -- -- -- (462,054) (462,054)
----------- ---------- ----------- ------------ -------------
Balances, December 31, 1991.............................. 956 1,016,860 -- (676,901) 353,878
Issuance of 3,675 shares of common stock for cash upon
exercise of stock options............................... 4 2,221 -- -- 2,225
Issuance of 230,334 shares of common stock upon
conversion of 129,630 shares of preferred stock......... 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................................... -- 4,937,462 -- -- 4,938,243
Issuance of 678,573 shares of preferred stock for cash,
net of offering costs................................... -- 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.............................. 1,208 10,363,052 -- (3,284,260) 7,081,460
Issuance of 37,524 shares of common stock for cash upon
exercise of stock options............................... 38 25,545 -- -- 25,583
Issuance of 583,334 shares of preferred stock for cash,
net of offering costs................................... -- 6,968,115 -- -- 6,968,698
Issuance of 6,050 shares of preferred stock for
services................................................ -- 72,594 -- -- 72,600
Deferred compensation related to grant of stock
options................................................. -- 766,500 (745,458) -- 21,042
Net loss................................................. -- -- -- (7,158,581) (7,158,581)
----------- ---------- ----------- ------------ -------------
Balances, December 31, 1993.............................. 1,246 18,195,806 (745,458) (10,442,841) 7,010,802
</TABLE>
F-6
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
OCTOBER 22, 1986 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK STOCK STOCK
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of 3,475,666 shares of common stock upon
conversion of 2,049,207 shares of preferred stock....... $ -- $ -- $ (781) $ (679) $ (589)
Issuance of 2,000,000 shares of common stock for cash,
net of offering costs................................... -- -- -- -- --
Issuance of 20,000 shares of common stock for services... -- -- -- -- --
Issuance of 46,118 shares of common stock for cash upon
exercise of options..................................... -- -- -- -- --
Amortization of deferred compensation.................... -- -- -- -- --
Net loss................................................. -- -- -- -- --
----------- ----------- ----- ----- -----
Balances, December 31, 1994.............................. -- -- -- -- --
Issuance of 242,385 shares of common stock for cash upon
exercise of options..................................... -- -- -- -- --
Issuance of 39,771 shares of common stock for cash....... -- -- -- -- --
Issuance of 3,287 shares of common stock for services.... -- -- -- -- --
Amortization of deferred compensation.................... -- -- -- -- --
Net loss................................................. -- -- -- -- --
----------- ----------- ----- ----- -----
Balances, December 31, 1995.............................. $ -- $ -- $ -- $ -- $ --
----------- ----------- ----- ----- -----
----------- ----------- ----- ----- -----
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DEFERRED DURING NET
COMMON PAID-IN COMPEN- DEVELOPMENT STOCKHOLDERS'
STOCK CAPITAL SATION STAGE EQUITY
----------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Issuance of 3,475,666 shares of common stock upon
conversion of 2,049,207 shares of preferred stock....... $ 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 upon
exercise of options..................................... 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 upon
exercise of options..................................... 243 100,378 -- -- 100,621
Issuance of 39,771 shares of common stock for cash....... 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
----------- ---------- ----------- ------------ -------------
----------- ---------- ----------- ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 22,
1986
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
---------------------------------------- DECEMBER 31,
1993 1994 1995 1995
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (7,158,581) $ (6,756,333) $ (3,318,091) $ (20,517,265)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 366,933 596,842 674,039 2,413,028
Gain on sale of equipment......................... -- -- -- (28,720)
Issuance of common and preferred stock in lieu of
cash for services................................ 72,600 95,978 9,861 214,539
Amortization of deferred compensation............. 21,042 255,500 255,500 532,042
Decrease (increase) in operating assets:
Accounts receivable............................. 97,747 (226,788) 237,000 (23,000)
Other assets.................................... 28,819 (21,553) 24,874 (45,754)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses........... 435,818 142,592 110,187 1,176,178
Deferred income................................. 3,400,000 (3,400,000) 587,500 587,500
------------ ------------ ------------ --------------
Net cash used in operating activities......... (2,735,622) (9,313,762) (1,419,130) (15,691,452)
Cash flows from investing activities:
Net sale (purchase) of marketable investment
securities......................................... 1,589,384 (3,392,135) 3,092,135 (300,000)
Acquisition of equipment and leasehold
improvements....................................... (1,206,683) (1,048,020) (373,171) (4,059,126)
Proceeds from sale of equipment..................... 648,274 -- -- 1,048,484
------------ ------------ ------------ --------------
Net cash provided by (used in) investing
activities................................... 1,030,975 (4,440,155) 2,718,964 (3,310,642)
</TABLE>
F-8
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 22,
1986
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
---------------------------------------- DECEMBER 31,
1993 1994 1995 1995
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from note payable to bank................... $ -- $ -- $ -- $ 123,855
Proceeds from issuance of preferred stock and
collection of subscription receivable............... 2,968,698 4,000,000 -- 17,581,416
Proceeds from issuance of common stock............... 25,583 9,558,775 210,488 9,811,748
Proceeds from long-term debt......................... -- -- 1,166,434 1,166,434
Principal payments on note payable to bank........... -- -- -- (123,855)
Principal payments under capital lease obligations... (53,618) (287,539) (427,053) (879,415)
Principal payments on long-term debt................. (11,489) -- (141,160) (338,464)
Repurchase of preferred stock........................ -- -- -- (300,000)
------------ ------------ ------------ --------------
Net cash provided by financing activities.......... 2,929,174 13,271,236 808,709 27,041,719
------------ ------------ ------------ --------------
Net increase (decrease) in cash and cash equivalents... 1,224,527 (482,681) 2,108,543 8,039,625
Cash and cash equivalents at beginning of period....... 5,189,236 6,413,763 5,931,082 --
------------ ------------ ------------ --------------
Cash and cash equivalents at end of period............. $ 6,413,763 $ 5,931,082 $ 8,039,625 $ 8,039,625
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................. $ 91,038 $ 149,013 $ 171,752 $ 475,713
Cash paid for taxes.................................... -- -- 500,000 500,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of equipment through incurrence of capital
lease obligations..................................... $ 648,274 $ 25,669 $ 62,945 $ 1,368,406
Acquisition of leasehold improvements through
incurrence of debt.................................... -- -- -- 197,304
Issuance of preferred stock for stock subscription
receivable............................................ 4,000,000 -- -- 4,000,000
Accrual of deferred offering costs..................... 150,000 -- -- 150,000
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994, AND 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NPS Pharmaceuticals, Inc. (the "Company"), considered a development stage
company under the guidelines of STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.
7, 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
Cash equivalents of $4.8 million and $5.4 million at December 31, 1994
and 1995, respectively, consist of short-term securities and certificates of
deposit with an initial term of less than three months. For purposes of the
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
(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) is 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
leases is included with depreciation and amortization expense.
(d) NET LOSS PER SHARE
The Company's loss per share is based on the weighted average number of
common shares outstanding during the periods. Common stock equivalents
(stock options and warrants) have been excluded in the computation as their
inclusion would have an antidilutive effect. For periods prior to May 26,
1994, the date of the Company's initial public offering, upon which all
outstanding shares of preferred stock were converted to shares of common
stock, the loss presented is pro forma after giving retroactive effect to
the conversion of Series C, D, and E preferred stock and the inclusion of
common stock options issued for consideration below the initial public
offering price during the twelve-month period prior to the date of the
initial filing of the Registration Statement, even when antidilutive,
pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, using the treasury-stock method.
F-10
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases, operating loss, and
tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(f) 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.
(g) MARKETABLE INVESTMENT SECURITIES
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
("Statement 115"), January 1, 1994. Statement 115 requires that debt and
equity securities be grouped in one of three categories: trading, available-
for-sale, or held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the Company has
the ability and intent to hold the security until maturity. All other
securities not included in trading or held-to-maturity are classified as
available-for-sale. The effect of this adoption of Statement 115 was not
material to the Company's financial statements.
Available-for sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains
and losses, net of the related tax effect, on available-for-sale securities
are excluded from earnings and are reported as a separate component of
stockholders' equity until realized. Realized gains and losses from the sale
of available-for-sale securities are determined on a specific-identification
basis.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than temporary
results in a reduction in carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is established.
Premiums and discounts are amortized or accreted over the life of the
related held-to-maturity security as an adjustment to yield using the
effective interest method. Dividend and interest income are recognized when
earned.
F-11
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(2) MARKETABLE INVESTMENT SECURITIES
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for available-for-sale and held-to-maturity securities by
major security type and class of security at December 31, 1994 and 1995, were as
follows:
<TABLE>
<CAPTION>
GROSS
GROSS UNREALIZED
AMORTIZED UNREALIZED HOLDING
COST HOLDING GAINS LOSSES FAIR VALUE
------------ --------------- ------------- ------------
<S> <C> <C> <C> <C>
At December 31, 1994
Held-to-maturity:
Corporate obligations (due within one year)................ $ 3,392,135 -- $ 296 $ 3,391,839
At December 31, 1995
Available-for-sale:
Corporate obligations (due within one year)................ $ 300,000 -- -- $ 300,000
</TABLE>
(3) 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) 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 Norcalcin in Japan, China, Korea, and
Taiwan. Kirin paid to NPS a $5.0 million license fee and has agreed to pay
up to $7.0 million in research support, potential additional milestone
payments totaling $13.0 million, and royalties on product sales. The Kirin
research support payments are $500,000 per quarter through June 1996 and a
total of $5.0 million over the remaining four years. Kirin received
exclusive rights to develop and sell Norcalcin within its territory. Both
parties will participate in a collaborative research program around NPS's
parathyroid calcium receptor technology.
The Company recognized the $5.0 million nonrefundable license fee and
$1.0 million in research support as revenue in 1995. The agreement may be
terminated by Kirin after June 30, 1996.
(b) 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
establishes a three year research collaboration between the parties, which
may be extended on mutual agreement. 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.
The Company received an initial licensing fee payment of $4.0 million in
November 1993 and received an additional $2.0 million payment in January
1995. The Company recognized this revenue as the related research costs were
incurred, and recognized $600,000 in 1993, $3.6 million in 1994 and $1.8
million in 1995. Commencing on July 1, 1995, the Company began receiving
quarterly research
F-12
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(3) COLLABORATIVE AND LICENSE AGREEMENTS (CONTINUED)
(b) SMITHKLINE BEECHAM CORPORATION (CONTINUED)
payments from SmithKline Beecham to support research efforts through the
scheduled expiration of the research term on October 31, 1996, if not
previously terminated. The Company recognized $1.6 million from such
payments in 1995. The Company is also entitled to receive 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.
S.R. One, Limited, an affiliate of SmithKline Beecham, is an equity
investor in the Company.
Subsequent to year-end, the Company reached its first milestone under
the SB Agreement and received a corresponding milestone payment of $3.0
million.
(c) THE BRIGHAM AND WOMEN'S HOSPITAL, INC.
In February 1993, the Company entered into two agreements with The
Brigham and Women's Hospital, Inc. (the "Hospital"). Under the first
agreement, the Company received an exclusive license to the Hospital's
calcium receptor patentable technology at that date. The Company will pay
milestone payments to the Hospital and a royalty on sales of products
covered by any issued patent under the license. The Company also entered
into an agreement to sponsor research through February 28, 1996 at the
Hospital in the amount of $300,000 per year and the Hospital granted to the
Company a right of first negotiation for license rights to any newly
discovered patentable calcium receptor technology. During 1993, 1994, and
1995, the Company paid to the Hospital $400,241, $320,121, and $306,777,
respectively, in sponsored research payments and license fees.
On February 7, 1996, the Company reached an agreement with the Hospital
to extend the sponsored collaborative research agreement. Under the terms of
the extension, the Company has agreed to continue funding research for an
additional two years. The extended research agreement calls for the Company
to make research support and advance royalty payments of $810,000 to the
Hospital during the period from February 1996 to February 1998.
(d) SMALL BUSINESS INNOVATION RESEARCH GRANTS
The Company recognized revenue of $267,568, $260,706, and $126,444
during 1993, 1994, and 1995, respectively, under the terms of Small Business
Innovation Research grants from three government agencies.
F-13
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(4) LEASES
The Company is obligated under capital leases for equipment that expire at
various dates during the next three years. The Company also has a noncancelable
operating lease for office space that expires in September 1999. Rental expense
for this operating lease was $340,276, $413,552, and $493,667 for 1993, 1994,
and 1995, 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, 1995 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASE
---------- ------------
<S> <C> <C>
Year ending December 31:
1996.............................................................. $ 466,129 $ 525,919
1997.............................................................. 48,123 525,919
1998.............................................................. 9,127 525,919
1999.............................................................. -- 394,439
---------- ------------
Total minimum lease payments.................................... 523,379 $ 1,972,196
------------
------------
Less amounts representing interest (at rates ranging from 6% to
16%)............................................................... 34,388
----------
Present value of net minimum capital lease payments................. 488,991
Less current installments of obligations under capital leases....... 435,230
----------
Obligations under capital leases, excluding current
installments................................................... $ 53,761
----------
----------
</TABLE>
At December 31, 1994 and 1995, the gross amount of equipment and related
accumulated amortization recorded under capital leases was as follows:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Equipment......................................................... $ 1,232,980 $ 1,212,699
Less accumulated amortization..................................... 572,090 748,881
------------ ------------
Net equipment................................................. $ 660,890 $ 463,818
------------ ------------
------------ ------------
</TABLE>
The Company has granted a leasing company a warrant to purchase 20,250
common shares at $4.67 per share. The warrant expires in May 1996.
(5) LONG-TERM DEBT
Long-term debt at December 31, 1995 consists of the following notes payable
to a financial institution:
<TABLE>
<S> <C>
10% to 16% notes payable in monthly installments of $37,105
including interest, due June 1, 1998 through June 1, 1999;
secured by certain equipment and leasehold improvements........ $1,025,274
Less, current installments...................................... 331,746
---------
Long-term debt, excluding current installments.............. $ 693,528
---------
---------
</TABLE>
The aggregate maturities of long-term debt for each of the years
subsequent to December 31, 1995 are as follows: 1996, $331,746; 1997,
$378,613; 1998, $302,065; and 1999, $12,850.
F-14
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(5) LONG-TERM DEBT (CONTINUED)
In connection with these notes payable, the Company granted the
financial institution a warrant to purchase 32,542 shares of common stock at
$3.69 per share. The warrant expires in June 2002.
(6) CAPITAL STOCK
The Company is incorporated under the laws of the State of Delaware with
authorized capital of 5,000,000 shares of preferred stock and 20,000,000 shares
of common stock, all with a par value of $.001. No shares of preferred stock
were issued or outstanding at December 31, 1994 and 1995.
The Company has three stock option plans: the 1987 Stock Option Plan (the
"1987 Plan"), the 1994 Equity Incentive Plan (the "1994 Plan"), and the 1994
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). An aggregate
of 2,390,000 shares are authorized for issuance under the three plans. As of
December 31, 1995, there are no shares reserved for future grant under the 1987
Plan, there are 315,503 shares reserved for future grant under the 1994 Plan,
and there are 36,000 shares reserved for future grant under the Directors' Plan.
Under the Company's 1994 Plan, the exercise price of options granted is not less
than the fair market value on the date of grant. The number of shares, terms,
and exercise period are determined by the Board of Directors on an
option-by-option basis, but 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 will be granted an option to purchase 15,000 shares of common stock.
Additional options will be granted at December 31 of each subsequent year. The
exercise price of options granted is the fair market value on the date of grant.
A summary of activity related to aggregate options under all three plans is
indicated in the following table:
<TABLE>
<CAPTION>
1993
------------------------- 1994 1995
EXERCISE --------------------------- ---------------------------
OPTIONS PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ------------- ---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year..................... 719,400 $ .34 - .81 1,192,875 $ .34 - 4.00 1,419,125 $ .34 - 6.00
Granted................... 511,500 .74 - 4.00 309,800 3.00 - 6.00 374,000 3.50 - 8.25
Exercised................. (37,524) .34 - .74 (46,118) .34 - .74 (257,633) .34 - 2.00
Canceled.................. (501) - .74 (37,432) .34 - 4.00 (4,568) 2.00 - 3.00
---------- ------------- ---------- --------------- ---------- ---------------
Outstanding, end of
year..................... 1,192,875 $ .34 - 4.00 1,419,125 $ .34 - 6.00 1,530,924 $ .34 - 8.25
---------- ------------- ---------- --------------- ---------- ---------------
---------- ------------- ---------- --------------- ---------- ---------------
</TABLE>
Exercise of options by employees, consultants, and directors has been made
subject to vesting based on job tenure and as of December 31, 1995, options to
purchase 802,540 shares of common stock are vested and exercisable.
In November and December 1993, the Company issued options to purchase
378,750 and 4,500 shares of common stock, respectively, at an exercise price of
$2.00 and $4.00 per share, respectively, to employees, officers, and directors
of the Company. For financial statement presentation purposes, the Company has
recorded as deferred compensation expense the excess of the deemed value of the
common stock at the date of grant over the exercise price. The compensation
expense will be amortized ratably over the
F-15
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(6) CAPITAL STOCK (CONTINUED)
three-year vesting period of the options and will aggregate $766,500 over such
period. During 1995, employees exercised 257,633 stock options utilizing 15,248
common shares and cash for 242,385 common shares.
The Company's 1994 Employee Stock Purchase Plan (the "Purchase Plan") has
90,000 shares authorized for purchase by employees of the Company. Employees
have purchased 39,771 shares under the Purchase Plan as of December 31, 1995,
and 50,229 shares remain available for future purchase.
(7) INCOME TAXES
The Company has income tax expense of $500,000 for the year ended December
31, 1995 consisting of current foreign taxes.
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to net income (loss) before income taxes
as a result of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Computed expected tax benefit............................... $ (2,433,918) $ (2,297,153) $ (958,150)
Change in the beginning-of-the-year balance of the valuation
allowance for deferred tax assets allocated to income tax
expense.................................................... 2,621,555 2,376,354 1,279,785
Foreign taxes net of federal income tax benefit............. -- -- 330,000
Other....................................................... (187,637) (79,201) (151,635)
------------ ------------ ------------
$ -- $ -- $ 500,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1994 and 1995 are presented
below:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Deferred revenue............................................... $ -- $ 220,000
Equipment and leasehold improvements, principally due to
differences in depreciation................................... 183,000 159,000
Net operating loss carryforward................................ 5,815,000 6,873,000
Research activities credit carryforward........................ 803,000 953,000
------------ ------------
Total gross deferred tax assets.............................. 6,801,000 8,205,000
Less valuation allowance..................................... 6,801,000 8,205,000
------------ ------------
Net deferred tax assets...................................... $ -- $ --
------------ ------------
------------ ------------
</TABLE>
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 1995 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, 1994 was
$4.2 million. The net change in the Company's total valuation allowance for the
years ended December 31, 1994 and 1995 was an increase of $2.6 million and $1.4
million, respectively.
F-16
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(7) INCOME TAXES (CONTINUED)
At December 31, 1995, the Company had net operating loss and research credit
carryforwards to offset future income for federal income tax purposes
approximately as follows:
<TABLE>
<CAPTION>
NET OPERATING LOSS NET OPERATING LOSS
CARRYFORWARD FOR CARRYFORWARD FOR RESEARCH
REGULAR INCOME TAX ALTERNATIVE MINIMUM CREDIT
PURPOSES TAX PURPOSES CARRYFORWARD
------------------ -------------------- ------------
<S> <C> <C> <C>
Expiring
2002......................................... $ -- $ -- $ 2,000
2003......................................... -- -- 14,000
2004......................................... 159,000 90,000 18,000
2005......................................... 292,000 273,000 20,000
2006......................................... 1,377,000 1,385,000 48,000
2007......................................... 1,141,000 1,321,000 49,000
2008......................................... 3,132,000 3,425,000 335,000
2009......................................... 9,493,000 9,492,000 317,000
2010......................................... 2,832,000 2,939,000 150,000
------------------ ----------- ------------
$ 18,426,000 $ 18,925,000 $ 953,000
------------------ ----------- ------------
------------------ ----------- ------------
</TABLE>
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.
(8) EMPLOYEE BENEFIT PLAN
In October 1990, the Company adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering all of the Company's employees.
Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by the lesser of 15 percent of eligible compensation or the
prescribed annual limit ($9,240 in 1995) and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
additional matching contributions to the 401(k) Plan by the Company on behalf of
all participants. The Company has not made any such contributions to date.
(9) CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A director of the Company is Vice President of Plexus Ventures, Inc.
("Plexus"). The Company had a consulting agreement with Plexus through December
31, 1995, whereunder Plexus assisted the Company with its effort to estalish a
collaboration for Norcalcin in Europe. During the years ended December 31, 1994,
and 1995, the Company paid fees to Plexus totaling $34,000 and $84,500,
respectively. Plexus will earn an additional fee as payments are received from
Amgen. Under the agreement the maximum additional fee is $500,000, but the
Company and Plexus have agreed to negotiate in good faith for an increase in the
maximum because of the non-European territory licensed to Amgen.
(10)ACCOUNTING STANDARDS NOT YET ADOPTED
In October of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION ("FASB 123"). The Company is
F-17
<PAGE>
NPS PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(10)ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED (CONTINUED)
required to adopt the provisions of this statement for years beginning after
December 15, 1995. This statement encourages all entities to adopt a fair value
based method of accounting for employee stock options or similar equity
instruments. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic-value method of accounting
prescribed by APB opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB
25"). Entities electing to remain with the accounting in APB 25 must make pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting defined in this statement had been applied. It is
currently anticipated that the Company will continue to measure compensation
costs in accordance with APB 25 and provide the disclosures required by FASB
123.
(11)SUBSEQUENT EVENTS
On March 18, 1996, the Company entered into a development and license
agreement with Amgen Inc. ("Amgen") to develop and commercialize Norcalcin-TM-
and other compounds for the treatment of hyperparathyroidism and indications
other than osteoporosis. Amgen agreed to pay to the Company a $10.0 million
non-refundable license fee, potential additional development milestone payments
totaling $26.0 million, and royalties on any future product sales. Amgen also
agreed to purchase one million shares of the Company's common stock for $7.5
million. Amgen is required to pay all costs of developing and commercializing
products. Amgen received exclusive worldwide rights excluding Japan, China,
Korea and Taiwan. The agreement may be terminated by Amgen at any time.
The Company received the $10.0 million license fee upon the signing of the
definitive agreement in March 1996. It is anticipated that closing of the stock
agreement and issuance of the shares will take place in March 1996. The pro
forma balance sheet at December 31, 1995 reflects receipt from Amgen of the
$10.0 million license fee and the issuance of the Common Stock for cash of $7.5
million.
(12)CONTINGENCY
The Company is subject to federal, state and local environmental laws and
regulations. It is the policy of the Company to comply with these laws and
regulations. The Company has received a letter from the United States
Environmental Protection Agency notifying the Company that it may have incurred
a liability for two barrels of radioactive waste taken by a third party
contractor to a hazardous and radioactivity waste storage treatment and disposal
facility. The Company has verified that the two barrels containing the waste
have been removed from the disposal facility and believes, based upon an
inspection, that the barrels neither leaked nor were damaged. The Company has
made no provision for any future liability for this contingency since any amount
of potential liability is not reasonably estimable.
F-18
<PAGE>
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON IS AUTHORIZED IN
CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SUCH SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 6
Use of Proceeds.................................. 14
Price Range of Common Stock...................... 15
Dividend Policy.................................. 15
Capitalization................................... 16
Dilution......................................... 17
Selected Financial Data.......................... 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 19
Business......................................... 22
Management....................................... 42
Certain Relationships and Related Transactions... 51
Principal Stockholders........................... 52
Description of Capital Stock..................... 54
Underwriting..................................... 56
Legal Matters.................................... 58
Experts.......................................... 58
Additional Information........................... 58
Index to Financial Statements.................... F-1
</TABLE>
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3,000,000 SHARES
[LOGO]
COMMON STOCK
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PROSPECTUS
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Vector Securities International, Inc.
Salomon Brothers Inc
UBS Securities LLC
MAY 3, 1996
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