NPS Pharmaceuticals 10K/A 2002 Annual report (amended)

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A

Amendment No. 3

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission File Number 0-23272

NPS PHARMACEUTICALS, INC.
(Exact name of Registrant as Specified in Its Charter)

Delaware		87-0439579
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

420 Chipeta Way, Salt Lake City, Utah		84108-1256
(Address of Principal Executive Offices)		(Zip Code)

(801) 583-4939
(Registrant’s Telephone Number, Including Area Code)


Securities registered under Section 12(b) of the Act:		None
Securities registered pursuant to Section 12(g) of the Act:		Common Stock, $.001 Par Value
		Preferred Stock Purchase Rights

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.YES NO

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act 12b-2): YES NO

The approximate aggregate market value of the Common Stock held by non-affiliates of the Registrant was $447,800,950 as of June 28, 2002, based upon the closing price for the shares of common stock reported on The Nasdaq Stock Market and The Toronto Stock Exchange, on such date. This excludes 1,177,014 shares of Common Stock held by directors and officers as of June 28, 2002. The determination of affiliate status is not a conclusive determination for other purposes.

PART I

This Annual Report on Form 10-K/A and the documents incorporated by reference therein contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot guarantee the accuracy of such statements, and you should be aware that results and events could differ materially from those contained in such statements. You should consider carefully the statements set forth in the section entitled “Risk Factors” of this report.

ITEM 1. Business

Overview

Our objective is to build a profitable biopharmaceutical company by discovering, developing and commercializing small molecule drugs and recombinant proteins. Our current product candidates are primarily for the treatment of bone and mineral disorders, gastrointestinal disorders and central nervous system disorders.

Our product pipeline consists of product candidates in various stages of clinical development and preclinical development. Two of these product candidates, PREOS™; and Cinacalcet HCl (formerly called AMG 073), are in Phase III clinical trials. A third product candidate, ALX-0600, has completed a pilot Phase II clinical trial and plans are underway to commence additional clinical trials. PREOS and ALX-0600 are proprietary to and are being developed by us. PREOS is our brand name for our recombinant, full-length parathyroid hormone that we are developing for the treatment of osteoporosis. ALX-0600 is our analog of glucagon-like peptide 2 that we are developing for the treatment of gastrointestinal disorders such as short bowel syndrome and Crohn’s Disease. Cinacalcet HCl, our orally active, small molecule compound for the treatment of hyperparathyroidism, is being developed by our licensees, Amgen Inc. and Kirin Brewery Company, Ltd. Additional Phase I clinical development programs include: calcilytic compounds for the treatment of osteoporosis; NPS 1776 for epilepsy and migraine; and NPS 1506 for depression. Of these three, the calcilytic compounds are licensed to and are being developed by GlaxoSmithKline. We have entered into collaborative research development and license agreements with AstraZeneca AB, GlaxoSmithKline and Janssen Pharmaceutica N.V., a subsidiary of Johnson & Johnson with respect to certain of our product development programs.

Strategy

We intend to achieve our objective through the following strategy:

Build a diversified pipeline of products addressing a variety of medical conditions. We are developing a diverse pipeline of product candidates that are in various stages of clinical and preclinical development. Our portfolio approach allows us to reduce our exposure to the impact of any single product failure and increases our flexibility to focus on our most promising programs. We believe this strategy increases the likelihood that we will successfully develop commercially viable pharmaceutical products.

Develop sales, marketing and manufacturing capabilities and build-up inventory to facilitate product commercialization, either internally or through contract relationships. In order to commercialize our proprietary drug candidates and to exploit our co-promotion rights, we intend to develop sales and marketing capabilities, either internally or through contract relationships. We also intend to develop pre-launch and commercial-scale production capabilities through agreements with contract manufacturers.

Collaborate to reduce our risk and accelerate the commercialization of select product candidates. We believe collaborators with clinical development and marketing expertise in specific therapeutic areas will facilitate more rapid entry into the market for certain of our products and accelerate their acceptance by healthcare providers and third-party payors. We selectively enter into collaboration agreements and licenses with pharmaceutical and biotechnology companies to enhance our financial flexibility. This strategy allows us to devote greater resources to proprietary programs and to pursue a greater number of product candidates than would otherwise be possible.

In-license or acquire complementary products, technologies or companies. In addition to our internal discovery efforts, we intend to pursue our product portfolio strategy by identifying and evaluating potential products and technologies developed by third parties that we believe fit within our overall portfolio strategy. In 1999, we acquired Allelix Biopharmaceuticals Inc., in part because its product candidates complemented our existing programs in osteoporosis and central nervous system disorders and brought late-stage candidates to our product pipeline.

Continue to develop and leverage our core discovery competencies and proprietary expertise. We believe that the continued evaluation, selection and winnowing of candidates in our product development pipeline will be effective based in part on the ability of our scientists to apply techniques related to our core competencies. We intend to continue to use these abilities to identify molecular targets for the development of new drugs and to identify, evaluate, select, and winnow drug candidates meriting continued evaluation. Our multidisciplinary discovery teams focus on developing a broad product pipeline covering a variety of disorders.

Our Product Development Programs

The following is a summary of our product development programs by therapeutic area:

Product or Program	Indication(s)	Status	Licensees and Collaborators

*Bone and Mineral Disorders*

PREOS	Osteoporosis	Phase III	Proprietary

Calcilytic Compounds	Osteoporosis	Phase I / Preclinical	GlaxoSmithKline*

Cinacalcet HCl	Hyperparathyroidism
	Primary	Phase II	Amgen
	Secondary	Phase III	Amgen
	Secondary	Phase II (Japan)	Kirin

*Gastrointestinal Disorders*

ALX-0600	Short Bowel Syndrome	Phase II	Proprietary
	Crohn’s Disease	Preclinical	Proprietary

*Central Nervous System Disorders*

NPS 1776	Epilepsy / Migraine	Phase I	Proprietary

NPS 1506	Depression	Phase I	Proprietary

Metabotropic Glutamate
Receptors	Psychiatric and Neurologic Disorders and Pain	Preclinical	AstraZeneca*

Glycine Reuptake Inhibitors	Schizophrenia and Dementia	Preclinical	Janssen*

* We retain co-promotion rights for product candidates from these collaborations.

Bone and Mineral Disorders

Overview. Bone and mineral disorders include a range of diseases affecting nearly every major organ system in the body. The most common bone and mineral disorder is osteoporosis, an age-related disease characterized by reduced bone mineral density and increased susceptibility to fractures. Although bone loss is a universal consequence of age, the process is accelerated in women following menopause. Osteoporosis is often diagnosed only after fractures occur. Fractures of the hip, spine or wrist can result in serious long-term disability and even increased mortality.

Hyperparathyriodism is also classified as a bone and mineral disorder. In hyperparathyroidism, there is an oversecretion of parathyroid hormone by the parathyroid glands located in the neck. Symptoms of hyperparathyroidism may include bone loss and pain, bone deformities, muscle weakness, severe generalized itching and abnormal calcification of soft tissues, including the heart. Patients may also experience depression and cognitive dysfunction. Hyperparathyroidism is characterized as either primary or secondary. Primary hyperparathyroidism is an age-related disorder that is classified by enlargement of one or more of the four parathyroid glands. Secondary hyperparathyroidism is primarily a physiological response to failing kidney function. As renal function deteriorates, the body is unable to maintain proper levels of calcium, vitamin D

and phosphorus in the blood. To compensate, parathyroid glands enlarge and produce increased amounts of parathyroid hormone in an attempt to increase calcium and decrease phosphorus levels in the blood.

PREOS and Calcilytic Compounds for Osteoporosis

We are pursuing two separate but related programs for the treatment of osteoporosis. We are developing PREOS internally, and we are pursuing calcilytic compounds in conjunction with GlaxoSmithKline.

PREOS. PREOS is our brand name for recombinant, full-length, human parathyroid hormone that we are developing for the treatment of osteoporosis. Currently, we expect that PREOS will be delivered subcutaneously on a daily basis through an injection pen device designed for an aging patient who may also have arthritis in order to make delivery of the drug simple and relatively painless. Although chronically high levels of parathyroid hormone are known to cause bone loss, as in hyperparathyroidism, preclinical and clinical studies show that daily dosing with PREOS, in which parathyroid hormone levels rise rapidly and then return to normal levels within a few hours, actually stimulates bone growth. In a Phase II clinical trial of over 200 post-menopausal women completed in 1997, daily injections of PREOS produced a clinically and statistically significant increase in bone mineral density in the lumbar spine of nearly seven percent in only one year.

We are conducting a pivotal Phase III clinical trial with PREOS in post-menopausal women with osteoporosis and another ancillary Phase III trial in osteoporotic women undergoing estrogen replacement therapy.

Market Opportunity. The National Osteoporosis Foundation estimates that approximately 10 million American men and women aged 50 and over have osteoporosis and another 34 million men and women are osteopenic, i.e. are approaching osteoporosis, and therefore are at high risk of fractures because of low bone mineral density. This number is expected to rise to 52 million men and women by 2010, making low bone mass and osteoporosis a significant health threat. A recent study published in the Journal of the American Medical Association demonstrated that nearly one-half of post-menopausal women have undetected low bone mineral density, and women identified with low bone mineral density were at a significantly increased risk of fracture. In addition, 50 percent of women over 50 years of age in the United States will suffer an osteoporosis-related fracture during their lifetime. According to the National Osteoporosis Foundation, osteoporosis is responsible for more than 1.5 million fractures annually. The National Osteoporosis Foundation reports that an average of 24 percent of hip fracture patients age 50 and over die within one year after their fracture, and 25 percent of those who were ambulatory prior to a hip fracture require long-term care afterward. The size of the United States population aged 50 years and over is expected to increase significantly over the next several decades as a result of the aging of the “baby boomer” generation and longer life expectancies. Estimated United States expenditures for osteoporosis and related fractures is currently $17.0 billion each year.

Current therapies for osteoporosis include supplementing dietary calcium and vitamin D, which may help to slow the rate of bone loss. Other therapies include estrogen replacement therapy in post-menopausal women, bisphosphonates and raloxifene, a selective estrogen receptor modulator. All of these therapies act to prevent further bone loss by inhibiting bone resorption. These therapies have been shown to reduce the incidence of fracture, but they have only a limited positive effect on bone mineral density. These products only arrest further bone loss, and may not be effective treatments for all patients. For example, Fosamax, a bisphosphonate sold by Merck, showed a reduction in fractures but an increase in bone mineral density of only seven to ten percent over three years. Merck reported sales of Fosamax in 2002 of $2.25 billion.

We believe there exists a significant need for improved therapy that will increase bone mineral density to a greater degree and at a faster rate, thereby reducing the risk of fracture. Parathyroid hormone treatment, such as our product candidate, PREOS, and Lilly’s parathyroid hormone-fragment, Forteo, launched in the United States in December 2002, are designed to address this medical need and to supplement currently available treatments. These agents stimulate bone formation and are the only near-term products demonstrated to build architecturally sound, high quality, new bone.

PREOS is our recombinant parathyroid hormone consisting of all 84 amino acids found in the naturally occurring human parathyroid hormone. Lilly’s Forteo is a fragment of the naturally occurring parathyroid

hormone and is only comprised of the first 34 amino acids. Data from Lilly’s Phase III clinical trial indicated that, in post-menopausal women with severe osteoporosis, daily injections of Forteo provided statistically significant reductions in fractures and rapid and significant increases in bone mineral density. Because PREOS consists of 84 amino acids found in the naturally occurring human parathyroid hormone, we believe that our Phase III clinical trials will also show efficacy in the treatment of osteoporosis with a potentially improved side effect profile. In addition, studies currently being conducted by us and our academic collaborators are designed to confirm what, if any, therapeutic advantage our full-length human parathyroid hormone may have compared to fragments of parathyroid hormone.

PREOS Development Status. We are currently conducting a pivotal Phase III clinical trial for PREOS. This trial, referred to as the Treatment of Osteoporosis with Parathyroid hormone Study, or TOP Study, is a double-blind, placebo-controlled, multi-center clinical trial designed to demonstrate the ability of PREOS to reduce fractures and build new bone in women with osteoporosis. The TOP Study is evaluating the effects of PREOS in post-menopausal women who have osteoporosis and who might have suffered a fracture, but who are not receiving drug or hormone therapy for osteoporosis. Women participating in the study receive daily, subcutaneous injections of PREOS or placebo. Dosing in this study is planned to last for 18 months. Enrollment in the TOP Study was completed in March 2002 with over 2,600 patients. We expect that all dosing in the initial phase of this trial will be concluded by September 30, 2003. Women who have finished their participation in the TOP Study are able to receive additional treatment with PREOS. We refer to this study as the Open Label Extension Study, or the OLE study. Women who received PREOS in the TOP Study may receive an additional 6 months of PREOS treatment for a total of 24 months treatment. Women who received placebo in the TOP Study may receive 18 months of PREOS treatment.

We are also conducting a Phase III clinical study to measure the effects of PREOS in osteoporotic women undergoing estrogen replacement treatment. We refer to this trial as the Parathyroid Hormone for Osteoporotic Women on Estrogen Replacement Study, or POWER Study. This study is being conducted at 26 clinical centers in Europe, which is the largest pharmaceutical market for osteoporosis after the United States. Participants receive daily, subcutaneous injections of PREOS or placebo in addition to their ongoing hormone replacement therapies. Dosing in the trial is expected to last for 24 months, with a scheduled 12-month interim analysis and a 12-month follow-up period at the end of the study. Enrollment was completed in September 2002 with over 150 patients. By completing this trial in European countries, we expect to provide additional support for our regulatory submissions in Europe and our worldwide marketing efforts.

In addition, PREOS is being tested in a clinical trial coordinated by the University of California at San Francisco and sponsored by the National Institutes of Health. Our participation in this study was limited to making available supplies of PREOS for use in the study. In return, we have been granted the right to use data and results generated from the study in our regulatory filings with the FDA. This randomized, double-blind trial is referred to as the PaTH study, parathyroid hormone and alendronate in combination for the treatment of osteoporosis. This trial, which is scheduled to conclude in September 2003, enrolled approximately 240 women with low bone mineral density and will test whether PREOS is more effective in building bone mineral density than Fosamax, and whether the combination of PREOS and Fosamax is more effective in building bone mineral density than either therapy alone. We expect that one year results from the PaTH study will be presented at a major medical conference during 2003. The investigators have given us a limited review of preliminary, 1-year data. From this review, we currently expect that the full data package, when published, will demonstrate that PREOS will have a positive effect on both bone mineral density and bone quality and that measures of efficacy and safety are consistent with our Phase II study and with published studies of terraparitide and alendronate.

We are currently planning to initiate a study in men suffering from osteoporosis. This trial, which will begin in 2003, will not be included in our NDA filing.

We have manufactured enough PREOS to complete the TOP study. Our present manufacturing capabilities should produce sufficient supply of PREOS to complete all of our other ongoing clinical studies. For more information about the manufacture of PREOS, see the section of this annual report entitled “Business—Manufacturing.”

Calcilytic Compounds Development Status. We are collaborating with GlaxoSmithKline on the discovery and characterization of calcilytic compounds for the treatment of osteoporosis. Calcilytic compounds, antagonistics of calcium receptors temporarily increase the secretion of the body’s own parathyroid hormone. In animal studies, we demonstrated that intermittent increases in circulating levels of parathyroid hormone can be obtained through the use of calcilytics. In these studies, we observed that increased levels of parathyroid hormone achieved by this mechanism are equivalent to those achieved by an injection of parathyroid hormone sufficient to cause bone growth. As a result, we believe that orally administered calcilytic drugs that act on the parathyroid cell calcium receptors could provide a cost-effective treatment for osteoporosis. We conducted preclinical studies in conjunction with GlaxoSmithKline on some of the lead compounds identified in this program. GlaxoSmithKline has conducted a proof-of-principle Phase I clinical trial with a calcilytic compound for which we received a $1.0 million milestone payment. The purpose of this trial was to establish the safety of calcilytic compounds in humans. GlaxoSmithKline continues its evaluation of calcilytic compounds to identify a lead candidate to take into the clinic to test for both safety and efficacy.

GlaxoSmithKline has paid us a total of $33.7 million for license fees, research support, milestone payments and equity purchases as part of our collaboration. We will receive additional payments of up to an aggregate of $13.0 million if certain clinical milestones are achieved. Our agreement also provides for royalties on any sales by GlaxoSmithKline of products commercialized based on compounds identified in this collaboration. In addition to the milestone and royalty payments, we have a limited right to co-promote any products that are developed through our collaboration and we will receive co-promotion revenue if we elect to exercise these rights. Currently, the sponsored research portion of this agreement is continuing on a month-to-month basis whereunder GlaxoSmithKline is conducting substantially more activities than the Company. The parties are in discussions for mutually acceptable changes to the terms of the sponsored research component of this development and license agreement.

Cinacalcet HCl for Hyperparathyroidism

Cinacalcet HCl (formerly called AMG 073) is our orally active, calcimimetic compound being developed for the treatment of primary and secondary hyperparathyroidism. In contrast to calcilytic compounds, calcimimetic compounds activate the parathyroid cell calcium receptor and decrease the secretion of parathyroid hormone. Cinacalcet HCl has been licensed for development and commercialization to Amgen and Kirin. In December 2001, Amgen commenced Phase III clinical trials of Cinacalcet HCl for the treatment of secondary hyperparathyroidism. Amgen announced, in July 2003, that it has successfully completed three Phase III studies supporting the use of Cinacalcet HCl for the treatment of secondary hyperparathyroidism. Amgen also announced that it intends to file an NDA for Cinacalcet HCl for the treatment of secondary hyperparathyroidism during the second half of 2003.

Amgen continues to conduct Phase II clinical trials of AMG 073 for the treatment of primary hyperparathyroidism. Kirin is conducting Phase II clinical trials of Cinacalcet HCl for the treatment of secondary hyperparathyroidism.

Market Opportunity. According to the National Institute of Health, over 75,000 people in the United States develop new cases of primary hyperparathyroidism each year, and our market studies lead us to believe that over 500,000 people in the United States are estimated to suffer from the disorder. The current treatment for primary hyperparathyroidism is the surgical removal of one or more of the parathyroid glands in the neck. There are currently no effective pharmaceutical therapies for the treatment of primary hyperparathyroidism. Studies suggest that over 30 percent of the estimated two million patients in the United States with chronic renal failure are affected by secondary hyperparathyroidism. Secondary hyperparathyroidism commonly develops during the early stages of chronic renal failure before dialysis is necessary. Current treatments for secondary hyperparathyroidism include vitamin D and phosphate binders, neither of which directly regulate the secretion of parathyroid hormone.

Development Status. In July 2003, Amgen announced that it has successfully completed three Phase III studies supporting the use of Cinacalcet HCl for the treatment of secondary hyperparathyroidism. In each of the Phase III trials the drug was safe and well-tolerated. Statistically significant efficacy was seen as judged by metabolic endpoints. Amgen has also completed two Phase II clinical trials with AMG 073 in patients with primary hyperparathyroidism. The preliminary results from these two studies were presented at the American Society of Bone and Mineral Research meetings in 2000 and 2001 and the final results were presented at the Endocrine Society meeting in June 2002. Amgen has completed four Phase II studies in patients with end-

stage renal disease and secondary hyperparathyroidism. The preliminary results obtained with Cinacalcet HCl in patients on dialysis were presented at the American Society of Nephrology meetings in 2000 and 2001 and additional data from these studies were presented at the American Society of Nephrology meeting in November 2002.

The results from Amgen’s two Phase II studies in patients with primary hyperparathyroidism demonstrated that Cinacalcet HCl was well tolerated and effectively lowered circulating levels of parathyroid hormone and calcium. The larger of the two trials was a one year study involving 78 male and female patients with elevated levels of serum parathyroid hormone and calcium. The patients were randomized to receive either oral doses of Cinacalcet HCl or placebo twice a day for 52 weeks. Circulating levels of parathyroid hormone and calcium fell within hours following the oral administration of Cinacalcet HCl and serum calcium levels were maintained within the normal range for one year following dosing with Cinacalcet HCl.

The four Phase II trials of Cinacalcet HCl in patients with end-stage renal disease with secondary hyperparathyroidism and elevated levels of parathyroid hormone levels were randomized, placebo-controlled, double blind studies. A total of 297 patients were treated with Cinacalcet HCl once daily. Results of the studies indicated that Cinacalcet HCl was well tolerated and effective in reducing circulating levels of parathyroid hormone in patients with secondary hyperparathyroidism. Treatment of hemodialysis patients with Cinacalcet HCl also significantly reduced the calcium-phosphorous product whereas this product increased in patients on placebo. This reduction was seen after twelve weeks of dosing with Cinacalcet HCl and was maintained for up to two years of treatment.

Patients with secondary hyperparathyroidism typically have bone abnormalities, which are often manifested as bone pain and lowered bone mineral density. Preliminary results of a Phase II clinical study were presented at the American Society of Nephrology meeting in November 2002. These preliminary results show that daily dosing with Cinacalcet HCl for one year not only lowered serum levels of parathyroid hormone but additionally prevented decreases in bone mineral density in the lumbar spine and femoral neck when compared to placebo. Total body bone mineral density was also increased by treatment with Cinacalcet HCl and these increases were significantly correlated with the percent reduction in serum levels of parathyroid hormone. No deleterious effects of Cinacalcet HCl on bone morphology were observed.

Chronically increased circulating levels of parathyroid hormone are often associated with cognitive deficits. In two of the Phase II studies conducted by Amgen, some patients were asked to participate in a Quality of Life Cognitive Functioning study by rating six indices of cognitive function at the start of the trial and after twelve or eighteen weeks of treatment with Cinacalcet HCl or placebo. A total of 132 patients completed this survey. In both studies, those receiving Cinacalcet HCl showed significant increases in the cognitive function scale compared to placebo and these increases were correlated with reductions in serum levels of parathyroid hormone. These findings suggest that Cinacalcet HCl improves cognitive function in patients with secondary hyperparathyroidism in addition to lowering serum levels of parathyroid hormone and the calcium-phosphorous product and increasing bone mineral density.

Amgen has paid to us license fees, research support payments, and milestone payments, and has made equity purchases totaling $22.5 million, including the milestone payment for the commencement of Phase III trials in secondary hyperparathyroidism. Amgen will pay us up to an additional $23.0 million if it achieves other development and regulatory milestones. Amgen will also pay us royalties on any sales of Cinacalcet HCl in its territories. Kirin has paid to us $19.0 million in license fees, research and development support payments and milestone payments, and under the terms of our agreement is required to pay us up to an additional $6.0 million upon accomplishment of additional milestones. Kirin also is required to pay us royalties on any sales of Cinacalcet HCl in its territories.

Gastrointestinal Disorders

Overview. The gastrointestinal tract is involved in the digestion and the absorption of nutrients. It also plays an important role in the excretion of toxic chemicals, pathogens and byproducts of metabolic and digestive processes, and in balancing the absorption and secretion of electrolytes and water. People that suffer from gastrointestinal disorders can have severe consequences on the quality of their life.

One disorder in particular that affects the ability of the gastrointestinal tract to absorb nutrients and water is short bowel syndrome. Short bowel syndrome is a condition which arises after extensive resection of the bowel. Patients with this problem suffer from malnutrition, severe diarrhea, dehydration, fatigue and weight loss due to a loss in the ability to absorb adequate amounts of nutrients and water. Treatment includes special dietary management and, often, total parenteral nutrition.

ALX-0600 for Gastrointestinal Disorders. We are independently developing ALX-0600 for the treatment of short bowel syndrome and Crohn’s Disease. ALX-0600 is an analog of glucagon-like peptide 2, a naturally occurring hormone that regulates proliferation of the cells lining the small intestine. Animal studies indicate that ALX-0600 stimulates the repair and regeneration of cells lining the small intestine, expanding the surface area for absorption of nutrients. In animal studies conducted by us in collaboration with outside researchers, ALX-0600 induced an approximately 50 percent increase in the weight of the small intestine within 14 days of administration. Further, these studies suggest the growth-promoting properties of ALX-0600 appear to be highly tissue-specific, predominantly affecting the small intestine, and thereby potentially reducing the risk of adverse side effects.

Market Opportunity. Scientific journal articles and our own market studies have indicated that approximately 25,000 adults and 7,000 children in North America are afflicted with short bowel syndrome. Many of these patients require total parenteral nutrition, the cost of which can exceed $100,000 annually per patient. There are currently no effective therapies for enhancing the growth and repair of the cell lining of the small intestine. We believe that the short bowel syndrome market is an attractive one because of the high cost of treating patients and the absence of any effective drug therapies. We have been granted orphan drug designation for ALX-0600 for short bowel syndrome from the FDA, which provides, subject to several restrictions, seven years of marketing exclusivity once a product is approved for treatment of diseases that afflict fewer than 200,000 patients. The Commission of the European Communities has also recently designated ALX-0600 an orphan medicinal product for the treatment of short bowel syndrome.

We believe that ALX-0600 may also be useful in treating other gastrointestinal conditions characterized by malabsorption, altered absorptive capacity and inflammation or deterioration of the intestinal wall. Examples of these conditions include inflammatory bowel disease, like Crohn’s Disease, and intestinal mucositis in cancer patients.

Development Status. We have completed a pilot Phase II study in adults with short bowel syndrome. The purposes of this study were to evaluate the safety, tolerability and effect of a 21-day subcutaneous dosing regimen of ALX-0600. In this study, subgroups comprising a total of 22 patients with significant portions of the small intestine removed, received ALX-0600 in one of three doses by daily subcutaneous injection. After 21 days of treatment, the patients, all of whom were dependent on parenteral nutrition, showed significant improvements in intestinal function. An important result of the improved intestinal function in these patients was a statistically significant increase in fluid and nutrient absorption. Histological examination of tissue from patient biopsies showed a statistically significant increase in the number and size of epithelial cells lining the small intestine. The drug appeared to be safe and well-tolerated. We continue reviewing the data from this study and are designing a pivotal study in short bowel syndrome, to be commenced following approval of the clinical design by both U.S. and European regulatory agencies. We also expect to begin a proof-of-concept clinical study in patients with Crohn’s Disease in the second half of 2003.

Prior to acquiring Allelix in December 1999, Allelix had entered into a research funding agreement with the Government of Canada pursuant to the Technology Partnership Canada program. Under this agreement, Canada is obligated to reimburse us for up to 30 percent of eligible research and development costs we incur for our ALX-0600 product candidate through December 2002 up to a maximum of Cdn. $8.4 million. Through December 31, 2001, we have invoiced the Canadian Government for a total of Cdn. $4.7 million and have received payment on this amount. During 2002, we have recognized revenue of Cdn. $2.8 million under the Technology Partnership’s Canada Program through June 2002. In July 2002, we began negotiations with the Canadian Government to pursue mutually acceptable adjustments to the terms of the agreement. As these negotiations are still ongoing, the outcome of which is uncertain, we have not recognized any revenue under this agreement during the six months ended December 31, 2002, although we have incurred development costs during this period that we believe qualify for reimbursement of the remaining Cdn.

$900,000 up to the maximum Cdn. $8.4 million. The agreement provides Canada with a 10 percent royalty on revenues we receive from the sale or license of ALX-0600. Our royalty obligation terminates on December 31, 2008, if we have paid at least Cdn. $23.9 million. If we have not paid that amount of royalties by that date, our royalty obligation continues until the earlier of the date we have paid Cdn. $23.9 million, or December 31, 2017. The agreement imposes a number of obligations on us to conduct certain development activities within Canada and use Canadian- based companies to provide certain services in connection with the development of ALX-0600. This requirement could make continued development of ALX-0600 unfeasible because of the costs and time required to develop and source this product solely in Canada. As a result, we have used and currently use non-Canadian based companies for some of these services. For example, we arranged for a non-Canadian contract manufacturer to manufacture bulk supplies of ALX-0600 for our Phase II clinical trials. We notified the Government of Canada of our arrangements and received their authorization to proceed. We cannot be certain that additional waivers will be granted in the future. Certain violations of the terms of the agreement, if pursued by Canada, might result in a forfeiture of the technology to Canada or other adverse consequences. If we cannot reach an agreement with the Government of Canada, or amend certain provisions of the agreement, we may choose to abandon or it may be impractical to continue our development of ALX-0600. If we do reach an agreement, we could be required to make payments that are material in amount.

Central Nervous System Disorders

Overview. Central nervous system disorders are broad, complex and severe diseases that are a major focus of current medical research. However, few central nervous system disorders are able to be effectively treated, creating an opportunity for novel therapies. Central nervous system disorders affect a broad portion of the population through diseases such as epilepsy, bipolar disorder, stroke, Alzheimer’s disease, Parkinson’s disease, dementia, anxiety, depression, schizophrenia, headache and pain. Recent market research reports indicate that nearly $50.6 billion is expended annually in retail prescription drug sales for central nervous system related products on a worldwide basis. However, many of these treatments are palliative with significant side effects and a need for new and improved treatment exists. We are addressing central nervous system disorders on a number of different fronts.

Metabotropic Glutamate Receptor Program. Since 1996, we have been working to find compounds that act on targets in the central nervous system called metabotropic glutamate receptors, or mGluRs. Because these molecular receptors are structurally related to calcium receptors, we have been able to leverage our expertise in calcium receptors to create proprietary methods for screening drug candidates active at mGluRs. We have discovered a number of compounds that activate or inhibit mGluRs and that are highly selective for specific subtypes of mGluRs. Our animal studies with a number of these compounds have demonstrated their potential as drug candidates for the treatment of central nervous system disorders such as chronic pain.

There are three principal groups of mGluRs and several subtypes of mGluRs within those groups that differ in their chemical composition, their effects on cellular metabolism activities and their location throughout the central nervous system. Published research indicates that the different mGluRs subtypes are involved in diseases such as anxiety, schizophrenia, Parkinson’s disease and chronic pain among others. Our ability to identify compounds that are selective for each of the various mGluR subtypes has enabled the development of powerful and selective tool compounds to aid in understanding of the role of mGluRs in various central nervous system disease states. We believe that it is possible to pursue the development of a multitude of products that will provide novel treatments for many central nervous system disorders.

In March 2001, we entered into an agreement with AstraZeneca under which we collaborate exclusively in an extensive program around a number of mGluR subtypes. We granted AstraZeneca exclusive rights to commercialize mGluR subtype-selective compounds. Under our agreement, we are required to co-direct the research and pay for an equal share of the preclinical research costs, including capital and a minimum number of personnel, through at least September 2003 and under some circumstances through March 2006. If certain milestones are met, AstraZeneca is required to pay us up to $30.0 million. AstraZeneca is also required to pay us royalties on sales of products that include those compounds. We have the right to co-promote any resulting product in the United States and Canada and receive co-promotion revenue, if any. Should we elect to co-promote products, in some circumstances we will be required to share in the

development and regulatory costs associated with those products, and we may not receive some late-stage milestone payments. For more information about our agreement with AstraZeneca, see the section entitled “Business—Collaborative Research, Development and License Agreements.”

Other Programs for Central Nervous System Disorders. We collaborated with Janssen on glycine reuptake inhibitors to identify prospective drug candidates for schizophrenia and dementia. In November 2001 we received a milestone payment from Janssen as a result of the selection of a preclinical compound for further development as a potential treatment for schizophrenia. We will receive additional milestone payments of up to $20.5 million from Janssen and royalties on sales of any drugs developed or sold by Janssen under this collaboration agreement.

NPS 1776 is a proprietary small molecule compound. The Company is now engaged in active consideration and review of this compound for the treatment of migraine and epilepsy. Our preclinical studies show that NPS 1776 is effective in a number of animal models of epilepsy, spasticity, and pain. We have completed several Phase I clinical trials with NPS 1776 to evaluate its safety and tolerability and its ability to be delivered in a sustained release formulation. Our analysis of the data indicates that the drug was safe and well tolerated. Initial formulation studies demonstrated that the compound is amenable to multiple sustained release formulation technologies.

In March 2000, we entered into an agreement with Abbott Laboratories Inc. in which we granted Abbott worldwide marketing rights to NPS 1776 in exchange for Abbott’s commitment to fund further development of this product candidate and pay us milestone payments as well as royalties on any sales. In January 2002, Abbott terminated the agreement. As a result, all rights to NPS 1776 were returned to us. In addition, we are entitled to use all studies and information generated by Abbott under the agreement in our development effort for NPS 1776. We intend to file an IND for NPS 1776 by the end of 2003 and to have begun a pilot clinical study in acute migraine.

NPS 1506 targets NMDA receptor-operated calcium channels which are activated by the neurotransmitter glutamate. Published research has suggested that glutamate may play a role in the development of depression. We believe NPS 1506 may be effective as a treatment for the acute and urgent symptoms of major depressive order. NPS 1506 does not appear to exhibit the side effects that have plagued other NMDA receptor antagonists. NPS 1506, at neuroprotective or antidepressant doses in preclinical animal models, caused no PCP-like behavioral effects, no learning or memory impairment, no neuronal vacuolization, and no significant sedation or cardiovascular side effects. Efforts are underway to evaluate the future continued development of NPS 1506 for the treatment of depression.

In 1998 we completed a Phase I clinical trial in healthy volunteers with ALX-0646, a small molecule, for the treatment of migraine. In August 2000, we entered into an agreement with Forest Laboratories Inc. in which we granted to Forest worldwide commercialization rights to ALX-0646 in return for Forest’s commitment to fund further development of ALX-0646 and pay us milestone payments of up to $25.0 million, as well as royalties on any sales of ALX-0646. In November 2001, we earned and received a $1.0 million milestone payment from Forest for developments made by Forest with the compound. In January 2002, Forest notified us that we had earned a $2.0 million milestone payment for the achievement of certain clinical and preclinical developments related to Forest’s work with ALX-0646 for treating migraine. Forest read and approved a draft press release prepared by us and announcing that we had earned the milestone payment. In March 2002, we received notice from Forest that it was terminating the agreement and returning all rights to ALX-0646 to us. Forest has asserted that it has no obligation to pay the $2.0 million milestone payment as a result of its termination. We have initiated arbitration in accordance with the terms of the agreement claiming our right to receive this milestone payment. Absent resolution of this issue, we will not recognize revenue for the $2.0 million milestone. NPS is continuing its evaluation of alternatives for future development plans for the compound.

Internal Discovery Research

Through internal discovery efforts, we have developed a diverse product pipeline covering a variety of disorders. This pipeline allows us to reduce the impact of any single product failure and increases our flexibility to focus on our most promising programs. The continued expansion of our product pipeline is

based on the ability of our scientists to apply techniques related to our core competencies such as the use of proteins as therapeutics, manipulating G-Protein Coupled receptors and finding compounds that act on those receptors. Our current discovery research activities span the spectrum from target identification and validation through late stage preclinical safety assessment.

Our internal discovery research group comprises 67 staff members, 21 of which hold doctorate degrees, with 36 members in our Salt Lake City location and 31 members in our Toronto location. The disciplines within our discovery research group include medicinal chemistry, molecular and cellular biology, pharmacology, physiology, and drug metabolism and pharmacokinetics. Areas of expertise within the group include bone and mineral metabolism, gastrointestinal physiology and pharmacology, and central nervous system physiology and pharmacology. We intend to continue our focus on scientific discovery by retaining creative scientists who we believe can make breakthrough discoveries leading to innovative products.

Collaborative Research, Development and License Agreements

We selectively enter into collaboration agreements and licenses with pharmaceutical and biotechnology companies to leverage our financial investment in our discovery, development and commercialization programs. These agreements generally include payments to the Company for research support performed by us, payments for the achievement of specified milestones, and payments for royalties on sales of products developed under the terms of the particular agreement. In return for these financial benefits, we grant to the particular collaborator an exclusive license to the technology that is the subject of the collaboration as well as to the products developed under the agreement. This strategy allows us to devote greater resources to selected programs and to pursue a greater number of programs and products than would otherwise be possible. In addition, we believe collaborators with clinical development and marketing expertise in specific therapeutic areas will facilit ate more rapid entry into the market for our products and accelerate their acceptance by healthcare providers and third-party payors. These agreements generally contain provisions restricting the transfer of such agreements to a third party upon a change of control of the company, sale of substantially all of the assets of the company or a sale of a majority of the voting shares of the company, without first obtaining the written consent of the collaborator. In some instances, the collaborator has the right to terminate the agreement on the occurrence of such an event. We currently have collaborative research, development or license agreements with several collaborators, including Amgen, GlaxoSmithKline, AstraZeneca, Janssen and Kirin.

We also enter into research support agreements with various academic and other not-for-profit institutions. These agreements generally require us to fund certain research at the institution over a specific period of time in exchange for which we acquire the right to use the results of the research and obtain an option to exclusively license from the institution any inventions made during the term of the research on terms mutually agreed to at that time.

Amgen. In December 1995, we entered into a development and license agreement with Amgen in which we granted Amgen the exclusive right to develop and commercialize Cinacalcet HCl and related compounds for the treatment of hyperparathyroidism and any other indications other than osteoporosis worldwide, excluding Japan, China, Hong Kong, North and South Korea and Taiwan, territories in which we licensed such rights to Kirin. If our agreement with Kirin is terminated, Amgen’s territory becomes worldwide. Under the terms of our agreement, Amgen is authorized and responsible to conduct, fund and pursue all aspects of the development, submissions for regulatory approvals, manufacture and commercialization of compounds licensed under the agreement, including Cinacalcet HCl, in its territories. Amgen paid us an initial up-front license fee of $10.0 million upon signing the agreement and agreed to pay us up to $400,000 per year in development support for five years, which obligation has now expired. In addition, if specified milestones are achieved, then Amgen is required to make additional milestone payments of up to $26.0 million and must pay royalties to us on any sales of Cinacalcet HCl or other related compounds. To date, Amgen has paid to us $3.0 million in milestone payments. We may terminate the agreement if Amgen breaches the agreement and does not cure the breach within 120 days of receiving notice of the breach. Amgen may terminate the agreement for any reason on 90 days’ prior written notice. If there is a termination for a reason other than our breach of the agreement, the technology, patent and commercialization rights to all compounds licensed under the agreement including Cinacalcet HCl would

revert back to us. Furthermore, if Amgen terminates the agreement none of their payments to us are refundable.

GlaxoSmithKline. In November 1993, we entered into a collaborative research and worldwide exclusive license agreement with GlaxoSmithKline for the research, development and commercialization of calcium receptor active compounds for the treatment of osteoporosis and other bone metabolism disorders, excluding hyperparathyroidism. We initially received from GlaxoSmithKline an upfront license fee payment of $6.0 million and we later began receiving payments from GlaxoSmithKline in support of our research efforts under the initial research term of the agreement. GlaxoSmithKline also has a first right to negotiate for an exclusive license regarding other company research for indications within the field of bone metabolism disorders, and an exclusive right to negotiate for a license to compounds developed under the agreement for indications outside the field of bone metabolism disorders, which rights expire upon termination of this agreement. Once compounds have been selected for development, GlaxoSmithKline has the authority and responsibility to conduct and fund all product development, including clinical trials and regulatory submissions, and manufacturing. We have the right to co-promote, in the United States, products resulting from the collaboration. In addition to research funding, and inclusive of prior milestone payments and the upfront license fee, GlaxoSmithKline has agreed to pay us up to an aggregate of $23.0 million as it achieves certain additional development or marketing milestones. GlaxoSmithKline must also pay us royalties on any sales of products for osteoporosis and other bone metabolism disorders that include compounds developed by GlaxoSmithKline under the agreement, and a percentage of profits from co-promotion of such products. To date, we have received license fee, milestone and research and development support payments totaling $21.0 million under this agreement. GlaxoSmithKline may terminate the agreement on 30 days’ written notice after a six-month waiting period. Additionally, in the event we breach the agreement GlaxoSmithKline may terminate on 60 days’ written notice for our breach. If GlaxoSmithKline terminates the agreement, none of their payments to us are refundable unless such termination is due to our material breach which is not cured, in which case we would be required to return to GlaxoSmithKline all milestone payments received by us, other than the initial license fee. Upon termination, rights and licenses we granted GlaxoSmithKline revert to us. The collaborative research portion of this agreement is now continuing on a month-to-month basis with considerably more work being done by GlaxoSmithKline than by us. We are discussing with GlaxoSmithKline appropriate next phases of the collaborative research portion of our agreement.

AstraZeneca. In March 2001, we entered into an exclusive research collaboration and license agreement with AstraZeneca to collaborate on the discovery, development and marketing of small molecule therapies for the treatment of various disorders of the central nervous system. Specifically, the collaboration focuses on the identification of small molecules active on protein structures known as metabotropic glutamate receptors (mGluRs). We granted AstraZeneca an exclusive license to the worldwide development and commercialization of any mGluR-active compounds identified under the collaboration. During the research term, we will work together on the identification of mGluR-active compounds. We are required to co-direct the research and pay for an equal share of the research costs through a minimum of 30 months and, under certain circumstances, for a term of 60 months. Once compounds have been selected for development, AstraZeneca will conduct and fund product development, including all human clinical trials, regulatory submissions, commercialization and manufacturing. We have the right to co-promote any resulting product in the United States and Canada and receive co-promotion revenue, if any. Should we elect to co-promote products, in some circumstances we will be required to share proportionately in the development and regulatory costs associated with those products. If we elect not to co-promote, we are entitled up to an aggregate of $30.0 million in milestone payments and royalties on any sales of products developed and marketed under the agreement. To date no milestone payments have been earned under the agreement. We may terminate the agreement if AstraZeneca breaches the agreement and does not cure the breach within 60 days of receiving notice of the breach. After two years of the research program, either party may terminate the agreement on six months’ prior written notice. After the research term, AstraZeneca may terminate the agreement at anytime upon 90 days’ prior written notice. Termination by AstraZeneca for reasons other than our breach or insolvency will result in the return to us of all rights we granted and the related technology, including improvements. Termination by AstraZeneca for our breach or insolvency would result in the assignment to AstraZeneca of rights to certain of our patents and technology related to mGlur-active

compounds. Similarly, termination by us for AstraZeneca’s breach or insolvency would result in AstraZeneca’s assignment of rights to certain patents and technology to us.

Janssen. In October 1998, we entered into a collaborative agreement with Janssen for the research, development and commercialization of new drugs for the treatment of schizophrenia and dementia. The research phase of this collaboration ended in October 2000. In addition, Janssen controls and is responsible for development and commercialization of the compounds, including manufacturing, and including all costs and expenses associated with the development and commercialization efforts. While Janssen has the right to market products worldwide, we may co-promote, in Canada, any products developed under the agreement. We will receive up to an aggregate of $21.5 million in milestone payments if Janssen reaches certain milestones, and royalties from any product sales resulting from the collaboration. To date, we have received milestone payments totaling $1.0 million under this agreement. We may terminate the agreement if Janssen breaches the agreement and does not cure the breach within 60 days of receiving notice of the breach. In that case, all rights granted to Janssen revert to us. Janssen may terminate, for any reason, on 90 days notice to us. If Janssen terminates, other than for our breach, then the rights to any compounds or products are transferred to us. We can also terminate Janssen’s rights if Janssen does not launch the product in the United States, but must pay a royalty to Janssen on product sales after that termination. If Janssen terminates the agreement, none of their payments to us are refundable.

Kirin. In June 1995, we entered into a collaborative research and license agreement with Kirin to develop and commercialize Cinacalcet HCl and other related compounds for the treatment of hyperparathyroidism and any other indications other than osteoporosis and bone metabolism disorders in Japan, China, Hong Kong, North and South Korea and Taiwan. Kirin is responsible for all costs associated with developing, obtaining regulatory approvals and commercializing products within its territories. The agreement also requires Kirin to use reasonable good faith efforts to introduce a product to market. Kirin paid us an initial up-front license fee of $5.0 million and agreed to pay us certain milestone payments on the achievement of specified events. To date, we have received $7.0 million in milestone payments from Kirin. Kirin is required to pay us royalties on any sales of products containing Cinacalcet HCl or a similar com pound within its territories. We may terminate the agreement if Kirin breaches the agreement and does not cure the breach within 90 days of receiving notice of the breach. In this event, Amgen would receive rights to develop and commercialize Cinacalcet HCl for the treatment of hyperparathyroidism and other indications except osteoporosis, in the terminated territories. Kirin may terminate the agreement for any reason on 90 days’ prior written notice, and on a country by country basis on specified conditions relating to market size. If Kirin terminates the agreement, Amgen would receive rights to develop and commercialize Cinacalcet HCl for the treatment of hyperparathyroidism and other indications, except osteoporosis, in the terminated territories. If Kirin terminates the agreement, none of their payments to us are refundable. We are advised that Kirin and Amgen have executed a separate data sharing agreement related to clinical data under their separate agreements with us. We have also authorized them to enter into a manufacturing agreement with one or more manufacturing companies for clinical and commercial supplies.

Sponsored and Government Funded Research Programs

For example, in February 1993, we entered into a collaborative research agreement and a patent license agreement with The Brigham and Women’s Hospital, an affiliate of Harvard University Medical School. The patent license agreement grants us an exclusive license to certain calcium receptor and inorganic ion receptor technology covered by patents we jointly own with the hospital. Under the patent license agreement, we are responsible for all costs relating to obtaining regulatory approval from the FDA or any other federal, state or local government agency and carrying out any clinical studies, relating to the technology. The research agreement grants us a right of first negotiation for exclusive license rights to any patentable subject matter arising out of research that we sponsor at the hospital. The Brigham and Women’s Hospital is also entitled to a royalty on any sales of certain products under the patent license agreement, and we have committed to

promote sales of any licensed products for hyperparathyroidism for which we receive regulatory approval. Brigham and Women’s Hospital may terminate the patent agreement if we breach the terms of the patent agreement and do not cure the breach within 60 days of receiving notice of the breach. Certain violations of terms of the patent agreement, if pursued by Brigham and Women’s Hospital, might result in the exclusive, royalty-free license of the technology to Brigham and Women’s Hospital or other adverse consequences. Either party may terminate the research agreement in the event of a breach, if the breaching party fails to cure the breach within 30 days of receiving notice. Upon termination of the research agreement by either party, we must return all information, data and material related to the research agreement to Brigham and Women’s Hospital.

Prior to the time that we acquired Allelix in December 1999, Allelix had entered into a research funding agreement with the Government of Canada pursuant to the Technology Partnership Canada program. Under this agreement, the Government of Canada is obligated to reimburse us for up to 30 percent of eligible research and development costs we incur for our ALX-0600 product candidate through December 2002 up to a maximum of Cdn. $8.4 million. Through December 31, 2001, we have invoiced the Canadian Government for a total of Cdn. $4.7 million and have received payment on this amount. During 2002, we have recognized revenue of Cdn. $2.8 million under the Technology Partnership’s Canada Program through June 2002. In July 2002, we began negotiations with the Canadian Government to pursue mutually acceptable adjustments to the terms of the agreement. As these negotiations are still ongoing, the outcome of which is uncertain, we have not recognized any revenue under this agreement during the six months ended December 31, 2002, although we have incurred development costs during this period we believe qualify for reimbursement of the remaining $900,000 up to the maximum Cdn. $8.4 million. The agreement provides the Government of Canada with a 10 percent royalty on revenues we receive from the sale or license of ALX-0600. Our royalty obligation terminates on December 31, 2008, if we have paid at least Cdn. $23.9 million. If we have not paid that amount of royalties by that date, our royalty obligation continues until the earlier of the date we have paid Cdn. $23.9 million, or December 31, 2017. The agreement imposes a number of obligations on us to conduct certain development activities within Canada and use Canadian-based companies to provide certain services in connection with the development of ALX-0600. For example, the agreement requires us to produce in Canada clinical and commercial supplies of ALX-0600. In addition, the agreement requires us to enter into a licensing arrangement with a pharmaceutical company operating in Canada for the conduct of Phase III clinical trials and commercialization of ALX-0600.

The agreement also prohibits us from entering into any licensing agreement for the further development, production and marketing of ALX-0600 without the prior written consent of the Government of Canada. In general, the agreement includes on-going commitments to create manufacturing, marketing and sales jobs in Canada.

We have used and currently use non-Canadian based companies for some of these services. For example, we arranged for a non-Canadian contract manufacturer to manufacture bulk supplies of ALX-0600 for our Phase II clinical trials. Certain violations of the terms of the agreement, if pursued by Canada, might result in a forfeiture of the technology to Canada or other adverse consequences. We notified the Government of Canada of our arrangements and received their authorization to proceed. If we default under the agreement, the Canadian governments declares an event of default, and we do not remedy the default, we could be required to repay all amounts received from the Canadian Government plus interest and other damages depending on the occurrence of certain events. However, the Canadian Government does not have unilateral ability to terminate or cancel the contract. The Canadian Government may declare an event of default if we become bankrupt, are dissolved, intentionally submit false or misleading information, fail to comply or perform in accordance with the material terms of the agreement, or fail to make potential royalty payments which may become due in the future under this agreement. If we cannot reach an agreement with the Government of Canada on amending certain provisions of the agreement, we may choose to abandon or it may be impractical to continue our development of ALX-0600. If we do reach an agreement, we could be required to make payments that are material in amount.

New Drug Development and Approval Process

Regulation by governmental authorities in the United States and other countries is a significant factor in the manufacture and marketing of pharmaceuticals and in our ongoing research and development activities. All of our product candidates will require regulatory approval by governmental agencies prior to commercialization. In particular, all of our drug candidates are subject to rigorous preclinical testing and clinical trials and other premarketing approval requirements by the FDA and regulatory authorities in other countries. In the United States, various federal, and in some cases state statutes and regulations also govern or affect the manufacturing, safety, labeling, storage, record keeping and marketing of such products. The lengthy process of seeking required approvals and the continuing need for compliance with applicable statutes and regulations require the expenditure of substantial resources. Regulatory approval, when and if obtained, may significantly limit the indicated uses for which our products may be marketed. Further, approved drugs, as well as their manufacturers, are subject to ongoing review and discovery of previously unknown problems with such products may result in restrictions on their manufacturer, sale or use or in their withdrawal from the market.

The steps required by the FDA before our drug candidates may be marketed in the United States include, among other things:

•

the performance of preclinical laboratory and animal tests and formulation studies;


	•	the submission to the FDA of an Investigational New Drug application, or IND, which must become effective before human clinical trials may commence;


	•	the completion of adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug; and


	•	the submission and FDA approval of a drug application or NDA.

The testing and approval process requires substantial time, effort and financial resources and we cannot be certain that any approvals for any of our proposed products will be granted on a timely basis, if at all.

Prior to commencing a clinical trial, we must submit an IND to the FDA. The IND becomes effective 30 days after receipt by the FDA, unless within the 30-day period, the FDA raises concerns or questions with respect to the conduct of the trial. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the study can begin. The submission of an IND may not result in FDA authorization to commence a clinical trial. Further, an independent institutional review board at the medical center or centers proposing to conduct the trial must review and approve the plan for any clinical trial before it commences.

Human clinical trials are typically conducted in three sequential phases that may overlap:

•

PHASE I: the drug is initially introduced into healthy human subjects or patients and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion.


	•	PHASE II: involves studies in a limited patient population to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine optimal dosage.


	•	PHASE III: when Phase II evaluations demonstrate that a dosage range of the product is effective and has an acceptable safety profile, Phase III trials are undertaken to further evaluate dosage and clinical efficacy and to further test for safety in an expanded patient population at geographically dispersed clinical study sites.

We cannot be certain that we or any of our collaborative partners will successfully complete Phase I, Phase II or Phase III testing of any compound within any specific time period, if at all. Furthermore, the FDA or the study sponsor may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

The FDA has not established approved protocols for conducting pivotal clinical trials for short bowel syndrome. We will need to reach agreement with the FDA regarding trial design and clinical endpoints before

we can begin pivotal trials of ALX-0600. We cannot be certain that the FDA will agree to trial design and clinical endpoints that will make continued development of ALX-0600 feasible on a timely basis or at all.

The results of product development, preclinical studies and clinical trials are submitted to the FDA as part of an NDA. The FDA may withhold approval for an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical data. Even if such data is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. If approved, the FDA may withdraw product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.

The FDA’s fast track program is intended to facilitate the development and expedite the review of drugs intended for the treatment of serious or life-threatening diseases and that demonstrate the potential to address unmet medical needs for such conditions. Under this program, the FDA can, for example, review portions of an NDA for a fast track product before the entire application is complete, thus potentially beginning the review process at an earlier time. We cannot guarantee that the FDA will grant any requests that we may make for fast track designation, that any fast track designation would affect the time of review, or that the FDA will approve the NDA submitted for any of our drug candidates, whether or not fast track designation is granted. Additionally, the FDA’s approval of a fast track product can include restrictions on the product’s use or distribution, such as permitting use only for specified medical procedures or limiting distribution to physicians or facilities with special training or experience. Approval of fast track products can be conditional with a requirement for additional clinical studies after approval.

Satisfaction of the above FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially, based upon the type, complexity and novelty of a product or indication.

Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon our or our partner’s activities. The FDA or any other regulatory agency may not grant any approvals on a timely basis, if at all. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, the approval may be significantly limited to specific indications and dosages. Further, even if regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delays in obtaining, or failures to obtain regulatory approvals may have a material adverse effect on our business. In addition, we cannot predict what adverse governmental regulations may arise from future United States or foreign governmental action.

Any products manufactured or distributed by us or our partners pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA for compliance with Current Good Manufacturing Practice, or cGMP, regulations which impose certain procedural and documentation requirements upon us and our contract manufacturers. We cannot be certain that we or our present or future suppliers will be able to comply with the cGMP regulations and other FDA regulatory requirements.

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process. If a product that has orphan drug designation subsequently receives FDA approval for the disease for which it has such designation, the product is entitled to orphan exclusivity. For example, the FDA may not approve any other applications to market the same drug

for the same disease, except in very limited circumstances, for seven years. We intend to file for orphan drug designation for those diseases which meet the criteria for orphan exclusivity. Although obtaining FDA approval to market a product with orphan drug exclusivity can be advantageous, there can be no assurance that it would provide us with a material commercial advantage.

Steps similar to those in the United States must be undertaken in virtually every other country comprising the market for our product candidates before any such product can be commercialized in those countries. The approval procedure and the time required for approval vary from country to country and may involve additional testing. There can be no assurance that approvals will be granted on a timely basis, or at all. In addition, regulatory approval of prices is required in most countries other than the United States. There can be no assurance that the resulting prices would be sufficient to generate an acceptable return to us.

Patents and Other Proprietary Technology

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

We file patent applications on our own behalf as assignee and, when appropriate, have filed and expect to continue to file, applications jointly with our collaborators. These patent applications cover compositions of matter, methods of treatment, methods of discovery, use of novel compounds and novel modes of action, as well as recombinantly expressed receptors and gene sequences that are important in our research and development activities. Some of our principal intellectual property rights related to processes, compounds, uses and techniques related to calcium receptor science are now protected by issued United States patents. We intend to file additional patent applications relating to our technology and to specific products, as we think appropriate.

We hold patents directed to potential therapeutic products such as new chemical entities, pharmaceutical compositions and methods of treating diseases. We hold patents directed also to nucleic acid and amino acid sequences of novel cellular receptors and methods of screening for compounds active at such cellular receptors. We continue actively to seek patent protection for these and related technologies in the United States and in foreign countries.

We have been issued approximately 168 patents in the U.S. and have been granted approximately 299 patents in other countries. Eight issued U.S. patents cover technology related to parathyroid hormone. These patents have expiration dates (not including any patent term extensions) ranging from 2008 to 2018. Six issued U.S. patents cover technology related to calcilytic compounds. These patents have expiration dates (not including any patent term extensions) ranging from 2016 to 2019. Twelve issued U.S. patents cover calcimimetics (including Cinacalcet HCl) and calcium receptor technology. These patents have expiration dates (not including any patent term extensions) ranging from 2013 to 2017. Eleven issued U.S. patents cover technology related to ALX-0600 and GLP-2, certain of which are licensed from 1149336 Ontario Inc. These patents have expiration dates (not including any patent term extensions) ranging from 2015 to 2018. Three issued U.S. patents cover technol ogy related to NPS 1776. These patents have expiration dates (not including any patent term extensions) ranging from 2013 to 2020. Five issued U.S. patents cover technology related to NPS 1506. These patents have expiration dates (not including any patent term extensions) ranging from 2013 to 2018. Seven issued U.S. patents cover technology related to metabotropic glutamate receptors. These patents have expiration dates (not including any patent term extensions) ranging from 2016 to 2020. Thirteen issued U.S. patents cover technology related to glycine reuptake inhibitors. These patents have expiration dates (not including any patent term extensions) ranging from 2016 to 2020.

We also rely on trade secrets and contractual arrangements to protect our trade secrets. Much of the know-how important to our technology and many of its processes are dependent upon the knowledge, experience and skills of our key scientific and technical personnel and are not the subject of pending patent applications or issued patents. To protect our rights to know-how and technology, we require all of our employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit the

unauthorized use of, and restrict the disclosure of, confidential information and require disclosure and assignment to us of their ideas, developments, discoveries and inventions.

In connection with our research and development activities, we have sponsored research at various university and government laboratories. For example, we have executed license and research agreements regarding research in the area of calcium and other ion receptors with The Brigham and Women’s Hospital. We have also sponsored work at other government and academic laboratories for various evaluations, assays, screenings and other tests. Generally, under these agreements, we fund the work of investigators in exchange for the results of the specified work and the right or option to a license to any patentable inventions that may result in certain designated areas. If the sponsored work produces patentable subject matter, we generally have the first right to negotiate for license rights related to that subject matter. Any resulting license would be expected to require us to pay royalties on net sales of licensed products.

Competition

We and our collaborators and licensees are pursuing areas of product development in which we believe there is a potential for extensive technological innovation in relatively short periods of time. We operate in a field in which new discoveries occur at a rapid pace. Our competitors may succeed in developing technologies or products that are more effective than ours, or in obtaining regulatory approvals for their drugs more rapidly than we are able to, which could render our products obsolete or noncompetitive. Competition in the pharmaceutical industry is intense and is expected to continue to increase. Many competitors, including biotechnology and pharmaceutical companies, are actively engaged in research and development in areas where we are also developing products, including the fields of osteoporosis, hyperparathyroidism, and central nervous system disorders. For osteoporosis, there are a number of therapies which are currently being marketed, including es trogen replacement therapies like Wyeth-Ayerst’s Premarin, bisphosphonates like Merck’s Fosamax, and selective estrogen receptor modulators, like Lilly’s Evista. Lilly also launched Forteo in December 2002, which will compete directly with PREOS as a bone-building agent for the treatment of osteoporosis patients at high risk for fracture. Lilly’s product is the first to market in the treatment of osteoporosis using an injectable bone-building drug. Lilly has also announced that it is investigating alternate methods of delivery of Forteo.

Many of our competitors have substantially greater financial, technical, marketing and personnel resources. In addition, some of them have considerable experience in preclinical testing, human clinical trials and other regulatory approval procedures. Moreover, certain academic institutions, governmental agencies and other research organizations are conducting research in the same areas in which we are working. These institutions are becoming increasingly aware of the commercial value of their findings and are more actively seeking patent protection and licensing arrangements to collect royalties for the technology that they have developed. These institutions may also market competitive commercial products on their own or through joint ventures and will compete with us in recruiting highly qualified scientific personnel. Our ability to compete successfully will depend, in part, on our ability to:

•

develop marketing, sales and distribution capabilities for our proprietary products;


	•	leverage our established collaborations and enter into new collaborations for the development of our products;


	•	identify new product candidates through our internal discovery effort or through acquisition;


	•	develop products that reach the market first;


	•	develop products that are superior to other products in the market;


	•	develop products that are cost-effective and competitively priced; and


	•	obtain and enforce patents covering our technology.

Manufacturing

We do not have manufacturing facilities to produce sufficient supplies of PREOS, ALX-0600 or any of our other product candidates to support clinical trials or commercial launch of these products, if they are approved. We are dependent on third parties for manufacturing and storage of our product candidates. If we are unable to contract for a sufficient supply of our product candidates on acceptable terms, or if we encounter delays or difficulties in the manufacturing process or our relationships with our manufacturers, we

may not have sufficient product to conduct or complete our clinical trials or support preparations for the commercial launch of our product candidates, if approved.

We have entered into agreements with contract manufacturers to manufacture PREOS for use in clinical trial activities. These contract manufacturers are currently our only source for the production and formulation of PREOS. To date, these contract manufacturers have produced only small quantities of PREOS relative to those needed for commercialization. In addition, we have experienced difficulties in producing clinical supplies of PREOS that meet our specifications on a timely basis.

On May 15, 2002, we reported that we were unable to produce finished clinical supplies of PREOS that met our release specifications. PREOS is formulated as a freeze-dried powder that is reconstituted into a liquid when inserted into its injector pen for patient use. We require that the reconstituted drug remain stable in liquid form for a specified period under refrigeration. Some production batches at that time had exhibited precipitation of the reconstituted drug before the expiration of the required time period. After conducting an extensive review of fill and finish procedures to assess and correct the problem, on July 23, 2002, we announced that we had implemented changes in the process used to prepare the finished drug, and that we had produced limited quantities of PREOS that met our release specifications. Since we instituted certain changes to the fill and finish process for PREOS in June 2002, all batches have passed stability specifications. Based on our continued work, and on contacts with regulatory agencies, we do not believe that any further changes will be required in our production processes to proceed with the filing of an NDA for PREOS.

We currently have sufficient clinical supplies of PREOS to complete the TOP study, and we believe that our contract manufacturers will be able to produce sufficient supply of PREOS to complete all of our other ongoing clinical studies. However, if any of the problems we have experienced in the past reoccur and as a result we are unable to produce, in a timely manner, adequate clinical supplies to meet the needs of our other current clinical trials, we would be required to modify our finished product formulation and modify or terminate our clinical trials for PREOS. Any modification of our finished product or modification or termination of our Phase III clinical trials could adversely affect our ability to obtain necessary regulatory approvals and significantly delay or prevent the commercial launch of the product, which would materially harm our business, cause our stock price to decline and impair our ability to raise capital.

We depend on a number of single source contract manufacturers to supply key components of PREOS. For instance, we depend on SynCo Bio Partners B.V., or SynCo, which produces supplies of bulk drug product of PREOS to support the PREOS clinical trials and the commercial launch of PREOS. We also depend on Vetter Pharma-Fertigung GmbH, or Vetter, for the production of finished supplies of PREOS. Because the “fill and finish” part of the manufacturing process for PREOS requires the use of Vetter’s proprietary technology, Vetter is our sole source for finished supplies of PREOS. Absent the development of an alternative method of delivery of PREOS, we will remain dependent on the availability of this proprietary technology. Because of our dependence on Vetter, we are subject to the risk that Vetter may not have the capacity from time to time to produce sufficient quantities of PREOS to meet the needs of our clinical trials or be able to scale to commerci al production of PREOS. We are also subject to the risk that disruptions in Vetter’s operations would result in delays in PREOS’ clinical trials, regulatory approvals and commercial introduction. While we are currently in discussions, to date, we have not entered into a long-term agreement with Vetter, who currently produces PREOS on a purchase order basis. Accordingly, Vetter could terminate our relationship at any time and for any reason. If our relationship with Vetter is terminated, or if Vetter is unable to produce PREOS in required quantities, on a timely basis or at all, we could be forced to ultimately develop an alternative delivery process for PREOS, which would require additional clinical trials and regulatory approvals. Any disruption or termination of our relationship with Vetter would materially harm our business and financial condition and cause our stock price to decline.

We expect to depend on contract manufacturers to supply commercial-scale quantities of PREOS. In October 2002, we entered into an agreement with Boehringer Ingelheim Austria GmbH, or BI, for the manufacture of bulk drug supplies of PREOS in support of commercial launch. Under this agreement, we are working with BI to facilitate a technology transfer process and appropriate testing, documentation and quality standards and procedures prior to the commencement of commercial production. We expect this technology transfer process to be lengthy and complicated, and we have agreed to expend substantial resources over the term of the agreement. Production of commercial supplies of PREOS will occur over a three-year period commencing in 2004. As of December 31, 2002, we have an outstanding commitment for future technology

transfer, testing, documentation, and quality standards and procedure development, and commercial production of drug substance of approximately $96.6 million. We estimate that the outstanding commitments will be paid as follows: $7.2 million in 2003, $14.3 million in 2004, $37.1 million in 2005 and $38.0 million in 2006. In addition, FDA and comparable foreign regulatory approvals may be required. The BI agreement further provides a general basis for the parties to mutually agree as to the terms of any future production of PREOS, based in part on current projections as to yield and other matters. Any failure to successfully transition on a timely basis our bulk manufacturing to BI would delay our commercialization efforts.

Dependence on contract manufacturers for commercial production involves a number of risks, many of which are outside our control. These risks include potential delays in transferring technology, and the inability of our contract manufacturer to scale production on a timely basis, to manufacture commercial quantities at reasonable costs, to comply with current good manufacturing practices and to implement procedures that result in the production of drugs that meet our specifications and regulatory requirements.

We are also seeking arrangements with contract manufacturers for supplies of ALX-0600 to be used in future clinical trials. Our agreement with the Government of Canada requires that the ALX-0600 we use in clinical trials and for commercial launch be manufactured by a Canadian company. We have been unable to identify a Canadian manufacturer capable of manufacturing and formulating ALX-0600 in compliance with Current Good Manufacturing Practices, or cGMP, and with sufficient quantity and quality for our future clinical development program. As a result, we have arranged for a contract manufacturer outside of Canada to manufacture the bulk compound, which is then formulated into ALX-0600 by a Canadian company. We have notified the Government of Canada of our arrangements and received their authorization to proceed with the manufacture of ALX-0600 for our Phase II clinical trials. If clinical supplies of ALX-0600 are disrupted, exhausted, or fail to arrive when neede d, we will have to substantially curtail or postpone initiation of planned clinical trials with ALX-0600.

Employees

As of June 30, 2003, we employed 219 individuals full-time, of which 50 hold Ph.D. degrees and 37 hold other advanced degrees. A total of 154 full-time employees are engaged in research, development and support activities. A total of 65 full-time employees are employed in finance, legal, human resources, market research, corporate development and general administrative activities. None of our employees are covered by collective bargaining agreements and our management considers its relations with our employees to be good.

Trademarks

“NPS” and “NPS Pharmaceuticals” are our registered trademarks. We have applied to the United States Patent and Trademark Office for registration of the trademark “PREOS.” All other trademarks, trade names or service marks appearing in this Annual Report on Form 10-K are the property of their respective owners.

Available Information

Our Internet address is www.npsp.com. We make available free of charge on or through our Internet website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Recent Events

On February 19, 2003, we entered into an Agreement and Plan of Reorganization, or Merger Agreement, with Enzon Pharmaceuticals, Inc., which set forth the terms and conditions of the proposed merger of NPS and Enzon. On June 4, 2003, NPS and Enzon announced that they had mutually agreed to terminate the Merger Agreement and other ancillary documents entered into in connection with the Merger Agreement. As part of the agreement to terminate the merger, NPS paid to Enzon a termination fee in the form of 1.5 million shares of NPS common stock, which, subject to certain limitations contained in a Registration Rights Agreement, will be registered for resale by Enzon. We have incurred total expenses of approximately $4.2 million relating to the proposed merger, which excludes the issuance of 1.5 million shares of NPS common stock. Such expenses will impact our capital resources.

RISK FACTORS

We have a history of operating losses. We expect to incur net losses and we may never achieve or maintain profitability.

With the exception of 1996, we have not been profitable since our inception in 1986. We reported net losses of $86.8 million, $50.0 million and $32.1 million for the years ended 2002, 2001 and 2000. As of December 31, 2002, we had an accumulated deficit of approximately $247.8 million. We have not generated any revenue from product sales to date, and it is possible that we will never have significant, if any, product sales revenue. We expect to continue to incur losses for at least the next several years as we and our collaborators and licensees pursue clinical trials and research and development efforts. To become profitable, we, either alone or with our collaborators and licensees, must successfully develop, manufacture and market our current product candidates, particularly PREOS and Cinacalcet HCl, as well as continue to identify, develop, manufacture and market new product candidates. It is possible that we will never have significa nt product sales revenue or receive significant royalties on our licensed product candidates.

We do not have, and may never develop, any commercial drugs or other products that generate revenues.

Our existing product candidates will require significant additional development, clinical trials, regulatory clearances and additional investment before they can be commercialized. Our product development efforts may not lead to commercial drugs for a number of reasons, including the failure of our product candidates to be safe and effective in clinical trials or because we have inadequate financial or other resources to pursue the programs through the clinical trial process. We do not expect to be able to market any of our existing product candidates for a number of years, if at all.

We are dependent on the successful outcome of the clinical trials for our two most advanced product candidates, PREOS and Cinacalcet HCl. If either or both of these product candidates fail to advance in the clinic, our business will be materially harmed and our stock price will be adversely affected.

We are currently conducting Phase III clinical trials for PREOS in humans as well as a carcinogenicity study in rats. Amgen, our licensee, is conducting Phase III clinical trials for Cinacalcet HCl, a compound intended to treat hyperparathyroidism. Our success will depend, to a great degree, on the success of these and subsequent clinical trials. In order to successfully commercialize PREOS and Cinacalcet HCl, we and our collaborators must be able to, among other things, obtain required regulatory approvals for these product candidates. Prior to receiving approval for commercialization, we must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA and comparable foreign regulatory authorities, that each of these product candidates is both safe and efficacious. While no significant safety issues have emerged in Phase I and Phase II clinical trials with respect to either of these product candidates, we will still need to demonstrate their efficacy for the treatment of their respective specific indications, as well as their continued safety through the conduct of Phase III clinical trials. To date, we have not demonstrated long-term safety in clinical trials with either of these product candidates. Additionally, the results of our current clinical studies may indicate that the candidates are unsafe, ineffective or both, notwithstanding the results of earlier clinical trials. We cannot assure you that either or both of these products will prove to be safe or efficacious in accordance with regulatory requirements. Further, we cannot assure you that these product candidates will be approved in a timely manner, if at all. Our ability to successfully complete clinical trials for PREOS will also depend on whether problems we experienced in 2002 in producing finished clinical supplies of PREOS reoccur. The successful outcome of Amgen’s Phase III clinical trials for Cinacalcet HCl will depend in part on Amgen’s ability to successfully complete enrollment in the trials on a timely basis and to obtain adequate clinical supplies to meet the needs of their clinical trials in compliance with applicable regulatory requirements. If we or Amgen fail to successfully obtain regulatory approvals for PREOS or Cinacalcet HCl, our business will be materially harmed and our stock price will be adversely affected.

We have no manufacturing capabilities. We depend on third parties, including a number of sole suppliers, for manufacturing and storage of our product candidates used in our clinical trials. We do not have long-term agreements with all of our sole source suppliers of PREOS. Product introductions may be delayed or suspended if the manufacture of our products is interrupted or discontinued.

We do not have manufacturing facilities to produce sufficient supplies of PREOS, ALX-0600 or any of our other product candidates to support clinical trials or commercial launch of these products, if they are approved. We are dependent on third parties, including a number of sole suppliers, for manufacturing and storage of our product candidates. If we are unable to contract for a sufficient supply of our product candidates on acceptable terms, or if we encounter delays or difficulties in the manufacturing process or our relationships with our manufacturers, we may not have sufficient product to conduct or complete our clinical trials or support preparations for the commercial launch of our product candidates, if approved.

We expect to depend on contract manufacturers to supply commercial-scale quantities of PREOS. In October 2002, we entered into an agreement with Boehringer Ingelheim Austria GmbH, or BI, for the manufacture of commercial quantities of bulk drug supplies of PREOS in support of commercial launch. Under this agreement, we are working with BI to facilitate a technology transfer process and appropriate testing, documentation and quality standards and procedures prior to the commencement of commercial production. We expect this technology transfer process to be lengthy and complicated, and we have agreed to expend substantial resources over the term of the agreement. In addition, FDA and comparable foreign regulatory approvals may be required. The BI agreement further provides a general basis for the parties to mutually agree as to the terms of any future production of PREOS, based in part on current projections as to yield and other matters. Any failure to successful ly transition on a timely basis our bulk manufacturing to BI would delay our commercialization efforts.

Even if we are able to complete our clinical trials, our current or future manufacturers may be unable to scale production when necessary to enable commercial launch or accurately and reliably manufacture commercial quantities of PREOS at reasonable costs, on a timely basis and in compliance with the FDA’s cGMP. If our current or future contract manufacturers fail in any of these respects, our ability to timely complete our clinical trials, obtain required regulatory approvals and successfully commercialize PREOS will be materially and adversely affected.

We depend on a number of single source contract manufacturers to supply key components of PREOS. For instance, we depend on SynCo, which produces supplies of bulk drug product of PREOS to support the PREOS clinical trials and the commercial launch of PREOS. We also depend on Vetter for the production of finished supplies of PREOS. Because the “fill and finish” part of the manufacturing process for PREOS requires the use of Vetter’s proprietary technology, Vetter is our sole source for finished supplies of PREOS. Absent the development of an alternative method of delivery of PREOS, we will remain dependent on the availability of this proprietary technology. Because of our dependence on Vetter, we are subject to the risk that Vetter may not have the capacity from time to time to produce sufficient quantities of PREOS to meet the needs of our clinical trials or be able to scale to commercial production of PREOS. We are also subject to the risk that d isruptions in Vetter’s operations would result in delays in PREOS’ clinical trials, regulatory approvals and commercial introduction. While we are currently in discussions, to date we have not entered into a long-term agreement with Vetter, who currently produces PREOS on a purchase order basis. Accordingly, Vetter could terminate our relationship at any time and for any reason. If our relationship with Vetter is terminated, or if Vetter is unable to produce PREOS in required quantities, on a timely basis or at all, we could be forced to ultimately develop an alternative delivery process for PREOS, which would require significant additional time and expense, as well as additional clinical trials and regulatory approvals. Any

disruption or termination of our relationship with Vetter would materially harm our business and financial condition and cause our stock price to decline.

Our reliance on contract manufacturers exposes us to additional risks, including:

•

delays in scale-up to quantities needed for clinical trials or failure to manufacture such quantities to our specifications, or to deliver such quantities on the dates we require;


	•	our current and future manufacturers are subject to ongoing, periodic, unannounced inspection by the FDA and corresponding state and international regulatory authorities for compliance with strictly enforced cGMP regulations and similar foreign standards, and we do not have control over our contract manufacturers’ compliance with these regulations and standards;


	•	our current and future manufacturers may not be able to comply with applicable regulatory requirements, which would prohibit them from manufacturing products for us;


	•	if we need to change to other commercial manufacturing contractors, the FDA and comparable foreign regulators must approve these contractors prior to our use, which would require new testing and compliance inspections, and the new manufacturers would have to be educated in, or themselves develop substantially equivalent processes necessary for, the production of our products;


	•	our manufacturers might not be able to fulfill our commercial needs, which would require us to seek new manufacturing arrangements and may result in substantial delays in meeting market demand; and


	•	we may not have intellectual property rights, or may have to share intellectual property rights, to any improvements in the manufacturing processes or new manufacturing processes for our products.

Any of these factors could cause us to delay or suspend clinical trials, regulatory submission, required approvals or commercialization of our products under development, entail higher costs and result in our being unable to effectively commercialize our products.

We do not currently intend to manufacture any of our product candidates, although we may choose to do so in the future. If we decide to manufacture our products, we would be subject to the regulatory risks and requirements described above. We would also be subject to similar risks regarding delays or difficulties encountered in manufacturing our pharmaceutical products and we would require additional facilities and substantial additional capital. We cannot assure you that we would be able to manufacture any of our products successfully in accordance with regulatory requirements and in a cost-effective manner.

Failure to timely produce adequate clinical supplies of our lead product candidate, PREOS, could require us to modify or terminate certain of our Phase III clinical trial of PREOS, which would materially harm our business, cause our stock price to decline and impair our ability to raise capital.

On May 15, 2002, we reported that we were unable to produce finished clinical supplies of PREOS that met our release specifications. PREOS is formulated as a freeze-dried powder that is reconstituted into a liquid when inserted into its injector pen for patient use. We require that the reconstituted drug remain stable in liquid form for a specified period under refrigeration. Some production batches, at that time, had exhibited precipitation of the reconstituted drug in the injector pen before the expiration of the required time period. After conducting an extensive review of fill and finish procedures to assess and correct the problem, on July 23, 2002, we announced that we had implemented changes in the process used to prepare the finished drug, and that we had produced limited quantities of PREOS that met our release specifications.

We currently have sufficient clinical supplies of PREOS to complete the TOP study, and we believe that our contract manufacturers will be able to produce sufficient supply of PREOS to complete all of our other ongoing clinical studies. However, if any problems we have experienced in the past reoccur, and as a result we are unable to produce, in a timely manner, adequate clinical supplies to meet the needs of our other clinical trials, we would be required to modify our finished product formulation and modify or terminate such clinical trials for PREOS. Any modification of our finished product or modification or termination of those Phase III clinical trials could adversely affect our ability to obtain necessary regulatory approvals and significantly delay or prevent the commercial launch of the product, which would materially harm our business, cause our stock price to decline and impair our ability to raise capital.

Clinical trials are long, expensive and uncertain and the FDA may ultimately not approve any of our product candidates. We cannot assure you that data collected from preclinical and clinical trials of our product candidates will be sufficient to support approval by the FDA, the failure of which could delay our profitability and adversely affect our stock price.

Many of our research and development programs are at an early stage. Clinical trials are long, expensive and uncertain processes. Clinical trials may not be commenced or completed on schedule, and the FDA may not ultimately approve our product candidates for commercial sale. Further, even if the results of our preclinical studies or clinical trials are initially positive, it is possible that we will obtain different results in the later stages of drug development or that results seen in clinical trials will not continue with longer-term treatment. Drugs in late stages of clinical development may fail to show the desired safety and efficacy traits despite having progressed through initial clinical testing. For example, positive results in early Phase I or Phase II clinical trials may not be repeated in larger Phase II or Phase III clinical trials. All of our potential drug candidates are prone to the risks of failure inherent in drug development. The clinical tri als of any of our drug candidates, including PREOS and Cinacalcet HCl, could be unsuccessful, which would prevent us from commercializing the drug. Our failure to develop safe, commercially viable drugs would substantially impair our ability to generate revenues and sustain our operations and would materially harm our business and adversely affect our stock price.

If we fail to maintain our existing or establish new collaborative relationships, or if our collaborators do not devote adequate resources to the development and commercialization of our licensed drug candidates, we may have to reduce our rate of product development and may not see products brought to market or be able to achieve profitability.

Our strategy for developing, manufacturing and commercializing our products includes entering into various relationships with large pharmaceutical companies to advance many of our programs. We have granted exclusive development, commercialization and marketing rights to a number of our collaborators for some of our key product development programs, including Cinacalcet HCl, calcilytics, mGluRs and glycine reuptake inhibitors. Except in the case of our collaboration with AstraZeneca for research involving mGluRs, our collaborators have full control over those efforts in their territories and the resources they commit to the programs. Accordingly, the success of the development and commercialization of product candidates in those programs depends on their efforts and is beyond our control. For us to receive any significant milestone or royalty payments from our collaborators, they must advance drugs through clinical trials, establish the safety and efficacy of our drug candidates, obtain regulatory approvals or achieve market acceptance of those products. As a result, if a collaborator elects to terminate its agreement with us with respect to a research program, our ability to advance the program may be significantly impaired or we may elect to discontinue funding the program altogether. For example, in early 2002, Abbott terminated its agreement with respect to NPS 1776, and Forest Laboratories has terminated its agreement with us with respect to ALX-0646. As a result, the advancement of these programs was delayed.

Under our collaboration with AstraZeneca, which commenced in March 2001, we are required to co-direct the research and to pay for an equal share of the research through a minimum of 30 months and, under certain circumstances, for the full term of 60 months. This commitment of personnel and capital may limit or restrict our ability to initiate or pursue other research efforts.

As part of our product development and commercialization strategy, we evaluate whether to seek collaborators for our product candidates. If we elect to collaborate, we may not be able to negotiate collaborative arrangements for our product candidates on acceptable terms, if at all. If we are unable to establish collaborative arrangements, we will either need to increase our expenditures and undertake the development and commercialization activities at our own expense or delay further development of the affected product candidate.

Our research funding agreement with the Canadian government significantly limits our ability to establish collaborations for ALX-0600 without its consent.

Collaborative agreements, including our existing collaborative agreements, pose the following risks:

•

our contracts with collaborators may be terminated and we may not be able to replace our collaborators;


	•	the terms of our contracts with our collaborators may not be favorable to us in the future;


	•	our collaborators may not pursue further development and commercialization of compounds resulting from their collaborations with us;


	•	a collaborator with marketing and distribution rights to one or more of our product candidates may not commit enough resources to the marketing and distribution of such candidates;


	•	disputes with our collaborators may arise, leading to delays in or termination of the research, development or commercialization of our product candidates, or resulting in significant litigation or arbitration;


	•	contracts with our collaborators may fail to provide significant protection if one or more of them fail to perform;


	•	in some circumstances, if a collaborator terminates an agreement, or if we are found to be in breach of our obligations, we may be unable to secure all of the necessary intellectual property rights and regulatory approval to continue developing the same compound or product;


	•	our collaborators could independently develop, or develop with third parties, drugs that compete with our products; and


	•	we may be unable to meet our financial or other obligations under our collaborative agreements; for example, we have had to obtain a waiver of our obligation to have manufactured in Canada clinical supplies of ALX-0600 because no such Canadian manufacturer could be identified, and we could face similar issues in the future, which might lead to a loss of significant rights, including intellectual property rights, or require us to pay significant damages.

We cannot assure you of the success of our current collaborative efforts nor can we assure you of the success of any of our future collaborative efforts. If our collaborative efforts fail, our business and financial condition would be materially harmed.

Because we do not have marketing, sales or distribution capabilities, we may be unable to market and sell our products and generate revenues.

We have recruited and continue to recruit marketing, market research, and product planning personnel. However, we currently have no sales, marketing or distribution capabilities. In order to commercialize any product candidates for which we receive FDA approval, we will have to develop a sales and marketing force or rely on third parties to perform these functions. To market products directly, we will have to develop a marketing and sales force with technical expertise and supporting distribution capability. Our inability to develop expertise and attract skilled marketing and sales personnel to establish in-house sales and distribution capabilities may limit our ability to gain market acceptance for our products and generate revenues. For example, if we are successful in our Phase III clinical trials with PREOS, and the FDA grants approval for the commercialization of PREOS, we will be unable to introduce the product to market without developing these capabiliti es internally or establishing a marketing collaboration with a pharmaceutical company with those resources. We have only recently begun to develop our internal sales and marketing force and cannot assure you that we will be successful in our efforts to establish this force. Further, if we establish relationships with one or more large pharmaceutical companies with existing distribution systems and direct sales forces to market any or all of our product candidates, we cannot assure you that we will be able to enter into or maintain agreements with these companies on acceptable terms, if at all.

In addition, we expect to begin to incur significant expenses in developing sales, marketing and distribution capabilities in advance of determining our commercialization strategy with respect to one or more of our product candidates, including determining whether to establish a collaboration with one or more pharmaceutical companies. The determination of our commercialization strategy with respect to a product candidate will depend on a number of factors, including:

•

the extent to which we are successful in securing collaborative partners to offset some or all of the funding obligations with respect to product candidates;


	•	the extent to which our agreement with our collaborators permits us to exercise marketing or promotion rights with respect to the product candidate;


	•	how our product candidates compare to competitive products with respect to labeling, pricing, therapeutic effect, and method of delivery; and


	•	whether we are able to establish agreements with third party collaborators, including large pharmaceutical companies, with respect to any of our product candidates on terms that are acceptable to us.

A number of these factors are outside of our control and will be difficult to determine. Therefore, we may change commercialization strategies by entering into agreements with our collaborators or third parties after we have incurred significant expenses in developing internal sales, marketing and distribution capabilities. A change of this nature could result in increased expenses or delays in commercialization and therefore could delay revenues and adversely affect our future operating results.

Our agreement with the Government of Canada regarding the development of ALX-0600 could adversely impact our ability to complete development of ALX-0600, result in our loss of important rights or cause us to make material payments to the Government of Canada.

Our agreement with the Government of Canada requires that the ALX-0600 we use in clinical trials and for commercial launch be manufactured by a Canadian company. This agreement also contains a number of other significant restrictions on our ability to develop, manufacture and commercialize ALX-0600 outside of Canada. To the extent that we are unable to comply with any performance obligation or obtain a waiver of the obligation, the Government of Canada would have the right to declare us in default. If we were unable to cure the default, we could suffer adverse consequences, including the payment of liquidated damages that would be material to us, repaying all amounts received by us from the Government of Canada or surrendering all intellectual property rights associated with ALX-0600 in some circumstances. However, the Government of Canada does not have the unilateral ability to terminate or cancel the contract. We have been unable to identify a Canadian manufac turer capable of manufacturing and formulating ALX-0600 in compliance with cGMP and with sufficient quantity and quality for our future clinical development program. As a result, we have arranged for a contract manufacturer outside of Canada to manufacture the bulk compound, which is then formulated into ALX-0600 by a Canadian company. We have notified the Government of Canada of our arrangements and received their authorization to proceed with the manufacture of ALX-0600 for our Phase II clinical trials. We cannot be certain that we will be able to obtain additional waivers in the future. We are currently in negotiations with the Government of Canada to amend the provisions of our agreement that could adversely affect the continued development of ALX-0600. In July 2002, we began negotiations with the Government of Canada to pursue mutually acceptable adjustments to the terms of the agreement. We cannot assure you that such negotiations will be successful. If we cannot reach an agreement with the Governm ent of Canada on amending certain provisions of the agreement, it may be impractical for NPS to continue our development of ALX-0600. If we do reach an agreement we could be required us to make payments that could be material in amount.

We may need additional financing, but our access to capital funding is uncertain.

Our current and anticipated operations, particularly our product development and commercialization programs for PREOS and ALX-0600, require substantial capital. We expect that our existing cash and cash equivalents will sufficiently fund our operations through at least 2003. However, our future capital needs will depend on many factors, including the extent to which we enter into collaboration agreements with respect to any of our proprietary product candidates, receive milestone payments from our collaborators and make progress in our internally funded research, development and commercialization activities. Our capital requirements will also depend on the magnitude and scope of these activities, our ability to maintain existing and establish new collaborations, the terms of those collaborations, the success of our collaborators in developing and marketing products under their respective collaborations with us, the success of our contract

manufacturers in producing clinical supplies of our product candidates on a timely basis and in sufficient quantities to meet our clinical trial requirements, competing technological and market developments, the time and cost of obtaining regulatory approvals, the extent to which we choose to commercialize our future products through our own sales and marketing capabilities, the cost of preparing, filing, prosecuting, maintaining and enforcing patent and other rights and our success in acquiring and integrating complementary products, technologies or companies. We do not have committed external sources of funding and we cannot assure you that we will be able to obtain additional funds on acceptable terms, if at all. If adequate funds are not available, we may be required to:

•

engage in equity financings that would be dilutive to current stockholders;


	•	delay, reduce the scope of or eliminate one or more of our development programs;


	•	obtain funds through arrangements with collaborators or others that may require us to relinquish rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves; or


	•	license rights to technologies, product candidates or products on terms that are less favorable to us than might otherwise be available.

If funding is insufficient at any time in the future, we may not be able to develop or commercialize our products, take advantage of business opportunities or respond to competitive pressures.

Because of the uncertainty of pharmaceutical pricing, reimbursement and healthcare reform measures, we may be unable to sell our products profitably.

The availability of reimbursement by governmental and other third-party payors affects the market for any pharmaceutical product. These third-party payors continually attempt to contain or reduce the costs of healthcare. There have been a number of legislative and regulatory proposals to change the healthcare system and further proposals are likely. Under current guidelines, Medicare does not reimburse patients for self-administered drugs. Medicare’s policy may decrease the market for our products that are designed to treat patients with age-related disorders, such as osteoporosis and hyperparathyroidism. Significant uncertainty exists with respect to the reimbursement status of newly approved healthcare products. In addition, third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. We might not be able to sell our products profitably or recoup the value of our investment in product development if re imbursement is unavailable or limited in scope, particularly for product candidates addressing small patient populations, such as ALX-0600 for the treatment of short bowel syndrome.

As a result of intense competition and technological change in the pharmaceutical industry, the marketplace may not accept our products and we may not be able to compete successfully against other companies in our industry and achieve profitability.

Many of our competitors have drug products that have already been approved or are in development, and operate large, well-funded research and development programs in these fields. For example, Forteo, a fragment of the full-length parathyroid hormone for the treatment of osteoporosis, was introduced into the United States market in December 2002 by Lilly as a treatment for patients with osteoporosis who are at high risk of bone fracture. If PREOS is approved by the FDA, it will compete directly with Forteo and other approved therapies, including estrogen replacement therapies, bisphosphonate and selective estrogen modulators therapies. Similarly, Hectoral, a product of Bone Care International, Inc., is currently being marketed as a treatment to relieve some symptoms of secondary hyperparathyroidism and, if it is approved by the FDA, will compete directly with Cinacalcet HCl. Also, Genzyme Pharmaceuticals, Inc. is currently marketing RenaGel, which is a treatment for hyperphosphatemia, a condition resulting from secondary hyperparathyroidism. Many of our competitors have substantially greater financial and management resources, superior intellectual property positions and greater manufacturing, marketing and sales capabilities, areas in which we have limited or no experience. In addition, many of our competitors have significantly greater experience than we do in undertaking preclinical testing and clinical trials of new or improved pharmaceutical products and obtaining required regulatory approvals. Consequently, our competitors may obtain FDA and

other regulatory approvals for product candidates sooner and be more successful in manufacturing and marketing their products than we or our collaborators.

Existing and future products, therapies and technological approaches will compete directly with the products we seek to develop. Current and prospective competing products may provide greater therapeutic benefits for a specific problem, may offer easier delivery, or may offer comparable performance at a lower cost. Any product candidate that we develop and that obtains regulatory approval must then compete for market acceptance and market share. Our product candidates may not gain market acceptance among physicians, patients, healthcare payors and the medical community. Further, any products we develop may become obsolete before we recover any expenses we incurred in connection with the development of these products. As a result, we may never achieve profitability.

We may be unable to obtain patents to protect our technologies from other companies with competitive products, and patents of other companies could prevent us from manufacturing, developing, or marketing our products.

The patent positions of pharmaceutical and biotechnology firms are uncertain and involve complex legal and factual questions. The U.S. Patent and Trademark Office has not established a consistent policy regarding the breadth of claims that it will allow in biotechnology patents. If it allows broad claims, the number and cost of patent interference proceedings in the U.S. and the risk of infringement litigation may increase. If it allows narrow claims, the risk of infringement may decrease, but the value of our rights under our patents, licenses and patent applications may also decrease. In addition, the scope of the claims in a patent application can be significantly modified during prosecution before the patent is issued. Consequently, we cannot know whether our pending applications will result in the issuance of patents or, if any patents are issued, whether they will provide us with significant proprietary protection or will be circumvented, invalidated, or f ound to be unenforceable. Until recently, patent applications in the United States were maintained in secrecy until the patents issued, and publication of discoveries in scientific or patent literature often lags behind actual discoveries. Patent applications filed in the United States after November 2000 generally will be published 18 months after the filing date unless the applicant certifies that the invention will not be the subject of a foreign patent application. We cannot assure you that, even if published, we will be aware of all such literature. Accordingly, we cannot be certain that the named inventors of our products and processes were the first to invent that product or process or that we were the first to pursue patent coverage for our inventions.

Our commercial success depends in part on our ability to maintain and enforce our proprietary rights. If third parties engage in activities that infringe our proprietary rights, our management’s focus will be diverted and we may incur significant costs in asserting our rights. We may not be successful in asserting our proprietary rights, which could result in our patents being held invalid or a court holding that the third party is not infringing, either of which would harm our competitive position. We cannot assure you that others will not design around our patented technology.

Moreover, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office or other analogous proceedings in other parts of the world to determine priority of invention and the validity of patent rights granted or applied for, which could result in substantial cost and delay, even if the eventual outcome is favorable to us. We cannot assure you that our pending patent applications, if issued, would be held valid or enforceable. Additionally, many of our foreign patent applications have been published as part of the patent prosecution process in such countries. Protection of the rights revealed in published patent applications can be complex, costly and uncertain.

In order to protect goodwill associated with our company and product names, we rely on trademark protection for our marks. We have filed to register the “PREOS” trademark with the United States Patent and Trademark Office, which may or may not register this mark. A third party may assert a claim that the PREOS mark is confusingly similar to its mark, and such claims or the failure to timely register the PREOS mark or objections by the FDA could force us to select a new name for PREOS, which could cause us to incur additional expense or delay its introduction to market.

We also rely on trade secrets, know-how and confidentiality provisions in our agreements with our collaborators, employees and consultants to protect our intellectual property. However, these and other parties

may not comply with the terms of their agreements with us, and we might be unable to adequately enforce our rights against these people or obtain adequate compensation for the damages caused by their unauthorized disclosure or use. Our trade secrets or those of our collaborators may become known or may be independently discovered by others.

Finally, if we are found to be in noncompliance with one or more of our obligations under the terms of our research funding agreement with the Canadian government, we may be required to surrender all intellectual property rights associated with ALX-0600, or, at our option, pay liquidated damages.

Our products and product candidates may infringe the intellectual property rights of others, which could increase our costs and negatively affect our profitability.

Our success also depends on avoiding infringement of the proprietary technologies of others. In particular, there may be certain issued patents and patent applications claiming subject matter which we or our collaborators may be required to license in order to research, develop or commercialize at least some of our product candidates, including PREOS. In addition, third parties may assert infringement or other intellectual property claims against us based on our patents or other intellectual property rights. An adverse outcome in these proceedings could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease or modify our use of the technology. If we are required to license such technology, we cannot assure you that a license under such patents and patent applications will be available on acceptable terms or at all. Futher, we may incur substantial costs defending ourselves in lawsu its against charges of patent infringement or other unlawful use of another’s proprietary technology.

We are subject to extensive government regulation that may cause us to cancel or delay the introduction of our products to market.

Our research and development activities and the clinical investigation, manufacture, distribution and marketing of drug products are subject to extensive regulation by governmental authorities in the United States and other countries. Prior to marketing in the United States, a drug must undergo rigorous testing and an extensive regulatory approval process implemented by the FDA under federal law, including the Federal Food, Drug and Cosmetic Act. To receive approval, we or our collaborators must, among other things, demonstrate with substantial evidence from well-controlled clinical trials that the product is both safe and effective for each indication where approval is sought. Depending upon the type, complexity and novelty of the product and the nature of the disease or disorder to be treated, that approval process can take several years and require substantial expenditures. Data obtained from testing are susceptible to varying interpretations that could delay , limit or prevent regulatory approvals of our products. Drug testing is subject to complex FDA rules and regulations, including the requirement to conduct human testing on a large number of test subjects. We, our collaborators or the FDA may suspend human trials at any time if a party believes that the test subjects are exposed to unacceptable health risks. We cannot assure you that any of our product candidates will be safe for human use. Other countries also have extensive requirements regarding clinical trials, market authorization and pricing. These regulatory schemes vary widely from country to country, but, in general, are subject to all of the risks associated with United States approvals.

The FDA has not established approved protocols for conducting pivotal clinical trials for short bowel syndrome. We will need to reach an agreement with the FDA regarding trial design and clinical endpoints before we can begin pivotal trials of ALX-0600. We cannot be certain that the FDA will agree to trial design and clinical endpoints that will make continued development of ALX-0600 feasible on a timely basis or at all.

If any of our products receive regulatory approval, the approval will be limited to those disease states and conditions for which the product is safe and effective, as demonstrated through clinical trials. In addition, results of pre-clinical studies and clinical trials with respect to our products could subject us to adverse product labeling requirements which could harm the sale of such products. Even if regulatory approval is obtained, later discovery of previously unknown problems may result in restrictions of the product, including withdrawal of the product from the market. Further, governmental approval may subject us to ongoing

requirements for post-marketing studies. Even if we obtain governmental approval, a marketed product, its respective manufacturer and its manufacturing facilities are subject to unannounced inspections by the FDA and must comply with the FDA’s Current Good Manufacturing Practice, or cGMP, and other regulations. These regulations govern all areas of production, record keeping, personnel and quality control. If a manufacturer fails to comply with any of the manufacturing regulations, it may be subject to, among other things, product seizures, recalls, fines, injunctions, suspensions or revocations of marketing licenses, operating restrictions and criminal prosecution. Other countries also impose similar manufacturing requirements.

If we fail to attract and retain key employees, the development and commercialization of our products may be adversely affected.

We depend heavily on the principal members of our scientific and management staff. If we lose any of these persons, our ability to develop products and become profitable could suffer. The risk of being unable to retain key personnel may be increased by the fact that we have not executed long-term employment contracts with our employees. Our future success will also depend in large part on our ability to hire a qualified chief financial officer and our continued ability to attract and retain other highly qualified scientific and management personnel. We face competition for personnel from other companies, academic institutions, government entities and other organizations.

If product liability claims are brought against us or we are unable to obtain or maintain product liability insurance, we may incur substantial liabilities that could reduce our financial resources.

The clinical testing and commercial use of pharmaceutical products involves significant exposure to product liability claims. We have obtained limited product liability insurance coverage for our clinical trials on humans, however, our insurance coverage may be insufficient to protect us against all product liability damages. Further, liability insurance coverage is becoming increasingly expensive and we might not be able to obtain or maintain product liability insurance in the future on acceptable terms or in sufficient amounts to protect us against product liability damages. Regardless of merit or eventual outcome, liability claims may result in decreased demand for a future product, injury to reputation, withdrawal of clinical trial volunteers, loss of revenue, costs of litigation, distraction of management and substantial monetary awards to plaintiffs. Additionally, if we are required to pay a product liability claim, we may not have sufficient financial res ources to complete development or commercialization of any of our product candidates and our business and results of operations will be adversely affected.

Our operations involve hazardous materials and we must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

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

Our stock price has been and may continue to be volatile and an investment in our common stock could suffer a decline in value.

You should consider an investment in our common stock as risky and invest only if you can withstand a significant loss and wide fluctuations in the market value of your investment. We receive only limited attention by securities analysts and frequently experience an imbalance between supply and demand for our common stock. The market price of our common stock has been highly volatile and is likely to continue to be volatile. Factors affecting our common stock price include:

•

fluctuations in our operating results;


	•	announcements of technological innovations or new commercial products by us, our collaborators or our competitors;


	•	published reports by securities analysts;

•

the progress of our and our collaborators’ clinical trials, including our and our collaborator’s ability to produce clinical supplies of our product candidates on a timely basis and in sufficient quantities to meet our clinical trial requirements;


	•	governmental regulation and changes in medical and pharmaceutical product reimbursement policies;


	•	developments in patent or other intellectual property rights;


	•	publicity concerning the discovery and development activities by our licensees;


	•	public concern as to the safety and efficacy of drugs that we and our competitors develop; and


	•	general market conditions.

Antitakeover provisions in our Certificate of Incorporation, Bylaws, stockholder rights plan and under Delaware law may discourage or prevent a change of control.

Provisions of our Certificate of Incorporation, Bylaws and Section 203 of the Delaware General Corporation Law could delay or prevent a change of control of the Company. For example, our Board of Directors, without further stockholder approval, may issue preferred stock that could delay or prevent a change of control as well as reduce the voting power of the holders of common stock, even to the extent of losing control to others. In addition, our Board of Directors has adopted a stockholder rights plan, commonly known as a “poison pill,” that may delay or prevent a change of control and recently, the Board of Directors amended the Company’s Bylaws to eliminate the right of 20% of the stockholders to call a special meeting of stockholders.

Substantial future sales of our common stock by us or by our existing stockholders could cause our stock price to fall.

Additional equity financings or other share issuances by us, including the issuance of 1.5 million shares of our common stock to Enzon in connection with the termination of the proposed merger and shares issued in connection with strategic alliances, could adversely affect the market price of our common stock. Sales by existing stockholders of a large number of shares of our common stock in the public market or the perception that additional sales could occur could cause the market price of our common stock to drop.

ITEM 2. Properties.

We have ongoing operations in Salt Lake City, Utah; Parsipanny, New Jersey; Mississauga, Ontario; and Toronto, Ontario. In Salt Lake City, we lease approximately 54,000 square feet of laboratory, support and administrative space in the Research Park of the University of Utah. Our lease in Salt Lake City expires in September 2004, but may be extended for three additional three-year terms. In Parsipanny, we lease approximately 5,500 square feet of administrative space. The Parsipanny lease will expire in September 2004. In Mississauga, we own a building consisting of approximately 90,000 square feet of laboratory, support and administrative space. In Toronto, we lease approximately 3,900 square feet of administrative space. The Toronto lease expires in February 2004. We currently anticipate that our existing space will meet our needs for at least the next two years.

ITEM 3. Legal Proceedings.

From time to time, we are involved in litigation arising out of our operations. We maintain liability insurance, including product liability coverage, in amounts our management believes is adequate. We are not currently engaged in any legal proceedings that we expect would materially harm our business or financial condition.

ITEM 4. Submission of Matters to a Vote of Security Holders.

No matter was submitted to the stockholders during the fourth quarter of 2002.

PART II

ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

Since May 26, 1994, our common stock has been quoted on the Nasdaq National Market under the symbol “NPSP.” The shares of NPS Allelix Inc., our Canadian subsidiary, are traded on the Toronto Stock Exchange under the symbol “NX” and are exchangeable into shares of our common stock at any time on a one-for-one basis. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock, as reported on the Nasdaq National Market.

	High		Low

2001
First Quarter	$	47.12	$	15.00
Second Quarter		43.00		17.56
Third Quarter		40.13		25.21
Fourth Quarter		41.40		28.80
2002
First Quarter	$	38.70	$	24.25
Second Quarter		35.00		13.06
Third Quarter		26.22		11.59
Fourth Quarter		30.93		20.45

As of December 31, 2002, there were approximately 303 holders of record of our common stock, which includes approximately 127 holders of the exchangeable shares of NPS Allelix.

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

We have adopted a policy and implemented procedures allowing directors and officers to effect sales of the Company’s securities under SEC Rule 10b5-1. Under this rule, directors and officers may adopt a prearranged contract, instructions, or written plan arranging for the sale of Company securities on specified conditions. To this effect, prearranged plans have already been implemented and additional such plans may be adopted from time to time.

ITEM 6. Selected Financial Data.

The selected consolidated financial data presented below are for each fiscal year in the five-year period ended December 31, 2002, and for the period from October 22, 1986 (inception) through December 31, 2002. This is derived from, and qualified by reference to, NPS’s audited consolidated financial statements and notes thereto. The selected quarterly data presented below are derived from our unaudited consolidated financial statements. NPS is considered a development stage enterprise as described in note 1 to the consolidated financial statements.

	Year Ended December 31,															October 22, 1986 (inception) through December 31, 2002

Consolidated Statements of Operations Data:	2002			2001			2000			1999			1998

	(in thousands, except per share amounts)
Revenues from research and license agreements	$	2,154		$	10,410		$	7,596		$	3,445		$	3,568		$	75,673

Operating expenses:
Research and development		80,872			60,090			27,888			16,935			17,856			260,418
General and administrative		14,777			12,099			12,036			5,983			5,546			73,928
Amortization of goodwill and acquired intangibles (1)		1,322			3,411			3,561			—			—			8,294
In process research and development acquired		—			—			—			17,760			—			17,760

Total operating expenses		96,971			75,600			43,485			40,678			23,402			360,400

Operating loss		(94,817	)		(65,190	)		(35,889	)		(37,233	)		(19,834	)		(284,727	)
Other income, net		7,883			15,522			4,277			1,579			2,672			38,608

Loss before income tax expense		(86,934	)		(49,668	)		(31,612	)		(35,654	)		(17,162	)		(246,119	)
Income tax expense (benefit)		(102	)		300			—			—			—			1,216

Loss before cumulative effect of change in accounting principle		(86,832	)		(49,968	)		(31,612	)		(35,654	)		(17,162	)		(247,335	)
Cumulative effect on prior years (to December 31, 1999) of changing to a different revenue recognition method (2)					—			(500	)		—			—			(500	)

Net loss	$	(86,832	)	$	(49,968	)	$	(32,112	)	$	(35,654	)	$	(17,162	)	$	(247,835	)

Diluted loss per share:
Loss before cumulative effect of change in accounting principle	$	(2.79	)	$	(1.67	)	$	(1.32	)	$	(2.77	)	$	(1.39	)
Cumulative effect on prior years (to December 31, 1999) of changing to a different revenue recognition method (2)		—			—			(0.02	)		—			—

Net loss per share (3)	$	(2.79	)	$	(1.67	)	$	(1.34	)	$	(2.77	)	$	(1.39	)

Diluted weighted average shares outstanding (3)		31,165			29,912			24,007			12,863			12,337
Proforma amounts assuming revenue recognition method is applied retroactively:
Net loss										$	(34,654	)	$	(16,162	)
Diluted net loss per share										$	(2.69	)	$	(1.31	)

(1)

The Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142) as of January 1, 2002. The Company recognized $2.1 million and $2.2 million respectively, for the years ended December 2001 and 2000 of amortization of goodwill and the assembled workforce component of purchased intangibles, which was not recorded in 2002 under SFAS No. 142.

(2)

During the fourth quarter of 2000, the Company adopted Staff Accounting Bulletin No. 101, Revenue Recognition (SAB No. 101). SAB No. 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. The result of the adoption of SAB No. 101 was to reduce recognition of previously reported license fee revenues prior to December 31, 1999 by $500,000 through a cumulative effect of accounting change for the year ended December 31, 2000. These revenues were recognized as income in the year ended December 31, 2000.

(3)	See note 1 to the consolidated financial statements for information concerning the computation of net loss per share.

Consolidated Balance Sheets Data:

	Year Ended December 31,

	2002			2001			2000			1999			1998

	(in thousands)
Cash, cash equivalents, and marketable investment securities	$	234,454		$	207,518		$	246,936		$	35,679		$	43,444
Working capital		228,497			206,314			244,712			32,532			40,767
Total assets		253,468			234,976			269,270			64,966			48,111
Long-term portion of capital leases and long-term debt		—			—			54			1,940			32
Deficit accumulated during development stage		(247,835	)		(161,003	)		(111,035	)		(78,923	)		(43,269	)
Stockholders’ equity		242,362			221,935			265,340			56,079			45,146

Quarterly Financial Data:

	Quarter Ended

	December 31			September 30			June 30			March 31

2002	(in thousands, except per share amounts)
Revenue from research and license agreements	$	133		$	140		$	1,094		$	787
Operating loss		(27,265	)		(20,274	)		(23,054	)		(24,224	)
Net loss		(25,399	)		(18,284	)		(21,145	)		(22,004	)
Basic and diluted loss per common and common share equivalent (1)	$	(0.76	)	$	(0.60	)	$	(0.70	)	$	(0.73	)


	December 31			September 30			June 30			March 31

2001	(in thousands, except per share amounts)
Revenue from research and license agreements	$	9,033		$	395		$	491		$	491
Operating loss		(16,761	)		(17,014	)		(20,094	)		(11,321	)
Net loss		(13,608	)		(14,125	)		(16,167	)		(6,068	)
Basic and diluted loss per common and common share equivalent (1)	$	(0.45	)	$	(0.47	)	$	(0.54	)	$	(0.20	)

(1)	Earnings per share are computed independently for each of the quarters presented and therefore may not sum to the total for the year.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K/A and the documents incorporated by reference therein contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements represent our management’s judgment regarding future events. In many cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “plan,” “expect,” “anticipate,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other words of similar import, although some forward-looking statements are expressed differently. All statements other than statements of historical fact included in this Annual Report on Form 10-K/A and the documents incorporated by reference therein regarding our financial position, business strategy and plans or objectives for future operations are forward-looking statements. Without limiting the broader description of forward-looking statements above, we specifically note that statements regarding potential drug candidates, their potential therapeutic effect, the possibility of obtaining regulatory approval, our ability or the ability of our collaborators to manufacture and sell any products, market acceptance or our ability to earn a profit from sales or licenses of any drug candidate or discover new drugs in the future are all forward-looking in nature. We cannot guarantee the accuracy of the forward-looking statements, and you should be aware that results and events could differ materially and adversely from those contained in the forward-looking statements due to a number of factors, including:

•

the risks inherent in our research and development activities, including the successful continuation of our strategic collaborations, our and our collaborators’ ability to successfuly complete clinical trials, commercialize products and receive required regulatory approvals, and the length, time and cost of obtaining such regulatory approvals;


	•	competitive factors;


	•	our ability to maintain the level of our expenses consistent with our internal budgets and forecasts;


	•	the ability of our contract manufacturers to successfully produce adequate clinical supplies of our product candidates to meet our clinical trial and commercial launch requirements;


	•	changes in our relationships with our collaborators;


	•	variability of our royalty, license and other revenues;


	•	our ability to enter into and maintain agreements with current and future collaborators on commercially reasonable terms;


	•	uncertainty regarding our patents and patent rights;


	•	compliance with current or prospective governmental regulation;


	•	technological change; and


	•	general economic and market conditions.

You should also consider carefully the statements set forth in the section entitled “Risk Factors” of this Annual Report on Form 10-K/A, which addresses these and additional factors that could cause results or events to differ from those set forth in the forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements. We have no plans to update these forward-looking statements.

Overview

Our product pipeline consists of product candidates in various stages of clinical development and preclinical development. Two of these product candidates, PREOS and Cinacalcet HCl, are in Phase III clinical trials. A third product candidate, ALX-0600, has completed a pilot Phase II clinical trial and plans are underway to commence additional clinical trials. PREOS and ALX-0600 are proprietary to and are being developed by us. PREOS is our recombinant, full-length parathyroid hormone for the treatment of osteoporosis, and ALX-0600 is our analog of glucagon-like peptide 2 for the treatment of gastrointestinal disorders such as short bowel syndrome and Crohn’s Disease. Cinacalcet HCl, our orally active, small molecule compound for the treatment of hyperparathyroidism, is being developed by our licensees, Amgen Inc. and Kirin Brewery Company, Ltd. Additional Phase I clinical development programs include: calcilytic compounds for the treatment of osteoporosis; NPS 1776 for epilepsy and migraine; and NPS 1506 for acute depression. We collaborate on three preclinical programs with AstraZeneca AB, GlaxoSmithKline and Janssen Pharmaceutica N.V., a subsidiary of Johnson & Johnson.

We have incurred cumulative losses from inception through December 31, 2002 of approximately $247.8 million, net of cumulative revenues from research and license agreements of approximately $75.7 million. We expect to continue to incur significant operating losses over at least the next several years as we continue our current and anticipated development projects, particularly our clinical trial programs for PREOS, ALX-0600, and NPS 1776, as we maintain our contractual commitment to fund research activities in our metabotropic glutamate receptor program, and as we develop marketing, sales and manufacturing capabilities.

Major Research and Development Projects

Our major research and development projects involve PREOS and ALX-0600 and we have other research and development efforts in central nervous system disorders.

PREOS. PREOS is our brand name for recombinant, full length, human parathyroid hormone that we are developing for the treatment of osteoporosis. We are currently conducting Phase III clinical trials to demonstrate both safety and efficacy of this product candidate. During the years ended December 31, 2002, 2001 and 2000, we incurred $54.7 million, $43.7 million and $13.7 million, respectively, in the research and development of this product candidate. We have incurred costs of approximately $112.1 million since we acquired this product candidate from Allelix BioPharmaceuticals Inc. (Allelix) in December 1999.

Our development administration overhead costs are included in total research and development expense for each period, but are not allocated among our various projects.

The goal of our PREOS development program is to obtain marketing approval from the U.S. Food and Drug Administration, or FDA, and analogous international agencies; and we will consider the project substantially complete if we obtain those approvals even though subsequent to that time we might incur additional expenses in conducting additional clinical trials and follow-up studies. To obtain the first of such approvals, we hope to file a New Drug Application, or NDA, with the FDA at the conclusion of our Phase III trials, assuming that the clinical trials’ results support a filing. We completed enrollment in a pivotal Phase III trial in March 2002 and expect to complete dosing in that trial by September 30, 2003. Assuming successful completion of the Phase III trials, we anticipate filing an NDA for the treatment of osteoporosis in mid-2004. Because of the ongoing work with respect to the Phase III trials, the preparation and filing of the NDA, the initiatio n of commercial manufacturing activities, the preparations for sales and marketing, and the risks associated with the clinical trial approval process, including the risk that we may have to repeat, revise or expand the scope of trials or conduct additional clinical trials not presently planned to secure marketing approvals and the additional risks identified herein, we are unable to estimate the costs to completion or the

completion date for the PREOS program. Material cash inflows relating to our PREOS development program will not commence until after marketing approvals are obtained, and then only if PREOS finds acceptance in the marketplace. To date, we have not received any revenues from product sales of PREOS. The risks and uncertainties associated with completing the development of PREOS on schedule, or at all, include the following:

•

PREOS may not be shown to be safe and efficacious in the Phase III trials;


	•	We may be unable to obtain regulatory approval of the drug or be unable to obtain such approval on a timely basis;


	•	Our ability to continue to be able to secure adequate clinical and commercial supplies of PREOS in order to complete the Phase III clinical trials and initiate commercial launch upon approval; and


	•	We may not have adequate funds to complete the development of PREOS.

A failure to obtain marketing approval for PREOS, secure adequate clinical and commercial supplies of PREOS, or to timely complete development and obtain regulatory approval would likely have the following results on our operations, financial position and liquidity:

•

We would not earn any sales revenue from PREOS, which would increase the likelihood that we would need to obtain additional financing for our other development efforts; and


	•	Our reputation among investors might be harmed, which might make it more difficult for us to obtain equity capital on attractive terms or at all.

Because of the many risks and uncertainties relating to the completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict when material cash inflows from this program will commence, if ever.

ALX-0600. ALX-0600 is an analog of glucagon-like peptide 2, a naturally occurring hormone that regulates proliferation of the cells lining the small intestine. We are independently developing ALX-0600 for the treatment of short bowel syndrome and Crohns Disease. We have completed a pilot Phase II trial in adults with short bowel syndrome. The drug appeared to be safe and well tolerated in this study. We are presently designing a pivotal study for adults with short bowel syndrome and expect to commence such study in late 2003 following approval of the clinical design by both the U.S. and European regulatory agencies. We also expect to begin a proof-of-concept clinical study in patients with Crohn’s Disease in the second half of 2003.

Our development administration overhead costs are included in total research and development expense for each period, but are not allocated among our various projects.

During the years ended December 31, 2002, 2001 and 2000, we incurred $10.2 million, $3.6 million and $1.3 million, respectively, in the research and development of this product candidate. We have incurred costs of approximately $18.0 million since we acquired this product candidate from Allelix in December 1999.

The goal of our ALX-0600 development program is to obtain marketing approval from the FDA, and analogous international agencies; and we will consider the project substantially complete if we obtain those approvals even though subsequent to that time we might incur additional expenses in conducting additional clinical trials and follow-up studies. Before we can obtain such marketing approvals we will need to complete pivotal Phase II/III clinical trials with satisfactory results and submit a NDA to the FDA. Because of the ongoing work with respect to the design of the pivotal trial in adults with short bowel syndrome, the early stage of the proposed clinical trials in Crohn’s Disease, and the risks associated with the clinical trial process, including the risk that we may repeat, revise or expand the scope of future trials or conduct additional clinical trials not presently planned to secure marketing approvals and the additional risks identified herein, we are unable to estimate the costs to completion or the completion date for the ALX-0600 program. Because of the many risks and uncertainties relating to the completion of clinicals trials, receipt of marketing approval from the applicable regulatory agency and acceptance in the marketplace, the availability of sufficient funds to complete development of the product, we cannot predict when material cash inflows from our ALX-0600 program will commence, if ever. To date, we have not received any revenues from product sales of ALX-

0600. The risks and uncertainties associated with completing the development of ALX-0600 on schedule, or at all, include the following:

•

ALX-0600 may not be shown to be safe and efficacious in the Phase III trials;


	•	We may be unable to obtain regulatory approval of the drug or be unable to obtain such approval on a timely basis;


	•	Our ability to continue to be able to secure adequate clinical and commercial supplies of ALX-0600 in order to complete the Phase III clinical trials and initiate commercial launch upon approval; and


	•	We may not have adequate funds to complete the development of ALX-0600.

A failure to obtain marketing approval for ALX-0600 or to timely complete development and obtain regulatory approval would likely have the following results on our operations, financial position and liquidity:

•

We would not earn any sales revenue from ALX-0600, which would increase the likelihood that we would need to obtain additional financing for our other development efforts; and


	•	Our reputation among investors might be harmed, which might make it more difficult for us to obtain equity capital on attractive terms or at all.

Central Nervous System Disorders

Most of the remaining research and development expenses for the year ended December 31, 2002 were generated by various early clinical stage programs, pre-clinical studies and drug discovery programs, including our collaboration with AstraZeneca in metabotropic glutamate receptors (mGluRs) described below.

Metabotropic Glutamate Receptor Program. Since 1996, we have been working to find compounds that act on targets in the central nervous system called metabotropic glutamate receptors, or mGluRs. We have discovered a number of compounds that activate or inhibit mGluRs and that are highly selective for specific subtypes of mGluRs. Our animal studies with a number of these compounds have demonstrated their potential as drug candidates for the treatment of central nervous system disorders such as chronic pain.

During the year ended December 31, 2002, 2001 and 2000, we incurred $2.2 million, $1.3 million and 194,000, respectively, in research and development expenses under our collaboration with AstraZeneca.

Material cash inflows in the form of royalties relating to this collaboration will not commence until after marketing approvals are obtained, and then only if the product finds acceptance in the marketplace. No product candidates have yet entered clinical trials. In order to obtain marketing approval, we will need to complete Phase I, II and III clinical trials with satisfactory results and submit a NDA to the FDA. Because of this, and the substantial risks and uncertainties relating to the completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict when material cash inflows from our collaboration with AstraZeneca will commence, if ever.

Other Programs for Central Nervous System Disorders. We collaborated with Janssen on glycine reuptake inhibitors to identify prospective drug candidates for schizophrenia and dementia. Janssen has now assumed full responsibility for the development of product candidates identified under the collaboration. We

are not expending any significant resources in the program. In November 2001 we received a milestone payment from Janssen as a result of the selection of a preclinical compound for further development as a potential treatment for schizophrenia. We will receive additional milestone payments of up to $20.5 million from Janssen and royalties on sales of any drugs developed or sold by Janssen under this collaboration agreement.

NPS 1776 is a proprietary small molecule compound. We are now engaged in active consideration and review of this compound for the treatment of migraine and epilepsy. Our preclinical studies show that NPS 1776 is effective in a number of animal models of epilepsy, spasticity, and pain. We have completed several Phase I clinical trials with NPS 1776 to evaluate its safety and tolerability and its ability to be delivered in a sustained release formulation. Our analysis of the data indicates that the drug was safe and well tolerated. Initial formulation studies demonstrated that the compound is amenable to multiple sustained release formulation technologies.

NPS 1506 is a novel compound for which we originally pursued development for the treatment of stroke. This compound targets NMDA receptor-operated calcium channels which are activated by the neurotransmitter glutamate. Published research has suggested that glutamate may play a role in the development of depression. We believe NPS 1506 may be effective as a treatment for the acute and urgent symptoms of acute depression. NPS 1506 does not appear to exhibit the side effects that have plagued other NMDA receptor antagonists. NPS 1506, at neuroprotective or antidepressant doses in preclinical animal models, caused no PCP-like behavioral effects, no learning or memory impairment, no neuronal vacuolization, and no significant sedation or cardiovascular side effects. Efforts are underway to evaluate the future continued development of NPS 1506 for the treatment of acute depression.

During the years ended December 31, 2002, 2001 and 2000, we incurred $456,000, $472,000 and $1.3 million, respectively, in research and development expenses for these programs in the aggregate.

The goal of these programs is to discover, synthesize and obtain marketing approval for product candidates. Material cash inflows will not commence until after marketing approvals are obtained, and then only if the product finds acceptance in the marketplace. Currently all compounds are in pre-clinical stages or early clinical stages. In order to obtain marketing approval, we will need to initiate and complete Phase I, II and III clinical trials with satisfactory results and submit a NDA to the FDA. Because of this, and the many risks and uncertainties relating to the completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict when material cash inflows from these projects will commence, if ever.

Results of Operations

Revenues. Substantially all our revenues have come from license fees, research and development support or milestone payments from our licensees and collaborators. These revenues fluctuate from year to year. Our revenues were $2.2 million, $10.4 million, and $7.6 million in 2002, 2001 and 2000, respectively. The decrease in revenues from 2001 to 2002 and the increase from 2000 to 2001 were primarily due to the recognition of milestone payments from our licensees Amgen, Kirin, Forest, and Janssen in 2001. Similar milestones were not recognized in either 2002 or 2000. We recognized revenue from our agreements as follows:

•

Under our agreement with GlaxoSmithKline, we recognized $438,000 in 2002, $750,000 in 2001, and $1.8 million in 2000;


	•	Under our agreement with Kirin, we recognized no revenue in 2002, $3.0 million in 2001 and $1.0 million in 2000;


	•	Under our agreement with Amgen, we recognized no revenue in 2002, $3.0 million in 2001, and $400,000 in 2000;


	•	Under our agreement with Forest, we recognized no revenue in 2002, $1.0 million in 2001, and $200,000 in 2000;

•

Under our agreement with Lilly Canada, we recognized no revenue in each of 2002 and 2001, and $1.7 million in 2000;


	•	Under our agreement with Janssen, we recognized no revenue in 2002, $1.0 million in 2001, and $1.9 million in 2000; and


	•	Under our research funding agreement with the Government of Canada, we recognized $1.8 million in 2002, $1.3 million in 2001, and $404,000 in 2000.

See “Liquidity and Capital Resources” below for further discussion of payments that we may earn in the future under these agreements.

Research and Development. Our research and development expenses arise primarily from compensation and other related costs of our personnel who are dedicated to research and development activities and from the fees paid and costs reimbursed to outside professionals to conduct research, clinical studies and trials, and to manufacture drug compounds and related supplies prior to FDA approval. Our research and development expenses increased to $80.9 million in 2002 from $60.1 million in 2001 and $27.9 million in 2000. Research and development expenses increased from 2001 to 2002 principally due to an $8.9 million increase in the costs of conducting our clinical trials for PREOS, including the costs of our pivotal Phase III trial for which enrollment began during 2000 and enrollment was complete in March 2002, a $4.1 million increase in the costs associated with activities in the development of ALX-0600, and an $8.7 million increase in costs to arrange for manufacturing and to manufacture clinical supplies of PREOS and ALX-0600, including costs related to a commercial manufacturing agreement signed in October 2002 with Boehringer Ingelheim Austria GmbH for the manufacture of bulk drug supplies of PREOS in support of commercial launch. Research and development expenses increased from 2000 to 2001 principally due to a $27.4 million increase in the costs of conducting our clinical trials for PREOS, a $1.0 million increase in the costs associated with activities in the development of ALX-0600, and a $2.8 million increase in costs to arrange for manufacturing and to manufacture clinical supplies of PREOS and ALX-0600.

General and Administrative. Our general and administrative expenses consist primarily of the costs of our management and administrative staff, business insurance, taxes, professional fees and market research and promotion activities for our product candidates. Our general and administrative expenses increased to $14.8 million in 2002 from $12.1 million in 2001 and $12.0 million in 2000. The increase in general and administrative expenses from 2001 to 2002 was due primarily to a $2.8 million increase in costs associated with increased marketing activities for PREOS and the hiring of additional marketing personnel.

Amortization of Goodwill and Purchased Intangibles. Goodwill and purchased intangibles originated with our December 1999 acquisition of Allelix Biopharmaceuticals, Inc. (Allelix). The remaining intangible assets, net of accumulated amortization, at December 31, 2002 totaled approximately $9.5 million. Amortization of goodwill and acquired intangibles decreased from $3.6 million in 2000 and $3.4 million in 2001 to $1.3 million in 2002. The decrease in 2002 is the result of our adoption of the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. SFAS No. 142 eliminated the amortization of goodwill. During 2001 and 2000, we recorded amortization expense of $2.1 million and $2.2 million, respectively, or $0.07 and $0.09, respectively, per basic and diluted share, that would not have been recorded under SFAS No. 142.

In-Process Research and Development Acquired. We recorded an expense of $17.8 million in 1999 for in-process research and development that we acquired as part of our purchase of Allelix. The acquired in-process research and development consisted of five drug development programs, of which PREOS, for osteoporosis, and ALX-0600, for gastrointestinal disorders, accounted for 83 percent of the total value.

Since the date of the acquisition, we revised our plans for the next series of clinical trials for PREOS and ALX-0600. We started a pivotal Phase III clinical trial with PREOS. We have also completed a pilot Phase II clinical trial with ALX-0600 in adults with short bowel syndrome. Since the date of acquisition and through December 31, 2002, we have incurred total costs of approximately $112.1 million for PREOS and $18.0 million for ALX-0600. Total costs include all costs associated with the programs including all clinical development costs, manufacturing costs, outside legal and patent costs, personnel costs, and marketing related costs. Total costs and time-to-completion for each of these product candidates will depend on the costs we

incur to conduct current clinical trials and to perform any additional work we find necessary to obtain FDA approval.

We believe the assumptions we used in the valuation of the in-process research and development we acquired from Allelix were reasonable at the time of the acquisition. However, we have modified our development plans as new data have become available regarding each product candidate. Accordingly, actual results may vary from the projected results in the valuation.

Total Other Income, Net. Our total other income, net, decreased from $15.5 million in 2001 to $7.9 million in 2002. The decrease form 2001 to 2002 was mainly the result of decreased interest income of $5.1 million and decreased gain on sale of marketable investment securities of $1.0 million, both the result of lower interest rates and lower average cash, cash equivalent, and marketable investment securities balances. Balances of cash, cash equivalent and marketable investment securities during the fiscal year ended December 31, 2002, decreased as a result of the need to fund current operations and will continue to decrease as we operate our business; however, we were able to increase our cash, cash equivalent and marketable investment securities due primarily to proceeds we received from a public offering of 4.6 million shares of our common stock, which was completed in October 2002. Addit ionally during 2001, we recognized income of $1.7 million from equity method investments and recognized only $200,000 from equity method investments in 2002.

Our total other income, net, increased from $4.3 million in 2000 to $15.5 million in 2001. The increase from 2000 to 2001 was mainly the result of increased interest income of $7.2 million in 2001. The increase in interest income was the result of higher average balances of cash, cash equivalent and marketable investment securities. These balances increased primarily due to proceeds we received from our private placement offering of 3.9 million shares of our common stock which was closed in April 2000 and from a public offering of 4.6 million shares of our common stock which was completed in November 2000. In addition, the gain on the sale of marketable investment securities increased by $1.5 million in 2001 due to a decreasing interest rate environment resulting in larger realized gains on marketable investment securities. Finally, during 2001, we recognized income of $1.7 million from equity-method investments. A similar income amount was not recognized in 2000.

Taxes

As of December 31, 2002, we had a United States federal income tax net operating loss carryforward of approximately $97.6 million and a United States federal income tax research credit carryforward of approximately $5.4 million. We also had a Canadian federal and provincial income tax net operating loss carryforward of approximately $64.9 million and $79.0 million, respectively, a Canadian research pool carryforward of approximately $142.2 million and a Canadian investment tax credit carryforward of approximately $15.7 million. Our ability to utilize the United States operating loss and 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.

Cumulative Effect on Prior Years (to December 31, 1999) of Changing to a Different Revenue Recognition Method

During the fourth quarter of 2000, we adopted Staff Accounting Bulletin No. 101 (SAB No. 101). SAB No. 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. Under our previous accounting policy, revenues from nonrefundable licensing fees were recognized when received when we had no further obligations relative to such licensing fees. In compliance with SAB No. 101, we now recognize revenues from nonrefundable licensing fees over the continuing involvement period with each licensee. The adoption of SAB No. 101 resulted in an increase in operating income of $500,000 and no change in the net loss for the year ended December 31, 2000. Prior-year financial statements have not been restated to reflect the change in accounting principle.

Liquidity and Capital Resources

We have financed operations since inception primarily through payments received under collaborative research and license agreements and the private and public issuance and sale of equity securities. As of December 31, 2002, we had recognized $75.7 million of cumulative revenues from payments for research support, license fees and milestone payments and $434.5 million from the sale of equity securities for cash. Our principal sources of liquidity are cash, cash equivalents, and marketable investment securities, which totaled $234.5 million at December 31, 2002. The primary objectives for our marketable investment securities portfolio are liquidity and safety of principal. Investments are intended to achieve the highest rate of return to us, consistent with these two objectives. Our investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.

We could receive future milestone payments of up to $92.5 million in the aggregate if each of our current licensees accomplishes the specified research and/or development milestones provided in the respective agreements. In addition, all of the agreements require the licensees to make royalty payments to us if they sell products covered by the terms of our license agreements. However, we do not control the subject matter, timing or resources applied by our licensees to their development programs. Thus, potential receipt of milestone and royalty payments from these licensees is largely beyond our control. Some of the late-stage development milestone payments from AstraZeneca will not be due if we elect a co-promotion option under which we may commercialize products. Further, each of these agreements may be terminated before its scheduled expiration date by the respective licensee either for any reason or under certain conditions.

Prior to the time that we acquired Allelix in December 1999, Allelix had entered into a research funding agreement with the Government of Canada pursuant to the Technology Partnership Canada program. Under this agreement, the Government of Canada is obligated to reimburse us for up to 30 percent of eligible research and development costs we incur for our ALX-0600 product candidate through December 2002 up to a maximum of Cdn. $8.4 million. Through December 31, 2001, we have invoiced the Canadian Government for a total of Cdn. $4.7 million and have received payment on this amount. During 2002, we have recognized revenue of Cdn. $2.8 million under the Technology Partnership’s Canada Program through June 2002. In July 2002, we began negotiations with the Canadian Government to pursue mutually acceptable adjustments to the terms of the agreement. As these negotiations are still ongoing, the outcome of which is uncertain, we have not recognized any revenue under this agreement during the six months ended December 31, 2002, although we have incurred development costs during this period we believe qualify for reimbursement of the remaining Cnd. $900,000 up to the maximum Cdn. $8.4 million. The agreement provides the Government of Canada with a 10 percent royalty on revenues we receive from the sale or license of ALX-0600. Our royalty obligation terminates on December 31, 2008, if we have paid at least Cdn. $23.9 million. If we have not paid that amount of royalties by that date, our royalty obligation continues until the earlier of the date we have paid Cdn. $23.9 million, or December 31, 2017. The agreement imposes a number of obligations on us to conduct certain development activities within Canada and use Canadian based companies to provide certain services in connection with the development of ALX-0600. For example, the agreement requires us to produce in Canada clinical and commercial supplies of ALX-0600. In addition, the agreement requires us to enter into a licensing agreement with a pharmaceutical company operating in Canada for the conduct of Phase III clinical trials and commercialization of ALX-0600.

or find it impractical to continue our development of ALX-0600. If we do reach an agreement, we could be required to make payments that are material in amount.

We have entered into certain research and license agreements that require us to make research support payments to academic or research institutions when the research is performed. Additional payments may be required upon the accomplishment of research milestones by the institutions or as license fees or royalties to maintain the licenses. As of December 31, 2002, we have a total commitment of up to $2.4 million for future research support and milestone payments. Further, depending on the commercial success of certain of our products, we may be required to pay license fees or royalties. We expect to enter into additional sponsored research and license agreements in the future.

Under our agreement with AstraZeneca, we are required to co-direct the research and pay for an equal share of the preclinical research costs, including capital and a minimum number of personnel, through at least September 2003 and, under certain circumstances, through March 2006. Additionally, as of December 31, 2002, we have a commitment for future manufacturing of PREOS of approximately $110.8 million. We expect to enter into additional collaborative research agreements and manufacturing agreements in the future, which may require up-front payments and long-term commitments of cash.

The following represents the contractual obligations of the Company as of December 31, 2002 (in millions):

Contractual Obligations	Total		2003		2004		2005		2006

Operating Leases	$	1.4	$	0.8	$	0.6	$	—	$	—
Purchase Commitments		113.2		16.2		21.9		37.1		38.0

We expect that our existing capital resources including interest earned thereon, will be sufficient to allow us to maintain our current and planned operations through 2003. However, our actual needs will depend on numerous factors, including the progress and scope of our internally funded research, development and commercialization activities; our ability tresearch funding agreements; our o comply with the terms of our ability to maintain existing collaborations; our decision to seek additional collaboration; the success of our collaborators in developing and marketing products under their respective collaborations with us; competing technological and market developments; the time and cost of obtaining regulatory approvals; the extent to which we choose to commercialize our future products through our own sales and marketing capabilities; our success in producing clinical supplies of our product candidates on a timely basis sufficient to meet the needs of our clinical trials; the costs we incur in obtaining and enforcing patent and other proprietary rights or gaining the freedom to operate under the patents of others; and our success in acquiring and integrating complementary products, technologies or businesses. Our clinical trials may be modified or terminated for several reasons including the risk that our product candidates will demonstrate safety concerns, the risk that regulatory authorities may not approve our product candidates for further development or may require additional or expanded clinical trials to be performed, and the risk that our manufacturers may not be able to supply sufficient quantities of our drug candidates to support our clinical trials, which could lead to a disruption or cessation of the clinical trials. We do not have on hand sufficient supplies of our product candidates to meet all of our clinical trial requirements and we are dependent on outside manufacturers to provide these supplies on a timely basis. We currently have sufficient clinical supplies of PREOS to complete our TOP study, but have not yet produced sufficient quantities of PREOS to meet all of our clinical trial needs. If any of the events that pose these risks comes to fruition, we may have to substantially modify or terminate current and planned clinical trials, our business may be materially harmed, our stock price may be adversely affected, and our ability to raise additional capital may be impaired.

We need to raise substantial additional funds to support our long-term research, product development, and commercialization programs. The Company regularly considers various fund raising alternatives, including, for example, partnering of existing programs, monitizing of potential revenue streams, debt or equity financing and merger and acquisition alternatives. We may also seek additional funding through strategic alliances, collaborations, or license agreements and other financing mechanisms. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research and

development programs, or to obtain funds through arrangements with licensees or others that may require us to relinquish rights to certain of our technologies or product candidates that we may otherwise seek to develop or commercialize on our own.

Critical Accounting Policies

Our critical accounting policies are as follows:

•

revenue recognition; and


	•	valuation of long-lived and intangible assets and goodwill.

Revenue Recognition. We earn our revenue from research and development support payments, license fees and milestone payments. As described below, significant management judgment and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.

We apply the provisions of SAB No. 101, to all of our revenue transactions. We recognize revenue from our research and development support agreements as related research and development costs are incurred and the services are performed. The terms and conditions of our research and development support agreements are such that revenues are earned as the related costs are incurred. The principal costs under these agreements are for personnel employed to conduct research and development under these agreements. We recognize revenue from milestone payments as agreed upon events representing the achievement of substantive steps in the development process are achieved and where the amount of the milestone payment approximates the value of achieving the milestone. We recognize revenue from upfront nonrefundable license fees on a straight-line basis over the period we have continuing involvement in the research and development project. Cash received in advance of the perf ormance of the related research and development support and for up-front nonrefundable license fees when we have continuing involvement is recorded as deferred income.

Valuation of Long-lived and Intangible Assets and Goodwill. We assess the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

•

significant underperformance relative to expected historical or projected future operating results;


	•	significant changes in the manner of our use of the acquired assets or the strategy for our overall business;


	•	significant negative industry or economic trends;


	•	significant decline in our stock price for a sustained period; and


	•	our market capitalization relative to net book value.

Our balance sheet reflects net intangible assets of $2.6 million, long-lived assets of $4.3 million, and goodwill of $6.9 million as of December 31, 2002.

When we determine that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. To date, we have not determined the existence of any indication of impairment sufficient to require us to adjust our historical measure of value of such assets.

In 2002, Statement on Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, became effective and as a result, we have ceased amortizing goodwill. In lieu of amortization, we performed an initial impairment review of our goodwill in 2002 and we will perform an annual impairment review thereafter. As of January 1, 2002, we had unamortized goodwill in the amount of $6.8 million and unamortized identifiable intangible assets in the amount of $3.9 million, all of which were subject to the

transition provisions of SFAS No. 142. During the years ended December 31, 2001 and 2000, we recorded amortization expense of $2.1 million and $2.2 million, respectively, or $0.07 and $0.09, respectively, per basic and diluted share, that would not have been recorded under SFAS No. 142. The assembled workforce component of identifiable intangible assets was fully amortized as of December 31, 2001. We completed our impairment review of goodwill during 2002 and determined that no impairment charge was required. We did not record an impairment charge upon completion of the initial impairment review in the first quarter of 2002, nor on our annual impairment review during the fourth quarter of 2002.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset.

We are required and plan to adopt the provisions of SFAS No. 143 for the quarter ending March 31, 2003. To accomplish this, we must identify legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. We have not completed our analysis of the impact of SFAS No. 143, but we do not anticipate that it will have a material impact on the consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (the Interpretation), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The Interpretation also requires the recognition of a liability by a guarantor at the inception of certain guarantees.

The Interpretation requires the guarantor to recognize a liability for the non-contingent component of the guarantee, this is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements.

We made additional disclosures upon adopting the disclosure requirements of the Interpretation as of December 31, 2002, and will apply the recognition and measurement provisions for all guarantees entered into or modified after December 31, 2002.

The Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (Issue No. 00-21), addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Issue No. 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying Issue No. 00-21, separate contracts with the same entity or related parties that are entered into at or near the same time are presumed to have been negotiated as a package and should, therefore, be evaluated as a single arrangement in considering whether there are one or more units of accounting. That presumption may be overcome if there is sufficient evidence to the contrary. Issue No. 00-21 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. We are required and plan to adopt the provisions of Issue No. 00-21 for the quarter ending September 30, 2003. Because of the effort necessary to comply with Issue No. 00-21, it is not practicable for management to estimate the impact of adopting this statement as of the date of this report.

2003 and is effective for us for any existing entities or structures as of July 1, 2003. All entities with significant variable interests in a VIE must make certain disclosures depending on the type of involvement with the VIE. If it is reasonably possible that at the effective date we will be required either to consolidate or make disclosure about our involvement with a VIE, we must make the applicable disclosures in our consolidated financial statements for the year ended December 31, 2002. We have determined that we have no VIE accounting facts or circumstances, and thus we were not required to make any additional disclosures upon adopting the disclosure requirements of Interpretation No. 46 for the year ended December 31, 2002, and will apply prospectively the consolidation provisions for any VIE entered into after January 31, 2003.

Recent Events

On February 19, 2003, we entered into an Agreement and Plan of Merger, or Merger Agreement, with Enzon Pharmaceuticals, Inc., or Enzon, which set forth the terms and conditions of the proposed merger of NPS and Enzon. On June 4, 2003, NPS and Enzon announced that they had mutually agreed to terminate the Merger Agreement and other ancillary documents entered into in connection with the Merger Agreement. As part of the agreement to terminate the merger, NPS paid to Enzon a termination fee in the form of 1.5 million shares of NPS common stock, which, subject to certain limitations contained in a Registration Rights Agreement, will be registered for resale by Enzon. We have incurred total expenses of approximately $4.2 million relating to the proposed merger, which excludes the issuance of 1.5 million shares of NPS common stock. Such expenses will impact our capital resources.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk. Our primary objectives in managing our investment portfolio are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. The securities we hold in our investment portfolio are subject to interest rate risk. At any time, sharp changes in interest rates can affect the fair value of the investment portfolio and its interest earnings. After a review of our marketable investment securities, we believe that in the event of a hypothetical 10 percent increase in interest rates, the resulting decrease in fair market value of our marketable investment securities would be insignificant to the financial statements. Currently, we do not hedge these interest rate exposures. We have established policies and procedures to manage exposure to fluctuations in interest rates. We place our investments with high quality issuers and limit the amount of credit exposure to any one issuer and do not use derivative financial instruments in our investment portfolio. We invest in highly liquid, investment-grade securities and money market funds of various issues, types and maturities. These securities are classified as available-for-sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as accumulated other comprehensive income as a separate component in stockholders’ equity.

Foreign Currency Risk. Some of our research and development operations are in Canada. As a result, our financial results could be affected by factors such as a change in the foreign currency exchange rate between the U.S. dollar and the Canadian dollar, or by weak economic conditions in Canada. When the U.S. dollar strengthens against the Canadian dollar, the cost of expenses in Canada decreases. When the U.S. dollar weakens against the Canadian dollar, the cost of expenses in Canada increases. The monetary assets and liabilities in our foreign subsidiary which are impacted by the foreign currency fluctuations are cash, marketable investment securities, accounts receivable, accounts payable, and certain accrued liabilities. A hypothetical 10% increase or decrease in the exchange rate between the U.S. dollar and the Canadian dollar from the December 31, 2002 rate would cause the fair value of such monetary assets and liabilities in Canada to change by an insignificant amount. We are not currently engaged in any foreign currency hedging activities.

ITEM 8. Financial Statements and Supplementary Data.

Financial statements and notes thereto appear on pages F-1 to F-32 of this Form 10-K Annual Report.

ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

There have been no changes in and disagreements with accountants on accounting and financial disclosure.

PART III

ITEM 10. Directors and Executive Officers of the Registrant.

The following table sets forth information concerning our executive officers and directors as of December 31, 2002:

Name	Age	Position

Hunter Jackson, Ph.D. (3)	52	Chief Executive Officer, President and Chairman of the Board
David L. Clark	49	Vice President, Operations
N. Patricia Freston, Ph.D.	63	Vice President, Human Resources
G. Thomas Heath	53	Senior Vice President, Sales and Marketing
James U. Jensen, J.D.	58	Vice President, Corporate Development and Legal Affairs, and Secretary
Thomas B. Marriott, Ph.D.	55	Vice President, Development Research
Gerard Michel	39	Vice President, Corporate Development
Alan L. Mueller, Ph.D.	48	Vice President, Discovery Research
Edward F. Nemeth, Ph.D.	50	Vice President and Chief Scientific Officer
Stephen R. Parrish	46	Vice President, Manufacturing
Santo J. Costa, J.D. (2)	58	Director
John R. Evans, M.D. (2)	73	Director
James G. Groninger (3)	57	Director
Joseph Klein, III (1)	41	Director
Donald E. Kuhla, Ph.D. (3)	60	Director
Thomas N. Parks, Ph.D. (2)	52	Director
Edward K. Rygiel (1)	62	Director
Calvin R. Stiller, C.M., O.Ont., M.D. (3)	61	Director
Peter G. Tombros (1)	60	Director

(1)	Member of the Audit Committee

(2)	Member of the Compensation Committee

(3)	Member of the Nominating and Corporate Governance Committee

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

David L. Clark has been Vice President, Operations since March 2000. He has also served as our Vice President, Investor Relations. Before being appointed to these positions, he served as Director of Business Development and Corporate Communications for us from September 1998 to December 1999. He served as Director of Corporate Communications for us from March 1996 to September 1998. From 1988 to 1996 he served as Vice President, Business Development for Agridyne Technologies Inc., a publicly held biotechnology company. Mr. Clark received an M.S. in Plant Genetics from the University of Illinois. He received an M.B.A. from the University of Utah.

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

G. Thomas Heath, has been Senior Vice President, Sales and Marketing since November 2001. In 1997, Mr. Heath co-founded Echelon Biosciences Inc., where he served as President and continues to serve as a director. From 1976 to 1996, Mr. Heath served in various marketing and sales positions at Pfizer Inc., where he managed the pre-launch planning and successful introductions of a number of new pharmaceutical products. Mr. Heath also served as Vice President, Sales and Marketing at Pfizer Canada, where he managed a force of over 250 salespeople. Mr. Heath received B.A. and M.B.A. degrees from the University of Utah.

James U. Jensen, J.D. has been Vice President, Corporate Development and Legal Affairs, and Secretary since August 1991. He has been Secretary of NPS since 1987, and served as a director from 1987 to 2001. From 1986 to July 1991, he was a partner in the law firm of Woodbury, Jensen, Kesler & Swinton, P.C., or its predecessor firm, concentrating on technology transfer and licensing and corporate finance. From July 1985 until October 1986, he served as Chief Financial Officer of Cericor, a software company. He serves as a director of Wasatch Funds, Inc., a registered investment company, and various private companies. Mr. Jensen received J.D. and M.B.A. degrees 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 to 1990, Dr. Marriott was Director, Drug Metabolism for McNeil Pharmaceutical with the responsibility for planning, initiating and completing bioanalytical, drug disposition and clinical biopharmaceutics and pharmacokinetics research required for investigational new drug applications and new drug applications. He received a Ph.D. in Chemistry from the University of Oregon.

Gerard J. Michel, M.S., M.B.A. has been Vice President, Corporate Development since July 2002. From 1995 to July 2002, Mr. Michel served as a Principal of the consulting firm of Booz-Allen & Hamilton. In this consulting capacity, he worked with large pharmaceutical companies, biotech firms, and service firms. From 1988 to 1995 Mr. Michel was with Lederle Labs, serving in Marketing, Sales and Corporate Development roles, both domestically and international. Mr. Michel received an M.S. in Microbiology and an M.B.A., both from the University of Rochester.

Alan L. Mueller, Ph.D. has been Vice President, Discovery Research since January 2001. Before being appointed to that position, he served us as Director, Discovery Research from September 1999 to January 2001. He joined NPS in February 1989 as a Senior Scientist. Prior to that time, he was a Pharmacologist at Abbott Laboratories. Dr Mueller received a Ph.D. in Pharmacology from the University of Colorado Health Sciences Center, Denver.

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

Stephen R. Parrish, M.S. has been Vice President, Manufacturing since September 2002. Prior to joining NPS as an employee, Mr. Parrish worked with NPS for six months as a consultant through ManuPharm Consulting, Mr. Parrish’s own consulting company since October 1998. In that capacity, he provided manufacturing consulting services to the biotechnology and pharmaceutical industries. From March 1995 to September 1998, he served as Head of Operations for Medeva Pharma. Mr. Parrish received a B.S. in Pharmacy and an M.S. in Pharmaceutical Analysis, both from the University of Manchester.

Santo J. Costa, J.D. has served as a director since 1995. Mr. Costa has served as a member of the Board of Advisors of AM Pappas & Associates since March 2000 and Of Counsel to the law firm of Maupin Taylor & Ellis since June 2001. Mr. Costa served as a director of Quintiles Transnational Corporation, a publicly held global contract research organization, from April 1994 through June 2001 and served as its Vice Chairman from November 1999 through June 2001. From April 1994 to November 1999 he served as President and Chief Operating Officer for Quintiles. From 1986 to 1993, he was employed by Glaxo, Inc., a worldwide pharmaceutical company, where he served as Senior Vice President, Administration and General Counsel and was a member of that company’s board of directors. He is a director of three other publicly held

companies, CV Therapeutics, Pilot Therapeutics, and Ribapharm, as well as several private companies. Mr. Costa received his J.D. from St. John’s University.

John R. Evans, M.D. has served as a director and Vice-Chairman of our board since the closing of our acquisition of Allelix in December 1999. Previously, Dr. Evans was Chairman of the Board of Allelix since 1983. From 1979 to 1983, Dr. Evans served as a Director of the Population, Health and Nutrition Department of the World Bank in Washington. From 1972 to 1978 he served as President of the University of Toronto. Currently, Dr. Evans is Chairman of the Canada Foundation for Innovation and serves as Chairman of the Board for Torstar Corporation in Toronto. He is a member of the board of directors of MDS Inc., a publicly held health and life sciences company listed on the New York Stock Exchange and the Toronto Stock Exchange, and of GlycoDesign, Inc. Dr. Evans received an M.D. degree from the University of Toronto and engaged in specialty training in internal medicine and cardiology in London, Boston and Toronto.

James G. Groninger has served as a director since 1988. In February 2002, Mr. Groninger was appointed CEO of LBS Technologies, Inc., a private biotechnology company focusing on aRNA amplification and cellular therapy. 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. Mr. Groninger is a member of the board of directors of Cygne Designs, Inc., a publicly held company, and Layton BioScience, Inc. and LBS Technologies, both private biotechnology companies. Mr. Groninger received an M.B.A. degree from Harvard Business School.

Joseph Klein, III has served as a director of NPS since 1998. Currently, Mr. Klein is Managing Director of Gauss Capital Advisors, LLC, a financial and investment advisory firm which he founded in March 1998. From September 2001 to September 2002, Mr. Klein served as a Venture Partner of MPM Capital, a large healthcare venture capital firm. From September 2000 to September 2001, Mr. Klein served as Managing Director of Gauss Capital Advisors, LLC, a financial and investment advisory firm. From June 1999 to September 2000, Mr. Klein served as Vice President, Strategy for Medical Manager Corporation, a physician office management information systems vendor. From June 1998 to June 1999, Mr. Klein served as Health Care Investment Analyst for The Kaufmann Fund, Inc., an open-ended mutual fund. From December 1995 to March 1998, Mr. Klein was Portfolio Manager and Chairman of the Investment Advisory Committee of the T. Rowe Price Health Sciences Fund, Inc. For over eight years from 1989 to March 1998, Mr. Klein served as Vice President and Health Care Investment Analyst for T. Rowe Price Associates, Inc., an investment management firm. He holds an M.B.A. from the Stanford Graduate School of Business and a B.A. in Economics form Yale University. Mr. Klein is a Director of Guilford Pharmaceuticals, a publicly held biotechnology company.

Donald E. Kuhla, Ph.D. has served as a director since 1991. Since 1998, Dr. Kuhla has been President and Chief Operating Officer of Albany Molecular Research, Inc., a chemical contract research organization, where he has also been a director since 1995. From 1994 through 1998 Dr. Kuhla was Vice President of Plexus Ventures, Inc., a business consulting firm. From 1990 to 1994, Dr. Kuhla held senior management positions with two venture capital-backed, biotechnology startup 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 Ph.D. degree in Organic Chemistry from Ohio State University.

Thomas N. Parks, Ph.D. has served as a director since our founding in 1986. 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. Dr. Parks joined the faculty at the University of Utah Medical School in 1978 as an Assistant Professor. Dr. Parks received a Ph.D. degree in Psychobiology from Yale University. He was a postdoctoral fellow in Developmental Neurology at the University of Virginia Medical School.

Edward K. Rygiel has served as a director since the closing of our acquisition of Allelix in December 1999. Mr. Rygiel served on the board of Allelix since 1995. Since January 2000, Mr. Rygiel has been Executive Vice President of MDS Inc., a publicly held health and life sciences company. Since April 1, 2003 he has been Executive Chairman of MDS Capital Corp., an independent venture capital group in which MDS

Inc. has a minority interest. He previously served as President and Chief Executive Officer of MDS Capital Corp. from 1988 through March 2003. From 1988 to 2000, Mr. Rygiel was Senior Vice President, Strategic Investments, of MDS Inc. Mr. Rygiel currently is a director and Chairman of Hemosol, Inc., a publicly held biotechnology company, as well as the director of a number of private companies. Mr. Rygiel earned a B.A.Sc. from the University of Toronto, School of Chemical Engineering.

Calvin R. Stiller, C.M., O.Ont., M.D. has served as a director since the closing of our acquisition of Allelix in December 1999. Dr. Stiller served on the board of Allelix since April 1999. Since 1996, Dr. Stiller has served as Chairman and Chief Executive Officer of Canadian Medical Discoveries Fund. Dr. Stiller served as the Chief of the Multi-Organ Transplant Service at the University Hospital in London, Ontario from 1984 through 1996. He is a full professor of medicine at the University of Western Ontario. Dr. Stiller is the Chairman of the Ontario Research and Development Challenge Fund and serves as a director of Spectral Diagnostic, and CPL Trust, a publicly held company. Dr. Stiller received an M.D. degree from the University of Saskatchewan.

Peter G. Tombros has served as a director since 1998. From 1994 until June of 2001, Mr. Tombros served as President, Chief Executive Officer and Director of Enzon Inc., a publicly held biopharmaceutical company. Prior to joining Enzon, Mr. Tombros spent 25 years with Pfizer Inc., a global healthcare company in a variety of senior management positions including Vice President of Marketing, Senior Vice President and General Manager of the Roerig Pharmaceuticals Division, Executive Vice President of Pfizer Pharmaceuticals Division, Director of Pfizer Pharmaceuticals Division, Vice President of Corporate Strategic Planning, and Vice President, Corporate Officer, Pfizer Inc. In June 2001, he was appointed Chairman of the Board and Chief Executive Officer of VivoQuest, a private biopharmaceutical company. Mr. Tombros also serves on the Board of Directors of Alpharma Inc., a publicly held pharmaceutical company, and Cambrex, a supplier of human health and bioscience products to the life sciences industry. Mr. Tombros received B.S. and M.S. degrees from the Pennsylvania State University and an M.B.A. degree from the University of Pennsylvania Wharton Graduate School of Business.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and persons who own more than 10% of the Company’s common stock, to file with the Commission reports of ownership and changes in ownership of NPS common stock. Officers, directors, and greater than 10% stockholders are required by the Commission to furnish the Company with copies of all Section 16(a) forms they file.

To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company or written representations that no other reports were required, during the fiscal year ended December 31, 2002, the Company believes that all reporting persons complied with all Section 16(a) filing requirements except that Mr. Michel and Mr. Parrish filed late Forms 3; Mr. Marriott failed to report one common stock sale by an affiliate on a timely filed Form 4.

ITEM 11. Executive Compensation.

Compensation of Executive Officers

The following table shows for the fiscal years ended December 31, 2002, 2001 and 2000, certain compensation awarded, 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

Name and Principal Position	Year		Annual Compensation Salary($)		Other($)			Long-Term Compensation Stock Options Granted(#)

Hunter Jackson, Ph.D.		2002		386,000		6,000	(1)		60,000
Chief Executive Officer, President and		2001		383,300		149,122	(2)		40,000
Chairman of the Board		2000		309,642		152,620	(3)		40,000

G. Thomas Heath		2002		241,058		4,821	(1)		25,000
Senior Vice President,		2001		27,600		354	(1)		25,000
Marketing and Sales

David L. Clark		2002		227,481		4,176	(1)		20,000
Vice President, Operations		2001		214,808		5,100	(1)		20,000
		2000		169,703		5,100	(1)		20,000

Thomas B. Marriott, Ph.D.		2002		221,000		5,996	(1)		30,000
Vice President, Development Research		2001		218,181		5,100	(1)		20,000
		2000		197,404		5,100	(1)		20,000

Edward F. Nemeth, Ph.D.		2002		213,423		18,201	(4)		20,000
Vice President		2001		190,750		2,889	(1)		20,000
and Chief Scientific Officer		2000		181,531		2,726	(1)		20,000

(1)	401(k) Company match

(2)

Represents payments by the Company in 2001 for expenses incurred in connection with Dr. Jackson’s relocation to Salt Lake City, Utah, including moving, transportation, legal, and tax services, and costs incurred by Dr. Jackson in connection with selling his residence in Toronto and purchasing a residence in Salt Lake City ($144,022); and 401(k) Company match ($5,100).

(3)

Represents payments by the Company in 2000 for expenses incurred in connection with Dr. Jackson’s relocation to Toronto, Canada, including moving, transportation, legal and tax services, and costs incurred by Dr. Jackson in connection with selling his prior residence and purchasing a residence in Toronto ($147,520); and 401(k) Company match ($5,100).

(4)	Represents reimbursement for interest payments incurred in connection with moving from Salt Lake City, Utah to Toronto, Ontario ($14,905); and 401(k) Company match ($3,296).

The following table sets forth each grant of options to purchase common stock made during the year ended December 31, 2002, to each of the Named Executive Officers. Grants of options to each of the Named Executive Officers were made under the 1998 Plan:

OPTION GRANTS IN 2002

	Number of Securities Underlying		% of Total Options			Exercise or Base				Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term (2)
	Options		Granted in			Price Per		Expiration
Name	Granted		Fiscal Year			Share		Date (1)		5%		10%

Hunter Jackson		60,000		6.65	%	$	22.30		5/23/2012	$	841,461	$	2,132,427
Thomas B. Marriott		30,000		3.33	%	$	22.30		5/23/2012	$	420,731	$	1,066,214
G. Thomas Heath		25,000		2.77	%	$	22.30		5/23/2012	$	350,609	$	888,511
David L. Clark		20,000		2.22	%	$	22.30		5/23/2012	$	280,487	$	710,809
Edward F. Nemeth		20,000		2.22	%	$	22.30		5/23/2012	$	280,487	$	710,809

(1)	These options have a ten-year term, subject to earlier termination upon death, disability, or termination of employment.

(2)

The potential realizable value is calculated based on the term of the option at its time of grant (ten 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 for fiscal year ended December 31, 2002, with respect to (a) the exercise of stock options by the Named Executive Officers in 2002; (b) the number of unexercised options held by the Named Executive Officers as of December 31, 2002; and (c) the value of unexercised in-the-money options as of December 31, 2001.

AGGREGATED OPTION EXERCISES IN 2002 AND YEAR-END VALUE TABLE

					Number of Unexercised Options				Value of In-the-Money Options
	Shares Acquired On		Value
Name	Exercise		Realized (1)		Exercisable		Unexercisable		Exercisable		Unexercisable

Hunter Jackson		20,000	$	395,600		362,800		107,200	$	6,448,981	$	566,744
Thomas B. Marriott		16,000	$	373,195		150,400		53,600	$	2,498,129	$	283,372
David L. Clark		5,503	$	135,925		21,200		43,600	$	235,194	$	254,672
Edward F. Nemeth		—		—		221,400		43,600	$	4,019,728	$	254,672
G. Thomas Heath		—		—		7,500		42,500		—	$	71,750

(1)	Value realized is based on the fair market value of NPS 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.

Compensation of Directors

The Company’s directors do not currently receive any cash compensation for service on the Board or any Committee thereof. Outside directors are reimbursed for out-of-pocket 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.

1994 Non-Employee Directors’ Stock Option Plan

In January 1994, the Board adopted, and the stockholders subsequently approved, the 1994 Non-Employee Directors’ Stock Option Plan (Directors’ Plan). An amendment to increase the number of shares available for grant under the Directors’ Plan from 90,000 to 160,000 was approved by the stockholders in July 1996. In May 1999 a subsequent amendment was approved by stockholders to increase the number of shares available for issuance from 160,000 to 260,000. In May 2002 an amendment was approved by stockholders to increase the number of shares available for issuance from 260,000 to 360,000. Under the Directors’ Plan, non-employee directors of the Company are eligible to receive options. As of the record date, nine directors were eligible for rewards under the Directors’ Plan. Options granted under the Directors’ Plan are automatic and non-discretionary and do not qualify as ISOs. Pursuant to the terms of the Directors’ Plan, each per son who is elected for the first time to be an outside 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. Originally, under the Directors’ Plan, on December 1 of each year, each person who was then a Non-Employee Director and had been a Non-Employee Director for at least three months was automatically granted an option to purchase 3,000 shares of common stock. In May 2000, this date was amended to provide that the grant date would be the same date as the grant date for employee options, which date was historically in December and was changed to May as part of arrangements made by the Company incident to the Company’s acquisition of Allelix Biopharmaceuticals Inc., effective December 29, 1999.

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, so long as the optionee has, during the entire period prior to such vesting date, continuously served as a non-employee director or in other continuous affiliation as provided under the Directors’ Plan. If the optionee’s service as a non-employee director terminates for any reason other than death, the option will remain exercisable for twelve months after the date of termination of such directorship or later if other affiliations with the Company continue thereafter, or until the option’s expiration date, if earlier. If the optionee dies, the option will remain exercisable for eighteen months following the date of death or until the expiration date of the option, whichever is earlier. In the event of a change in control transaction in which the Company is not the surviving corporation, or in which more than 50% of the shares of the Company’s common stock entitled to vote are exchanged, the time during which options outstanding under the Directors’ Plan vest shall be accelerated. 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, 2002, options to purchase a total of 58,310 shares of common stock had been exercised under the Directors’ Plan at exercise prices from $3.00 to $10.75 per share. As of that date, options to purchase 210,160 shares of common stock with exercise prices from $3.00 to $29.53 per share and a weighted average exercise price per share of $12.74 were outstanding. As of December 31, 2002, 91,530 shares remain available for future awards under the Directors’ Plan.

Non-Employee Directors’ Stock Bonus Program

In December 1994, the Board adopted the Non-Employee Directors’ Stock Bonus Program under the 1994 Equity Incentive Plan (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 meeting attended, and, through December 31, 2000, 200 shares of common stock per year for serving on a Board Committee. Beginning in January 2001, this same formula remained in effect except that each non-employee director receives 200 shares of common stock for each committee meeting attended in person and 100 shares of common stock for each committee

meeting attended by telephone, and no shares for membership on such committee. A total of 17,100 shares were granted under the Stock Bonus Program for meetings attended in 2002.

The right to receive awards under the Stock Bonus Program is generally non-transferable. The stock awards are usually made during the first quarter of each year for Board activities during the previous 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.

Termination of Employment and Change-in-Control Arrangements

Severance Pay Plan. Beginning early in 2002, the Company began consideration of and in December 2002 it adopted a Severance Pay Plan. Pursuant to the plan, each of the Company’s executive officers are entitled to receive severance payments of up to two years base salary and continued medical benefits for up to two years, if within a designated period (not to exceed 24 months) following a “change in control” of NPS his or her employment is terminated without cause or for certain other reasons specified in the plan.

Option Plan Retirement Provisions. Beginning early in 2002, the Company began consideration of and in December 2002, the Company adopted a provision for unfunded retirement benefits, whereunder the Company amended the NPS Non-Employee Directors’ Stock Option Plan, the NPS 1994 Equity Incentive Plan, the NPS 1987 Stock Option Plan and the NPS 1998 Stock Option Plan to provide for an additional two years of option vesting for individuals who retire from the Company and to allow such individuals to exercise their vested options until the end of their original term.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Securities Authorized for Issuance Under Equity Compensation Plans

EQUITY COMPENSATION PLAN INFORMATION

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

	(a)		(b)		(c)
Equity compensation plans approved by security holders		3,111,000	$	16.64		2,658,548
Equity compensation plans not approved by security holders		None		N/A		None

Total		3,111,000	$	16.64		2,658,548

Compensation Committee Interlocks and Insider Participation

Mr. Tombros, Mr. Costa, Mr. Evans, and Mr. Groninger served on the Compensation Committee during the fiscal year 2002. 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. Mr. Groninger is a brother-in-law of Dr. Jackson, the Company’s Chief Executive Officer, President and Chairman of the Board. Mr. Groninger abstains from participating in the determination of the proper compensation package for Dr. Jackson.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information regarding the ownership of NPS common stock as of July 18, 2003, by: (a) all those known by the Company to be beneficial owners of more than five percent of the Company’s common stock; (b) each current director and nominee for director; (c) each of the executive officers named in the Summary Compensation Table; and (d) all executive officers and directors of the Company as a group.

Name and Address of Beneficial Owner	Amount of Beneficial Ownership		Percent of Total (1)

(unless otherwise noted)
Deutsche Bank AG		4,871,219		13.25	%
Taunusanlage 12, D-60325
Frankfurt am Main
Federal Republic of Germany
T. Rowe Price Associates, Inc.(2)		3,527,900		9.60	%
100 East Pratt Street
Baltimore, MD 21202
Morgan Stanley Investment Management.		2,427,582		6.61	%
1585 Broadway
New York, NY 10036
Hunter Jackson, Ph.D.(3)		604,562		1.63	%
Thomas N. Parks, Ph.D.(4)		326,205		*
Calvin R. Stiller(5)		267,239		*
Thomas B. Marriott, Ph.D.(6)		183,274		*
John R. Evans(7)		127,781		*
Edward F. Nemeth, Ph.D.(8)		283,100		*
Donald E. Kuhla, Ph.D.(9)		59,800		*
Edward K. Rygiel(10)		37,864		*
Peter Tombros(11)		37,700		*
David L. Clark(12)		33,819		*
Joseph Klein, III(13)		25,000		*
Santo J. Costa, J.D.(14)		18,100		*
G. Thomas Heath(15)		21,200		*
James G. Groninger(16)		7,310		*
All directors and executive officers as a group(17)		2,288,301		6.03	%

*	Means less than 1%.

The above table is based upon information supplied by officers, directors, and principal stockholders and Schedules 13D and 13G filed with 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 set forth herein, the address of the persons set forth above is the address of the Company appearing elsewhere in this Annual Report.

(1)

The number of shares of common stock issued and outstanding on July 18, 2003, was 36,750,909 shares. The calculation of percentage ownership for each listed beneficial owner is based upon the number of shares of common stock issued and outstanding at July 18, 2003, plus shares of common stock subject to options held by such person at July 18, 2003, and exercisable within 60 days thereafter. The persons and entities named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them, except as noted below.

(2)

These securities are owned by various individual and institutional investors which T. Rowe Price Associates, Inc. serves as investment adviser with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Securities Exchange Act of 1934, T. Rowe Price Associates is deemed to be a beneficial owner of such securities; however, T. Rowe Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities.

(3)	Includes 100,000 shares held in a two trusts and 2 shares held by Dr. Jackson’s children, of which he disclaims beneficial ownership. Also includes 384,000 shares subject to options exercisable within 60 days of July 18, 2003.

(4)	Includes 106,224 shares held in trusts of which Dr. Parks disclaims beneficial ownership. Also includes 30,300 shares subject to options exercisable within 60 days of July 18, 2003.

(5)	Includes 240,443 shares held by Canadian Medical Discoveries Fund, of which Dr. Stiller disclaims beneficial ownership. Also includes 22,596 shares subject to options exercisable within 60 days of July 18, 2003.

(6)	Includes 7,241 shares held by spouse of which Mr. Marriott disclaims beneficial ownership. Also includes 164,900 shares subject to options exercisable within 60 days of July 18, 2003.

(7)	Includes 26,481 shares subject to options exercisable within 60 days of July 18, 2003.

(8)	Includes 238,600 shares subject to options exercisable within 60 days of July 18, 2003.

(9)	Includes 21,300 shares subject to options exercisable within 60 days of July 18, 2003.

(10)	Includes 31,664 shares subject to options exercisable within 60 days of July 18, 2003.

(11)	Includes 24,300 shares subject to options exercisable within 60 days of July 18, 2003.

(12)	Includes 30,800 shares subject to options exercisable within 60 days of July 18, 2003.

(13)	Includes 22,300 shares subject to options exercisable within 60 days of July 18, 2003.

(14)	Includes 15,300 shares subject to options exercisable within 60 days of July 18, 2003.

(15)	Includes 20,500 shares subject to options exercisable within 60 days of July 18, 2003.

(16)	Includes 5,460 shares subject to options exercisable within 60 days of July 18, 2003.

(17)	Includes 19 people. An aggregate of 1,177,788 shares are subject to options held by such 19 people and exercisable within 60 days of July 18, 2003.

ITEM 13. Certain Relationships and Related Transactions.

We have entered into related party transactions with each of the parties described below. In each case the agreement was entered into after a substantial selection process. We believe each of the transactions were on terms as favorable as could have been obtained from unrelated third parties.

Consulting Agreement with Plexus

Dr. Kuhla, one of our directors since 1991, was a Vice President of Plexus Ventures from February 1994 through June 1998. We had a consulting agreement with Plexus through December 31, 1995, under which Plexus assisted us with our efforts to establish a collaboration for our hyperparathyroidism program. In December 2001 Plexus earned $60,000 in fees as a result of a milestone payment by Amgen to NPS for the commencement of a Phase III clinical trial with AMG 073. Plexus may earn an additional $340,000 in fees as we receive payments from Amgen. We also granted Plexus an option to purchase 20,000 shares of our common stock at $10.50 per share, with vesting contingent on milestone payments from Amgen. All options are now vested as a result of the Amgen milestone payment earned in December 2001. Dr. Kuhla holds a one-third interest in Plexus.

Pharmaceutical Services Agreement with MDS

Dr. Evans, a director and vice-chairman of our board since December 1999, is a director of MDS, Inc. In addition, Mr. Rygiel, a director since December 1999 is Executive Vice President of MDS, Inc. MDS is an international health and life sciences company. By and through its subsidiaries, it provides drug discovery and development services, including contract research services related to preclinical studies and clinical trials. We have contracted with MDS to provide such services for our clinical trials with ALX1-11. In 2002, we paid MDS approximately $3.5 million for such services.

Indemnification Agreements

The Company’s policy is to enter into agreements with each of its directors and executive officers providing for the indemnification of such persons to the fullest extent permitted by law for any liability they may incur by reason of their service as officers and/or directors to the Company. The Company has entered into indemnity agreements with each of its directors and executive officers.

ITEM 14. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. Within 90 days prior to the filing of this report, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Disclosure controls and procedures are the controls and other procedures that the company designed to ensure that it records, processes, summarizes and reports in a timely manner the information it must disclose in reports that it files with or submits to the SEC. Based on this evaluation, our Chief Executive Officer and our Principal Financial Officer concluded that, as of the date of their evaluation, the Company’s disclosure controls and procedures were effective.

Changes in Internal Controls. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation.

PART IV

ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.


	(a)	1. Index to consolidated financial statements and report of independent auditors. The consolidated financial statements required by this item are submitted in a separate section beginning on page F-1 of this report.

	Page Number

Table of Contents to Consolidated Financial Statements		F-1
Independent Auditors’ Report		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)		F-5
Consolidated Statements of Cash Flows		F-12
Notes to Consolidated Financial Statements		F-13


		2. Index to financial statement schedules. There are no financial statements schedules included because they are either not applicable or the required information is shown in the consolidated financial statements or the notes thereto.


		3. Exhibits.

Exhibit Number		Description of Document

2.1		Arrangement Agreement made as of September 27, 1999, as amended by Amendment No. 1 as of October 28, 1999 and as amended and restated as of November 15, 1999 between Allelix Biopharmaceuticals Inc. and the Registrant (1)
3.1A		Amended and Restated Certificate of Incorporation of the Registrant (2)
3.1B		Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, dated December 16, 1999 (3)
3.1C		Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant, dated December 18, 1996 (4)
3.1D		Amendment to Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant, dated September 5, 2000 (5)
3.2A		Amended and Restated Bylaws of the Registrant (4)
3.2B		Certificate of Adoption of Amendments to the Amended and Restated Bylaws of the Registrant, dated February 19, 2003 (12)
4.1		Specimen Common Stock Certificate (4)
4.2A		Rights Agreement, dated as of December 4, 1996, between the Registrant and American Stock Transfer & Trust, Inc., with Exhibit A, Form of Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant; Exhibit B, Form of Right Certificate; and Exhibit C, Summary of Rights to Purchase Shares of Preferred Stock of the Registrant (6)
4.2B		First Amendment to the Rights Agreement and Certificate of Compliance with Section 27 thereof, dated December 31, 2001 (7)
4.2C		Second Amendment to the Rights Agreement and Certificate of Compliance with Section 27 thereof, dated February 19, 2003 (8)
4.3		Provisions attaching to the Exchangeable Shares of NPS Allelix Inc. (1)
4.4		Support Agreement made as of December 22, 1999 among NPS Pharmaceuticals, Inc., and NPS Holdings Company, and NPS Allelix Inc. (1)
4.5		Voting and Exchange Trust Agreement made as of December 22, 1999, among the Registrant, NPS Allelix Inc. and CIBC Mellon Trust Company (1)

Exhibit Number		Description of Document

10.1		1987 Stock Option Plan and Form of Stock Option Agreement (4)
10.1B		1987 Stock Option Plan, as amended December 2002 (12)
10.2A		1994 Equity Incentive Plan and Form of Stock Option Grant Agreement (4)
10.2B		1994 Equity Incentive Plan, as amended December 1996 (9)
10.2C		1994 Equity Incentive Plan, as amended December 2002 (12)
10.3A		1994 Non-Employee Directors’ Stock Option Plan (4)
10.3B		1994 Non-Employee Directors’ Stock Option Plan, as amended December 1996 (9)
10.3C		1994 Non-Employee Directors’ Stock Option Plan, as amended December 2002 (12)
10.4A		1994 Employee Stock Purchase Plan and Form of Offering Document (4)
10.4B		1994 Employee Stock Purchase Plan as amended December 1996, and Form of Offering Document (9)
10.4C		1994 Employee Stock Purchase Plan, as amended December 2002 (12)
10.5A		1998 Stock Option Plan (10)
10.5B		1998 Stock Option Plan, as amended December 2002 (12)
10.6		Form of Indemnity Agreement entered into between the Registrant and each of its officers and directors (4)
10.7		Severance Pay Plan (12)
10.8A		Collaborative Research and License Agreement between the Registrant and SmithKline Beecham Corporation (now GlaxoSmithKline), dated November 1, 1993 (4)
10.8B		Amendment Agreement to Collaborative Research and License Agreement between GlaxoSmithKline, effective June 29, 1995 (9)
10.8C		Amendment Agreement between the Registrant and GlaxoSmithKline, dated October 28, 1996 (4)
10.8D		Amendment Agreement between the Registrant and GlaxoSmithKline, dated October 24, 1997 (10)
10.8E		Amendment Agreement between the Registrant and GlaxoSmithKline, dated October 27, 1997 (10)
10.8F		Amendment to Collaborative Research and License Agreement between the Registrant and GlaxoSmithKline, dated November 26, 1997 (10)
10.8G		Letter, dated January 24, 2000, from SmithKline Beecham to NPS Re: Amendment Agreement to Amend the November 26, 1997 Amendment Agreement (12)
10.8H		Letter, dated May 15, 2000, from SmithKline Beecham to NPS Re: Amendment Agreement (12)
10.8I		Letter, dated August 1, 2001, from GlaxoSmithKline to NPS Re: Amendment Agreement to Amend the January 24, 2000 Amendment Agreement (12)
10.9A		Patent Agreement between the Registrant and The Brigham and Women’s Hospital, Inc., dated February 19, 1993 (4)
10.9B		Letter dated March 15, 1993 from the Registrant to The Brigham and Women’s Hospital, Inc. regarding Patent Agreement between the Registrant and The Brigham and Women’s Hospital, Inc. (12)
10.9C		Amendment to Patent Agreement between the Registrant and The Brigham and Women’s Hospital, Inc., effective February 7, 1996 (11)
10.9D		1999 Patent Agreement Amendment between the Registrant and The Brigham and Women’s Hospital, Inc., effective February 18, 1999 (12)
10.10		Collaborative Research and License Agreement between the Registrant and Kirin Brewery Company, Ltd. dated June 29, 1995 (11)
10.11		Development and License Agreement between the Registrant and Amgen Inc. effective as of December 27, 1995 (9)
10.12A		Office Lease between Registrant and Salt Lake Research Park Associates, dated June 3, 1994 (11)
10.12B		Amendment to Lease between Registrant and Salt Lake Research Park Associates, effective December 1, 1995 (12)
10.12C		Amendment to Office Lease between Registrant and Salt Lake Research Park Associates, effective July 1, 1997 (12)
10.12D		Third Amendment to Lease between Registrant and Salt Lake Research Park Associates, effective March 1, 1997 (12)

Exhibit Number		Description of Document

10.12E		Fourth Amendment to Lease between Registrant and Salt Lake Research Associates, LC, dated September 22, 1998 (12)
10.12F		Fifth Amendment to Lease between Registrant and Salt Lake Research Associates, LC, dated April 14, 1999 (12)
10.13		Agreement for the Development of the “ALX-0600” Recombinate Peptide for the Treatment of Various Intestinal Disorders between NPS Allelix Corp. (formerly Allelix Biopharmaceuticals Inc.) and Her Majesty the Queen in Right of Canada on behalf of Technology Partnerships Canada, dated November 9, 1999 (13)
10.14		Manufacturing Agreement between NPS Allelix Corp. and SynCo Bio Partners B.V., effective as of May 17, 2001 (13)
10.15		Addendum to Manufacturing Agreement between NPS Allelix Corp. and SynCo Bio Partners B.V., effective as of October 26, 2001 (13)
21.1		List of Subsidiaries (12)
23.1		Consent of Independent Auditors
24.1		Power of Attorney (see page 52)
99.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated herein by reference to the Registrant’s Definitive Proxy Statement (SEC File No. 000-23272, Film No. 99760104, filing date November 18, 1999).

(2)	Incorporated herein by reference to the Registrant’s Registration Statement on Form S-1 filed on January 21, 1994 (SEC File No. 333-74318).

(3)	Incorporated herein by reference to the Registrant’s Registration Statement on Form S-3 filed on September 6, 2000 (SEC File No. 333-45274, Film No. 717603).

(4)	Incorporated herein by reference to the Registrant’s Current Report on Form 8-K dated December 19, 1996 (SEC File No. 000-23272, Film No. 96683282).

(5)	Incorporated herein by reference to the Registrant’s Registration Statement on Form 8-A12G/A (SEC File No. 000-23272, Film No. 1826478, filing date December 31, 2001).

(6)	Incorporated herein by reference to the Registrant’s Registration Statement on Form 8-A/A (SEC File No. 000-23272, Film No. 03575669, filing date February 21, 2003).

(7)	Incorporated herein by reference to the Registrant’s Registration Statement on Form S-8 (SEC File No. 333-17521, Film No. 96677983, filing date December 9, 1996).

(8)	Incorporated herein by reference to the Registrant’s Definitive Proxy Statement (SEC File No. 000-23272, Film No. 98590984, filing date April 9, 1998).

(9)	Incorporated herein by reference to Amendment No. 1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed on March 29, 1996.

(10)	Incorporated herein by reference to the Registrant’s Current Report on Form 8-K dated January 27, 1998 (SEC File No. 000-23272, Film No. 98513828).

(11)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended on December 31, 1995.

(12)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended on December 31, 2002 (SEC File No. 000-23272, Film No. 03612691, filing date March 21, 2003).

(13)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K/A for the fiscal year ended on December 31, 2002 (SEC File No. 000-23272, Film No. 03739737, filing date June 11, 2003).

(b)

Reports on Form 8-K:

•

The Company filed a Current Report on Form 8-K dated February 20, 2003 (SEC File No. 000-23272, Film No. 03699936) in connection with the announcement of the proposed merger with Enzon Pharmaceuticals, Inc.

•

The Company filed a Current Report of Form 8-K dated June 4, 2003 (SEC File No. 000-23272, Film No. 03735653) in connection with the announcement of the mutual agreement by the Company and Enzon Pharmaceuticals, Inc. to terminate the previously announced merger of the two companies.

(c)

See Exhibits listed under Item 14(a)(3).

(d)

The financial statement schedules required by this Item are listed under Item 14(a)(2).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NPS PHARMACEUTICALS, INC.

Date: July 29, 2003	By:	/s/ HUNTER JACKSON Hunter Jackson, President Chief Executive Officer and Chairman of the Board


Date: July 29, 2003	By:	/s/ MORGAN R. BROWN Morgan R. Brown, Principal Financial Officer

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K/A has been signed below by the following person in the capacities and on the date indicated.


Name	Title	Date

*	Director	July 29, 2003

Santo J. Costa

*	Director	July 29, 2003

John R. Evans

*	Director	July 29, 2003

James G. Groninger

*	Director	July 29, 2003

Joseph Klein, III

*	Director	July 29, 2003

Donald E. Kuhla, Ph.D.

*	Director	July 29, 2003

Thomas N. Parks, Ph.D.

*	Director	July 29, 2003

Edward Rygiel

*	Director	July 29, 2003

Calvin Stiller, M.D.

*	Director	July 29, 2003

Peter G. Tombros


*By:	/s/ HUNTER JACKSON Hunter Jackson Attorney-in-Fact

CERTIFICATION

I, Hunter Jackson, certify that:

1. I have reviewed this Annual Report on Form 10-K/A of NPS Pharmaceuticals, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;


		b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and


		c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and


		b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: July 29, 2003

/s/ HUNTER JACKSON
Hunter Jackson, President
Chief Executive Officer and Chairman of the Board

CERTIFICATION

I, Morgan R. Brown, certify that:

1. I have reviewed this Annual Report on Form 10-K/A of NPS Pharmaceuticals, Inc.;


		b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and


		c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


		b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: July 29, 2003

/s/ MORGAN R. BROWN
Morgan R. Brown,
Principal Financial Officer

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Table of Contents

	Page

Independent Auditors’ Report		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)		F-5
Consolidated Statements of Cash Flows		F-12
Notes to Consolidated Financial Statements		F-13

F-1

Independent Auditors’ Report

The Board of Directors and Stockholders
NPS Pharmaceuticals, Inc.:

We have audited the accompanying consolidated balance sheets of NPS Pharmaceuticals, Inc. and subsidiaries (a development stage enterprise) as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2002, and for the period from October 22, 1986 (inception) through December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of NPS Pharmaceuticals, Inc. and subsidiaries (a development stage enterprise) as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, and for the period from October 22, 1986 (inception) through December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

As discussed in note 1 to the consolidated financial statements, the Company changed its method of amortizing goodwill and intangible assets in 2002 and its method of recognizing revenue on nonrefundable licensing fees in 2000.

/s/ KPMG LLP

Salt Lake City, Utah
January 30, 2003, except as
to note 14, which is as of
June 4, 2003

F-2

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Balance Sheets
December 31, 2002 and 2001
(In thousands, except share data)

	2002			2001

Assets
Current assets:
Cash and cash equivalents	$	96,094			39,142
Marketable investment securities (note 3)		138,360			168,376
Accounts receivable		1,958			8,609
Other current assets		3,191			3,228

Total current assets		239,603			219,355

Plant and equipment (note 5):
Land		412			409
Building		1,164			1,097
Equipment		9,727			8,892
Leasehold improvements		3,016			2,988

		14,319			13,386
Less accumulated depreciation and amortization		10,009			8,518

Net plant and equipment		4,310			4,868

Goodwill, net of accumulated amortization of $3,450 and $3,419 at December 31, 2002 and 2001, respectively (note 4)		6,900			6,838
Purchased intangible assets, net of accumulated amortization of $3,949 and $2,609 at December 31, 2002 and 2001, respectively (note 4)		2,632			3,913
Other assets		23			2

	$	253,468			234,976

Liabilities and Stockholders’ Equity
Current liabilities:
Current installments of obligations under capital leases	$	—			4
Accounts payable		6,623			10,737
Accrued expenses		4,408			2,060
Accrued severance (note 11)		—			240
Deferred income		75			—

Total current liabilities		11,106			13,041

Stockholders’ equity (notes 6 and 7):
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; issued and outstanding no shares		—			—
Common stock, $0.001 par value. Authorized 45,000,000 shares; issued and outstanding 35,089,784 shares at December 31, 2002 and 30,164,597 shares at December 31, 2001		35			30
Additional paid-in capital		489,352			382,681
Deferred compensation		(370	)		(34	)
Accumulated other comprehensive income		1,180			261
Deficit accumulated during development stage		(247,835	)		(161,003	)

Total stockholders’ equity		242,362			221,935

Commitments and contingencies (notes 2, 5, 7, and 13)	$	253,468			234,976

See accompanying notes to consolidated financial statements.

F-3

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Statements of Operations
(In thousands, except per share data)

	Years ended December 31									October 22, 1986 (inception) through December 31, 2002

	2002			2001			2000


Revenues from research and license agreements	$	2,154			10,410			7,596			75,673

Operating expenses:
Research and development		80,872			60,090			27,888			260,418
General and administrative		14,777			12,099			12,036			73,928
Amortization of goodwill and purchased intangibles		1,322			3,411			3,561			8,294
In-process research and development acquired (note 4)		—			—			—			17,760

Total operating expenses		96,971			75,600			43,485			360,400

Operating loss		(94,817	)		(65,190	)		(35,889	)		(284,727	)

Other income (expense):
Interest income		6,861			12,010			4,836			35,413
Gain on sale of marketable investment securities		617			1,642			181			2,457
Gain (loss) on disposition of equipment, leasehold improvements, and leases		62			11			(1,096	)		(1,125	)
Interest expense		—			(5	)		(96	)		(806	)
Foreign currency transaction gain (loss)		(39	)		51			137			149
Other		382			1,813			315			2,520

Total other income		7,883			15,522			4,277			38,608

Loss before income tax expense (benefit)		(86,934	)		(49,668	)		(31,612	)		(246,119	)
Income tax expense (benefit) (note 8)		(102	)		300			—			1,216

Loss before cumulative effect of change in accounting principle		(86,832	)		(49,968	)		(31,612	)		(247,335	)
Cumulative effect on prior years (to December 31, 1999) of changing to a different revenue recognition method		—			—			(500	)		(500	)

Net loss	$	(86,832	)		(49,968	)		(32,112	)		(247,835	)

Basic and diluted loss per common and common-equivalent share:
Loss before cumulative effect of change in accounting principle	$	(2.79	)		(1.67	)		(1.32	)
Cumulative effect on prior years (to December 31, 1999) of changing to a different revenue recognition method		—			—			(0.02	)

Net loss	$	(2.79	)		(1.67	)		(1.34	)

Weighted average common and common-equivalent shares outstanding during the year:
Basic and diluted		31,165			29,912			24,007

See accompanying notes to consolidated financial statements.

F-4

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
October 22, 1986 (inception) through December 31, 2002
(In thousands, except share data)

	Preferred stock		Common stock		Additional paid-in capital			Deferred compensation		Deficit accumulated during development stage			Comprehensive income (loss)			Accumulated other Comprehensive income (loss)		Total stockholders’ equity

Balances, December 31, 1985	$	—		—		—			—		—						—		—
Issuance of 1,125,000 shares of common stock for cash and equipment valued at fair value upon incorporation at October 22, 1986		—		1		14			—		—						—		15
Net loss		—		—		—			—		(12	)		(12	)		—		(12	)

Comprehensive loss		—		—		—			—		—		$	(12	)		—		—

Balances, December 31, 1986		—		1		14			—		(12	)					—		3
Repurchase of 375,000 shares of common stock		—		—		(5	)		—		—						—		(5	)
Issuance of 82,500 shares of common stock for services		—		—		1			—		—						—		1
Net income		—		—		—			—		121			121			—		121

Comprehensive income		—		—		—			—		—		$	121			—		—

Balances, December 31, 1987		—		1		10			—		109						—		120
Issuance of 55,556 shares of preferred stock for cash		6		—		294			—		—						—		300
Issuance of 11,448 shares of common stock for cash under option plan		—		—		1			—		—						—		1
Issuance of 97,500 shares of common stock for services under option plan		—		—		33			—		—						—		33
Net loss		—		—		—			—		(106	)		(106	)		—		(106	)

Comprehensive loss		—		—		—			—		—		$	(106	)		—		—

Balances, December 31, 1988		6		1		338			—		3						—		348
Issuance of 37,037 shares of preferred stock for cash		4		—		336			—		—						—		340
Issuance of 7,500 shares of common stock for services under option plan		—		—		3			—		—						—		3
Net loss		—		—		—			—		(5	)		(5	)		—		(5	)

Comprehensive loss		—		—		—			—		—		$	(5	)		—		—

Balances, December 31, 1989		10		1		677			—		(2	)					—		686

F-5

	Preferred stock			Common stock		Additional paid-in capital			Deferred compensation		Deficit accumulated during development stage			Comprehensive income (loss)			Accumulated other comprehensive income (loss)		Total stockholders’ equity

Issuance of 37,037 shares of preferred stock for cash	$	3			—		337			—		—						—		340
Issuance of 2,475 shares of common stock for cash under option plan		—			—		1			—		—			—			—		1
Net loss		—			—		—			—		(213	)		(213	)		—		(213	)

Comprehensive loss		—			—		—			—		—		$	(213	)		—		—

Balances, December 31, 1990		13			1		1,015			—		(215	)					—		814
Issuance of 4,500 shares of common stock for cash under option plan		—			—		2			—		—						—		2
Net loss		—			—		—			—		(462	)		(462	)		—		(462	)

Comprehensive loss		—			—		—			—		—		$	(462	)		—		—

Balances, December 31, 1991		13			1		1,017			—		(677	)					—		354
Issuance of 3,675 shares of common stock for cash under option plan		—			—		2			—		—						—		2
Issuance of 230,334 shares of common stock upon conversion of 129,630 shares of preferred stock		(13	)		—		13			—		—						—		—
Repurchase and cancellation of 83,334 shares of common stock for cash		—			—		(300	)		—		—						—		(300	)
Issuance of 781,250 shares of preferred stock for cash, net of offering costs		1			—		4,937			—		—						—		4,938
Issuance of 678,573 shares of preferred stock for cash, net of offering costs		1			—		4,694			—		—						—		4,695
Issuance of 101,452 shares of common stock for services related to preferred stock offering		—			—		—			—		—						—		—
Net loss		—			—		—			—		(2,607	)		(2,607	)		—		(2,607	)

Comprehensive loss		—			—		—			—		—		$	(2,607	)		—		—

Balances, December 31, 1992		2			1		10,363			—		(3,284	)					—		7,082

F-6

	Preferred stock			Common stock		Additional paid-in capital			Deferred compensation			Deficit accumulated during development stage			Comprehensive income (loss)			Accumulated other comprehensive income (loss)		Total stockholders’ equity

Issuance of 37,524 shares of common stock for cash under option plan	$	—			—		26			—			—						—		26
Issuance of 583,334 shares of preferred stock for cash, net of offering costs		—			—		6,968			—			—						—		6,968
Issuance of 6,050 shares of preferred stock for services		—			—		73			—			—						—		73
Deferred compensation related to grant of stock options, net of current year expense		—			—		766			(745	)		—						—		21
Net loss		—			—		—			—			(7,159	)		(7,159	)		—		(7,159	)

Comprehensive loss		—			—		—			—			—		$	(7,159	)		—		—

Balances, December 31, 1993		2			1		18,196			(745	)		(10,443	)					—		7,011
Issuance of 3,475,666 shares of common stock upon conversion of 2,049,207 shares of preferred stock		(2	)		4		(2	)		—			—						—		—
Issuance of 2,000,000 shares of common stock for cash, net of offering costs		—			2		9,530			—			—						—		9,532
Issuance of 20,000 shares of common stock for services		—			—		96			—			—						—		96
Issuance of 46,118 shares of common stock for cash and options for 432 shares under option plans		—			—		27			—			—						—		27
Amortization of deferred compensation		—			—		—			255			—						—		255
Net loss		—			—		—			—			(6,756	)		(6,756	)		—		(6,756	)

Comprehensive loss		—			—		—			—			—		$	(6,756	)		—		—

Balances, December 31, 1994		—			7		27,847			(490	)		(17,199	)					—		10,165
Issuance of 242,385 shares of common stock for cash and options for 14,816 shares under option plans		—			—		100			—			—						—		100
Issuance of 39,771 shares of common stock for cash under employee purchase plan		—			—		110			—			—						—		110
Issuance of 3,287 shares of common stock for services		—			—		10			—			—						—		10
Amortization of deferred compensation		—			—		—			255			—						—		255
Net loss		—			—		—			—			(3,318	)		(3,318	)		—		(3,318	)

Comprehensive loss		—			—		—			—			—		$	(3,318	)		—		—

Balances, December 31, 1995		—			7		28,067			(235	)		(20,517	)					—		7,322

F-7

	Preferred stock		Common stock		Additional paid-in capital		Deferred compensation		Deficit accumulated during development stage			Comprehensive income (loss)			Accumulated other Comprehensive income (loss)		Total stockholders’ equity

Issuance of 1,000,000 shares of common stock for cash	$	—		1		7,499		—		—						—		7,500
Issuance of 3,450,000 shares of common stock for cash, net of offering costs		—		4		47,909		—		—						—		47,913
Issuance of 223,940 shares of common stock for cash and options for 5,746 shares under option plans		—		—		221		—		—						—		221
Issuance of 24,814 shares of common stock for services under option plans		—		—		334		—		—						—		334
Issuance of 18,147 shares of common stock for cash under employee purchase plan		—		—		110		—		—						—		110
Issuance of 17,519 shares of common stock for warrants for 2,731 shares upon exercise of warrants		—		—		—		—		—						—		—
Consulting expense related to the grant of stock options for services rendered		—		—		130		—		—						—		130
Amortization of deferred compensation		—		—		—		235		—						—		235
Net income		—		—		—		—		6,105			6,105			—		6,105

Comprehensive income		—		—		—		—		—		$	6,105			—		—

Balances, December 31, 1996		—		12		84,270		—		(14,412	)					—		69,870
Issuance of 160,000 shares of common stock for cash		—		—		1,554		—		—						—		1,554
Issuance of 211,554 shares of common stock for cash and 11,864 shares under option plans		—		—		302		—		—						—		302
Issuance of 11,200 shares of common stock for services under option plans		—		—		128		—		—						—		128
Issuance of 20,343 shares of common stock for cash under employee purchase plan		—		—		160		—		—						—		160
Net loss		—		—		—		—		(11,695	)		(11,695	)		—		(11,695	)

Comprehensive loss		—		—		—		—		—		$	(11,695	)		—		—

Balances, December 31, 1997		—		12		86,414		—		(26,107	)					—		60,319

F-8

	Preferred stock		Common stock		Additional paid-in capital		Deferred compensation		Deficit accumulated during development stage			Comprehensive income (loss)			Accumulated other comprehensive income (loss)			Total stockholders’ equity

Issuance of 204,000 shares of common stock for cash	$	—		—		1,299		—		—						—			1,299
Issuance of 124,252 shares of common stock for cash under option plans		—		—		243		—		—						—			243
Issuance of 16,097 shares of common stock for services under option plans		—		—		121		—		—						—			121
Issuance of 31,669 shares of common stock for cash under employee purchase plan		—		—		215		—		—						—			215
Gross unrealized gains on marketable securities													433
Reclassification for realized gains on marketable securities													(323	)

Net unrealized gains on marketable investment securities		—		—		—		—		—			110			110			110
Net loss		—		—		—		—		(17,162	)		(17,162	)		—			(17,162	)

Comprehensive loss		—		—		—		—		—		$	(17,052	)		—			—

Balances, December 31, 1998		—		12		88,292		—		(43,269	)					110			45,145
Issuance of 249,000 shares of common stock for cash		—		1		1,323		—		—						—			1,324
Issuance of 124,365 shares of common stock for cash under option plans		—		—		251		—		—						—			251
Issuance of 15,062 shares of common stock for services under option plans		—		—		105		—		—						—			105
Issuance of 38,034 shares of common stock for cash under employee purchase plan		—		—		222		—		—						—			222
Issuance of 6,516,923 shares and options and warrants to purchase 675,520 shares of common stock in purchase business combination		—		7		44,746		—		—						—			44,753
Compensation expense on stock option issuances		—		—		97		—		—						—			97
Gross unrealized loss on marketable securities													(266	)
Reclassification for realized losses on marketable securities													102

Net unrealized losses on marketable investment securities		—		—		—		—		—			(164	)		(164	)		(164	)
Net loss		—		—		—		—		(35,654	)		(35,654	)		—			(35,654	)

Comprehensive loss		—		—		—		—		—		$	(35,818	)		—			—

Balances, December 31, 1999		—		20		135,036		—		(78,923	)					(54	)		56,079

F-9

	Preferred stock		Common stock		Additional paid-in capital		Deferred compensation			Deficit accumulated during development stage			Comprehensive income (loss)			Accumulated other comprehensive income (loss)			Total stockholders’ equity

Issuance of 3,900,000 shares of common stock for cash (note 6)	$	—		4		43,314		—			—						—			43,318
Issuance of 210,526 common shares in exchange for minority interest (note 6)		—		—		2,500		—			—						—			2,500
Issuance of 168,492 shares of common stock for cash (note 6)		—		—		2,000		—			—						—			2,000
Issuance of 4,600,000 shares of common stock for cash (note 6)		—		5		180,716		—			—						—			180,721
Issuance of 1,254,791 shares of common stock for cash of $11,109 and receivables of $193 under option and warrant plans (note 6)		—		1		11,301		—			—						—			11,302
Issuance of 10,700 shares of common stock for services		—		—		241		—			—						—			241
Issuance of 17,243 shares of common stock for cash under employee purchase plan		—		—		136		—			—						—			136
Compensation expense on stock option issuances		—		—		1,758		—			—						—			1,758
Deferred compensation, net of current year expense		—		—		800		(800	)		—						—			—
Gross unrealized gain on marketable securities														426
Reclassification for realized gain/losses on marketable securities														(181	)

Net unrealized gains on marketable investment securities		—		—		—		—			—			245			245			245
Foreign currency translation loss		—		—		—		—			—			(848	)		(848	)		(848	)
Net loss		—		—		—		—			(32,112	)		(32,112	)		—			(32,112	)

Comprehensive loss		—		—		—		—			—		$	(32,715	)		—			—

Balances, December 31, 2000		—		30		377,802		(800	)		(111,035	)					(657	)		265,340

F-10

	Preferred stock		Common stock		Additional paid-in capital			Deferred compensation			Deficit accumulated during development stage			Comprehensive income (loss)			Accumulated other comprehensive income (loss)			Total stockholders’ equity

Issuance of 432,216 shares of common stock for cash of $2,741 and receivables of $271 under option and warrant plans (note 6)	$	—		—		3,012			—			—						—			3,012
Issuance of 20,096 shares of common stock for services		—		—		402			—			—						—			402
Issuance of 20,813 shares of common stock for cash under employee purchase plan		—		—		337			—			—						—			337
Compensation expense on stock option issuances		—		—		1,894			—			—						—			1,894
Deferred compensation, net of current year expense		—		—		(766	)		766			—						—			—
Gross unrealized gain on marketable securities															3,481
Reclassification for realized gain/losses on marketable securities															(1,642	)

Net unrealized gains on marketable investment securities		—		—		—			—			—			1,839			1,839			1,839
Foreign currency translation loss		—		—		—			—			—			(921	)		(921	)		(921	)
Net loss		—		—		—			—			(49,968	)		(49,968	)		—			(49,968	)

Comprehensive loss		—		—		—			—			—		$	(49,050	)		—			—

Balances, December 31, 2001		—		30		382,681			(34	)		(161,003	)					261			221,935
Issuance of 4,600,000 shares of common stock for cash (note 6)		—		5		102,943			—			—						—			102,948
Issuance of 284,560 shares of common stock for cash under option and warrant plans (note 6)		—		—		2,024			—			—						—			2,024
Issuance of 21,140 shares of common stock for services		—		—		602			—			—						—			602
Issuance of 19,487 shares of common stock for cash under employee purchase plan		—		—		329			—			—						—			329
Compensation expense on stock option issuances		—		—		437			—			—						—			437
Deferred compensation, net of current year expense		—		—		336			(336	)		—						—			—
Gross unrealized gain on marketable securities															1,127
Reclassification for realized gain/losses on marketable securities															(617	)

Net unrealized gains on marketable investment securities		—		—		—			—			—			510			510			510
Foreign currency translation gain		—		—		—			—			—			409			409			409
Net loss		—		—		—			—			(86,832	)		(86,832	)		—			(86,832	)

Comprehensive loss		—		—		—			—			—		$	(85,913	)		—			—

Balances, December 31, 2002	$	—		35		489,352			(370	)		(247,835	)					1,180			242,362

See accompanying notes to consolidated financial statements.

F-11

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(In thousands)

	Years ended December 31									October 22, 1986 (inception) through
										December 31,
	2002			2001			2000			2002

Cash flows from operating activities:
Net loss	$	(86,832	)		(49,968	)		(32,112	)		(247,835	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,807			5,066			5,428			20,011
Loss (gain) on disposition of equipment, leasehold improvements, and leases		(62	)		(11	)		1,096			1,124
Realized gain on sale of marketable investment securities		(617	)		(1,642	)		(181	)		(2,457	)
Issuance of common and preferred stock in lieu of cash for services		602			402			241			2,280
Compensation expense on stock options		437			1,894			1,758			4,952
Write-off of in-process research and development		—			—			—			17,760
Decrease (increase) in operating assets:
Accounts receivable		6,668			(8,182	)		270			(1,671	)
Other current assets and other assets		(210	)		(1,655	)		(461	)		(2,364	)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses, and accrued severance		(2,129	)		9,551			838			8,780
Deferred income		75			—			(1,255	)		(411	)

Net cash used in operating activities		(79,261	)		(44,545	)		(24,378	)		(199,831	)

Cash flows from investing activities:
Net sale (purchase) of marketable investment securities		31,143			(48,406	)		(93,118	)		(122,852	)
Acquisitions of equipment and leasehold improvements		(906	)		(1,682	)		(273	)		(12,789	)
Proceeds from sale of equipment		62			11			199			1,348
Cash paid for acquisition, net of cash received		—			—			—			(676	)

Net cash provided by (used in) investing activities		30,299			(50,077	)		(93,192	)		(134,969	)

Cash flows from financing activities:
Proceeds from note payable to bank		—			—			—			124
Proceeds from issuance of preferred stock		—			—			—			17,581
Proceeds from issuance of common stock		105,536			3,271			237,284			417,216
Proceeds from long-term debt		—			—			—			1,166
Principal payments on note payable to bank		—			—			—			(124	)
Principal payments under capital lease obligations		(4	)		(344	)		(367	)		(2,161	)
Principal payments on long-term debt		—			—			(1,490	)		(2,854	)
Repurchase of preferred stock		—			—			—			(300	)

Net cash provided by financing activities		105,532			2,927			235,427			430,648

Effect of exchange rate changes on cash		382			(246	)		110			246

Net increase (decrease) in cash and cash equivalents		56,952			(91,941	)		117,967			96,094
Cash and cash equivalents at beginning of period		39,142			131,083			13,116			—

Cash and cash equivalents at end of period	$	96,094			39,142			131,083			96,094

Supplemental disclosures of cash flow information:
Cash paid for interest	$	—			5			96			806
Cash paid (received) for taxes		(102	)		300			—			1,216
Supplemental schedule of noncash investing and financing activities:
Acquisition of equipment through incurrence of capital lease obligations	$	—			—			—			1,478
Acquisition of leasehold improvements through incurrence of debt		—			—			—			177
Issuance of stock for stock subscription receivable		—			271			193			4,000
Unrealized gain on marketable investment securities		510			1,839			245			2,540

See accompanying notes to consolidated financial statements.

F-12

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(1) Organization and Summary of Significant Accounting Policies

The consolidated financial statements are comprised of the financial statements of NPS Pharmaceuticals, Inc. (NPS) and its subsidiaries, collectively referred to as the Company. The Company, a development stage enterprise, is engaged in the discovery, development, and commercialization of pharmaceutical products. 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 consolidated financial statements:


	(a) Cash Equivalents


		The Company considers all highly liquid investments with maturities at the date of purchase of three months or less to be cash equivalents. Cash equivalents consist of commercial paper, money market funds, and debt securities of approximately $90.9 million and $36.2 million at December 31, 2002 and 2001, respectively. At December 31, 2002 and 2001, the book value of cash equivalents approximates fair value.


	(b) Revenue Recognition


		The Company earns revenue from research and development support payments, license fees, and milestone payments. The Company recognizes revenue from its research and development support agreements as related research and development costs are incurred and the services are performed. The terms and conditions of the Company’s research and development support agreements are such that revenues are earned as the related costs are incurred. The principal costs under these agreements are for personnel expenses to conduct research and development under these agreements. The Company recognizes revenue from milestone payments as agreed-upon events representing the achievement of substantive steps in the development process are achieved and where the amount of the milestone payments approximates the value of achieving the milestone. The Company recognizes revenue from up-front nonrefundable license fees on a straight-line basis over the period of the Company’s continued involvement in the research and development project. Cash received in advance of the performance of the related research and development support and for up-front nonrefundable license fees when the Company has continuing involvement is recorded as deferred income.


		In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, Revenue Recognition (SAB No. 101), to provide guidance on the recognition, presentation, and disclosure of revenue in financial statements. SAB No. 101 explains the SEC’s general framework for revenue recognition.


		The Company adopted SAB No. 101 in 2000. The effect of the adoption of SAB No. 101 on retained earnings as of January 1, 2000 has been reflected as a cumulative effect of change in accounting principle in the net loss for the year ended December 31, 2000. Prior to 2000, the Company recognized revenue from nonrefundable license fees at the inception of an agreement when the Company had no further obligations relative to such licensing fees. Upon adoption of SAB No. 101, the Company changed its revenue recognition policy with respect to nonrefundable licensing fees.


		Based on the criteria included in SAB No. 101, the Company concluded that up-front nonrefundable license fees should be recognized on a straight-line basis over the period wherein the Company has continuing involvement. The cumulative effect includes the reversal of $500,000 related to revenue recognized in prior periods, which was then recognized in the year ended December 31, 2000; as such, the net loss did not change for the year ended December 31, 2000.

F-13

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(1) Organization and Summary of Significant Accounting Policies

(c) Research and Development Costs


		Research and development costs are expensed as incurred. These include the following types of costs incurred in performing research and development activities: salaries and benefits, allocated overhead and occupancy costs, clinical trial and related clinical manufacturing costs, contract services and other outside costs.


	(d) Trade Accounts Receivable


		Trade accounts receivable are recorded for research and development support performed and license fees and milestone payments due and do not bear interest. The Company determines the allowance for doubtful accounts based on assessed customers’ ability to pay, historical write-off experience, and economic trends and is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. The Company did not record a provision for bad debts in 2002, 2001, and 2000. The Company does not have any off-balance-sheet credit exposure related to its customers.


	(e) 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 of plant is calculated on the straight-line method over its estimated useful life of 15 years. Depreciation and amortization of equipment (including equipment held under capital lease) are calculated on the straight-line method over their estimated useful lives of three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the life of the asset or remainder of the lease term. Amortization of assets held under capital lease is included with depreciation and amortization expense.


	(f) 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.


	(g) Loss per Common Share


		Basic loss per common share is the amount of loss for the period applicable to each share of common stock outstanding during the reporting period. Diluted loss per common share is the amount of loss for the period applicable to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period.

F-14

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(1) Organization and Summary of Significant Accounting Policies

Potential common shares of approximately 3.1 million, 2.6 million, and 2.5 million during the years ended December 31, 2002, 2001, and 2000, respectively, that could potentially dilute basic earnings per share in the future were not included in the computation of diluted loss per share because to do so would have been antidilutive for the period.


	(h) Stock-Based Compensation


		The Company employs the footnote disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS No. 123 encourages entities to adopt a fair-value based method of accounting for stock options or similar equity instruments. However, it also allows an entity to continue measuring compensation cost for stock-based compensation using the intrinsic-value method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). The Company has elected to continue to apply the provisions APB No. 25, under which no compensation cost has been recognized when the exercise price of the option equals the market price of the stock on the date of grant. The Company uses the straight-line method of amortization for stock-b ased compensation. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company’s net loss and net loss per share would have been increased to the following pro forma amounts (in thousands, except per share amounts):

	2002			2001			2000

Net loss:
As reported	$	(86,832	)		(49,968	)		(32,112	)
Add: Stock based employee compensation expense included in reported net income		101			1,476			1,163
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(8,387	)		(6,008	)		(2,787	)

Pro forma	$	(95,118	)		(54,500	)		(33,736	)

Net loss per share as reported:
Basic and diluted	$	(2.79	)		(1.67	)		(1.34	)

Pro forma:
Basic and diluted	$	(3.05	)		(1.82	)		(1.41	)

Net loss, as reported, also included compensation cost of $336,000, $375,000, and $523,000 for stock-based compensation awards for nonemployees in 2002, 2001, and 2000, respectively. The Company has refined its methodology in calculating its pro forma footnote disclosure and corrected its historical computations. In the Company’s previous footnotes, the pro forma net loss per share on a basic and diluted basis was $1.86 and $1.45 for the years ended December 31, 2001 and 2000, respectively.


	(i) 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 consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.

F-15

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(1) Organization and Summary of Significant Accounting Policies

(j) Marketable Investment Securities


		The Company classifies its marketable investment securities as available for sale. Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of stockholders’ equity until realized. A decline in the market value below cost that is deemed other than temporary is charged to results of operations resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related security as adjustments to yield using the effective-interest method. Interest income is recognized when earned. Realized gains and losses from the sale of marketable investment securities are included in results of operations and are determined on the specific-identification basis.


	(k) Principles of Consolidation


		The consolidated financial statements include the accounts of the Company and all subsidiaries in which it owns a majority voting interest. The Company carries one investment in a nonpublic corporation at cost, and the Company eliminates all intercompany accounts and transactions in consolidation. The Company reports all monetary amounts in U.S. dollars unless specified otherwise.


	(l) Goodwill and Other Purchased Intangibles


		Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.


		Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over six years. All other purchased intangible assets are amortized on a straight-line basis over five years.


	(m) Accounting for Impairment of Long-Lived Assets


		The Company reviews its long-lived assets, excluding goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of their carrying amount or fair value less cost to sell.


		The Company reviews its goodwill for impairment at least annually or more often if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. The goodwill impairment test is a two-step test. Goodwill is considered impaired and a loss is recognized, when its carrying value exceeds its implied fair value. The Company completed its impairment review of goodwill during 2002 and determined that no impairment charge was required.

F-16

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(1) Organization and Summary of Significant Accounting Policies

(n) Foreign Currency Translation


		The local foreign currency is the functional currency for the Company’s foreign subsidiaries. Assets and liabilities of foreign operations are translated to U.S. dollars at the current exchange rates as of the applicable balance sheet date. Revenues and expenses are translated at the average exchange rates prevailing during the period. Adjustments resulting from translation are reported as a separate component of stockholders’ equity. Certain transactions of the foreign subsidiaries are denominated in currencies other than the functional currency, including transactions with the parent company. Transaction gains and losses are included in other income (expense) for the period in which the transaction occurs. The Company’s subsidiaries operating in Canada had net assets of approximately $8.3 million and $8.8 million as of December 31, 2002 and 2001, respectively.


	(o) Operating Segments


		The Company is engaged in the discovery, development, and commercialization of pharmaceutical products and in its current state of development, considers its operations to be a single reportable segment. Financial results of this reportable segment are presented in the accompanying consolidated financial statements. The Company’s only non-United States revenues relate to the Company’s Canadian subsidiary and represent 73%, 22%, and 30% of the Company’s total revenues for the years ended December 31, 2002, 2001, and 2000, respectively.


	(p) Comprehensive Income (Loss)


		Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting stockholders’ equity that, under accounting principles generally accepted in the United States of America, are excluded from net income (loss). For the Company, these consist of net unrealized gains or losses on marketable investment securities and foreign currency translation gains and losses. Accumulated other comprehensive income (loss) as of December 31, 2002 and 2001, consists of accumulated net unrealized gains on marketable investment securities of $2,540,000 and $2,030,000, respectively, and foreign currency translation losses of $1,360,000 and $1,769,000, respectively.


	(q) Reclassifications


		Certain prior year amounts have been reclassified to conform with the current year presentation.

(2) Collaborative and License Agreements

The Company has selectively entered into collaboration agreements and licenses with pharmaceutical and biotechnology companies to leverage the Company’s financial investment in its discovery, development and commercialization programs. These agreements generally include payments to the Company for research support performed by the Company, payments for the achievement of specified milestones and, payments for royalties on sales of products developed under the terms of the particular agreement. In return for these financial benefits, the Company grants to the particular collaborator an exclusive license to the technology that is the subject of the collaboration as well as to the products developed under the agreement. These agreements generally contain provisions restricting the transfer of such agreements to a third party upon a change of control of the Company, sale of substantially all of the assets of the Company or a sale of a majority of the vot ing shares of the Company, without first obtaining the written

F-17

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(2) Collaborative and License Agreements

consent of the collaborator. In some instances, the collaborator has the right to terminate the agreement on the occurrence of such an event.


		The Company also enters into research support agreements with various academic and other not-for-profit institutions. These agreements generally require the Company to fund certain research at the institution over a specific period of time in exchange for which the Company acquires the right to use the results of the research and obtains an option to exclusively license from the institution any inventions made during the term of the research on terms mutually agreed to at that time. Following is a description of significant current collaborations and license agreements:


	(a)	Amgen Inc.


		Effective December 1995, the Company entered into a development and license agreement with Amgen Inc. (Amgen) in which the Company granted Amgen the exclusive right to develop and commercialize Cinacalcet HCl and related compounds for the treatment of hyperparathyroidism and any other indications other than osteoporosis worldwide, excluding Japan, China, Hong Kong, North and South Korea and Taiwan, territories in which the Company licensed such rights to Kirin. If the Company’s agreement with Kirin is terminated, Amgen’s territory becomes worldwide. Under the terms of the Company’s agreement, Amgen is authorized and responsible to conduct, fund and pursue all aspects of the development, submissions for regulatory approvals, manufacture and commercialization of compounds licensed under the agreement, including Cinacalcet HCl, in its territories. Amgen paid the Company an initial up-front license fee of $10.0 million upon signing the agreement and agreed to pay the Company up to $400,000 per year in development support for five years, which obligation has now expired. Amgen also acquired an equity investment in the Company in 1996. In addition, if specified milestones are achieved, then Amgen is required to make additional milestone payments of up to $26.0 million and must pay royalties to the Company on any sales of Cinacalcet HCl or other related compounds. To date, Amgen has paid the Company $3.0 million in milestone payments. The Company recognized research and licensing revenue of $3.0 million and $400,000 in 2001 and 2000, respectively. During 2000, the Company incurred research and development expenses of $400,000 under the terms of the agreement. Subsequent to 2000, the Company did not incur any research and development expenses under the terms of the agreement. The Company may terminate the agreement if Amgen breaches the agreement and does not cure the breach within 120 days of receiving notice of the breach. Amgen may terminate the agreement for any reason on 90 days’ prior written notice. If there is a termination for a reason other than the Company’s breach of the agreement, the technology, patent and commercialization rights to all compounds licensed under the agreement, including Cinacalcet HCl, would revert to the Company. Furthermore, if Amgen terminates the agreement, none of their payments to the Company are refundable.


	(b)	AstraZeneca AB


		In March 2001, the Company entered into an exclusive research collaboration and license agreement with AstraZeneca AB (AstraZeneca) to collaborate on the discovery, development and marketing of small molecule therapies for the treatment of various disorders of the central nervous system. Specifically, the collaboration focuses on the identification of small molecules active on protien structures known as metabolic glutomate receptors (mGluRs). The Company granted AstraZeneca an exclusive license to the worldwide development and commercialization of any mGluR-active compounds identified under the collaboration. During the research term, the Company will work

F-18

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(2) Collaborative and License Agreements

		together on the identification of mGluR-active compounds. The Company is required to co-direct the research and pay for an equal share of the research costs through a minimum of 30 months and, under certain circumstances, for a term of 60 months. Once compounds have been selected for development, AstraZeneca will conduct and fund product development, including all human clinical trials, regulatory submissions, commercialization and manufacturing. The Company has the right to co-promote any resulting product in the United States and Canada and receive co-promotion revenue, if any. Should the Company elect to co-promote products, in some circumstances the Company will be required to share proportionately in the development and regulatory costs associated with those products. If the Company elects not to co-promote, the Company is entitled to up to an aggregate of $30.0 million in milestone payments and royalties on any sales of products developed and marketed under the agreement. To date no milestone payments have been earned under the agreement. During 2002, 2001 and 2000, the Company incurred research and development expenses of $2.2 million, $1.3 million, and $194,000, respectively, under the terms of the agreement. The Company may terminate the agreement if AstraZeneca breaches the agreement and does not cure the breach within 60 days of receiving notice of the breach. After two years of the research program, either party may terminate the agreement on six months’ prior written notice. After the research term, AstraZeneca may terminate the agreement at any time upon 90 days’ prior written notice. Termination by AstraZeneca for reasons other than the Company’s breach or insolvency will result in the return to the Company of all rights granted by the Company and the related technology, including improvements. Termination by AstraZeneca for the Company’s breach or insolvency would result in the assignment to AstraZeneca of rights to certain of the Company’s patents and technology related to mGlur-active compounds. Similarly, termination by the Company for AstraZeneca’s breach or insolvency would result in AstraZeneca’s assignment of rights to certain patents and technology to the Company.

(c)

Eli Lilly and Company and Lilly Canada


		In December 1989, Allelix Pharmaceuticals Inc. (Allelix) entered into a collaborative research and license agreement with Eli Lilly and Company and Lilly Canada (Lilly). Lilly is solely responsible for development, preclinical and clinical testing, and commercialization of any products related to excitatory amino acid receptors under the collaboration, and has an exclusive worldwide license to manufacture and market products developed under the agreement. The Company is entitled to royalties on any sales of products developed under the agreement. The Company recognized research and licensing revenue of $1.7 million in 2000. The funded research period expired in November 2000. Lilly is incurring all costs of developing and commercializing products. During 2000, the Company incurred research and development expenses of $1.7 million under the terms of the agreement. Subsequent to 2000, the Company did not incur any research and development expenses under the terms of the agreement. Lilly has the right to terminate the agreement upon ninety days notice to the Company and may terminate the agreement earlier under certain conditions. Furthermore, if Lilly terminates the agreement, none of their payments to the Company are refundable.


	(d)	GlaxoSmithKline


		In November 1993, the Company entered into a collaborative research and worldwide exclusive license agreement with GlaxoSmithKline (GSK) for the research, development and commercialization of calcium receptor active compounds for the treatment of osteoporosis and other bone metabolism disorders, excluding hyperparathyroidism. The Company initially received from

F-19

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(2) Collaborative and License Agreements

		GSK an upfront license for payment of $6.0 million and later began receiving payments from GSK in support of the Company’s research efforts under the initial research term of the agreement. GSK also acquired an equity investment in the Company in 1993. GSK has a first right to negotiate for an exclusive license regarding other company research for indications within the field of bone metabolism disorders, and an exclusive right to negotiate for a license to compounds developed under the agreement for indications outside the field of bone metabolism disorders, which rights expire upon termination of this agreement. Once compounds have been selected for development, GSK has the authority and responsibility to conduct and fund all product development, including clinical trials and regulatory submissions, and manufacturing. The Company has the right to co-promote, in the United States, products resulting from the collaboration. In addition to research funding, and inclusive of prior milestone payments and the upfront license fee, GSK has agreed to pay the Company up to an aggregate of $23.0 million as it achieves certain additional development or marketing milestones. GSK must also pay the Company royalties on any sales of products for osteoporosis and other bone metabolism disorders that include compounds developed by GSK under the agreement, and a percentage of profits from co-promotion of such products. To date, the Company has received payments totaling $21.0 million under this agreement. Under the GSK agreement, the Company has recognized research and licensing revenue of $438,000, $750,000 and $1.8 million in 2002, 2001 and 2000, respectively. Additionally, during 2002, 2001 and 2000, the Company incurred research and development expenses of $438,000, $750,000 and $1.8 million, respectively, under the terms of the agreement. GSK may terminate the agreement on 30 days’ written notice after a six-month waiting period. Additionally, in the event the Company breaches the agreement, GSK may terminate on 60 days’ written notice for the Company’s breach. If GSK terminates the agreement, none of their payments to the Company are refundable unless such termination is due to the Company’s material breach which is not cured, in which case, the Company would be required to return to GSK all milestone payments received by the Company, other than the initial license fee. Upon termination, rights and licenses the Company granted GSK revert to the Company. The collaborative research portion of this agreement is now continuing on a month-to-month basis with considerably more work being done by GSK than by the Company. The Company is discussing with GSK appropriate next phases of the collaborative research portion of this agreement.

	(e)	Janssen Pharmaceutica N.V.


		In October 1998, Allelix entered into a collaborative agreement with Janssen Pharmaceutica N.V. (Janssen), a wholly owned subsidiary of Johnson & Johnson, for the research, development and commercialization of new drugs for the treatment of schizophrenia and dementia. Johnson & Johnson Development Corporation acquired an equity investment in Allelix in 1998. The research phase of this collaboration ended in October 2000. In addition, Janssen controls and is responsible for development and commercialization of the compounds, including manufacturing, and including all costs and expenses associated with the development and commercialization efforts. While Janssen has the right to market products worldwide, the Company may co-promote, in Canada, any products developed under the agreement. The Company will receive up to an aggregate of $21.5 million in milestone payments if Janssen reaches certain milestones, and royalties from any product sales resulting from the collaboration. To date, the Company has received milestone payments totaling $1.0 million under this agreement. Under the Janssen agreement, the Company has recognized research and licensing revenue of $1.0 million and $1.9 million in 2001 and 2000, respectively. During 2000, the Company incurred research and development expenses of $1.9 million

F-20

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(2) Collaborative and License Agreements

		under the terms of the agreement. Subsequent to 2000, the Company did not incur any research and development expenses under the terms of the agreement. The Company may terminate the agreement if Janssen breaches the agreement and does not cure the breach within 60 days of receiving notice of the breach. In that case, all rights granted to Janssen revert to the Company. Janssen may terminate, for any reason, on 90 days’ notice to the Company. If Janssen terminates, other than for our breach, then the rights to any compounds or products are transferred to the Company. The Company can also terminate Janssen’s rights if Janssen does not launch the product in the United States, but must pay a royalty to Janssen on product sales after the termination. If Janssen terminates the agreement, none of their payments to the Company are refundable.

	(f)	Kirin Brewery Company, Ltd.


		In June 1995, the Company entered into a collaborative research and license agreement with Kirin Brewery Company, Ltd. (Kirin) to develop and commercialize Cinacalcet HCl and other related compounds for the treatment of hyperparathyroidism and any other indications other than osteoporosis and bone metabolism disorders in Japan, China, Hong Kong, North and South Korea and Taiwan. Kirin is responsible for all costs associated with developing, obtaining regulatory approvals and commercializing products within its territories. The agreement also requires Kirin to use reasonable good faith efforts to introduce a product to market. Kirin paid the Company an initial up-front license fee of $5.0 million and agreed to pay the Company certain milestone payments on the achievement of specified events. To date, the Company has received $7.0 million in milestone payments from Kirin. Kirin is required to pay the Company royalties on any sales of products containing Cinacalcet HCl or a similar compound within its territories. Kirin research support payments were $500,000 per quarter through June 1997 and were $250,000 per quarter through June 2000. The funded research period expired in 2000. The Company recognized research and licensing revenue of $3.0 million and $500,000 in 2001 and 2000, respectively. Additionally, as a consequence of implementing SAB No. 101, the Company recognized $500,000 of revenue during 2000 for licensing fees paid by Kirin as part of the $5.0 million license fee which was initially recognized in 1995. During 2000, the Company incurred research and development expenses of $500,000 under the terms of the agreement. Subsequent to 2000, the Company did not incur any research and development expenses under the terms of the agreement. The Company may terminate the agreement if Kirin breaches the agreement and does not cure the breach within 90 days of receiving notice of the breach. In this event, Amgen would receive rights to develop and commercialize Cinacalcet HCl for the treatment of hyperparathyroidism and other indications, except osteoporosis, in the terminated territories. Kirin may terminate the agreement for any reason on 90 days’ prior written notice, and on a country by country basis on specified conditions relating to market size. If Kirin terminates the agreement, Amgen would receive rights to develop and commercialize Cinacalcet HCl for the treatment of hyperparathyroidism and other indications, except osteoporosis, in the terminated territories. If Kirin terminates the agreement, none of their payments to the Company are refundable.


	(g)	Technology Partnerships Canada


		In November 1999, Allelix entered into an agreement with the Government of Canada under its Technology Partnerships Canada program relating to the Company’s clinical development program for various intestinal disorders utilizing the ALX-0600 technology. The terms of the agreement call for the Canadian Government to reimburse the Company for up to 30% of qualified costs incurred by Allelix in pursuing clinical development through December 2002, up to a maximum of Cdn.

F-21

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(2) Collaborative and License Agreements

		$8.4 million. Through December 31, 2001, the Company has invoiced the Canadian Government for a total of Cdn. $4.7 million and has received payment on this amount. During 2002, the Company has recognized revenue of Cdn. $2.8 million under the Technology Partnerships Canada program through June 2002. In July 2002, the Company entered into negotiations with the Canadian Government to pursue mutually acceptable adjustments in the terms of the agreement. As these negotiations are still on-going, the outcome of which is uncertain, the Company has not recognized any revenue under this agreement during the six months ended December 31, 2002, although the Company has incurred development costs during this period it believes qualify for reimbursement of the remaining Cdn. $900,000 up to the maximum Cdn. $8.4 million. The terms of the agreement also provide that the Company is obliged to pay certain royalties on revenues received from the sale or license of any product developed from the ALX-0600 technology. The maximum of those payments would be reached upon paying a total of Cdn. $23.9 million or under some circumstances through the period of December 2017, whichever occurs first. The royalty rate is 10% of the revenue or royalties received by Allelix. If the Company defaults under the agreement, the Canadian Government declares an event of default, and the Company does not remedy the default, the Company could be required to repay all amounts received from the Canadian Government, plus interest and other damages depending on the occurrence of certain events. However, the Canadian Government does not have the unilateral ability to terminate or cancel the contract. The Canadian Government may declare an event of default if the Company becomes bankrupt, is dissolved, intentionally submits false or misleading information, fails to comply or perform in accordance with the material terms of the agreement, or fails to make potential royalty payments which may become due in the future under this agreement. The Company recognized $1.8 million, $1.3 million, and $404,000 as research support revenue in 2002, 2001, and 2000, respectively. Additionally during 2002, 2001 and 2000, the Company incurred $7.4 million, $4.9 million and $1.3 million, respectively, in qualifying expenditures under the terms of the agreement.

	(h)	In-License and Purchase Agreements


		The Company has entered into certain sponsored research, license, and purchase agreements that require the Company to make research support and milestone payments to academic or commercial research institutions. During 2002, 2001, and 2000, the Company paid to these institutions $1.2 million, $885,000, and $1.0 million, respectively, in sponsored research payments and license fees. As of December 31, 2002, the Company had a total commitment of up to $2.4 million for future research support and milestone payments. Depending on the commercial success of certain products, the Company may be required to pay license fees or royalties.

F-22

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(3) Marketable Investment Securities

Investment securities available for sale as of December 31, 2002 are summarized as follows (in thousands):

	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value

Equity securities:
Common stock	$	1		—		—		1
Debt securities:
Treasury		17,089		224		—		17,313
Corporate		63,513		2,007		—		65,520
Municipal		11,387		15		—		11,402
Government agency		43,830		294		—		44,124

	$	135,820		2,540		—		138,360


	Investment securities available for sale as of December 31, 2001 are summarized as follows (in thousands):

	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses			Fair value

Equity securities:
Common stock	$	1		—		—			1
Preferred stock		4,000		—		—			4,000
Debt securities:
Treasury		23,040		35		—			23,075
Corporate		84,651		1,611		—			86,262
Municipal		4,000		—		—			4,000
Government agency		50,654		403		(19	)		51,038

	$	166,346		2,049		(19	)		168,376


	Maturities of investment securities available for sale are as follows at December 31, 2002 (in thousands):

	Amortized cost		Fair value

Due within one year	$	48,350		48,697
Due after one year through five years		87,469		89,662

Total debt securities		135,819		138,359
Equity securities		1		1

	$	135,820		138,360

For the years ended December 31, 2002, 2001, and 2000, purchases of marketable investment securities were $220.5 million, $422.7 million, and $314.1 million, respectively. For the years ended December 31, 2002, 2001, and 2000, sales and maturities of marketable investment securities were $251.6 million, $374.3 million, and $221.0 million, respectively.

F-23

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(4) Goodwill and Identifiable Intangible Assets

Goodwill. The cost of acquired companies in excess of the fair value of the net assets and purchased intangible assets at acquisition date was recorded as goodwill. As of December 31, 2002, the Company had goodwill of $6.9 million, which is net of $3.5 million in accumulated amortization, from the acquisition of Allelix in December 1999. The Company recorded on expense of $17.8 million in December 1999 for in-process research and development that was acquired as part of the Company purchase of Allelix. Through December 31, 2001, goodwill was amortized over a period of six years on a straight-line basis. The following table sets forth reported net loss and basic and diluted net loss per share, as adjusted, to exclude amortization of goodwill and the assembled workforce component of purchased intangibles, which would not have been recorded under SFAS No. 142:

	Year ended December 31
	2001			2000

Net loss, as reported	$	(49,968	)		(32,112	)
Amortization expense of goodwill and assembled workforce		2,074			2,164

Net loss, as adjusted	$	(47,894	)		(29,948	)

Basic and diluted net loss per share, as reported	$	(1.67	)		(1.34	)
Amortization expense of goodwill and assembled workforce per basic and diluted share		.07			.09

Basic and diluted net loss per share, as adjusted	$	(1.60	)		(1.25	)

Purchased Intangible Assets. Purchased intangible assets consist of patents acquired in our December 1999 acquisition of Allelix and are amortized over a period of five years on a straight-line basis. The following table sets forth the gross carrying amount, accumulated amortization, and net carrying amount of purchased intangible assets:

	As of December 31, 2002			As of December 31, 2001

Gross carrying amount	$	6,581			6,522
Accumulated amortization		(3,949	)		(2,609	)

Net carrying amount	$	2,632			3,913

Amortization expense associated with purchased intangible assets was $1.3 million, $1.3 million, and $1.4 million for 2002, 2001, and 2000, respectively. Estimated amortization expense for existing purchased intangible assets is expected to be $1.3 million for the fiscal years ending December 31, 2003 and 2004.

(5) Leases

The Company has noncancelable operating leases for office and laboratory space that expire in 2004 and noncancelable operating leases for certain equipment that expire in 2006. Rental expense for these operating leases was approximately $1.2 million, $1.1 million, and $1.1 million for 2002, 2001, and 2000, respectively. The future lease payments under noncancelable operating leases as of December 31, 2002 are as follow (in thousands):

F-24

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(5) Leases

	Operating leases

Year ending December 31:
2003	$	823
2004		594
2005		5
2006		3

Total minimum lease payments	$	1,425

(6) Capital Stock

(a) Stockholder Rights Plan


		In December 1996, the board of directors approved the adoption of a Stockholder Rights Plan (the Rights Plan). The Rights Plan was subsequently amended on December 31, 2001 to increase the purchase price of a share of Series A Junior Participating Preferred Stock and to extend the expiration date of the Rights Plan. The Rights Plan provides for the distribution of a preferred stock purchase right (Right) as a dividend for each outstanding share of the Company’s common stock. This Right entitles stockholders to acquire stock in the Company or in an acquirer of the Company at a discounted price in the event that a person or group acquires 20% or more of the Company’s outstanding voting stock or announces a tender or exchange offer that would result in ownership of 20% or more of the Company’s stock. Each right entitles the registered holder to purchase from the Company 1/100th of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share at a price of $300 per 1/100th of a preferred share, subject to adjustment. The Rights may only be exercised on the occurrence of certain events related to a hostile takeover of the Company as described above. In any event, the Rights will expire on December 31, 2011. The Rights may be redeemed by the Company at $0.01 per right at any time prior to expiration or the occurrence of an event triggering exercise. At December 31, 2002, the Rights were not exercisable.


	(b) Exchangeable Shares of NPS Allelix Inc.


		On December 23, 1999, in connection with the acquisition of all of the outstanding common shares of Allelix, NPS Allelix Inc., an acquisition subsidiary of the Company, issued 3,476,009 exchangeable shares to certain Canadian stockholders of Allelix in exchange for their shares of Allelix. The exchangeable shares are designed to be the functional and economic equivalent of the Company’s common stock, and were issued to such stockholders in lieu of shares of the Company’s common stock because of Canadian tax considerations. The terms and conditions of the exchangeable share provisions provide each Canadian registered holder with the following rights:


		i)	the right to exchange such exchangeable shares for the Company’s common stock on a one-for-one basis at any time;


		ii)	the right to receive dividends, on a per share basis, in amounts (or property in the case of noncash dividends) which are the same as, and which are payable at the same time as, dividends declared on the Company’s common stock;


		iii)	the right to vote, on a per share equivalent basis, at all stockholder meetings at which the holders of the Company’s common stock are entitled to vote; and

F-25

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(6) Capital Stock

iv)

the right to participate, on a per share equivalent basis, in a liquidation, dissolution, or other winding up of the Company, on a pro rata basis with the registered holders of the Company’s common stock in the distribution of assets of the Company, through the medium of a mandatory exchange of exchangeable shares for the Company’s common stock.


		The exchangeable shares are exchangeable at any time by their holder solely into shares of the Company’s common stock on a one-for-one basis. On or after December 31, 2004, the Company has the right to cause the exchange of all outstanding exchangeable shares for shares of the Company’s common stock on a one-for-one basis. Also, the Company has the right to effect such an exchange at any time (i) if there are fewer than 1,000,000 exchangeable shares outstanding (other than those held by the Company and its affiliates); or (ii) on or after the occurrence of a change in control of the Company where it is not reasonably practicable to substantially replicate the existing terms and conditions of the exchangeable shares in connection with such a transaction. As of December 31, 2002, the Company had 323,320 exchangeable shares outstanding and; therefore, the Company has the right to effect an exchange into the Company’s common stock at any time.


		The exchangeable shares do not have liquidation rights in NPS Allelix Inc., and as such, the consolidated financial statements do not include minority interest.


		The Company has created a special voting share, not separately disclosed on the consolidated balance sheets, held in trust as a mechanism to accomplish the voting rights objectives of the exchangeable shares which are included as outstanding common shares on the Company’s consolidated balance sheets.


	*(c) Capital Stock Transactions*


		In February 2000, the Company completed a private placement of 3.9 million shares of its common stock to selected institutional and other accredited investors which closed on April 24, 2000, with net proceeds, after deducting offering costs of $3.5 million, to the Company of approximately $43.3 million.


		In March 2000, 80,000 options held by management with an exercise price per option of $6.625 vested upon the signing of a license agreement. The Company recognized compensation expense of $990,000 as a result of the vesting.


		On May 2, 2000, the Company issued 210,526 shares of common stock in exchange for 1,000 preferred shares of NPS Allelix Inc. that were recorded as a minority interest of $2.5 million at December 31, 1999. The value of the minority interest was allocated using the purchase method effective December 31, 1999 as the amount was fixed and determinable based upon contractual terms of the exchange. The minority interest was eliminated upon issuance of the common shares.


		On May 11, 2000, the Company sold 168,492 shares of its common stock for $2.0 million based upon the average of the bid and ask prices of the Company’s common stock during a period of 20 consecutive trading days prior to the sale under the terms of an on-going corporate license agreement. The fair value on May 11, 2000 of the shares issued on the closing date was $2,021,904.


		In November 2000, the Company completed a public offering of 4.6 million shares of its common stock at $42.00 per share, with net proceeds, after deducting offering costs of $12.5 million, to the Company of approximately $180.7 million.

F-26

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(6) Capital Stock

In October 2002, the Company completed a public offering of 4.6 million shares of its common stock at $23.95 per share, with net proceeds after deducting offering costs of $7.3 million to the Company of approximately $102.9 million.


		As of December 31, 2002, 2001, and 2000, other current assets included $0, $271,000, and $193,000, respectively, in amounts receivable for stock options recently exercised. Such amounts were collected shortly after the respective year-ends.

(7) Stock-Based Compensation Plans

As of December 31, 2002, the Company has four stock option plans: the 1987 Stock Option Plan (the 1987 Plan), the 1994 Equity Incentive Plan (the 1994 Plan), the 1994 Non-employee Directors’ Stock Option Plan (the Directors’ Plan), and the 1998 Stock Option Plan (the 1998 Plan). An aggregate of 5,715,429 shares are authorized for issuance under the four plans.

As of December 31, 2002, there are no shares reserved for future grant under the 1987 Plan, there are 260,634 shares reserved for future grant under the 1994 Plan, there are 91,530 shares reserved for future grant under the Directors’ Plan, and there are 2,251,890 shares reserved for future grant under the 1998 Plan. Under the Company’s 1994 Plan and the 1998 Plan, the exercise price of options granted is generally not less than the fair market value on the date of grant. The number of shares, terms, and exercise period are determined by the board of directors on an option-by-option basis, and the exercise period does not extend beyond ten years from the date of the grant. Options generally vest 28% after one year and 2% to 3% per month thereafter.


	Under the Directors’ Plan, each new director who is not an employee of the Company is initially granted options to purchase 15,000 shares of common stock. Additional options for 3,000 shares are granted annually for each year of service. The exercise price of options granted is the fair market value on the date of grant.

On March 26, 2001, the Company modified the 1994 Plan and the 1998 Plan such that all outstanding options at the date of modification vest upon a change in control of the Company. The March 26, 2001 intrinsic value of the remaining unvested modified options is $3.5 million at December 31, 2002. The Company has not recorded compensation expense for the intrinsic value of unvested options as a change in control is not considered probable as of December 31, 2002. At such time that a change in control is considered probable, the Company may incur a charge to compensation expense.

On December 13, 2002, the Company modified the option grants of certain employees. The result of the option modification was that upon the occurrence of a strategic corporate event in which the employee is severed, the employee would have an increased period of time to exercise vested options. The December 13, 2002 intrinsic value of the affected options is $19.7 million at December 31, 2002. The Company has not recorded compensation expense for the intrinsic value of affected options for any one of these employees as the strategic corporate event and ultimate severance is not considered probable as of December 31, 2002. At such time that severance is deemed probable for any one of these employees, the Company may incur a charge to compensation expense.

On December 13, 2002, the Company adopted an arrangement for the exercise of employee stock options following retirement. Pursuant to this arrangement, the Company modified option grants for each employee who later retires and meets certain criteria. Under the plan, retiring employees receive two years of vesting acceleration and have the remaining life of the options to exercise vested options. Employees are eligible to retire when the combination of years of service and age, with a minimum age

F-27

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(7) Stock-Based Compensation Plans

of 55, equal at least 70 years. The Company has not recorded compensation expense for the intrinsic value of impacted options for any employee as the Company is not able to estimate which employees will retire or the timing of that retirement. As of December 31, 2002, no employee has

notified the Company of his/her intention to retire. At such time as it is possible to estimate the number of employees who will benefit from the modification, the Company may incur a charge to compensation expense.

The Company also has an Employee Stock Purchase Plan (the Purchase Plan) whereby qualified employees are allowed to purchase limited amounts of the Company’s common stock at the lesser of 85% of the market price at the beginning or end of the offering period. The Company has authorized 260,000 shares for purchase by employees. Employees purchased 19,487, 20,813, and 17,243 shares under the Purchase Plan in the years ended December 31, 2002, 2001, and 2000, respectively, and 54,494 shares remain available for future purchase.


	A summary of activity related to aggregate options under all four plans is indicated in the following table (shares in thousands):

	Years ended December 31
	2002				2001				2000
	Number of shares		Weighted average exercise price		Number of shares		Weighted average exercise price		Number of shares		Weighted average exercise price

Options outstanding at beginning of year		2,632	$	14.05		2,485	$	8.74		2,821	$	7.19
Options granted		900		22.34		694		29.24		709		13.33

		3,532				3,179				3,530

Options exercised		309		8.72		460		7.40		973		7.34
Options canceled		112		23.51		87		18.68		72		12.10

		421				547				1,045

Options outstanding at end of year		3,111		16.64		2,632		14.05		2,485		8.74

Options exercisable at end of year		1,635		11.54		1,417		8.45		1,362		7.65
Weighted average fair value of options granted during the year				14.91				19.60				8.66

F-28

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(7) Stock-Based Compensation Plans

The following table summarizes information about stock options outstanding at December 31, 2002 (shares in thousands):

	Options outstanding						Options exercisable
Range of exercise price	Outstanding as of December 31, 2002		Weighted average remaining contractual life		Weighted average exercise price		Exercisable as of December 31, 2002		Weighted average exercise price

$0.00 — 5.63		433		4.0	$	3.52		365	$	3.34
5.64 — 11.26		1,072		5.6		9.25		925		9.01
11.27 — 16.89		111		6.9		13.38		54		12.90
16.90 — 22.52		781		9.2		21.95		28		20.38
22.53 — 28.16		32		8.7		26.05		5		23.35
28.17 — 33.79		608		8.4		29.70		229		29.62
33.80 — 39.42		60		8.5		35.95		21		35.87
39.43 — 45.05		6		7.8		41.14		3		41.20
45.06 — 50.68		2		5.5		48.13		2		47.76
50.69 — 56.31		6		7.7		54.02		3		54.05

		3,111		7.0		16.64		1,635		11.54

Pursuant to SFAS No. 123, the Company has estimated the fair value of each option grant on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2002, 2001, and 2000, respectively: risk free interest rates of 4.5%, 4.9%, and 6.7%; expected dividend yields of 0%; expected lives of 5 years; and expected volatility of 80%, 76%, and 73%. The weighted average fair value of employee stock purchase rights granted under the Employee Stock Purchase Plan (the Purchase Plan) in 2002, 2001, and 2000 was $13.85, $23.03, and $12.74, respectively. The fair value for the employee stock purchase rights was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions in 2002, 2001, and 2000, respectively: risk free interest rates of 1.8%, 4.1%, and 6.1%; expected dividend yields of 0%; expected lives of 0.5 years; and expected volatility of 75%, 10 3%, and 134%. The Company granted options in 2002, 2001, and 2000 to nonemployees for the performance of services. Options granted to nonemployees are remeasured based on their fair value until such options vest. Stock compensation cost for nonemployees is recognized over the period services are provided. The fair value of the options granted to nonemployees was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions in 2002, 2001 and 2000, respectively: risk free interest rates of 3.1%, 5.4%, and 6.1%; expected dividend yields of 0%; contract lives of 2.0 years, 5.7 years, and 2.8 years; and expected volatility of 99%, 71%, and 84%.

(8) Income Taxes

The Company has income tax expense (benefit) for the years ended December 31, 2002 and 2001 of $(102,000) and $300,000, respectively and no income tax expense for the year ended December 31, 2000.

F-29

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(8) Income Taxes

Income tax differed from the amounts computed by applying the U.S. federal income tax rate of 34% to loss before income tax expense as a result of the following (in thousands):

	2002			2001			2000

Computed expected tax benefit	$	(29,558	)		(16,887	)		(10,748	)
Goodwill amortization		—			529			809
Foreign tax rate differential		(3,395	)		2,078			(2,616	)
Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets attributable to operations and other adjustments		34,341			9,484			14,448
Adjustment to deferred tax assets for enacted changes in foreign tax laws and rates		6,268			12,930			—
U.S. and foreign credits		(6,699	)		(7,953	)		(1,384	)
State income taxes, net of federal tax effect		(577	)		117			(226	)
Other		(482	)		2			(283	)

	$	(102	)		300			—


	Domestic and foreign components of income (loss) before taxes are as follows (in thousands):

	2002			2001			2000

Domestic	$	(13,038	)		3,893			(8,578	)
Foreign		(73,896	)		(53,561	)		(23,034	)

Total loss before taxes	$	(86,934	)		(49,668	)		(31,612	)

F-30

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(8) Income Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2002 and 2001 are presented below (in thousands):

	2002						2001
	Domestic			Foreign			Domestic			Foreign

Deferred tax assets:
Stock compensation expense	$	1,193			—			1,412			—
Equipment and leasehold improvements, principally due to differences in depreciation		495			63			400			54
Intangible assets		—			3,507			—			3,859
Research and development pool carryforward		—			42,820			—			39,963
Net operating loss carryforward		36,393			20,670			28,987			2,831
Research credit carryforward		5,437			—			5,212			—
Investment tax credit carryforward		—			15,739			—			13,619
Capital loss carryforward		—			—			872			—
Minimum tax credit carryforward		—			—			112			—

Total gross deferred tax assets		43,518			82,799			36,995			60,326
Less valuation allowance		(43,518	)		(82,799	)		(36,995	)		(60,326	)

Deferred tax assets		—			—			—			—
Deferred tax liabilities		—			—			—			—

Net deferred tax asset (liability)	$	—			—			—			—

Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 2002 will be allocated as follows: 1) To the extent that the Allelix acquired net deferred tax assets are recognized, the tax benefit will be applied to reduce any remaining unamortized goodwill and then any remaining unamortized other purchased intangible assets related to the acquisition. At December 31, 2002, the remaining unamortized goodwill and other intangible assets equaled $9.5 million. 2) Tax benefits in excess of the acquired goodwill and other purchased intangibles related to the acquisition will be reported as a reduction of income tax expense. The valuation allowance includes the benefit for stock option exercises which increased the size of the domestic net operating loss carryovers. Future reductions to the domestic valuation allowance will be allocated $36.0 million to operations and $7.5 million to paid-in capital.


	The valuation allowance for deferred tax assets as of January 1, 2002 and 2001 was $97.3 million and $85.4 million, respectively. The net change in the Company’s total valuation allowance for the years ended December 31, 2002, 2001, and 2000 was an increase of $29.0 million, $11.9 million, and $16.0 million, respectively.

F-31

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(8) Income Taxes

At December 31, 2002, the Company had domestic and foreign net operating loss and credit carryforwards available to offset future income for tax purposes approximately as follows (in thousands):

	Domestic net operating loss carry- forward for regular income tax purposes		Domestic research credit carry- forward		Canadian net operating loss carryforward for regular income tax purposes				Canadian research pool carry- forward		Canadian investment tax credit carry- forward (net of tax)

					Federal		Provincial

Expiring:
2004	$	—		—		—		1,386		—		—
2005		247		—		497		1,928		—		1,136
2006		244		—		6		99		—		1,718
2007		—		49		9,345		15,072		—		1,381
2008		2,452		334		23,681		26,753		—		127
2009		6,342		317		31,346		33,760		—		—
2010		2,928		166		—		—		—		1,111
2011		58		360		—		—		—		3,930
2012		10,890		846		—		—		—		6,336
2018		19,497		1,035		—		—		—		—
2019		18,529		988		—		—		—		—
2020		19,044		724		—		—		—		—
2021		1,164		255		—		—		—		—
2022		16,174		363		—		—		—		—

Total	$	97,569		5,437		64,875		78,998		142,163		15,739


	The Company also has domestic state net operating loss carryovers in varying amounts depending on the different state laws. The Company’s domestic tax loss carryover for alternative minimum tax purposes is approximately the same as the Company’s regular tax loss carryover. The Company’s Canadian research pool carryover of $142.2 million carries forward indefinitely.

As measured under the rules of the Tax Reform Act of 1986, the Company has undergone one or more greater than 50% changes of ownership since 1986. Consequently, use of the Company’s domestic net operating loss carryforward and research credit carryforward against future taxable income in any one year may be limited. The maximum amount of carryforwards available in a given year is limited to the product of the Company’s fair market value on the date of ownership change and the federal long-term tax-exempt rate, plus any limited carryforward not utilized in prior years. Management does not believe that these rules will adversely impact the Company’s ability to utilize the above losses and credits in the aggregate.

(9) Employee Benefit Plan

The Company maintains a tax-qualified employee savings and retirement plan (the 401(k) Plan) covering all of the Company’s employees in the United States. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by the lesser of 15% of eligible compensation or the prescribed IRS annual limit 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 matched one-half of employee contributions in 2002 up to a

F-32

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(9) Employee Benefit Plan

maximum contribution from the Company of the lesser of 3% of employee compensation or $5,500 ($6,000 for employees over the age of 49 years by the end of 2002). Total matching contributions for the years ended December 31, 2002, 2001, and 2000 were $217,000, $164,000, and $152,000, respectively.

Additionally, the Company maintains a tax-qualified defined contribution pension plan for its Canadian employees. Employees may elect to reduce their current compensation by 2% or 4% of eligible compensation up to a maximum of Cnd. $6,750 per year and have the amount of such reduction contributed to the pension plan. The Company matches 100% of such contributions. Total matching contributions for the years ended December 31, 2002 and 2001 were Cnd. $200,000 and Cnd. $180,000, respectively.

(10) Disclosure about the Fair Value of Financial Instruments

The carrying value for certain short-term financial instruments that mature or reprice frequently at market rates approximates fair value. Such financial instruments include: cash and cash equivalents, accounts receivable, accounts payable, and accrued and other liabilities. The fair values of marketable investment securities are based on quoted market prices at the reporting date. The Company does not invest in derivatives.

(11) Accrued Severance

Effective February 6, 2001, the Company terminated the employment of five administrative employees. The Company recorded $516,000 for severance benefits in 2001. Approximately $71,000 and $211,000 was paid in severance benefits in 2002 and 2001, respectively, and approximately $234,000 related to stock compensation was charged to additional paid-in capital in 2001.


	Additionally, effective November 30, 2001, the Company terminated the employment of one research employee. The Company recorded $180,000 for severance benefits for this employee, which was included in research and development expense in 2001. Approximately $169,000 and $11,000 was paid in severance benefits in 2002 and 2001, respectively.


	Accrued severance liability activity for the years ended December 31, 2002, 2001, and 2000 is summarized as follows (in thousands):

	2002			2001			2000

Accrued severance at beginning of year	$	240			154			1,455
Severance costs incurred		—			696			—
Severance paid		(240	)		(376	)		(1,301	)
Severance charged to additional paid-in capital		—			(234	)		—

Accrued severance at end of year	$	—			240			154

(12) Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or normal use of the asset.

F-33

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(12) Recent Accounting Pronouncements

The Company is required and plans to adopt the provisions of SFAS No. 143 for the quarter ending March 31, 2003. To accomplish this, the Company must identify legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. We have not completed our analysis of the impact of SFAS No. 143, but we do not anticipate that it will have a material impact on the consolidated financial statements.

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (the Interpretation), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The Interpretation also requires the recognition of a liability by a guarantor at the inception of certain guarantees.

The Interpretation requires the guarantor to recognize a liability for the noncontingent component of the guarantee, this is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements.


	The Company made additional disclosures upon adopting the disclosure requirements of the Interpretation as of December 31, 2002, and will apply the recognition and measurement provisions for all guarantees entered into or modified after December 31, 2002.

The Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (Issue No. 00-21), addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Issue No. 00- 21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying Issue No. 00-21, separate contracts with the same entity or related parties that are entered into at or near the same time are presumed to have been negotiated as a package and should, therefore, be evaluated as a single arrangement in considering whether there are one or more units of accounting. That presumption may be overcome if there is sufficient evidence to the contrary. Issue No. 00-21 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The Company is required and plans to adopt the provisions of Issue No. 00-21 for the quarter ending September 30, 2003. Because of the effort necessary to comply with Issue No. 00-21, it is not practicable for management to estimate the impact of adopting this statement as of the date of this report.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (Interpretation No. 46), which addresses consolidation principles for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties (Variable Interest Entities or VIE). The Interpretation is effective for all entities or structures created after January 31, 2003 and is effective for the Company for any existing entities or structures as of July 1, 2003. All entities with significant variable interests in a VIE must make certain disclosures depending on the type of involvement with the VIE. If it is reasonably possible that at the effective date the Company will be required either to consolidate or make disclosure about its involvement with a VIE, the Company must make the applicable disclosures in its consolidated financial statements for the year ended December 31, 2002. The Company was not required to make any additional disclosures upon adopting the disclosure requirements of Interpretation 46 for the year ended December 31, 2002, and will apply prospectively the consolidation provisions for any VIE entered into after January 31, 2003.

F-34

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

December 31, 2002, 2001, and 2000

(13) Commitments and Contingencies

The Company has indemnified certain manufacturers and service providers from and against any and all losses, claims, damages or liabilities arising from services provided or any use, including clinical trials, or sale by the Company or any Company agent of any product supplied by the manufacturers. The Company is involved in various legal actions that arose in the normal course of business. Although the final outcome of such matters cannot be predicted, the Company believes the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

In January 2002, Forest Laboratories, Inc. notified the Company that the Company had earned a $2.0 million milestone payment under the terms of an exclusive worldwide license for the achievement of certain clinical and preclinical developments related to Forest’s work with ALX-0646 for treating migraine. In March 2002, the Company received notice from Forest that it was terminating the agreement and returning all rights to ALX-0646 to the Company. Forest has asserted that it has no obligation to pay the $2.0 million milestone payment as a result of its termination. The Company did not recognize revenue for the milestone. The Company has initiated arbitration in accordance with the terms of the agreement claiming its right to receive this milestone payment. The Company believes that Forest owes the milestone payment but cannot predict the outcome of the arbitration at this time. In June 2001, the Company entered into an agreement with a manufacturer for the production of bulk quantities of the drug substance for PREOS for Phase III clinical trial activities and for early commercial launch of PREOS. The agreement provides that the manufacturer will produce the drug substance over a four-year period commencing in 2001. As of December 31, 2002, the Company has an outstanding commitment for future manufacturing of the drug substance of approximately $14.2 million.

In October 2002, the Company entered into a commercial manufacturing agreement with a manufacturer for the production of bulk drug supplies of PREOS in support of commercial launch. Under the agreement, the Company will work with the manufacturer to facilitate a technology transfer process and appropriate testing, documentation, and quality standards and procedures prior to the commencement of commercial production. Production of commercial supplies of PREOS will occur over a three-year period commencing in 2004. As of December 31, 2002, the Company has an outstanding commitment for future technology transfer, testing, documentation, quality standards and procedure development, and commercial production of drug substance of approximately $96.6 million. The Company estimates that the outstanding commitments will be paid as follows: $7.2 million in 2003, $14.3 million in 2004, $37.1 million in 2005 and $38.0 million in 2006. Al though the Company does not currently intend to terminate the agreement, the agreement allows for termination upon the occurrence of certain events and upon the payment of a termination penalty. The termination penalty as of December 31, 2002, contingent upon certain events occurring, would have been approximately $10.6 million.

(14) Subsequent Events

On February 19, 2003, the Company signed a definitive agreement (Agreement) to a business combination with Enzon Pharmaceuticals, Inc. (Enzon). Under the terms of the agreement, a new legal entity will be formed and each Enzon shareholder will receive .7264 shares of common stock for each of approximately 43.4 million Enzon shares owned and each of the Company’s shareholders will receive 1.00 share of common stock for each Company share owned. The Agreement was unanimously approved by the board of directors of both companies, and was subject to certain closing conditions, including approval by the shareholders of the Company and Enzon. On June 4, 2003, the Company and Enzon agreed to terminate the Agreement. The Company will pay a termination fee of 1.5 million shares of Company common stock to Enzon which, subject to certain limitations, will be registered for resale by Enzon.

F-35

EXHIBIT INDEX

Exhibit Number		Description of Document

2.1		Arrangement Agreement made as of September 27, 1999, as amended by Amendment No. 1 as of October 28, 1999 and as amended and restated as of November 15, 1999 between Allelix Biopharmaceuticals Inc. and the Registrant (1)
3.1A		Amended and Restated Certificate of Incorporation of the Registrant (2)
3.1B		Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, dated December 16, 1999 (3)
3.1C		Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant, dated December 18, 1996 (4)
3.1D		Amendment to Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant, dated September 5, 2000 (3)
3.2A		Amended and Restated Bylaws of the Registrant (2)
3.2B		Certificate of Adoption of Amendments to the Amended and Restated Bylaws of the Registrant, dated February 19, 2003 (12)
4.1		Specimen Common Stock Certificate (2)
4.2A		Rights Agreement, dated as of December 4, 1996, between the Registrant and American Stock Transfer & Trust, Inc., with Exhibit A, Form of Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant; Exhibit B, Form of Right Certificate; and Exhibit C, Summary of Rights to Purchase Shares of Preferred Stock of the Registrant (4)
4.2B		First Amendment to the Rights Agreement and Certificate of Compliance with Section 27 thereof, dated December 31, 2001 (5)
4.2C		Second Amendment to the Rights Agreement and Certificate of Compliance with Section 27 thereof, dated February 19, 2003 (6)
4.3		Provisions attaching to the Exchangeable Shares of NPS Allelix Inc. (1)
4.4		Support Agreement made as of December 22, 1999 among NPS Pharmaceuticals, Inc., and NPS Holdings Company, and NPS Allelix Inc. (1)
4.5		Voting and Exchange Trust Agreement made as of December 22, 1999, among the Registrant, NPS Allelix Inc. and CIBC Mellon Trust Company (1)
10.1		1987 Stock Option Plan and Form of Stock Option Agreement (2)
10.1B		1987 Stock Option Plan, as amended December 2002 (12)
10.2A		1994 Equity Incentive Plan and Form of Stock Option Grant Agreement (2)
10.2B		1994 Equity Incentive Plan, as amended December 1996 (7)
10.2C		1994 Equity Incentive Plan, as amended December 2002 (12)
10.3A		1994 Non-Employee Directors’ Stock Option Plan (2)
10.3B		1994 Non-Employee Directors’ Stock Option Plan, as amended December 1996 (7)
10.3C		1994 Non-Employee Directors’ Stock Option Plan, as amended December 2002 (12)
10.4A		1994 Employee Stock Purchase Plan and Form of Offering Document (2)
10.4B		1994 Employee Stock Purchase Plan as amended December 1996, and Form of Offering Document (7)
10.4C		1994 Employee Stock Purchase Plan, as amended December 2002 (12)
10.5A		1998 Stock Option Plan (8)
10.5B		1998 Stock Option Plan, as amended December 2002 (12)
10.6		Form of Indemnity Agreement entered into between the Registrant and each of its officers and directors (2)
10.7		Severance Pay Plan (12)
10.8A		Collaborative Research and License Agreement between the Registrant and SmithKline Beecham Corporation (now GlaxoSmithKline), dated November 1, 1993 (2)

Exhibit Number		Description of Document

10.8B		Amendment Agreement to Collaborative Research and License Agreement between GlaxoSmithKline, effective June 29, 1995 (9)
10.8C		Amendment Agreement between the Registrant and GlaxoSmithKline, dated October 28, 1996 (4)
10.8D		Amendment Agreement between the Registrant and GlaxoSmithKline, dated October 24, 1997 (10)
10.8E		Amendment Agreement between the Registrant and GlaxoSmithKline, dated October 27, 1997 (10)
10.8F		Amendment to Collaborative Research and License Agreement between the Registrant and GlaxoSmithKline, dated November 26, 1997 (10)
10.8G		Letter, dated January 24, 2000, from SmithKline Beecham to NPS Re: Amendment Agreement to Amend the November 26, 1997 Amendment Agreement (12)
10.8H		Letter, dated May 15, 2000, from SmithKline Beecham to NPS Re: Amendment Agreement (12)
10.8I		Letter, dated August 1, 2001, from GlaxoSmithKline to NPS Re: Amendment Agreement to Amend the January 24, 2000 Amendment Agreement (12)
10.9A		Patent Agreement between the Registrant and The Brigham and Women’s Hospital, Inc., dated February 19, 1993 (2)
10.9B		Letter dated March 15, 1993 from the Registrant to The Brigham and Women’s Hospital, Inc. regarding Patent Agreement between the Registrant and The Brigham and Women’s Hospital, Inc. (12)
10.9C		Amendment to Patent Agreement between the Registrant and The Brigham and Women’s Hospital, Inc., effective February 7, 1996 (9)
10.9D		1999 Patent Agreement Amendment between the Registrant and The Brigham and Women’s Hospital, Inc., effective February 18, 1999 (12)
10.10		Collaborative Research and License Agreement between the Registrant and Kirin Brewery Company, Ltd. dated June 29, 1995 (11)
10.11		Development and License Agreement between the Registrant and Amgen Inc. effective as of December 27, 1995 (9)
10.12A		Office Lease between Registrant and Salt Lake Research Park Associates, dated June 3, 1994 (11)
10.12B		Amendment to Lease between Registrant and Salt Lake Research Park Associates, effective December 1, 1995 (12)
10.12C		Amendment to Office Lease between Registrant and Salt Lake Research Park Associates, effective July 1, 1997 (12)
10.12D		Third Amendment to Lease between Registrant and Salt Lake Research Park Associates, effective March 1, 1997 (12)
10.12E		Fourth Amendment to Lease between Registrant and Salt Lake Research Associates, LC, dated September 22, 1998 (12)
10.12F		Fifth Amendment to Lease between Registrant and Salt Lake Research Associates, LC, dated April 14, 1999 (12)
10.13		Agreement for the Development of the “ALX-0600” Recombinate Peptide for the Treatment of Various Intestinal Disorders between NPS Allelix Corp. (formerly Allelix Biopharmaceuticals Inc.) and Her Majesty the Queen in Right of Canada on behalf of Technology Partnerships Canada, dated November 9, 1999 (13)
10.14		Manufacturing Agreement between NPS Allelix Corp. and SynCo Bio Partners B.V., effective as of May 17, 2001 (13)
10.15		Addendum to Manufacturing Agreement between NPS Allelix Corp. and SynCo Bio Partners B.V., effective as of October 26, 2001 (13)
21.1		List of Subsidiaries (12)
23.1		Consent of Independent Auditors
24.1		Power of Attorney (see page 52)

Exhibit Number		Description of Document

99.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated herein by reference to the Registrant’s Definitive Proxy Statement (SEC File No. 000-23272, Film No. 99760104, filing date November 18, 1999).

(2)	Incorporated herein by reference to the Registrant’s Registration Statement on Form S-1 filed on January 21, 1994 (SEC File No. 333-74318).

(3)	Incorporated herein by reference to the Registrant’s Registration Statement on Form S-3 filed on September 6, 2000 (SEC File No. 333-45274, Film No. 717603).

(4)	Incorporated herein by reference to the Registrant’s Current Report on Form 8-K dated December 19, 1996 (SEC File No. 000-23272, Film No. 96683282).

(5)	Incorporated herein by reference to the Registrant’s Registration Statement on Form 8-A12G/A (SEC File No. 000-23272, Film No. 1826478, filing date December 31, 2001).

(6)	Incorporated herein by reference to the Registrant’s Registration Statement on Form 8-A/A (SEC File No. 000-23272, Film No. 03575669, filing date February 21, 2003).

(7)	Incorporated herein by reference to the Registrant’s Registration Statement on Form S-8 (SEC File No. 333-17521, Film No. 96677983, filing date December 9, 1996).

(8)	Incorporated herein by reference to the Registrant’s Definitive Proxy Statement (SEC File No. 000-23272, Film No. 98590984, filing date April 9, 1998).

(9)	Incorporated herein by reference to Amendment No. 1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed on March 29, 1996.

(10)	Incorporated herein by reference to the Registrant’s Current Report on Form 8-K dated January 27, 1998 (SEC File No. 000-23272, Film No. 98513828).

(11)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended on December 31, 1995.

(12)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended on December 31, 2002 (SEC File No. 000-23272, Film No. 03612691, filing date March 21, 2003).

(13)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K/A for the fiscal year ended on December 31, 2002 (SEC File No. 000-23272, Film No. 03739737, filing date June 11, 2003).

NPS Pharmaceuticals (NPSP) Inactive 10-K/A2002 FY Annual report (amended)