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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2001
[_] 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
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NPS PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 87-0439579
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
420 Chipeta Way, Salt Lake City, Utah 84108-1256
(Address of principal executive offices) (Zip Code)
(801) 583-4939
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
_____________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 10, 2001
----------------------------- ------------------------------
Common Stock $.001 par value 30,000,457*
* Includes 908,681 shares of exchangeable stock which are exchangeable at
any time into common stock on a one-for-one basis. Holders of shares of
exchangeable stock are entitled to dividends and other rights economically
equivalent to those of the common stock, and, through a voting trust, holders
are entitled to vote at all meetings of stockholders of the Registrant, also on
a one-for-one basis.
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page No.
--------
Item 1. Condensed Consolidated Financial Statements.
Condensed Consolidated Balance Sheets......................... 3
Condensed Consolidated Statements of Operations............... 4
Condensed Consolidated Statements of Cash Flows............... 5
Notes to Condensed Consolidated Financial Statements.......... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 14
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........... 15
SIGNATURES............................................................. 16
2
PART I. FINANCIAL INFORMATION
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
Item 1. Condensed Consolidated Financial Statements.
June 30, 2001 December 31, 2000
------------------ -----------------
Assets
Current assets:
Cash and cash equivalents $ 51,690 $ 131,083
Marketable investment securities 178,578 115,853
Accounts receivable 1,104 523
Other current assets 3,677 1,129
----------------- -----------------
Total current assets 235,049 248,588
Restricted marketable investment securities - 754
Plant and equipment:
Land 430 434
Building 1,153 1,164
Equipment 8,532 7,532
Leasehold improvements 2,891 2,767
----------------- -----------------
13,006 11,897
Less accumulated depreciation and amortization 7,721 6,922
----------------- -----------------
Net plant and equipment 5,285 4,975
Goodwill, net of accumulated amortization 8,085 9,072
Purchased intangible assets, net of accumulated amortization 4,961 5,867
Other assets 2 14
----------------- -----------------
$ 253,382 $ 269,270
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of obligations under capital leases $ 9 $ 305
Accounts payable 5,739 813
Accrued expenses 568 2,604
Accrued severance 226 154
----------------- -----------------
Total current liabilities 6,542 3,876
Obligations under capital leases, excluding current installments - 54
----------------- -----------------
Total liabilities 6,542 3,930
Stockholders' equity:
Common stock 30 30
Additional paid-in capital 380,821 377,802
Deferred compensation (201) (800)
Accumulated other comprehensive loss (540) (657)
Deficit accumulated during development stage (133,270) (111,035)
----------------- -----------------
Net stockholders' equity 246,840 265,340
----------------- -----------------
$ 253,382 $ 269,270
================= =================
See accompanying Notes to Condensed Consolidated Financial Statements.
3
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Condensed Consolidated Statement of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended October 22, 1986,
June 30, June 30, (inception) through
2001 2000 2001 2000 June 30, 2001
------------- ------------- ------------ ------------- ------------------
Revenues from research and license agreements $ 491 $ 1,957 $ 982 $ 4,154 $ 64,092
Operating expenses:
Research and development 16,930 6,260 24,197 13,961 143,653
General and administrative 2,797 2,994 6,476 6,792 53,529
Amortization of goodwill and acquired intangibles 858 910 1,724 1,820 5,284
In-process research and development acquired - - - - 17,760
------------- ------------- ------------ ------------- ------------------
Total operating expenses 20,585 10,164 32,397 22,573 220,226
------------- ------------- ------------ ------------- ------------------
Operating loss (20,094) (8,207) (31,415) (18,419) (156,134)
Other income (expense):
Interest income 3,173 896 6,978 1,373 23,519
Interest expense - (25) (5) (50) (807)
Gain on sale of marketable investment securities 371 88 824 88 1,022
Gain (loss) on disposition of equipment, leasehold
improvements and leases - (284) 11 (1,124) (1,186)
Foreign currency transaction gain 18 72 21 84 158
Other 365 26 1,351 29 1,676
------------- ------------- ------------ ------------- ------------------
Total other income 3,927 773 9,180 400 24,382
------------- ------------- ------------ ------------- ------------------
Loss before tax expense (16,167) (7,434) (22,235) (18,019) (131,752)
Income tax expense - - - - 1,018
------------- ------------- ------------ ------------- ------------------
Loss before cumulative effect of change
in accounting principle (16,167) (7,434) (22,235) (18,019) (132,770)
Cumulative effect on prior years
(to December 31, 1999) of changing to a
different revenue recognition method - - - (500) (500)
------------- ------------- ------------ ------------- ------------------
Net loss $ (16,167) $ (7,434) $ (22,235) $ (18,519) $ (133,270)
============= ============= ============ ============= ==================
Basic and diluted loss per common and common
equivalent share:
Loss before cumulative effect of change
in accounting principle $ (0.54) $ (0.32) $ (0.75) $ (0.83)
Cumulative effect on prior years
(to December 31, 1999) of changing to a
different revenue recognition method $ - $ - $ - $ (0.02)
------------- ------------- ------------ -------------
Net loss $ (0.54) $ (0.32) $ (0.75) $ (0.85)
============= ============= ============ =============
Weighted average common and common-equivalent
shares outstanding - basic and diluted 29,846 23,509 29,790 21,724
============= ============= ============ =============
See accompanying Notes to Condensed Consolidated Financial Statements.
4
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30, October 22, 1986
---------------------------- (inception) through
2001 2000 June 30, 2001
------------ ------------ -------------------
Cash flows from operating activities:
Net loss $ (22,235) $ (18,519) $ (133,270)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,522 2,847 14,660
Loss (gain) on disposition of equipment,
leasehold improvements and leases (11) 1,124 1,186
Realized gain on sale of marketable
investment securities (824) (88) (1,022)
Issuance of common and preferred stock in lieu
of cash for services 386 221 1,661
Compensation expense on stock options 1,780 1,163 4,401
Write off of in-process research and development - - 17,760
Decrease (increase) in operating assets:
Accounts receivable (580) 322 (736)
Other current assets and other assets (2,271) (87) (2,770)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses
and accrued severance 2,966 1,463 4,324
Deferred income - (557) (486)
Due to related parties - 113 -
------------ ------------ -------------------
Net cash used in operating activities (18,267) (11,998) (94,292)
Cash flows from investing activities:
Net purchase of marketable investment securities (61,011) (23,807) (166,600)
Acquisition of equipment and leasehold improvements (1,130) (48) (11,331)
Proceeds from sale of equipment 9 33 1,284
Cash paid for acquisition, net of cash received - - (676)
------------ ------------ -------------------
Net cash used in investing activities (62,132) (23,822) (177,323)
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 1,190 49,816 309,599
Proceeds from long-term debt - - 1,166
Principal payments on note payable to bank - - (124)
Principal payments under capital lease obligations (342) (207) (2,155)
Principal payments on long-term debt - (4) (2,854)
Repurchase of preferred stock - - (300)
------------ ------------ -------------------
Net cash provided by financing activities 848 49,605 323,037
Effect of exchange rate changes on cash 158 32 268
------------ ------------ -------------------
Net increase (decrease) in cash and cash equivalents (79,393) 13,817 51,690
Cash and cash equivalents at beginning of period 131,083 13,116 -
------------ ------------ -------------------
Cash and cash equivalents at end of period $ 51,690 $ 26,933 $ 51,690
============ ============ ===================
See accompanying Notes to Condensed Consolidated Financial Statements.
5
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30, October 22, 1986
---------------------------- (inception) through
2001 2000 June 30, 2001
------------ ------------ -------------------
Supplemental Disclosure of Cash Flow
Information:
Cash paid for interest $ - $ 50 $ 807
Cash paid for taxes - - 1,018
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 - - 197
Issuance of stock for stock subscription receivable 455 - 4,455
Accrual of deferred offering costs - - 150
Change in unrealized gain/loss on marketable
investment securities 221 47 412
Issuance of common stock in exchange for
minority interest - 2,500 2,500
See accompanying Notes to Condensed Consolidated Financial Statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared by NPS Pharmaceuticals, Inc. (NPS) pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC).
The condensed consolidated financial statements include the financial statements
of NPS and its Canadian operating subsidiary NPS Allelix Corp. (NPS Allelix)
formerly Allelix Biopharmaceuticals, Inc., collectively referred to as the
Company. Investments in a limited liability partnership and in non-public
corporations in which the Company has the ability to exercise significant
influence, but not control, are accounted for by the equity method. The Company
carries all other investments in non-public corporations at cost. In
management's opinion, the interim financial data presented includes all
adjustments (consisting solely of normal recurring items) necessary for fair
presentation. All intercompany accounts and transactions have been eliminated.
All monetary amounts are reported in U.S. dollars unless specified otherwise.
Certain information required by generally accepted accounting principles has
been condensed or omitted pursuant to rules and regulations of the SEC.
Operating results for the three and six months ended June 30, 2001, are not
necessarily indicative of the results that may be expected for any future period
or the year ending December 31, 2001.
This report should be read in conjunction with the Company's audited
consolidated financial statements and the notes thereto for the year ended
December 31, 2000, included in the Company's Annual Report on Form 10-K filed
with the SEC.
The preparation of the condensed consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the condensed consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
(2) Loss Per Common Share
Basic loss per common share is the amount of loss for the period available
to each common and exchangeable share outstanding during the reporting period.
Diluted loss per common share is the amount of loss for the period available to
each common and exchangeable share outstanding during the reporting period and
to each share that would have been outstanding assuming the issuance of all
potentially dilutive common stock equivalents outstanding during the period.
Loss per common share was the same for both the basic and diluted
calculations. Common stock equivalents (stock options and warrants outstanding)
of approximately 2.8 million and 3.0 million shares for the three and six months
ended June 30, 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 anti-dilutive for the periods
presented.
(3) Operating Segment
The Company is engaged in the discovery, development, and commercialization
of small molecule drugs and recombinant proteins 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
condensed consolidated financial statements.
7
(4) Comprehensive Loss
The components of the Company's comprehensive loss are as follows, in
thousands:
Three months Three months Six months Six months
ended ended ended ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
---------------- --------------- --------------- ---------------
Other comprehensive loss:
Gross unrealized loss (gain)
on marketable investment
securities $ 176 (135) (1,045) (163)
Reclassification for realized
gain on marketable
investment securities 371 88 824 88
------- ------- ------- -------
Net unrealized loss (gain) on
marketable investment
securities 547 (47) (221) (75)
Foreign currency translation
loss (gain) (997) 54 104 54
Net loss 16,167 7,434 22,235 18,519
------- ------- ------- -------
Comprehensive loss $15,771 $ 7,441 $22,118 $18,498
======= ======= ======= =======
(5) Plan of Termination
As of December 31, 2000, the Company had a balance of approximately
$154,000 for accrued severance for salaries and benefits payable to former
employees under formal plans of termination. All of this amount was paid in
severance benefits during the six months ended June 30, 2001.
Effective February 6, 2001, the Company terminated the employment of five
administrative employees. The Company recorded $516,000 for severance benefits
for these employees, which was included in general and administrative expense
during the three months ended March 31, 2001. Approximately $56,000 of this
amount was paid through June 30, 2001 in severance benefits and approximately
$234,000 was charged to additional paid-in capital during the six months ended
June 30, 2001.
(6) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 prohibits the use of the pooling-of-interests method of accounting and
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and is applicable to all purchase
method business combinations completed after June 30, 2001. SFAS No. 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. SFAS No. 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized effective January 1, 2002,
but instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 will also require that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of.
8
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $7.2 million and unamortized identifiable intangible
assets in the amount of $4.1 million, all of which will be subject to the
transition provisions of SFAS Nos. 141 and 142. Amortization expense related to
goodwill and assembled work force was $2.2 million and $1.0 million for the year
ended December 31, 2000 and the six months ended June 30, 2001, respectively.
Because of the extensive effort needed to comply with adopting SFAS Nos. 141 and
142, it is not practicable to reasonably estimate the impact of adopting these
Statements on the Company's financial statements at the date of this report,
including whether any transitional impairment losses will be required to be
recognized as the cumulative effect of a change in accounting principle.
The FASB issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, in 1998. SFAS No. 133, as amended by SFAS Nos. 137 and 138,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. For a derivative not designated as a hedging instrument, changes
in the fair value of the derivative are recognized in earnings in the period of
change. Because the Company does not currently hold any derivative instruments
and does not engage in hedging activities, the Company's adoption of SFAS No.
133, on January 1, 2001, did not have an impact on its consolidated financial
position, results of operations, or cash flows.
In December 1999, the Securities and Exchange Commission staff 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 the fourth quarter of 2000 and
in accordance with Accounting Principles Board (APB) Opinion No. 20, Accounting
Changes, and Statement of Financial Accounting Standards (SFAS) No. 3, Reporting
Accounting Changes in Interim Financial Statement, quarterly results of
operations for 2000 have been restated to reflect the new revenue recognition
policy. The effect of the adoption of SAB No. 101 on deficit accumulated during
development stage as of January 1, 2000 has been reflected as a cumulative
effect of change in accounting principle in the net loss for the six months
ended June 30, 2000. Based on the criteria included in SAB No. 101, the Company
concluded that nonrefundable license fees should be recognized 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,
$250,000 of which was recognized in the three months ended March 31, 2000, and
the remaining $250,000 of which was then recognized in the three months ended
June 30, 2000.
(7) Legal Proceedings
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.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING THE FINANCIAL STATEMENTS AND
NOTES THERETO, CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE FORWARD-
LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
ARE DISCUSSED IN THIS DOCUMENT, AS WELL AS IN OUR ANNUAL REPORT ON SEC-FILED
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000, UNDER THE HEADING "RISK
FACTORS."
Overview
We discover, develop and intend to commercialize small molecule drugs and
recombinant proteins, primarily for bone and mineral disorders and central
nervous system disorders. We have five drugs in clinical development and
several preclinical product candidates. Our two most advanced product
candidates focus on bone and mineral disorders. They are AMG 073, which has
completed a series of Phase II clinical trials for treatment of
hyperparathyroidism, and ALX1-11, which is in a pivotal Phase III clinical trial
for treatment of post-menopausal osteoporosis.
Substantially all of our resources are devoted to our research and
development programs. To date, we have not completed the development of any
pharmaceutical product for sale. We have incurred cumulative losses through
June 30, 2001 of approximately $133.3 million, net of cumulative revenues from
research and license agreements of approximately $64.1 million. We expect to
incur significant operating losses over at least the next several years as we
continue current clinical trial activities, expand our clinical trials for other
product candidates, and research activities. In particular, we are conducting a
1,800 to 2,000 patient Phase III clinical trial for ALX1-11, and expect to
expend significant resources on the development of this product.
Results of Operations
Revenues
Substantially all our revenues have come from license fees, milestone
payments, and research and development support payments from our licensees and
collaborators. These revenues fluctuate from quarter to quarter. Our revenues
were $491,000 for the quarter ended June 30, 2001, compared to $2.0 million for
the quarter ended June 30, 2000. Revenues for the six months ended June 30,
2001 were $982,000 compared to $4.2 million for the same period in the prior
year. The decrease in revenues for the three and six months ended June 30, 2001
was primarily due to the expiration during 2000 of research and development
support payments under existing license or collaborative agreements. We expect
that revenues in the third quarter of 2001 will be comparable with the amount
recognized in the second quarter of 2001. See "Liquidity and Capital Resources"
below for further discussion of payments that we may earn in the future under
these agreements.
Operating Expenses
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
manufacturing of drug compounds and related supplies prior to FDA approval. Our
research and development expenses increased to $16.9 million for the quarter
ended June 30, 2001 from $6.3 million
10
for the comparable period of 2000 and to $24.2 million for the six months ended
June 30, 2001 from $14.0 million in the comparable period in 2000. Research and
development expenses increased over the prior year amounts primarily due to the
cost of the advancing Phase III clinical trial for ALX1-11. We expect research
and development expenses to be approximately $18 to $20 million in the third
quarter of 2001. The anticipated increase is due to continued enrollment of
patients in the Phase III clinical trial for ALX1-11, conducting portions of our
clinical trials for ALX1-11 outside of the United States in anticipation of
marketing ALX1-11 in other countries, manufacturing ALX1-11 in anticipation of
FDA approval, and preparing for additional Phase II clinical trials for ALX-
0600. We may incur additional research and development expenses if we start
other clinical trials, or if we acquire new technologies, product candidates or
companies.
General and Administrative
Our general and administrative expenses consist primarily of the costs of
our management and administrative staff, business insurance, taxes and
professional fees. Our general and administrative expenses of $2.8 million for
the quarter ended June 30, 2001 were comparable with $3.0 million for the
quarter ended June 30, 2000. Additionally, general and administration expenses
of $6.5 million for the six months ended June 30, 2001 were comparable with $6.8
million for the same period in the prior year. We expect that general and
administrative expenses in the third quarter of 2001 will be approximately $3.0
million.
Amortization of Goodwill and Acquired Intangibles
We are required to amortize goodwill and other acquired intangibles as a
result of our December 1999 acquisition of Allelix Biopharmaceuticals Inc.
("Allelix"). The remaining intangible assets at June 30, 2001 total
approximately $13.0 million. We are amortizing these assets over their expected
lives, which range from two to six years. We recorded amortization expense of
$858,000 for the three months ended June 30, 2001 as compared to $910,000 for
three months ended June 30, 2000, and $1.7 million for the six months ended June
30, 2001 as compared to $1.8 million for the same period in the prior year.
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.
The two most advanced product candidates, ALX1-11, for osteoporosis, and ALX-
0600, for gastrointestinal disorders, accounted for 83% of the total value of
the acquired in-process research and development.
Since the date of the acquisition, we revised our plans for the next series
of clinical trials for ALX1-11 and ALX-0600. We started a pivotal Phase III
clinical trial with ALX1-11, which includes an 18-month course of treatment in
1,800 to 2,000 patients with osteoporosis. We also started enrolling a small
number of patients with short bowel syndrome in a pilot Phase II clinical trial
with ALX-0600. Since the date of acquisition and through June 30, 2001, we have
incurred development costs of approximately $26.6 million for ALX1-11 and $3.2
million for ALX-0600. Total development 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.
11
Total Other Income, Net
Our total other income, net, increased from $773,000 to $3.9 million for
the three months ended June 30, 2001 as compared with the same period in the
prior year, and from $400,000 to $9.2 million for the six months ended June 30,
2001 as compared with the same period in the prior year. The increases for the
three and six months ended June 30, 2001 are mainly the result of increased
interest income of $2.3 million and $5.6 million, respectively, and an increased
gain on sale of marketable investment securities of $283,000 and $736,000,
respectively, both resulting from higher cash, cash equivalent, and marketable
investment security balances. These balances increased primarily due to cash
received from a private placement offering of 3.9 million common shares of the
Company which was completed in February 2000 and closed in April 2000, and from
a follow-on offering of 4.6 million common shares of the Company which was
completed in November 2000. We expect that interest income will continue to be
higher in 2001 due to higher average cash, cash equivalent, and marketable
investment security balances for the year resulting from these offerings in
2000. However, we anticipate that interest income will decrease in the future
as cash is utilized for operations. Additionally, we recorded a non-cash loss
of approximately $1.2 million during the six months ended June 30, 2000
associated with closing a facility in New Jersey that we acquired as part of the
Allelix transaction. A similar loss was not recorded during the six months
ended June 30, 2001. Finally, during the six months ended June 30, 2001, we
recorded income from an equity investment of $1.3 million. Our equity investee,
for which we had an investment balance of zero, distributed proceeds from the
sale of substantially all of its assets to a third party. We expect that total
other income, net, to be $2.5 million to $3.0 million in the third quarter of
2001.
Cumulative Effect on Prior Years (to December 31, 1999) of Changing to a
Different Revenue Recognition Method
In December 1999, the Securities and Exchange Commission staff 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. We adopted SAB No. 101 in the fourth quarter of 2000 and in
accordance with Accounting Principles Board (APB) Opinion No. 20, Accounting
Changes, and Statement of Financial Accounting Standards (SFAS) No. 3, Reporting
Accounting Changes in Interim Financial Statement, quarterly results of
operations for 2000 have been restated to reflect the new revenue recognition
policy. The effect of the adoption of SAB No. 101 on deficit accumulated during
development stage as of January 1, 2000 has been reflected as a cumulative
effect of change in accounting principle in the net loss for the six months
ended June 30, 2000. Based on the criteria included in SAB No. 101, we
concluded that nonrefundable license fees should be recognized over the period
wherein we have continuing involvement. The cumulative effect includes the
reversal of $500,000 related to revenue recognized in prior periods, $250,000 of
which was recognized in the three months ended March 31, 2000, and the remaining
$250,000 of which was then recognized in the three months ended June 30, 2001.
Liquidity and Capital Resources
We have financed operations since inception primarily through collaborative
research and license agreements and the private and public placement of equity
securities. As of June 30, 2001, we had recognized $64.1 million of cumulative
revenues from payments for research support and license fees and $326.9 million
from the sale of equity securities for cash. The sale of equity securities
includes $1.0 million received from the exercise of options during the first six
months of 2001 and $150,000 from the sale of common stock under the terms of our
Employee Stock Purchase Plan. Our principal sources
12
of liquidity are cash, cash equivalents, and marketable investment securities,
which totaled $230.3 million at June 30, 2001.
Net cash used in operating activities was $18.3 million for the six months
ended June 30, 2001 compared to $12.0 million for the six months ended June 30,
2000. The increase in cash used in operating activities was due primarily to an
increase in the net loss, excluding all non-cash expense/income, of $5.1 million
for the six months ended June 30, 2001 as compared with the same period in the
prior year, and to increases in cash used for other current assets and other
assets of $2.2 million offset by increases in cash provided by accounts payable,
accrued expenses, and accrued severance of $1.5 million. Net cash used in
investing activities was $62.1 million for the six months ended June 30, 2001
compared to $23.8 million for the six months ended June 30, 2000. Net cash used
in investing activities in 2001 was almost entirely the result of continuing to
invest the proceeds from our offerings in 2000 in marketable investment
securities. Net cash provided by financing activities was $848,000 for the six
months ended June 30, 2001 compared to $49.6 million for the six months ended
June 30, 2000. Net cash provided by financing activities in 2000 resulted
primarily from the proceeds from our private placement, which closed in April
2000.
During the past, we have received quarterly research and/or development
support payments under our agreements with Amgen, Kirin, and GlaxoSmithKline,
and under NPS Allelix's agreements with Janssen and Eli Lilly Canada. With the
exception of GlaxoSmithKline, all of the research and development support
payments under these agreements expired in 2000. Funded research with
GlaxoSmithKline continues on a month-to-month basis. We do not receive any
research and development support payments under our agreements with Abbott
Laboratories, Forrest Laboratories, or AstraZeneca. However, we could receive
future payments of up to $142.5 million in the aggregate if each of our several
licensees accomplishes the specified research and/or development milestones
provided in the several agreements with these licensees. Some of the late-stage
development milestone payments will not be due from AstraZeneca if we elect a
co-promotion option. All of the agreements also require the licensees to make
royalty payments to us if they sell products derived from the license rights.
However, we do not control the subject matter, timing or resources applied by
our licensees to their development programs. Thus, potential receipt of
milestone payments from these licensees is largely beyond our control. Each of
these agreements may be terminated before its scheduled expiration date by the
respective licensee under certain conditions.
We have an agreement with Technology Partnerships Canada ("TPC"), a
Canadian government program, under which TPC will reimburse us for a portion of
our research and development expenses for our ALX-0600 product candidate. TPC
will reimburse us for 30% of the qualified costs we incur through December 2002,
to a maximum of Cdn. $8.4 million. We will pay a 10% royalty to TPC on revenues
received from the sale or license of any product we develop from the funded
research. These payments terminate in December 2008 if we have paid TPC a total
of at least Cdn. $23.9 million through that date. If we have paid TPC less than
that amount through that date, the payments continue until the earlier of when
we have paid TPC a total of Cdn $23.9 million or December 2017. As of June 30,
2001, we have invoiced TPC for a total of Cdn $3.6 million for reimbursement.
We have entered into service agreements and sponsored research and license
agreements that obligate us to purchase services and to make research support
payments to academic and/or commercial research institutions. We may be
required to make additional payments if the research institutions reach
milestones, or for license fees or royalties to maintain the licenses. We
expect to enter into additional sponsored research and license agreements in the
future.
We expect that our existing capital resources, including interest earned
thereon, will be sufficient to allow us to maintain our current and planned
operations for at least the next 24 months. However, our actual needs will
depend on numerous factors, especially with regard to the clinical trial and
pre-launch
13
marketing and production costs for ALX1-11. Furthermore, if we advance current
proprietary programs or if we in-license or otherwise acquire other
technologies, product candidates or companies, we may need to make substantial
additional expenditures.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 prohibits the use of the pooling-of-interests method of accounting and
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and is applicable to all purchase
method business combinations completed after June 30, 2001. SFAS No. 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. SFAS No. 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized effective January 1, 2002,
but instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 will also require that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of.
As of the date of adoption, we expect to have unamortized goodwill in the
amount of $7.2 million and unamortized identifiable intangible assets in the
amount of $4.1 million, all of which will be subject to the transition
provisions of SFAS Nos. 141 and 142. Amortization expense related to goodwill
and assembled work force was $2.2 million and $1.0 million for the year ended
December 31,2000 and the six months ended June 30, 2001, respectively. Because
of the extensive effort needed to comply with adopting SFAS Nos. 141 and 142, it
is not practicable to reasonably estimate the impact of adopting these
Statements on our financial statements at the date of this report, including
whether any transitional impairment losses will be required to be recognized as
the cumulative effect of a change in accounting principle.
The FASB issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities in 1998. SFAS No. 133, as amended by SFAS Nos. 137 and 138,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. For a derivative not designated as a hedging instrument, changes
in the fair value of the derivative are recognized in earnings in the period of
change. Because we do not currently hold any derivative instruments, and do not
engage in hedging activities, our adoption of SFAS No. 133 on January 1, 2001
did not have an impact on our consolidated financial position, results of
operations, or cash flows.
Item 3. 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. We have established policies and procedures to manage
the amount of credit exposure to any one issuer and do not use derivative
financial instruments in our investment portfolio. We maintain an investment
portfolio of various issuers, types and maturities, which consist mainly of
fixed-rate financial instruments. 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. At any
time, sharp changes in interest rates can affect the fair value of the
investment portfolio and its interest earnings. Currently, we do not hedge these
interest rate exposures. After a review of our marketable securities, we believe
that in the event of a hypothetical 10% increase in interest rates, the
resulting decrease in fair market value of marketable investment securities
would be insignificant to the financial statements.
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 June 30, 2001 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, although we may engage in those types of activities
in the future.
14
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Stockholders was held on May 24, 2001.
The stockholders approved all proposals by the vote specified below:
Proposal One: To elect eleven (11) directors as set forth in the Proxy
- ------------ Statement.
Nominees For Withheld
-------- ---------- --------
Santo J. Costa..................... 22,144,294 119,894
John R. Evans...................... 22,144,294 119,894
James G. Groninger................. 22,144,294 119,894
Tamar Howson....................... 22,126,101 138,087
Hunter Jackson..................... 22,072,158 192,030
Joseph Klein, III.................. 22,144,294 119,894
Donald E. Kuhla.................... 22,144,294 119,894
Thomas N. Parks.................... 22,144,294 119,894
Edward Rygiel...................... 22,108,216 155,972
Calvin Stiller..................... 22,144,294 119,894
Peter G. Tombros................... 22,144,294 119,894
Proposal Two: To ratify the appointment of KPMG LLP as independent auditors for
- ------------ the Company for the 2001 fiscal year: For: 22,201,022; Against:
62,081; Abstain: 1,085.
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: August 14, 2001 By: /s/ James U. Jensen
-----------------------------------
James U. Jensen, Vice President
Corporate Development and Legal
Affairs (Executive Officer)
Date: August 14, 2001 By: /s/ Robert K. Merrell
-----------------------------------
Robert K. Merrell, Vice President,
Finance, Chief Financial Officer
and Treasurer (Principal Financial
and Accounting Officer)
15