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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 September 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
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 November 12, 2001
---------------------------- ---------------------------------
Common Stock $.001 par value 30,038,611*
* Includes 879,866 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 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 6. Exhibits and Report on Form 8-K ...................................... 15
SIGNATURES .................................................................... 15
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
September 30, 2001 December 31, 2000
------------------ -----------------
Assets
Current assets:
Cash and cash equivalents $ 48,348 $ 131,083
Marketable investment securities 171,963 115,853
Accounts receivable 1,328 523
Other current assets 4,444 1,129
------------------ -----------------
Total current assets 226,083 248,588
Restricted marketable investment securities - 754
Plant and equipment:
Land 412 434
Building 1,107 1,164
Equipment 8,739 7,532
Leasehold improvements 2,902 2,767
------------------ -----------------
13,160 11,897
Less accumulated depreciation and amortization 8,108 6,922
------------------ -----------------
Net plant and equipment 5,052 4,975
Goodwill, net of accumulated amortization 7,328 9,072
Purchased intangible assets, net of accumulated amortization 4,354 5,867
Other assets 2 14
------------------ -----------------
$ 242,819 $ 269,270
================== =================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of obligations under capital leases $ 6 $ 305
Accounts payable 4,271 813
Accrued expenses 2,839 2,604
Accrued severance 129 154
------------------ -----------------
Total current liabilities 7,245 3,876
Obligations under capital leases, excluding current installments - 54
------------------ -----------------
Total liabilities 7,245 3,930
Stockholders' equity:
Common stock 30 30
Additional paid-in capital 381,279 377,802
Deferred compensation (118) (800)
Accumulated other comprehensive income (loss) 1,778 (657)
Deficit accumulated during development stage (147,395) (111,035)
------------------ -----------------
Net stockholders' equity 235,574 265,340
------------------ -----------------
$ 242,819 $ 269,270
================== =================
See accompanying Notes to Condensed Consolidated Financial Statements.
3
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Three Months Ended October 22, 1986,
September 30, September 30, (inception) through
2001 2000 2001 2000 September 30, 2001
--------- --------- ---------- --------- ------------------
Revenues from research and license agreements $ 395 $ 1,654 $ 1,377 $ 5,808 $ 64,486
Operating expenses:
Research and development 14,041 6,442 38,238 20,403 157,694
General and administrative 2,512 2,954 8,988 9,746 56,040
Amortization of goodwill and acquired intangibles 856 874 2,580 2,694 6,141
In-process research and development acquired - - - - 17,760
--------- --------- ---------- --------- ----------
Total operating expenses 17,409 10,270 49,806 32,843 237,635
--------- --------- ---------- --------- ----------
Operating loss (17,014) (8,616) (48,429) (27,035) (173,149)
Other income (expense):
Interest income 2,688 1,214 9,666 2,587 26,208
Interest expense - (27) (5) (77) (807)
Gain on sale of marketable investment securities 137 (9) 961 79 1,159
Gain (loss) on disposition of equipment, leasehold
improvements and leases - 26 11 (1,098) (1,186)
Foreign currency transaction gain 17 15 38 99 176
Other 47 14 1,398 43 1,722
--------- --------- ---------- --------- ----------
Total other income 2,889 1,233 12,069 1,633 27,272
--------- --------- ---------- --------- ----------
Loss before tax expense (14,125) (7,383) (36,360) (25,402) (145,877)
Income tax expense - - - - 1,018
--------- --------- ---------- --------- ----------
Loss before cumulative effect of change
in accounting principle (14,125) (7,383) (36,360) (25,402) (146,895)
Cumulative effect on prior years
(to December 31, 1999) of changing to a
different revenue recognition method - - - (500) (500)
--------- --------- ---------- --------- ----------
Net loss $ (14,125) $ (7,383) $ (36,360) $ (25,902) $ (147,395)
========= ========= ========== ========= ==========
Basic and diluted loss per common and common
equivalent share:
Loss before cumulative effect of change
in accounting principle $ (0.47) $ (0.30) $ (1.22) $ (1.12)
Cumulative effect on prior years
(to December 31, 1999) of changing to
a different revenue recognition method $ - $ - $ - $ (0.02)
--------- --------- ---------- ---------
Net loss $ (0.47) $ (0.30) $ (1.22) $ (1.14)
========= ========= ========== =========
Weighted average common and common-equivalent
shares outstanding - basic and diluted 29,993 24,903 29,859 22,791
========= ========= ========== =========
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)
October 22, 1986
Nine Months Ended September 30, (inception) through
------------------------------------
2001 2000 September 30, 2001
---------------- ---------------- -------------------
Cash flows from operating activities:
Net loss $ (36,360) $ (25,902) $ (147,395)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 3,812 4,172 15,950
Loss (gain) on disposition of equipment,
leasehold improvements and leases (11) 1,098 1,186
Realized gain on sale of marketable
investment securities (961) (79) (1,159)
Issuance of common and preferred stock in lieu
of cash for services 394 241 1,669
Compensation expense on stock options 1,853 1,406 4,474
Write off of in-process research and development - - 17,760
Decrease (increase) in operating assets:
Accounts receivable (845) 144 (1,001)
Other current assets and other assets (3,500) (163) (3,999)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses
and accrued severance 3,914 1,188 5,272
Deferred income - (711) (486)
Due to related parties - 59 -
--------------- --------------- ----------------
Net cash used in operating activities (31,704) (18,547) (107,729)
Cash flows from investing activities:
Net purchase of marketable investment securities (51,234) (26,940) (156,823)
Acquisition of equipment and leasehold improvements (1,430) (99) (11,631)
Proceeds from sale of equipment 11 79 1,286
Cash paid for acquisition, net of cash received - - (676)
--------------- --------------- ----------------
Net cash used in investing activities (52,653) (26,960) (167,844)
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 2,071 55,926 310,480
Proceeds from long-term debt - - 1,166
Principal payments on note payable to bank - - (124)
Principal payments under capital lease obligations (344) (296) (2,157)
Principal payments on long-term debt - (3) (2,854)
Repurchase of preferred stock - - (300)
--------------- --------------- ----------------
Net cash provided by financing activities 1,727 55,627 323,916
Effect of exchange rate changes on cash (105) 76 5
--------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (82,735) 10,196 48,348
Cash and cash equivalents at beginning of period 131,083 13,116 -
--------------- --------------- ----------------
Cash and cash equivalents at end of period $ 48,348 $ 23,312 $ 48,348
=============== =============== ================
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)
October 22, 1986
Nine Months Ended September 30, (inception) through
------------------------------------
2001 2000 September 30, 2001
---------------- ---------------- -------------------
Supplemental Disclosure of Cash Flow
Information:
Cash paid for interest $ 5 $ 77 $ 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 35 - 4,035
Accrual of deferred offering costs - - 150
Change in unrealized gain/loss on marketable
investment securities 3,255 119 3,446
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 operating subsidiaries NPS Allelix Corp. (NPS Allelix), Allelix
Neuroscience Inc., and NPS Services, L.C., 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 nine months ended September 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 2.6 million shares for each of the three and nine month periods
ended September 30, 2001 and 2000, that could potentially dilute basic earnings
(loss) 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 Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
--------------- ------------- -------------- -------------
Other comprehensive loss:
Gross unrealized gain
on marketable investment
securities $ (3,171) (35) (4,216) (198)
Reclassification for realized
gain (loss) on marketable
investment securities 137 (9) 961 79
--------------- ------------- -------------- -------------
Net unrealized gain on
marketable investment
securities (3,034) (44) (3,255) (119)
Foreign currency translation
loss 716 711 820 765
Net loss 14,125 7,383 36,360 25,902
--------------- ------------- -------------- -------------
Comprehensive loss $ 11,807 $ 8,050 $ 33,925 $26,548
=============== ============= ============== =============
(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. This entire amount was paid in
severance benefits during the nine months ended September 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 $153,000 of this
amount was paid through September 30, 2001 in severance benefits and
approximately $234,000 was charged to additional paid-in capital during the nine
months ended September 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 that intangible assets acquired in a purchase method business
combination must meet certain criteria 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, rather, these assets must be 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
Beginning January 1, 2002, the Company expects to have unamortized goodwill
in the amount of $6.9 million and unamortized identifiable intangible assets in
the amount of $3.9 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 $1.6 million for the year ended
December 31, 2000 and the nine months ended September 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 nine months
ended September 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 six 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
September 30, 2001 of approximately $147.4 million, net of cumulative revenues
from research and license agreements of approximately $64.5 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
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 $395,000 for the quarter ended September 30, 2001, compared to $1.7 million
for the quarter ended September 30, 2000. Revenues for the nine months ended
September 30, 2001 were $1.4 million compared to $5.8 million for the same
period in the prior year. The decrease in revenues for the three and nine months
ended September 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 fourth quarter of 2001
will be about $8.0 million if Amgen starts a Phase III trial with AMG 073 in
dialysis patients before the end of the quarter, and about $2.0 million if Amgen
does not start this trial before the end of the quarter. 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
10
drug compounds and related supplies prior to FDA approval. Our research and
development expenses increased to $14.0 million for the quarter ended September
30, 2001 from $6.4 million for the comparable period of 2000 and to $38.2
million for the nine months ended September 30, 2001 from $20.4 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 $15.0 to $20.0 million in the fourth quarter of 2001. The
anticipated increase is due to the conduct of Phase III clinical trial for
ALX1-11, conducting portions of our clinical trials for ALX1-11 outside of the
United States, 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 $2.5 million for
the quarter ended September 30, 2001 were comparable with $3.0 million for the
quarter ended September 30, 2000. Additionally, general and administration
expenses of $9.0 million for the nine months ended September 30, 2001 were
comparable with $9.7 million for the same period in the prior year. We expect
that general and administrative expenses in the fourth quarter of 2001 will be
approximately $2.5 to $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 September 30, 2001 total
approximately $11.7 million. We are amortizing these assets over their expected
lives, which range from two to six years at the time of acquisition. We recorded
amortization expense of $856,000 for the three months ended September 30, 2001
as compared to $874,000 for three months ended September 30, 2000, and $2.6
million for the nine months ended September 30, 2001 as compared to $2.7 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. 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. We also started enrolling a small number of
patients in a pilot Phase II clinical trial with ALX-0600. Since the date of
acquisition and through September 30, 2001, we have incurred development costs
of approximately $39.3 million for ALX1-11 and $4.2 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.
11
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, increased from $1.2 million to $2.9
million for the three months ended September 30, 2001 as compared with the same
period in the prior year, and from $1.6 million to $12.1 million for the nine
months ended September 30, 2001 as compared with the same period in the prior
year. The increases for the three and nine months ended September 30, 2001 are
mainly the result of increased interest income of $1.5 million and $7.1 million,
respectively, and an increased gain on sale of marketable investment securities
of $146,000 and $882,000, 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 nine months ended September 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 nine months ended September 30, 2001. Finally,
during the nine months ended September 30, 2001, we recorded income from an
equity investment of $1.3 million. Our equity investee distributed proceeds from
the sale of substantially all of its assets to a third party. We expect that
total other income, net, to be $2.2 million to $2.7 million in the fourth
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 nine months
ended September 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 September 30, 2001, we had recognized
$64.5 million of cumulative revenues from payments for research support and
license fees and $327.8 million from the sale of equity securities for cash. The
sale of equity securities includes $1.7 million
12
received from the exercise of options and warrants during the first nine months
of 2001 and $338,000 from the sale of common stock under the terms of our
Employee Stock Purchase Plan. Our principal sources of liquidity are cash, cash
equivalents, and marketable investment securities, which totaled $220.3 million
at September 30, 2001.
Net cash used in operating activities was $31.7 million for the nine
months ended September 30, 2001 compared to $18.5 million for the nine months
ended September 30, 2000. Net cash used in operating activities for the nine
months ended September 30, 2001 of $31.7 million resulted from a net loss of
$36.4 million, realized gains/losses and non-cash expense/income of $5.1
million, an increase in operating assets of $4.3 million and an increase in
operating liabilities of $3.9 million. Net cash used in operating activities for
the nine months ended September 30, 2000 of $18.5 million resulted from a net
loss of $25.9 million, realized gains/losses and non-cash expense/income of $6.8
million, an increase in operating assets of $19,000 and an increase in operating
liabilities of $536,000. Net cash used in investing activities was $52.7 million
for the nine months ended September 30, 2001 compared to $30.0 million for the
nine months ended September 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 $1.7 million for the nine months ended September 30,
2001 compared to $55.6 million for the nine months ended September 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 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 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 September
30, 2001, we have invoiced TPC for a total of Cdn $4.0 million for
reimbursement. If TPC declares an event of default under the agreement, we could
be required to repay all amounts received from TPC, plus interest and other
damages. As of September 30, 2001, no event of default has been declared.
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.
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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 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 that intangible assets acquired in a purchase method business
combination must meet certain criteria 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, rather, these assets must be 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.
Beginning January 1, 2001, we expect to have unamortized goodwill in
the amount of $6.9 million and unamortized identifiable intangible assets in the
amount of $3.9 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 $1.6 million for the year ended
December 31, 2000 and the nine months ended September 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
exposure to fluctuations in interest rates. We place our investments with high
quality issuers and limit the amount of
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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 our 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 September
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.
Part II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K.
(b) Reports on Form 8-K.
None
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: November 14, 2001 By: /s/ James U. Jensen
-----------------------------------------
James U. Jensen, Vice President
Corporate Development and Legal Affairs
(Executive Officer)
Date: November 14, 2001 By: /s/ Robert K. Merrell
-----------------------------------------
Robert K. Merrell, Vice President, Finance,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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