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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 March 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 (I.R.S. Employer
of incorporation or organization) 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)
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 May 10, 2002
----- ---------------------------
Common Stock $.001 par value 30,354,750*
* Includes 422,146 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 ............................. 15
PART II OTHER INFORMATION
Item 5. Other Information....................................................................... 16
SIGNATURES ...................................................................................... 16
2
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a Development Stage Enterprise)
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
March 31, 2002 December 31, 2001
----------------- -------------------
Assets
Current assets:
Cash and cash equivalents $ 43,307 $ 39,142
Marketable investment securities 150,235 168,376
Accounts receivable 1,682 8,609
Other current assets 3,162 3,228
----------------- -------------------
Total current assets 198,386 219,355
Plant and equipment:
Land 408 409
Building 1,094 1,097
Equipment 9,089 8,892
Leasehold improvements 2,987 2,988
----------------- -------------------
13,578 13,386
Less accumulated depreciation and amortization 8,921 8,518
----------------- -------------------
Net plant and equipment 4,657 4,868
Goodwill, net of accumulated amortization 6,821 6,838
Purchased intangible assets, net of accumulated amortization 3,578 3,913
Other assets 2 2
----------------- -------------------
$ 213,444 $ 234,976
================= ===================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of obligations under capital leases $ 2 $ 4
Accounts payable 8,550 10,737
Accrued expenses 4,638 2,060
Accrued severance 161 240
Deferred revenue 31 -
----------------- -------------------
Total current liabilities 13,382 13,041
Stockholders' equity:
Common stock 30 30
Additional paid-in capital 384,371 382,681
Deferred compensation (21) (34)
Accumulated other comprehensive income (loss) (1,311) 261
Deficit accumulated during development stage (183,007) (161,003)
----------------- -------------------
Net stockholders' equity 200,062 221,935
----------------- -------------------
213,444 234,976
================= ===================
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 October 22, 1986
March 31, (inception) through
2002 2001 March 31, 2002
-------------- --------------- --------------------
Revenues from research and license agreements $ 787 $ 491 $ 74,307
Operating expenses:
Research and development 21,104 7,267 200,649
General and administrative 3,582 3,679 62,734
Amortization of goodwill and acquired intangibles 325 866 7,297
In-process research and development acquired - - 17,760
-------------- ------------- -------------
Total operating expenses 25,011 11,812 288,440
-------------- ------------- -------------
Operating loss (24,224) (11,321) (214,133)
Other income (expense):
Interest income 2,016 3,805 30,567
Interest expense - (5) (806)
Gain on sale of marketable investment securities 135 453 1,976
Gain (loss) on disposition of equipment, leasehold
improvements and leases - 11 (1,187)
Foreign currency transaction gain (loss) (18) 3 170
Other 87 986 2,224
-------------- ------------- -------------
Total other income 2,220 5,253 32,944
-------------- ------------- -------------
Loss before tax expense (22,004) (6,068) (181,189)
Income tax expense - - 1,318
-------------- ------------- -------------
Loss before cummulative effect of change
in accounting principle (22,004) (6,068) (182,507)
Cummulative effect on prior years
(to December 31, 1999) of changing to a
different revenue recognition method - - (500)
-------------- ------------- -------------
Net loss $ (22,004) $ (6,068) $ (183,007)
============== ============= =============
Basic and diluted net loss per common and common -------------- -------------
equivalent share $ (0.73) $ (0.20)
============== =============
Weighted average common and common-equivalent
shares outstanding - basic and diluted 30,212 29,734
============== =============
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)
Three Months Ended March 31, October 22, 1986
------------------------------ (inception) through
2002 2001 March 31, 2002
------------ ------------ ------------------
Cash flows from operating activities:
Net loss $ (22,004) $ (6,068) $ (183,007)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 732 1,263 17,936
Loss (gain) on disposition of equipment,
leasehold improvements and leases - (11) 1,186
Realized gain on sale of marketable
investment securities (135) (453) (1,975)
Issuance of common and preferred stock in lieu
of cash for services 555 378 2,233
Compensation expense on stock options 26 882 4,541
Write off of in-process research and development - - 17,760
Decrease (increase) in operating assets:
Accounts receivable 6,922 (310) (1,417)
Other current assets and other assets (108) (1,750) (2,262)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses
and accrued severance 342 (1,069) 11,251
Deferred revenue 31 - (455)
---------- ----------- -------------
Net cash used in operating activities (13,639) (7,138) (134,209)
Cash flows from investing activities:
Net sale (purchase) of marketable investment securities 16,617 (36,301) (137,378)
Acquisition of equipment and leasehold improvements (201) (366) (12,084)
Proceeds from sale of equipment - 9 1,286
Cash paid for acquisition, net of cash received - - (676)
---------- ----------- -------------
Net cash provided by (used in)
investing activites 16,416 (36,658) (148,852)
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 1,294 574 312,974
Proceeds from long-term debt - - 1,166
Principal payments on note payable to bank - - (124)
Principal payments under capital lease obligations (2) (171) (2,159)
Principal payments on long-term debt - - (2,854)
Repurchase of preferred stock - - (300)
---------- ----------- -------------
Net cash provided by financing activities 1,292 403 326,408
Effect of exchange rate changes on cash 96 (230) (40)
---------- ----------- -------------
Net increase (decrease) in cash and cash equivalents 4,165 (43,623) 43,307
Cash and cash equivalents at beginning of period 39,142 131,083 -
---------- ----------- -------------
Cash and cash equivalents at end of period $ 43,307 $ 87,460 $ 43,307
========== =========== =============
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)
Three Months Ended March 31, October 22, 1986
---------------------------------------- (inception) through
2002 2001 March 31, 2002
------------------- ------------------- ---------------------
Supplemental Disclosure of Cash Flow
Information:
Cash paid for interest $ - $ 5 $ 806
Cash paid for taxes - - 1,318
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 99 23 4,099
Unrealized gain (loss) on marketable investment
securities (1,659) 768 371
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 subsidiaries, 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 months ended March 31, 2002, are not necessarily indicative of the results
that may be expected for any future period or the year ending December 31, 2002.
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, 2001, 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 common shares for all dilutive potential common shares outstanding during the
period.
Potential common shares of approximately 2.5 million and 2.4 million
during the three months ended March 31, 2002 and 2001, 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 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
condensed consolidated financial statements. The Company's only non-United
States revenue relate to the Company's Canadian subsidiary and represent 80
percent and 70 percent of the Company's total revenues for the three months
ended March 31, 2002 and 2001, respectively.
7
(4) Comprehensive Loss
The components of the Company's comprehensive loss are as follows, in
thousands:
Three months ended Three months ended
March 31, 2002 March 31, 2001
--------------------- --------------------
(in thousands)
Other comprehensive income (loss):
Gross unrealized gain (loss) on
marketable investment securities $ (1,524) $ 1,221
Reclassification for realized gain on
marketable investment securities (135) (453)
--------------------- --------------------
Net unrealized gain (loss) on marketable (1,659) 768
investment securities
Foreign currency translation gain (loss) 87 (1,101)
Net loss (22,004) (6,068)
--------------------- --------------------
Comprehensive loss $ (23,576) $ (6,401)
===================== ====================
(5) Plan of Termination
As of December 31, 2001, the Company had a balance of approximately
$240,000 for accrued severance for salaries and benefits payable to former
employees under formal plans of termination. Approximately $79,000 was paid in
severance benefits during the first three months of 2002.
(6) Goodwill and Identifiable Intangible Assets
In July 2001, the Financial Accounting Standards Board (FASB),
issued Statement on Financial Accounting Standard (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 requires 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 also
requires 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. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
Beginning January 1, 2002, the Company adopted the provisions of SFAS
No. 142. The Company completed its impairment review of goodwill during the
first quarter of 2002 and determined that no impairment charge was required upon
adoption.
Goodwill. The cost of acquired companies in excess of the fair value of
the net assets and purchased intangible assets at acquisition date is recorded
as goodwill. As of March 31, 2002, the Company had goodwill, net, of $6.8
million from the acquisition of Allelix Biopharmaceuticals Inc. (Allelix) in
December 1999. 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:
8
Three months ended Three months ended
March 31, 2002 March 31, 2001
-------------- --------------
(in thousands, except per share data)
Net loss, as reported $(22,004) $(6,068)
Amortization expense of goodwill
and assembled workforce -- 524
Net loss, as adjusted (22,004) (5,544)
Basic and diluted net loss per share,
as reported $(0.73) $(0.20)
Amortization expense of goodwill and assembled workforce
per basic and diluted share -- $0.01
Basic and diluted net loss per share,
as adjusted $(0.73) $(0.19)
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 As of
March 31, 2002 December 31, 2001
-------------- -----------------
(in thousands)
Gross carrying amount $6,505 $6,522
Accumulated amortization (2,927) (2,609)
Net carrying amount $3,578 $3,913
Amortization expense associated with purchased intangible assets was
$325,000 and $342,000 for the three months ended March 31, 2002 and 2001,
respectively. Estimated amortization expense for existing purchased intangible
assets is expected to be $1.3 million for each of the fiscal years ending
December 31, 2002 through December 31, 2004.
(7) 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.
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. Because
of the effort necessary to comply with the adoption of SFAS No. 143, it is not
practicable for management to estimate the impact of adopting this Statement as
of the date of this report on Form 10-Q.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the
9
disposal of a segment of a business. SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be disposed of by sale,
while also resolving significant implementation issues associated with SFAS No.
121. SFAS No. 144 retains the basic provisions of APB Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity rather than a segment of a
business.
On January 1, 2002, the Company adopted the provisions of SFAS No. 144.
The adoption of SFAS No. 144 for long-lived assets held for use did not have a
material impact on the condensed consolidated financial statements.
(8) 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations section contains forward-looking statements
which involve risks and uncertainties, pertaining generally to preclinical
testing and clinical trials of potential products, the expected continuation of
our collaborative agreements, the receipt of research payments thereunder, the
future achievement of various milestones in product development and the receipt
of payments related thereto, the potential receipt of royalty payments, the
period of time that our existing capital resources will meet our funding
requirements, and our financial results and operations. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including those set forth below.
Overview
Our objective is to build a profitable biopharmaceutical company by
discovering, developing and commercializing small molecule drugs and recombinant
proteins. Our product candidates are primarily for the treatment of bone and
mineral disorders, gastrointestinal disorders and central nervous system
disorders. We have three product candidates in active clinical development and
several preclinical product candidates. We have incurred cumulative losses from
inception through March 31, 2002 of approximately $183.0 million, net of
cumulative revenues from research and license agreements of approximately $74.3
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(TM)
(human parathyroid hormone, formerly known as ALX1-11) and ALX-0600, as we
maintain our contractual commitment to fund research activities in our metabolic
glutamate receptor program, and as we develop internal marketing and sales
capabilities and manufacturing relationships.
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 quarter to quarter. Our revenues
were $787,000 for the quarter ended March 31, 2002, compared to $491,000 for the
quarter ended March 31, 2001. See "Liquidity and Capital Resources" below for
further discussion of payments that we may earn in the future under these
agreements.
10
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 $21.1 million for
the quarter ended March 31, 2002, from $7.3 million for the comparable period of
2001. The increase in research and development expenses in the first quarter of
2002 was due primarily to the continued enrollment of patients in the Phase III
clinical trial for PREOS, increased activities in the development of ALX-0600,
our proprietary drug candidate for the treatment of Short Bowel Syndrome (SBS)
and 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
of $3.6 million for the quarter ended March 31, 2002, were comparable to the
$3.7 million for the quarter ended March 31, 2001.
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
amortization expense, at March 31, 2002 total approximately $10.4 million.
Amortization of intangibles decreased from $866,000 to $325,000 for the three
months ended March 31, 2002 as compared to the same period in the prior year.
The decrease 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 the three months ended March 31,
2001, we recorded amortization expense of $524,000, or $0.02 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 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 March 31, 2002, we have incurred
development costs of approximately $70.1 million for PREOS and $7.5 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.
Total Other Income, Net. Our total other income, net, decreased from
$5.3 million to $2.2 million for the three months ended March 31, 2002, as
compared with the same period in the prior year. The decrease for the three
months ended March 31, 2002 is mainly the result of decreased interest income of
$1.8 million and a decreased gain on sale of marketable investment securities of
$318,000, both resulting from lower interest rates and decreased cash, cash
equivalent, and marketable investment security balances. Balances of cash, cash
equivalent, and marketable investment securities decreased as a
11
result of the need to fund current operations. Additionally, during the three
months ended March 31, 2001, we recognized income of $964,000 from an equity
method investment. A similar income amount was not recorded during the three
months ended March 31, 2002.
Future Outlook. We estimate that revenues in the second quarter of 2002
will be approximately $500,000 from existing research and development funding
and license agreements. We expect that research and development expenses in the
second quarter of 2002 will be between $23.0 and $25.0 million and general and
administrative expenses will be between $3.5 and $4.0 million. The projected
increase in research and development expenses over actual expenses of $21.1
million for the first quarter of 2002 is primarily due to the anticipated
signing of a long-term manufacturing agreement for the commercial production of
bulk drug product for PREOS in the second quarter of 2002. We expect
amortization of purchased intangibles to be approximately $325,000 and other
income, net, to be between $1.7 and $2.1 million.
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 March 31, 2002, we had
recognized $74.3 million of cumulative revenues from payments for research
support, license fees and milestone payments and $330.3 million from the sale of
equity securities for cash. Our principal sources of liquidity are cash, cash
equivalents, and marketable investment securities, which totaled $193.5 million
at March 31, 2002. The primary objectives for our marketable investment security
portfolio are liquidity and safety of principal. Investments are made 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,
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. As of March 31, 2002, we had
invoiced Canada for a total of Cdn. $6.0 million for reimbursement. 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 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
contains a number of significant limitations on our ability to develop and
commercialize ALX-0600 outside of Canada.
We have entered into sponsored research, license, and purchase
agreements that obligate us to make research support and milestone payments to
academic or commercial research institutions and individuals. As of March 31,
2002, we have a total commitment of up to $1.7 million for future research
12
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 research costs, including personnel
and capital, through at least September 2003 and, under certain circumstances,
through March 2006. Additionally, as of March 31, 2002, we have a non-cancelable
commitment for future manufacturing of PREOS of approximately $17.3 million. We
expect to enter into additional collaborative research agreements and
manufacturing agreements in the future, which may require long-term commitments
of cash.
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 at least 2003. However, our actual needs will depend on
numerous factors, especially with regard to the clinical trial programs and
pre-launch market development and production costs for PREOS and ALX-0600. If we
advance current proprietary programs; if we in-license or otherwise acquire
other technologies, product candidates or companies; or if current clinical
trials are accelerated, delayed, modified or terminated for any reason, we may
need to make substantial additional expenditures or we may need to substantially
reduce planned expenditures. Our clinical trials may be accelerated, delayed,
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 contract manufacturers may not be able to supply sufficient quantities of
our drug candidates to support our clinical trials, which could lead to a
modification or cessation of the clinical trials. We do not have on hand
sufficient supplies of our product candidates to meet our clinical trial
requirements and we are dependent on outside contract manufacturers to provide
these supplies on a timely basis. We have sufficient clinical supplies of PREOS
to meet our clinical needs into the third quarter of 2002. However, our current
manufacturer of finished clinical supplies is not currently able to produce
clinical supplies that meet our release specifications. If any of the events
that pose these risks comes to fruition, we may have to substantially curtail,
modify or postpone 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. To provide for
financial flexibility and increased liquidity, the Company filed a shelf
registration statement in January 2002. Under the shelf registration statement,
the Company may offer up to $250.0 million of debt securities, common stock,
preferred stock, depository shares, and/or warrants, with terms to be determined
by market conditions. 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:
o revenue recognition; and
o 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.
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We apply the provisions of Staff Accounting Bulletin No. 101, Revenue
Recognition (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 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 nonrefundable license fees
over the period we have continuing involvement. Cash received in advance of the
performance of the related research and development support and for
nonrefundable license fees when we have continuing involvement is recorded as
deferred revenue and recognized as income over the period of our continuing
involvement.
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:
o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired assets
or the strategy for our overall business;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained period; and
o our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived
assets, and related goodwill and enterprise level goodwill 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. Net intangible assets,
long-lived assets, and goodwill amounted to $15.1 million as of March 31, 2002.
In 2002, 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. Beginning 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 three months
ended March 31, 2001, we recorded amortization expense of $524,000 or $0.02 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 did not record an impairment charge upon
completion of the initial impairment review in the first quarter of 2002.
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Caution on Forward-Looking Statements
Our business is subject to significant risks, including, but not
limited to, the risks inherent in our research and development activities,
including the successful continuation of our strategic collaborations, the
successful completion of clinical trials, the lengthy, expensive and uncertain
process of seeking regulatory approvals, uncertainties associated both with the
potential infringement of patents and other intellectual property rights of
third parties, and with obtaining and enforcing our own patents and patent
rights, uncertainties regarding government reforms and of product pricing and
reimbursement levels, technological change and competition, manufacturing
uncertainties and dependence on third parties. Even if our product candidates
appear promising at an early state of development, they may not reach the market
for numerous reasons. Such reasons include the possibilities that the product
will be ineffective or unsafe during clinical trials, will fail to receive
necessary regulatory approvals, will be difficult to manufacture on a large
scale, will be uneconomical to market or will be precluded from
commercialization by propriety rights of third parties. For more information
about the risks we face, see "Risk Factors" included in Part I of our Form 10-K
filed with the SEC.
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. 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
maintain an investment portfolio of various issuers, types and maturities, which
consist mainly of highly liquid, investment-grade securities and money market
funds. 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.
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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 March 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.
PART II OTHER INFORMATION
Item 5. Other Information
We have sufficient clinical supplies of PREOS to meet the needs of our
current clinical trials into the third quarter of 2002. However, our
manufacturer of finished clinical supplies is not currently able to produce
clinical supplies that meet our release specifications. We are engaged in an
extensive review of the fill and finish process and are working closely with our
contract manufacturer to produce clinical supplies. Together, we have narrowed
our focus to certain aspects of clinical supply production as opposed to bulk
drug manufacturing. Additional tests and production runs are scheduled to
confirm validity of manufacturing process adjustments.
We may not be successful in producing timely and adequate clinical
supplies to meet the needs of our current clinical trials. If we do not produce
timely and adequate clinical supplies of PREOS, we will modify or terminate the
conduct of our current clinical trials. If we modify or terminate our current
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.
On May 14, 2002, Robert K. Merrell resigned his position as Vice
President, Finance and Chief Financial Officer. He will remain with the Company
as a consultant pending appointment of a replacement.
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: May 15, 2002 By: /s/ JAMES U. JENSEN
--------------------------------------------
James U. Jensen, Vice President
Corporate Development and Legal Affairs
(Executive Officer)
Date: May 15, 2002 By: /s/ MORGAN R. BROWN
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Morgan R. Brown, Chief Accounting Officer
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