Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

Annual Report Pursuant to Section 13 of the SecuritiesExchange Act of 1934

 

 

Year Ended December 31, 2001

 

Commission File Number 0-24320

 

 

NAPRO BIOTHERAPEUTICS, INC.

 

 

| Incorporated      in Delaware |  IRS ID      No. 84-1187753 |
|-------------------------------|----------------------------------|

 

6304 Spine Road, Unit ABoulder, Colorado 80301(303) 516-8500

 

Securities registered pursuant to Section 12(b) of the Act:none

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.0075 par value; Preferred Stock PurchaseRights

 

We (1) have filed all reports required to be filed by Section13 or 15(b) of the Securities Exchange Act of 1934 during the preceding 12months, and (2) have been subject to such filing requirements for the past 90days.

 

Disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K will be contained, to the best of our knowledge, in a definitiveproxy statement incorporated by reference in Part III of this Form 10-K.

 

The aggregate market value of the voting stock held bynon-affiliates was $271,025,000 as of March 4, 2002.

 

The number of shares outstanding of our common stock, as ofMarch 4, 2002: 29,687,213

 

Incorporated by reference in Part III of this report iscertain information contained in the Proxy Statement for our 2002 Annual Meetingof Stockholders.

 

Table of Contents

|  | Item
Part I
1
Business
2
Properties
3
Legal Proceedings
4
Matters Submitted to Stockholders' Vote
Part II
5
Market Information and Related Stockholder Matters
6
Selected Financial Data
7
Management's Discussion and Analysis of Financial      Condition and Results of Operations

7A
Quantitative and Qualitative Disclosures about      Market Risk

8
Financial Statements and Supplementary Data
9
Changes in and Disagreements with Accountants
Part III
10
Directors and Executive Officers
11
Executive Compensation
12
Security Ownership of Certain Beneficial Owners and Management
13
Certain Relationships and Related Transactions
Part IV
14
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
 

Part I

 

Item 1

 

Business

 

General

 

NaPro BioTherapeutics, Inc. is a biopharmaceutical companyfocused on the development, production and licensing of complex natural productpharmaceuticals as well as the development and licensing of novel genomictechnologies for applications in human therapeutics and diagnostics,pharmacogenomics and agrobiotechnology. Our lead product is paclitaxel, anaturally occurring chemotherapeutic anti-cancer agent found in certain speciesof yew, or *Taxus,* trees. In addition to our efforts with paclitaxel andgenomics, we are also working on several types of compounds that have promisingactivity as anti-cancer agents. We believe some of these agents function bynovel mechanisms, which may increase their likelihood of success as newchemotherapeutics. We are also actively engaged in evaluating the in-licensingor purchase of potential new products and/or technologies, whether or not thoseproducts or technologies are derived from natural products. Our evaluation ofnew products and technologies may involve the examination of individualmolecules, classes of compounds, or platform technologies, in both cancer andother therapeutic areas. Acquisitions of new products or technologies mayinvolve the purchase of such products or technologies, or the acquisition of, ormerger with, other companies.

 

To date, the majority of our resources have been directedtoward the development and manufacture of paclitaxel. The market for paclitaxelis dominated by Bristol-Myers Squibb Company. Bristol's paclitaxel is widelyused in the treatment of breast and ovarian cancers, Kaposi's sarcoma, andnon-small cell lung cancer when used in combination with cisplatin. Bristol haspublicly announced that worldwide sales of its formulation of paclitaxel were$1.2 billion in 2001 and $1.6 billion in 2000. Our proprietary manufacturingtechnology includes the extraction, isolation, and purification of paclitaxel aswell as the semisynthesis of the drug substance. We continue to developrenewable sources of paclitaxel biomass. We have strong pharmaceutical companyalliances and are seeking additional alliances. We believe the combination ofour proprietary manufacturing technology, biomass capability, and pharmaceuticalalliances will allow us to participate significantly in the broad paclitaxelmarket. We cannot assure, however, that we will be able to participatesignificantly in the paclitaxel market. Prior to marketing paclitaxel, we musthave approval of the appropriate regulatory authorities. Following suchregulatory approval, the paclitaxel drug product must be manufactured accordingto the FDA's guidelines, and any major changes to the approved manufacturingprocesses may require additional regulatory approvals. We must also haveadequate quantities of product available for sale.

 

Our strategy for advancing the development andcommercialization of paclitaxel has been to form strategic alliances throughlong-term exclusive agreements with major pharmaceutical companies. On July 23,1999, we entered into a 20-year exclusive collaborative agreement with AbbottLaboratories for the development and commercialization in the U.S. and Canada ofone or more formulations of paclitaxel for the treatment of a variety ofcancers. In the agreement, we are responsible for supply of bulk drug;development activity is conducted jointly with Abbott. Abbott is responsible forfinishing, regulatory filings, marketing, and sale of the finished drug product.Most primary decisions related to the paclitaxel development program are made bya joint Abbott-NaPro development committee. In March 2001, we and Abbott filedan Abbreviated New Drug Application, or ANDA, with the U.S. Food and DrugAdministration, or FDA, for paclitaxel.

 

In November 2001 we and Abbott entered into a non-exclusivecross license with Bristol relating to paclitaxel which grants us a licenseunder Bristol patents to market injectible paclitaxel, pursuant to an ANDAapproval. We have the right under the agreement to sublicense to Abbott. Theagreement grants Bristol a license to our patents relating to stable paclitaxelformulations. The scope of both licenses is limited to the polyethoxylatedcaster oil and ethanol formulation currently approved by the FDA.

 

In 1992, we entered into a 20-year exclusive agreement withF.H. Faulding & Co., Ltd., a large Australian domestic pharmaceuticalcompany, for the clinical development, sale, marketing and distribution ofpaclitaxel. Faulding was acquired by Mayne-Nickless Limited, an Australiancompany. The combined entity actively markets anti-cancer pharmaceuticals andother health care products in Europe, Australia, Asia, South America and otherregions throughout the world. In 2000, we amended the Faulding agreement to,among other things, add additional countries to Faulding's exclusiveterritory. In 2001 we entered into a separate agreement with Faulding coveringdevelopment and sale of our paclitaxel in Europe. With the new agreement, theFaulding territory now includes substantially all of the world other than theU.S., Canada, Japan, Israel, the nations of the former Soviet Union and parts ofAfrica. Faulding has received marketing approval for, and is selling paclitaxelas ANZATAX(TM) in more than 25 countries.
 

In Europe, we are responsible for regulatory filings and forsupplying paclitaxel raw material exclusively to Faulding to formulate andfinish the product. We cannot assure that we will receive regulatory approval inEurope. Should we receive approval, Faulding will then market and sell the finalproprietary paclitaxel formulation in Europe. Under the agreement, Faulding paidan up-front licensing fee to us of $7.5 million. We will share equally the netsales of the product in Europe.

 

For countries outside of Europe covered by the Fauldingagreement, we supply paclitaxel to Faulding and Faulding formulates it into itscommercial drug product, ANZATAX(TM). Faulding obtained regulatory approval andbegan marketing ANZATAX(TM) as a pharmaceutical for the treatment of refractorybreast and ovarian cancers in Australia in January 1995. Since that time,ANZATAX(TM) has been approved in at least 25 additional countries.
 

We have established an exclusive supply and distributionagreement with Tzamal Pharma for the development and distribution of paclitaxelin Israel. In January 2001 we received approval in Israel to sell paclitaxelunder the trade name, Biotax(R).The Israeli Ministry of Health has approved Biotax(R)for use in a variety of cancers; Tzamal is currently selling Biotax(R).
 

In June 2001 we and JCR Pharmaceuticals Co., Ltd. enteredinto a mutually exclusive development, supply and distribution agreement forpaclitaxel in Japan. Under the agreement, we will be responsible formanufacturing and supplying the finished drug. JCR and we will jointly beresponsible for the clinical and regulatory program which will be necessary forseeking approval to market paclitaxel in Japan. JCR will fund this clinical andregulatory program. JCR will also be responsible for the sales and distributionof the product in Japan upon its approval.

 

In November 2000 we in-licensed gene alteration technologyfrom the University of Delaware and Thomas Jefferson University. The licenseagreement grants us exclusive, worldwide rights to intellectual propertyincluding patent applications relating to the use of proprietary moleculesdesigned to precisely alter genes in humans, animals, plants, viruses andmicrobes. We have agreed to provide research and patent funding, as well as anongoing license fee paid in our common stock. As of December 31, 2001 we haveissued 100,000 shares under the license. An additional 100,000 shares wereaccrued in 2001 and issued subsequent to year end.  To date we have issued 200,000shares under the license. Assuming we do not cancel the license, we will issuean additional 1,000,000 shares in 100,000 share-per-year increments on thelicense anniversaries. Certain milestones may accelerate the issuance dates. Thelicense is terminable at our option. If terminated, no further shares will beissued. In 2002 we have committed to fund at least $455,000 in research.

 

One of the technologies licensed to us allows us tomanufacture proprietary oligonucleotides (DNA fragments) that can be used tomake small, specifically targeted modifications in the chromosomes of a targetanimal or plant. With this technology, we are attempting to develop productsthat may allow us to:

 

cure or more effectively treat certain human geneticdisorders;

improve plant traits without inserting foreign DNA into thoseplants; or

to detect genetic variations in a patient's genes that mayindicate which patients will better respond to medication or experience moresevere side effects.

 

We may also be able to construct diagnostics, reagents, celllines and animal models that will help other scientific and medical research.This technology may permit certain control over changes in the genome. Suchcontrol may help us to determine the function of genes or natural variations inchromosomes.

 

Among the disorders we are researching are Huntington'sdisease and sickle cell disease. Huntington's disease is a progressivedisorder which causes nerve cells in the brain to waste away. Eventually, thepatient suffers dementia, uncontrolled movements, and death. There is no knowncure for this rare disease, that affects five of every million people. Symptomsusually appear between the ages of 35 and 50, although younger people can alsodevelop the disease. Sickle cell anemia is a hereditary blood disorder caused bya single point mutation of the betaglobulin gene. It is characterized by achange in the composition of hemoglobin, the protein used to carry oxygen in theblood. NaPro is developing *ex-vivo* techniques aimed at treating or curingthis disorder. This disease has been a target for traditional gene therapy forsome time. We are in the early stages of this development and our success, ifany, cannot be measured at this time.

 

We are involved in genetic research aimed at developingcompounds to treat or cure disease as well as technologies for delivering thetreatment to diseased cells. Our research is preliminary and may never lead toeffective treatments for these diseases or commercially viable products.

 

The following chart identifies the commercial products andseveral classes of compounds we are currently researching.

 

NaPro Products: Commercial or in Development

Product
Indication(s)
Development Status
ANZATAX(TM) paclitaxel (Faulding)
Breast, Ovarian & Non-Small Cell Lung Cancer
Commercialized in Australia, Asia, South America and the Mideast; in      development in Europe
Biotax(R) paclitaxel (Tzamal)
Breast, Ovarian & Non-Small Cell Lung Cancer
Commercialized in Israel
NaPro Paclitaxel (Abbott)
Breast, Ovarian & Non-Small Cell Lung Cancer
ANDA filed in U.S.
NaPro 80239
Hematological Cancer

Development candidate selection
NaPro 80661
Solid tumors
Development candidate selection
NaPro 82739

Solid tumors
Development candidate selection
NaPro 102339
Directed Drug Delivery
Technological development
NaPro proprietary oligonucleotides
Various genetic targets including Huntington's disease and sickle      cell anemia
Research and technological development
 

Paclitaxel Overview

 

Cancer is the second leading cause of death in the U.S., withover one million new cases diagnosed each year. Cancer is generally treated bysurgery, radiation, chemotherapy or a combination of these therapies. SinceBristol received regulatory approval in December 1992, paclitaxel has become thelargest selling drug of the cancer chemotherapy drugs known as cytotoxic agents.

 

In 1963, the National Cancer Institute, or NCI, recognizedthat the natural product paclitaxel killed leukemia cells and inhibited thedevelopment of a variety of tumors. Over the next two decades, researchersworking under grants from the NCI conducted studies to determine paclitaxel'sstructure and its mechanism of action. The NCI studies indicated that paclitaxelinhibits the normal action of microtub-ules in cancer cell division.Microtubules, located in the cytoplasm of cells, play a vital role in cellulardivision. Paclitaxel promotes microtubule assembly and blocks normal microtubuledisassembly in cells, which stops cell division and causes the cancer cell todie. This cytoplasmic mechanism of action contrasts with the nuclear mechanismof action of the majority of cell-killing drugs that kill the cell by attackingnuclear components such as DNA.

 

In June 1991, the NCI formalized a Collaborative Research andDevelopment Agreement, or CRADA, for development of paclitaxel with Bristol.Bristol assumed development of paclitaxel, including completion of the necessaryclinical trials and manufacturing scale-up. In June 1992, Bristol submitted aNew Drug Application, or NDA, to the FDA. Bristol received approval for the saleof paclitaxel as a treatment for refractory ovarian cancer in December 1992 andsince then has received approval for the sale of paclitaxel as a treatment forother cancers.

 

Paclitaxel is one of a family of compounds, commonly referredto as taxanes, that share a specific chemical structure. Taxanes are foundnaturally in many parts of various species of yew trees. The concentration ofindividual taxanes in yew trees is very small, generally less than 0.1%, andaccordingly, the process of extracting taxanes from yew biomass is complicatedand challenging. Several production approaches can be used to produce paclitaxelproduct. We believe the two most prevalent processes used today are conventionalbiomass extraction and semisynthesis.

 

With conventional biomass extraction, the manufacturingprocess is designed to extract, isolate and purify paclitaxel from yew biomassleaving behind other components, including non-paclitaxel taxanes. However, theextraction, isolation and purification processes are complicated because thereare more than 100 different taxanes present in yew biomass. In a semisynthesisprocess, the initial extraction, isolation and purification is similar to thatof the conventional biomass extraction process, except that the process not onlyisolates paclitaxel, but also other taxanes (which would otherwise be wastebyproducts) and converts these other taxanes into paclitaxel. By convertingother taxanes into paclitaxel, the semisynthesis process increases the yield ofpaclitaxel from the same quantity of biomass. Regardless of which process isused, the final product must meet acceptable impurity criteria.

 

Other companies have developed taxane products that aresimilar, but not identical, to paclitaxel. For example, Aventis S.A., a largeinternational pharmaceutical company, has developed docetaxel which is beingmarketed in various parts of the world under the trademark Taxotere(R).Taxotere(R) has a differenttoxicity profile than paclitaxel and has side effects not observed withpaclitaxel. The FDA approved Taxotere(R)for treatment of anthracycline-resistant breast cancer in patients withoutimpaired liver function, and for non-small cell lung cancer after failure of aprior platinum-based chemotherapy.

 

Development of Paclitaxel

 

Under the terms of our agreement with Abbott, we areresponsible for supplying bulk drug; development activities are conductedjointly with Abbott.

 

Under our agreements with Faulding, Faulding has primaryresponsibility for pursuing regulatory approval of paclitaxel within theFaulding territory other than Europe. We have responsibility for supporting theregulatory approvals in regard to information related to our manufacturingprocesses. In Europe, we have primary responsibility for pursuing regulatoryapproval.

 

Existing regulatory approvals have a direct impact on theclinical and marketing strategy we are pursuing. In December 1992 Bristolobtained NDA approval in the U.S. for its paclitaxel product. Under the Waxman-HatchAct, a non-patented drug such as paclitaxel that gains approval through an NDAprocess is granted a five-year period of marketing exclusivity (subject toextension under certain conditions), which prevents submission by another partyof an ANDA for generic substitutes until the exclusivity period expires. Bristol'sexclusivity period in the United States expired in December 1997. A statutecomparable to the Waxman-Hatch Act exists in Europe, although the related periodof exclusivity is ten years. Bristol's European exclusivity period ends in2003.

Biomass

 

Paclitaxel and other taxanes we use in the production ofpaclitaxel are present in many parts of various species of yew trees. Ourtechnology is designed to allow extraction and purification of paclitaxel andextraction of other taxanes from renewable sources of biomass such as needlesand limbstock harvested from yew trees. Taxanes other than paclitaxel can bechemically converted into paclitaxel.

 

We believe we may be able to reduce our raw material costwhile increasing our yield of paclitaxel by growing a reliable and renewablebiomass source. In order to have a supply of biomass for use in the productionof paclitaxel, we have agreements with various North American commercialnurseries. In 2002, substantially all of our production for Abbott will beextracted from cultivated biomass. We regularly conduct other research relatedto enhancing paclitaxel production in yew trees.

 

Manufacturing

 

The manufacture of paclitaxel occurs in three steps. First, acrude paclitaxel is extracted from yew trees. Second, the extracted crudepaclitaxel mixture is isolated and purified. In the final step, the resultingactive drug substance is formulated for final packaging. Faulding and Abbott areeach responsible for formulating and final packaging of paclitaxel that theymarket.

 

The first step in the manufacture of paclitaxel requires theextraction of crude paclitaxel from the raw biomass materials we cultivate fromour yew trees or purchase from others. We currently have contracts with thirdparty manufacturers to process crude paclitaxel from raw biomass materials.While we own and have operated large-scale extraction facilities in Boulder,Colorado, we believe that our manufacturing partners will increase our operatingflexibility and lower our cost of manufacturing. As a result, we have suspendedour extraction operations and rely upon our manufacturing partners to supply allof our requirements for crude paclitaxel extract. Any failure by ourmanufacturing partners to supply our requirements on a cost-effective basiswould jeopardize our ability to commercialize paclitaxel on a timely andcompetitive basis and to supply our strategic partners' commercial needs. Inaddition, only a limited number of contract manufacturers are both capable ofprocessing crude paclitaxel extract from raw biomass materials and complyingwith current federal and state good manufacturing practice regulations.Accordingly, if our manufacturing partners fail to supply our requirements, wemay not be able to enter into manufacturing agreements with alternativesuppliers of crude paclitaxel extract on commercially acceptable terms and, evenif we do, any manufacturer with which we contract may not be able to delivercrude paclitaxel extract in appropriate quantity.

 

We perform the second manufacturing step, isolation andpurification, in our facilities in Boulder, Colorado. Our manufacturingfacilities are subject to inspection by the regulatory agencies in the countriesin which our paclitaxel is sold. In the past, our manufacturing facilities havebeen inspected by the FDA, the Australian Therapeutic Goods Administration, orTGA, and the European Medicines Evaluation Agency, or EMEA. Those agencies havefound our facilities to be acceptable for the manufacture of bulk paclitaxel. Weare expanding the manufacturing capacity of our Boulder, Colorado facilities inanticipation of U.S. approval. We believe that our Boulder, Colorado facilitieshave adequate capacity to meet clinical and commercial requirements for the nearfuture, but we cannot assure such capacity.

 

In 2001 we substantially increased the capacity of ourcommercial isolation and purification facilities in Boulder, Colorado. We planadditional capacity expansion in 2002. We cannot assure, however, that we willsucceed in adapting our technology for large scale commercial manufacturing. Wealso cannot assure that we will have the sales volume to require additionalcapacity.

 

In order to diversify our supply options and increase ourmanufacturing capacity, we are developing, and have applied for patentprotection for, a semisynthesis process for manufacturing paclitaxel from othertaxanes contained in renewable biomass sources. We own, or have licensed,several patents relating to this process and have applied for others. During1999, we manufactured crude paclitaxel with the semisynthesis process in apilot-scale contracted facility. This crude paclitaxel is then purified at ourmanufacturing facility in Boulder, Colorado. We continue additional developmentand testing with a contract manufacturer. The use of semisynthetic paclitaxelwill require regulatory approvals, which cannot be assured. Furthermore, wecannot assure our semisynthesis process will perform as expected or that we willbe able to effectively adapt the process to commercial-scale manufacturing.

 

Strategic Alliances

 

Abbott: Our strategy has been to pursue and enter intostrategic alliances with large international pharmaceutical companies. In July1999 we entered into a 20 year exclusive collaborative agreement, which wasamended in June 2000 and September 2001, with Abbott covering the U.S. andCanada to develop and commercialize one or more formulations of paclitaxel fortreatment of a variety of cancer indications. Abbott is a large, multinational,diversified health care company with 2001 sales of $16.3 billion. We areresponsible for supplying bulk drug and clinical trials may be conducted jointlywith Abbott. Abbott is responsible for finishing, regulatory filings, marketingand sale of the finished drug product. We have granted an exclusive license toAbbott for our paclitaxel-related patents for intravenous and oral paclitaxelformulations.

 

In connection with the Abbott agreement, we may receive,including $32 million received to date, total funding of up to $118 million inthe form of up to $30 million in development milestones, up to $57 million inmarketing milestones, $20 million in secured debt, and $11 million in equityinvestments. Through April 2001 Abbott had purchased 2,000,000 shares of ourcommon stock for a total purchase price of $11 million.

 

We received an initial $1 million fee in July 1999.Contingent upon our successful achievement of all development milestones, wecould receive up to an additional $29 million in development fees. Should wereceive approval of our current ANDA, and upon commencement of commercial sales,we will receive a portion of such $29 million.

 

We have received $20 million of secured debt from Abbott. Thedebt bears a primary interest rate of 6.5% and is due in full on the earlier of:(i) the second anniversary of the first sale of finished product by Abbott to awholesaler or end-user customer following approval of finished product by theFDA; (ii) the termination of the Abbott agreement; or (iii) January 1, 2007. Thedebt is limited to a borrowing base of collateralized assets, recomputedmonthly. The majority of our hard assets are collateralized as security for thedebt.

 

Contingent upon receiving regulatory approval and achievingcertain commercial sales thresholds over several years, we may receiveadditional milestone payments from Abbott of up to $57 million. We cannot assurethat regulatory approval or sales thresholds necessary to trigger any of thefuture milestone payments will be achieved.

 

Under terms of the agreement, Abbott will purchase bulk drugfrom us. Once the paclitaxel product is approved and commercialized, Abbott willpay a percentage of its net paclitaxel sales to us, less Abbott's payments tous for purchase of bulk drug. Abbott may terminate the agreement at any timewith or without cause. Should Abbott terminate without cause, it is obligated tomake payments to us.

 

The Abbott agreement grants Abbott the exclusive right todevelop and market our paclitaxel in the U.S. and Canada for intravenous andoral anti-cancer uses. Abbott is required to purchase all of its requirementsfor paclitaxel from us, except in certain circumstances if we become unable tosupply Abbott's requirements. Except for limited instances where termination isdue to specific breaches of the agreement by us, we retain exclusive rightsfollowing termination to any clinical data generated during the course of theagreement. We are required to indemnify Abbott for defects in our paclitaxelthat is shipped to Abbott, breaches of our warranties or obligations under theagreement, harm caused by inappropriate co-marketing activities, and someintellectual property and product liability claims. Abbott is required toindemnify us for defects in a finished product containing our paclitaxelmanufactured by Abbott, breaches of Abbott's representations and warranties,harm caused by inappropriate marketing activities, and some intellectualproperty and product liability claims.

 

Faulding We formed a strategic alliance through along-term exclusive agreement with Faulding that covers substantially all of theworld other than the U.S., Canada, Japan, Israel, the nations of the formerSoviet Union and parts of Africa. Under this agreement, Faulding agreed to fundand, with our input, undertake the development work required to obtainregulatory approvals for commercializing our paclitaxel in the Fauldingterritory other than Europe. We are responsible for supplying Faulding with ourpaclitaxel and Faulding is required to purchase all of its paclitaxelrequirements from us. Faulding pays us a substantial share of its gross sales ofpaclitaxel. Faulding is currently marketing paclitaxel in more than 25countries. We cannot assure, however, that Faulding will succeed in obtainingfurther regulatory approvals to market our paclitaxel within its territory.Furthermore, if such approvals are received, we cannot assure that Faulding willmarket our paclitaxel successfully in these additional countries.

 

In Europe, we are responsible for regulatory filings and forfunding development. We will supply paclitaxel exclusively to Faulding toformulate and finish the product. We cannot assure that we will receiveregulatory approval in Europe. Should we receive approval, Faulding will thenmarket and sell the final proprietary paclitaxel formulation in Europe. We willshare the net product sales in Europe equally.

 

Faulding may terminate the agreements: (i) upon ourreorganization or insolvency; (ii) if Faulding becomes controlled by apharmaceutical company that sells paclitaxel in the Faulding territory; (iii) ifwe are controlled by Ivax Corporation or Bristol; (iv) if we are purchased by apharmaceutical company that sells paclitaxel in the Faulding territory and thatcompany refuses to be bound by the terms of the Faulding agreement; (v) if weare unable to meet the paclitaxel supply requirements of Faulding; or (vi) formaterial, uncured breach. We may terminate the agreement: (i) upon thereorganization or insolvency of Faulding; (ii) in certain circumstances, upon achange in control of Faulding; or (iii) for material, uncured breach.

 

We are required to indemnify Faulding for any defect in ourpaclitaxel that is shipped to Faulding and for uncured breaches of ourwarranties or obligations. Faulding is required to indemnify us against alllosses (i) resulting from a defect in a product manufactured by Fauldingcontaining our paclitaxel except if the defect is our fault, (ii) resulting froma product containing our paclitaxel formulated, stored, handled, promoted,distributed, registered or sold by Faulding and (iii) for uncured breaches ofFaulding's representations and warranties under the Faulding agreement.

 

In 2001 Faulding was purchased by Mayne-Nickless Limited, anAustralian company. Mayne-Nickless subsequently sold the U.S. assets of Faulding.This transaction has had a limited effect on our operations in the Fauldingterritory.

 

Tzamal We have established an exclusive supply anddistribution agreement with Tzamal Pharma for the development and distributionof paclitaxel in Israel. In January 2001, we received approval in Israel to sellpaclitaxel under the trade name Biotax(R).The Israeli Ministry of Health has approved Biotax(R)use in a variety of cancers and Tzamal is selling Biotax(R).

 

Tzamal Pharma is an Israeli pharmaceutical company, activeand well established in the Israeli pharmaceutical market and specializing,among other areas, in ethical products for the treatment of cancer, metabolicdiseases, neurological disorders and gynecology/fertility.

 

JCR In June 2001 we and JCR Pharmaceuticals Co., Ltd.entered into a mutually exclusive development, supply and distribution agreementfor paclitaxel in Japan. Under the agreement, we will be responsible formanufacturing and supplying the finished drug. Both companies will jointly beresponsible for the clinical and regulatory program necessary for seekingapproval to market paclitaxel in Japan. JCR will fund the clinical andregulatory program. JCR will be responsible for the sales and distribution ofthe product in Japan upon its approval.

 

JCR, headquartered in Ashiya, Japan, is a research anddevelopment oriented pharmaceutical manufacturer, focusing on the research ofbioactive substances such as enzymes, hormones, enzyme inhibitors, growthfactors and stimulating factors. It is also engaged in the development andresearch of bioengineered products such as recombinant human growth hormone.

 

Marketing and Sales

 

Marketing and sales of paclitaxel in the territories coveredby our agreements with Faulding are conducted by Faulding and in Israel byTzamal. Anticipated marketing and sales, if any, of paclitaxel in the U.S. andCanada, will be conducted by Abbott, and in Japan will be conducted by JCR.Currently, we have no sales force and have only limited marketing capabilities.Sales to Faulding and Abbott account for a substantial portion of our revenue.As a result, the loss of Faulding or Abbott as a customer or the failure ofFaulding or Abbott to successfully market our paclitaxel could have a materialadverse effect on us in the absence of a comparable alternative strategicalliance arrangement.

 

Competition

 

The biopharmaceutical industry is an expanding and rapidlychanging industry characterized by intense competition for product sales,financing, executive talent and intellectual property. We compete with allentities developing and producing therapeutic agents for cancer treatment, manyof whom have much greater capital resources and research and developmentcapabilities.

 

Within the paclitaxel segment of the cancer treatmentindustry, competitors' success in entering the paclitaxel market may reduceour market share and reduce the price we can charge for our paclitaxel, whichcould have a material adverse effect upon us. In addition, marketing is beinghandled exclusively by Abbott, Faulding and Tzamal within their territories.Regulatory approvals are being handled by Abbott in its territory and byFaulding in its non-European territory. Although we believe Abbott and Fauldinghave capable drug development and marketing abilities, we cannot assure thatthey will be capable or effective in gaining additional regulatory approvals ona timely basis, if at all, or be able to compete effectively with existing ornew competitors within their territories.

 

Bristol is marketing paclitaxel commercially in the U.S.,Australia, Canada, Europe and other territories. In addition, Aventis hasdeveloped a proprietary analog of paclitaxel, docetaxel, which is marketed underthe trademark Taxotere(R).Taxotere(R) is approved in theU.S., the European Union, Australia, Canada and other countries. Taxotere(R)is approved in the U.S. for treatment of patients with locally advanced ormetastatic breast cancer after failure of prior chemotherapy, and patients withlocally advanced or metastatic non-small cell lung cancer after failure of priorplatinum-based chemotherapy. While treatment with Taxotere(R)may cause certain side effects not observed with paclitaxel, Taxotere(R)competes with paclitaxel, and thereby may reduce overall paclitaxel sales.

 

The FDA has approved several generic versions of paclitaxel.Currently Ivax Corporation, Mylan Laboratories, Inc. and Bedford Laboratorieshave approval to sell generic paclitaxel in the U.S. Other generic manufacturersmay enter the U.S. market. In most cases, a European exclusivity period will endin 2003, 10 years after Bristol's initial approval. However, Ivax is marketingpaclitaxel for Kaposi's Sarcoma in Europe. We are aware of several otherpharmaceutical companies that are in the process of developing genericpaclitaxel in the U.S., Europe and elsewhere. Finally, academic and researchorganizations and pharmaceutical and biotechnology companies are pursuing, amongother things, genetically engineered drugs, chemical synthesis and cell-tissueculture that may compete with our products or technology. In addition, certaincompanies are pursuing the production of paclitaxel and other taxanes fromnatural product extraction techniques.

 

Our competitors, most notably Bristol and Aventis, havesubstantially greater capital resources, research and development capabilities,manufacturing and marketing resources and experience than we do. We expectBristol to compete intensely to maintain its dominance of the paclitaxel market.Generic competition has already caused a decline in the average price ofpaclitaxel, and as more and more competitors enter the market, the price ofpaclitaxel may erode even further. Our competitors may succeed in developingproducts that are more effective or less costly than any that may be developedby us and may receive regulatory approval before we do. Many companies andresearch institutions are also seeking means to obtain paclitaxel and taxanesfrom renewable biomass components of yew trees and other sources in order toincrease paclitaxel yields, avoid environmental concerns and reduce the cost ofbiomass. In addition, we are aware of several potential competitors that havedeveloped and patented or are developing various processes for producingpaclitaxel and paclitaxel-related substances semisynthetically, which may allowsuch competitors to produce a lower-cost paclitaxel. The development by a thirdparty of a cost-effective means to fully synthesize paclitaxel in commercialquantities or the manufacture of taxane derivatives or analogs that are moreeffective than paclitaxel in treating cancer could have a material adverseeffect on us.

Patents and Proprietary Technology

 

Our success depends in part on our ability to obtain andenforce patent protection for our products, both in the U.S. and othercountries, and operate without infringing the proprietary rights of thirdparties. The scope and extent of patent protection for our product candidates isuncertain and frequently involves complex legal and factual questions. We cannotpredict the breadth of claims that will be allowed and issued in patents relatedto biotechnology or pharmaceutical applications. Once patents have been issued,we cannot predict how the claims will be construed or enforced. In addition,statutory differences between countries may limit the protection we can obtainon some of our inventions outside of the U.S. For example, methods of treatinghumans are not patentable in many countries outside of the U.S.

 

We rely on patent and other intellectual property protectionto prevent our competitors from developing, manufacturing and marketing productsrelated to our technology. Our patents may not be enforceable and they may notafford us protection against competitors, especially since there is a lengthytime between when a patent application is filed and when it is actually issued.Additionally, there are hundreds of pharmaceutical and chemical patents beingissued every week throughout the world. Many of these have patent claims thatare difficult to categorize and interpret. Because of this, we may infringe onintellectual property rights of others without being aware of the infringement.If a patent holder believes that one of our product candidates infringes ontheir patent, they may sue us even if we have received patent protection for ourtechnology. If another person claims we are infringing their technology, wecould face a number of issues, including the following:

 

defending a lawsuit, which is very expensive and timeconsuming;

 

paying a large sum for damages if we are found to beinfringing;

 

being prohibited from selling or licensing our products orproduct candidates until we obtain a license from the patent holder, who mayrefuse to grant us a license or will only agree to do so on unfavorable terms.Even if we are granted a license, we may have to pay substantial royalties orgrant cross-licenses to our patents; and

 

redesigning our drug so it does not infringe on the patentholder's technology if we are unable to obtain a license. This may not bepossible and, even if possible, it could require substantial additional capitaland could delay commercialization.

 

The coverage claimed in a patent application can besignificantly narrowed before a patent is issued, either in the U.S. or abroad.We do not know whether any of our pending or future patent applications willresult in the issuance of patents. To the extent patents have been issued orwill be issued, some of these patents are subject to further proceedings thatmay limit their scope. It is not possible to determine which patents may providesignificant proprietary protection or competitive advantage, or which patentsmay be circumvented or invalidated. Furthermore, patents already issued to us,or patents that may issue on our pending applications, may become subject todispute, including interference proceedings in the U.S. to determine priority ofinvention. We are currently involved in opposition proceedings in Europe andother countries contesting the validity of issued patents. If our currentlyissued patents are invalidated or if the claims of those patents are narrowed,our ability to prevent competitors from marketing products that are currentlyprotected by those patents could be reduced or eliminated. We could then faceincreased competition resulting in reduced market share, prices and profit.

Paclitaxel is an unpatentable, naturally-occurring compound.Various compositions containing paclitaxel, and also various processes and othertechnologies, including those relating to extracting paclitaxel and preparingthe drug for finished formulation, are or may be patented. In addition, somemethods of administering paclitaxel are or may be patented. Some of thesepatents are owned or controlled by Bristol and Aventis. Bristol's key patentsinclude a patent that covers stabilized paclitaxel compositions for formulationand patents that cover paclitaxel dosing regimens, including the currentFDA-approved regimen for Taxol(R).Taxol(R) is a registeredtrademark of Bristol for an anti-cancer pharmaceutical preparation containingpaclitaxel. Bristol has obtained U.S. patents covering the administration methodfor paclitaxel the FDA approved. Abbott and a number of other companies havefiled applications with the FDA for generic paclitaxel based upon Bristol'sinitial FDA approval. Anyone obtaining FDA approval for generic paclitaxel willrely upon a method of administration that might infringe the Bristol patents.Bristol has sued some of those companies other than us that are seeking FDAapproval for generic paclitaxel for infringement of Bristol's patents. Thecourt ruled that several key claims of the Bristol patents are invalid. However,that ruling is being appealed by Bristol. The appeals process could takeanywhere from several months to several years. Under U.S. laws, during thepatent appeals process, Bristol would retain U.S. patent rights to the disputedpatents until all appeals are exhausted. Therefore, if the appeal is ultimatelyresolved in Bristol's favor, and the validity of Bristol's patents isupheld, generic competitors that have sold product could face substantialliability for patent infringement, and could be prevented from marketingpaclitaxel in the U.S. using the patented method of administration for the lifeof the patent. If the decision of the lower court is upheld by the court ofappeals, others will be allowed to sell generic paclitaxel for uses covered bythe invalidated patent claims.

 

In September 2000, we and Abbott filed a patent infringementsuit in the U.S. District Court for the District of Colorado against Bristolalleging infringement by Bristol of two patents we own: U.S. Patent numbers5,972,992 and 5,977,164 which relate to paclitaxel formulation. In November 2001we, Abbott and Bristol settled this suit. In connection with this settlement,the parties entered into a non-exclusive cross license agreement relating topaclitaxel. The agreement grants us a license under Bristol patents to marketinjectible paclitaxel, pursuant to an ANDA approval. We have the right under theagreement to sublicense to Abbott.

 

The agreement grants BMS a license to NaPro's patentsrelating to stable paclitaxel formulations. The scope of both licenses islimited to the polyethoxylated castor oil and ethanol formulation currentlyapproved by the FDA.

 

We are aware of competitors and potential competitors who arepursuing patent protection for various aspects of the extraction, preparation,formulation, administration and production of natural, semisynthetic andsynthetic paclitaxel. If our technology, products or activities are deemed toinfringe the other companies' rights, we could be subject to damages orprevented from using the technology that is infringing other companies'rights, or we could be required to obtain licenses to use that technology. Wecannot be sure that we would be able to obtain those licenses on termsacceptable to us, or at all. If we were unable to obtain those licenses or wereprevented from using our technology, we could encounter significant delays inproduct market introductions while we attempt to design around the patents orrights infringed, or we could find the development, manufacture or sale ofproducts to be impossible, any of which would have a material adverse effect onus. In addition, we could experience a loss of sales and incur substantial costin defending ourselves and indemnifying Abbott, Faulding, Tzamal or JCR inpatent infringement or proprietary rights violation actions brought againstthem. We could also incur substantial cost if we find it necessary to assertclaims against third parties to prevent the infringement of our patents andproprietary rights by others. Participation in such infringement proceedingscould have a material adverse effect on us, even if the eventual outcome wasfavorable.

 

We also rely on trade secrets, know-how and continuingtechnological advancement to maintain our competitive position with ourtechnology, some of which is not patented. In addition, our success will dependin part on our ability to protect our trade secrets related to extracting,isolating and purifying paclitaxel. Although we have entered intoconfidentiality agreements with employees, consultants and collaborators, whichcontain assignment of invention provisions, we cannot assure that others willnot gain access to these trade secrets, that such agreements will be honored orthat we will be able to effectively protect our rights to unpatented tradesecrets. Moreover, we cannot assure that others will not independently developsubstantially equivalent proprietary information and techniques or otherwisegain access to our trade secrets.

 

In June 2001 we and Abbott filed a patent infringement suitin the United States District Court for the Western District of Pennsylvaniaagainst Mylan Laboratories, Inc. The suit alleges infringement of U.S. Patentnumbers 5,733,888, 5,972,992, 5,977,164, 6,140,359, and 6,306,894 which relateto paclitaxel. Mylan has asserted defenses that if successful, would result inthe invalidity or unenforceability of the patents. A finding of invalidity orunenforceability of the patents could have a material adverse affect on us.

 

Government Regulation and Product Approvals

 

Research, preclinical development, clinical trials,manufacturing and marketing activities are subject to regulation for safety,efficacy and quality by governmental authorities in the U.S. and othercountries. Regulations govern, among other things, the testing, manufacture,safety, efficacy, labeling, storage, record keeping, approval, advertising andpromotion of our products. Product development and approval within thisregulatory framework take a number of years and involve the expenditure ofsubstantial resources.

 

The steps required before a pharmaceutical agent may bemarketed in the U.S. include preclinical laboratory tests, animal pharmacologyand toxicology studies and formulation studies, the submission of aninvestigational new drug application to the FDA for human clinical testing, thecarrying out of adequate and well-controlled human clinical trials to establishthe safety and efficacy, the submission of a new drug application to the FDA,and FDA approval of the new drug application. In addition to obtaining FDAapproval for each product, each domestic drug manufacturing establishment mustbe registered with the FDA. Domestic drug manufacturing establishments aresubject to regular inspections by the FDA and must comply with FDA regulations.

 

Preclinical studies include the laboratory evaluation of *invitro* pharmacology, product chemistry and formulation, as well as animalstudies to assess safety. Preclinical safety tests must be conducted bylaboratories that comply with FDA regulations. The results of some of thepreclinical tests form a part of an investigational new drug application alongwith the proposed clinical study, and chemistry and manufacturing information.The investigational new drug application process may be costly.

 

Clinical trials must be sponsored and conducted in accordancewith good clinical practice.

 

Clinical trials are typically conducted in three sequentialphases. In Phase I, the initial introduction of the drug into a small number ofhealthy volunteers is undertaken. The drug is evaluated for safety. The Phase Itrial must also provide pharmacological data that is sufficient to design thePhase II trials. For certain drugs such as cancer drugs Phase I trials may beconducted in patients rather than healthy volunteers.

 

Phase II trials involve studies in a limited patientpopulation in order to obtain initial indications of the efficacy of the drugfor specific, targeted indications, determine dosage tolerance and optimaldosage, and

identify possible adverse affects and safety risks. When acompound is determined preliminarily to be effective and to have an acceptablesafety profile in Phase II evaluation, Phase III trials can be undertaken toevaluate safety and efficacy further in expanded patient populations atgeographically diverse clinical trial sites. Positive results in Phase II are noguarantee of positive results in Phase III.

 

The results of the clinical trials and manufacturing,toxicology and pharmacology information are submitted to the FDA in the form ofa New Drug Application. The approval of an NDA permits commercial-scalemanufacturing, marketing, distribution, and sale of the drug in the U.S. The FDAmay deny a new drug application filed by us or our collaborators if theapplicable scientific and regulatory criteria are not satisfied. The FDA mayrequire additional testing or information, and may require post-approvaltesting, surveillance and reporting to monitor the products. The FDA mayultimately decide that an NDA filed by us or our collaborators does not meet theapplicable agency standards, and even if approval is granted, it can be limitedor revoked.

 

Among the conditions for new drug approval is the requirementthat the prospective manufacturer's manufacturing systems conform to the FDA'sregulations on current Good Manufacturing Practices. In complying with theseregulations, manufacturers must continue to expend time and resources in orderto ensure compliance. Thus, even if we acquire regulatory approval forpaclitaxel, our current and any future facilities will be subject to periodicreview and inspections by the FDA or other regulatory authorities. The FDA, theAustralian TGA and the European EMEA have inspected our paclitaxel manufacturingfacilities and have found them to be in compliance with applicable regulationsand to be acceptable for the manufacture of bulk paclitaxel. Subsequentdiscovery of previously unknown problems with a product or our manufacturingfacilities may result in restrictions, including withdrawal of the product fromthe market.

 

When patents or other periods of exclusivity on brand-namedrugs expire, manufacturers can apply to the FDA to sell generic versions bysubmitting an ANDA. Generic applicants submit information on the drug'schemistry, manufacturing stability, quality controls, packaging and labeling andshow that the generic drug and the brand-name drug are equivalent. The FDA'sreview process for an ANDA may take from 6 to 24 months. Along with Abbott, inMarch 2001 we filed an ANDA to permit us to begin marketing paclitaxel in theUnited States. We do not know when, if at all, the FDA will complete itsapproval process of our ANDA.

 

Outside the U.S., our ability to market a product iscontingent upon receiving a marketing authorization from the appropriateregulatory authority. This foreign regulatory approval process includes many ofthe same steps and uncertainties associated with FDA approval described above.

 

We are also subject to U.S. statutes and regulationsapplicable to exporting drugs. Those laws authorize the export of a drug withoutmarketing approval in the U.S. to any country if certain conditions are met.

 

The adoption by federal, state or local governments ofsignificant new laws or regulations or a change in the interpretation orimplementation of existing laws or regulations relating to environmental orother regulatory matters could increase the cost of producing products, delayregulatory approval or otherwise adversely affect our ability to produce or sellour paclitaxel or other products.

 

In addition to regulations enforced by the FDA, we are alsosubject to, among others, the regulations of the European Union, the U.S.Environmental Protection Agency, the Department of Interior (U.S. Fish andWildlife Services and the Bureau of Land Management), the Department ofAgriculture (U.S. Forest Service) and other countries and regulatory agencies.We are also subject to regulation under the Occupational Safety and Health Act,the Environmental Protection Act, the Toxic Substances Control Act, the ResourceConservation and Recovery Act and other present and future federal, state orlocal regulations. Our research and development activities involve thecontrolled use of hazardous materials, chemicals and various radioactivecompounds.

 

Our manufacturing partners are also subject to such laws andregulations, both in the U.S. and in any other countries in which they operate.Failure by our manufacturing partners to comply with such laws and regulationscould lead to an interruption in our supply of necessary raw materials.

 

We have filed DMFs and other documents describing portions ofour proprietary manufacturing processes with regulatory agencies in the U.S.,Australia and Europe, relating to our manufacture of our paclitaxel. Faulding,referring to our Australian DMF, has received marketing approval in Australiaand other countries for paclitaxel.

 

Research and Development

 

During the years ended December 31, 2001, 2000 and 1999, wespent approximately $10.3 million, $7.6 million and $5.8 million respectively,on research and development activity and to produce paclitaxel. Research anddevelopment is expected to remain a significant expense of our business. In theshort term, research and development is expected to concentrate on improvementof paclitaxel yield, production cost reduction, development of our semisynthesisprocess for paclitaxel production, and yield improvement in our paclitaxelproduction methodology for processing needles and limbstock. In addition, we areactively engaged in genomics research targeted at creating genetic therapeuticstargeting human disease, technology directed at improving plant traits anddeveloping technology useful in functional genomics and diagnostics. We plan tocontract out research considered essential but for which we lack facilities orstaff. We continue in early stage research and development of other potentialnatural product cancer chemotherapeutic drugs with novel mechanisms of action.We are assessing later-stage pharmaceutical product development opportunities inan effort to expand our pipeline of new products.

 

Foreign and Domestic Operations; Export Sales

 

The following table sets forth, for the past three years,sales, profitability (operating loss), and identifiable assets attributable toour U.S. and foreign operations (amounts in thousand dollars):

 
                                                   Year Ended December 31,                                            2001             2000        1999                                            ----          ----           ----U.S. Sales to Unaffiliated Customers (1)  $ 15,711     $   8,148      $   7,592Operating Loss         U.S.                             $(26,444)     $(16,168)      $(10,624)         Canada                                (73)          (79)          (165)Identifiable Assets         U.S.                             $ 34,161       $ 34,959      $ 16,095         Canada                              2,900          3,042         3,162____________
 (1) Includes export sales into Australia of $7,576 in2001, $7,720 in 2000 and $5,121 in 1999, as well as sales into Israel of $1,954in 2001 and $288 in 2000.

 

Sales of our paclitaxel into foreign markets accounted forapproximately 60% of our revenue for the year ended December 31, 2001, 98% ofour revenue for the year ended December 31, 2000 and 68% of our revenue for theyear ended December 31, 1999. We anticipate that a lower portion of our revenuewill be derived from sales of our products in foreign markets in future years.Pending regulatory approval, we anticipate sales to Abbott will increase in2002.

 

However a substantial portion of our sales and operationswill continue to be subject to the risks associated with foreign business,including economic or political instability, shipping delays, fluctuations inforeign currency exchange rates and various trade restrictions, all of whichcould have a significant impact on our ability to deliver products on acompetitive and timely basis. Future imposition of, or significant increases in,the level of customs duties, export quotas, drug regulatory restrictions orother regulatory or trade restrictions could have a material adverse effect onus.

 

Employees

 

As of February 28, 2002, we had 185 full-time employees, 2part-time employees, and 2 project employees. 14 of these employees hold Ph.D.or M.D. degrees. 46 employees were engaged in drug development, 26 in qualityassurance, 71 in manufacturing, 37 in administration and finance, 5 inregulatory affairs, and 4 in legal. We believe that our relations with ouremployees are good.

 

 

Item 2

 

Properties

 

We lease 54,000 square feet of space in Boulder, Colorado,used for executive offices, research and development and commercialmanufacturing. We lease an additional 27,000 square feet of space in Boulder,used for manufacturing, 10,000 square feet of space in Boulder, used fordevelopment, and 20,000 square feet of warehouse space in Weld County, Colorado.We own 5 acres of undeveloped land in Longmont, Colorado, with options topurchase an additional 6.3 acres. We lease 4,400 square feet in Newark,Delaware, used for research and development, 1,100 square feet in Allentown,Pennsylvania, used for research and development, and 2,100 square feet of officespace in New York City.

 

 

Item 3

 

Legal Proceedings

 

In September 2000 we and Abbott filed a patent infringementsuit in the U.S. District Court for the District of Colorado against Bristolalleging infringement of U.S. Patent numbers 5,972,992 and 5,977,164 whichrelate to paclitaxel. In November 2001 we, Abbott and Bristol settled this suit.In connection with this settlement, the parties entered into a non-exclusivecross license agreement relating to paclitaxel. The agreement grants us alicense under Bristol patents to market injectible paclitaxel, pursuant to anANDA approval. We have the right under the agreement to sublicense to Abbott.The agreement grants Bristol a license to our patents relating to stablepaclitaxel formulations. The scope of both licenses is limited to thepolyethoxylated castor oil and ethanol formulation currently approved by theFDA.

 

In June 2001 we and Abbott filed a patent infringement suitin the United States District Court for the Western District of Pennsylvaniaagainst Mylan Laboratories, Inc. The suit alleges infringement of U.S. Patentnumbers 5,733,888, 5,972,992, 5,977,164, 6,140,359 and 6,306,894, all of whichrelate to paclitaxel. Mylan has asserted defenses that, if successful, wouldresult in the invalidity or unenforceability of the patents. A finding ofinvalidity or unenforceability of the patents could have a material adverseaffect on us.

 

 

Item 4

 

Matters Submitted to Stockholders' Vote

 

None.

 

 

Part II

 

Item 5

 

Market Information and Related Stockholder Matters

 

Market Information

 

Our common stock is traded in the Nasdaq National Marketunder the symbol "NPRO." The following table sets forth, for theperiods indicated, the high and low closing sale prices for the common stock.

 

High
Low
2001
Fourth Quarter

Third Quarter

Second Quarter

First Quarter
$13.00

10.62

11.88

8.25
$ 6.11

6.00

6.44

5.53
2000
Fourth Quarter

Third Quarter

Second Quarter

First Quarter
$12.25

11.00

8.63

10.50
$ 5.25

5.13

2.50

2.50
 

Stockholders

 

As of December 31, 2001, we had 254 stockholders of record.

 

Dividends

 

To date, we have not paid any dividends on our common stock. Weintend to retain future earnings, if any, to finance the operation and expansionof our business and, therefore, we do not anticipate paying any cash dividendson our common stock in the foreseeable future, if at all.

 

Recent Sales of Unregistered Securities

 

In February 2002 we sold 888,889 shares of common stock and $8million principal amount of five-year 4% debentures convertible into commonstock at $15 per share. As issuances to accredited investors not involving anypublic offering, the sales were exempt from registration under Section 4(2) ofthe Securities Act and Regulation D thereunder.

 

In 2001, we issued 24,618 shares of common stock upon exerciseof stock options held by consultants, which included one of our formerdirectors. As issuances to sophisticated investors not involving any publicoffering, the sales were exempt from registration under Section 4(2) of theSecurities Act.

 

In April 2001, we sold 888,889 shares of common stock to Abbottupon achievement of a development milestone. As an issuance to an accreditedinvestor not involving any public offering, the sale of common stock to Abbottwas exempt from registration under Section 4(2) of the Securities Act andRegulation D thereunder.

 

 

Item 6

 

Selected Financial Data

 

The selected financial data presented below for each year inthe five years ended December 31, 2001, are derived from our financialstatements, which have been audited by Ernst & Young LLP, independentauditors, and are qualified by reference to such Financial Statements and Notesthereto. The data presented below should be read in conjunction with ourconsolidated financial statements at December 31, 2001 and 2000 and for each ofthe three years in the period ended December 31, 2001, and the related Notesthereto, "Management's Discussion and Analysis of Financial Condition andResults of Operations" and other financial information included elsewherein this report.

 
                                                                         Year Ended December 31,                                                       2001         2000         1999         1998         1997                                                       ----         ----         ----         ----         ----                                                                    (In thousands, except per share data)Statement of Operations Data:Product Sales                                         $15,711     $  8,148     $  7,592     $  4,952     $  3,814                                                      -------     ---------    ---------    --------     --------Expense:     Cost of products sold                             19,134        6,749        6,291        6,244        8,351     Research and development                          10,331        7,586        5,756        3,729        3,418     General and administrative                        10,797        7,815        6,188        6,458        5,992     Asset writedowns                                   1,966        2,245          146        1,899         (141)                                                     ---------  -----------  -----------  -----------  -----------                                                       42,228       24,395       18,381       18,330       17,620                                                     ---------   ----------   ----------   ----------  -----------Operating loss                                        (26,517)     (16,247)     (10,789)     (13,378)     (13,806)Other income (expense):     License fees                                       1,092        -            2,320       11,110        -     Interest income                                      793          372          309          550          494     Interest expense                                  (1,136)        (750)        (842)        (902)      (2,161)                                                    ----------  -----------  -----------  -----------  -----------Net loss                                             $(25,768)    $(16,625)    $ (9,002)   $  (2,620)    $(15,473)                                                     =========    =========    =========   ==========    =========Net loss attributable to common stockholders         $(25,768)     (16,625)    $(10,213)   $  (3,212)    $(15,537)                                                     =========   ==========    =========   ==========    =========Basic and diluted net loss per share               $     (.93)  $     (.69)   $   (0.50)  $    (0.22)   $   (1.28)                                                   ===========  ===========   ==========  ===========   ==========Weighted average shares outstanding                    27,585       23,924       20,554       14,642       12,104                                                    ==========   ==========   ==========  ===========   ==========                                                                         Year Ended December 31,                                                       2001         2000         1999          1998         1997                                                       ----         ----         ----          ----         ----                                                                            (In thousands)Balance Sheet Data:Cash, cash equivalents and short-term securities      $10,144      $18,982     $  1,937     $  7,441     $  8,102Working capital                                        13,582       23,168        2,915        7,121       (2,485)Total assets                                           37,061       38,001       19,257       25,666        30,358Long term debt, net of current maturities              19,846       14,953        4,723           80          480Deferred income, long term                              6,508        -            -            -            -Senior convertible debt, long term portion              -            -            -            5,176        -Senior convertible redeemable preferred stock           -            -            -            3,805        4,344Minority interest                                       -            -              622          622        2,574Accumulated deficit                                   (95,013)     (69,245)     (52,620)     (43,618)     (40,998)Stockholders' equity                                    1,137       18,587       11,133       10,884        7,262
 

Item 7

 

Management's Discussion and Analysis of Financial Conditionand Results of Operations

 

The following discussion and analysis provides informationthat management believes is relevant to an assessment and understanding of theresults of operations of NaPro BioTherapeutics, Inc. You should read thisdiscussion in conjunction with the Financial Statements and Notes includedelsewhere in this report. Special Note: Certain statements set forth belowconstitute "forward-looking statements" within the meaning of thePrivate Securities Litigation Reform Act of 1995, referred to as the"Reform Act". See "Special Note Regarding Forward LookingStatements."

General

 

We are a biopharmaceutical company focused on thedevelopment, production and licensing of complex natural product pharmaceuticalsas well as the development and licensing of novel genomic technologies forapplications in human therapeutics and diagnostics, pharmacogenomics andagrobiotechnology. Our lead product is paclitaxel, a naturally occurringchemotherapeutic anti-cancer agent found in certain species of yew, or *Taxus*trees. In addition to our efforts with paclitaxel and genomics, we are alsoworking on several types of compounds that have promising activity asanti-cancer agents. We believe some of these agents function by novelmechanisms, which may increase their likelihood of success as newchemotherapeutics. We are also actively engaged in evaluating the in-licensingor purchase of potential new products and/or technologies, whether or not thoseproducts or technologies are derived from natural products. Our evaluation ofnew products and technologies may involve the examination of individualmolecules, classes of compounds, or platform technologies, in both cancer andother therapeutic areas. Acquisitions of new products or technologies mayinvolve the purchase of such products or technologies, or the acquisition of, ormerger with, other companies.

 

We continue to incur substantial expense for research anddevelopment related to improvement of paclitaxel yield, production costreduction, development of our semisynthesis process, genomics research anddevelopment, and development of other potential drugs. Accordingly, we haveincurred significant losses, including losses of $25.8 million, $16.6 millionand $9 million for the years ended December 31, 2001, 2000 and 1999,respectively, resulting in an accumulated deficit of $95 million as of December31, 2001. We expect that we will continue to have a high level of operatingexpense and will be required to make significant up-front expenditures inconnection with our paclitaxel biomass procurement, product development andresearch and development activities. We anticipate that operating losses willcontinue until such time, if ever, as we are able to generate sufficient salesto support our operations.

 

Primarily, our ability to generate sufficient sales tosupport our operations depends upon the successful completion of our paclitaxeldevelopment program. Our strategy for that program has been to form strategicalliances through long-term exclusive agreements with major pharmaceuticalcompanies. On July 23, 1999, we entered into an exclusive collaborativeagreement of up to 20 years covering the U.S. and Canada with AbbottLaboratories to develop and commercialize one or more formulations of paclitaxelfor the treatment of a variety of cancers. Under our agreement with Abbott, weare responsible for supply of bulk drug; development activity is conductedjointly. Abbott is responsible for finishing, regulatory filings, marketing, andsale of the finished drug product. Most primary decisions related to thepaclitaxel development program are made by a joint Abbott-NaPro DevelopmentCommittee. In March 2001 we and Abbott filed an Abbreviated New DrugApplication, or ANDA, with the U.S. Food and Drug Administration, or FDA, forpaclitaxel.

 

In connection with the Abbott agreement, we may receive,including $32 million received through December 31, 2001, total funding of up to$118 million in the form of up to $30 million in development milestones, up to$57 million in marketing milestones, $20 million in secured debt, and $11million in equity investments. Through April 2001 Abbott had purchased 2,000,000shares of our common stock for a total purchase price of $11 million.

 

We received an initial $1 million fee from Abbott in July1999. Contingent upon our successful achievement of all development milestones,we could receive up to an additional $29 million in development fees. Should wereceive approval of our current ANDA, and upon commencement of commercial sales,we will receive a portion of such $29 million.

 

We have received $20 million of secured debt from Abbott. Thedebt bears a primary interest rate of 6.5% and is due in full on the earlier of:(i) the second anniversary of the first sale of finished product by Abbott to awholesaler or end-user customer following approval of finished product by theFDA; (ii) the termination of the Abbott agreement; or (iii) January 1, 2007. Thedebt is limited to a borrowing base of collateralized assets, recomputedmonthly. The majority of our hard assets are security for the debt.

 

Contingent upon receiving regulatory approval and achievingcertain commercial sales thresholds over several years, we may receiveadditional milestone payments from Abbott of up to $57 million. We cannot assurethat regulatory approval or sales thresholds necessary to trigger any of thefuture milestone payments will be achieved.

 

Under terms of the agreement, Abbott purchases bulk drug fromus. If the paclitaxel product is approved and commercialized, Abbott will pay apercentage of its net paclitaxel sales to us, less Abbott's payments forpurchase of bulk drug. Abbott may terminate the agreement at any time with orwithout cause. Should Abbott terminate without cause, it is obligated to makepayments to us.

 

In 1992 we entered into a 20-year exclusive agreement withF.H. Faulding & Co., Ltd., a large Australian pharmaceutical company, forthe clinical development, sale, marketing and distribution of paclitaxel.Faulding actively markets anti-cancer pharmaceuticals and other health careproducts in Europe, Australia, Asia, South America, and other regions throughoutthe world. In 2000, we amended the Faulding agreement to, among other things,add additional countries to Faulding's exclusive territory. In 2001 we enteredinto a separate agreement with Faulding covering development and sale ofpaclitaxel in Europe. Including the new agreement for Europe, the Fauldingterritory includes substantially all of the world other than the U.S., Canada,Japan, Israel, the former Soviet Union and parts of Africa. Faulding hasreceived marketing approval for, and is selling paclitaxel as ANZATAX(TM)in more than 25 countries.

 

In Europe, we are responsible for regulatory filings and willsupply paclitaxel exclusively to Faulding to formulate and finish the product.We cannot assure that we will receive regulatory approval in Europe. Should wereceive approval, Faulding will then market and sell the final proprietarypaclitaxel formulation in Europe. Under the agreement, Faulding paid an up-frontlicensing fee to us of $7.5 million. We will share equally the net sales of theproduct in Europe.

 

In January 2001 we received approval in Israel to sellpaclitaxel under the trade name Biotax(TM).We have established an exclusive supply and distribution agreement with TzamalPharma for the development and distribution of paclitaxel in Israel. The IsraeliMinistry of Health has approved Biotax for use in treating a variety of cancers.

 

In June 2001 we and JCR Pharmaceuticals Co., Ltd. enteredinto a mutually exclusive development, supply and distribution agreement forpaclitaxel in Japan. Under the agreement, we will be responsible formanufacturing and supplying the finished drug. JCR and we will jointly beresponsible for the clinical and regulatory program necessary for seekingapproval to market paclitaxel in Japan. JCR will fund the clinical andregulatory program. JCR will be responsible for the sales and distribution ofthe product in Japan upon its approval.

 

JCR, headquartered in Ashiya, Japan, is a research anddevelopment oriented pharmaceutical manufacturer, focusing on the research ofbioactive substances such as enzymes, hormones, enzyme inhibitors, growthfactors and stimulating factors. It is also engaged in the development andresearch of bioengineered products such as recombinant human growth hormone.

 

In anticipation of final FDA approval for commercial sales,we have purchased land in Boulder County, Colorado, for the possibleconstruction of new manufacturing and headquarters facilities. We havesubstantially expanded, and continue to expand, our existing manufacturingfacilities. We cannot assure, however, that we will receive regulatory approvalof paclitaxel (in the U.S., Europe or Japan) or that we and our strategicpartners will successfully market it. We anticipate financing the constructionand expansion with new capital, either in the form of debt or otherwise, ifavailable on acceptable terms, although we cannot assure that we will be able todo so.

 

Research and Development

 

Development and research are major focuses for us. We discussthe nature and status of our development and research in depth in Item1-Business, in the General, Paclitaxel Overview, Paclitaxel Development,Biomass, Manufacturing, Strategic Alliances, Competition, Patents andProprietary Technology, Government Regulation and Product Approvals, andResearch and Development sections, and in the General section of this Item 7.

 

We have incurred the following expense on research anddevelopment projects:

 

2001
2000
1999
Oncology
$ 8,205,000
$ 7,482,000
$ 5,756,000
Genomics
2,126,000
104,000
                  -    
$10,331,000      =========
$ 7,586,000      =========
$ 5,756,000      =========
 

Our development and research activity is subject to change aswe develop a better understanding of our projects and their prospects.Accordingly, we cannot estimate the timing or the cost of the effort necessaryto complete the projects, the estimated completion dates or the timing ofcommencement of material net cash inflows from the projects. We have includedthe risks and uncertainties associated with completing development on schedulein the Special Note Regarding Forward-looking Statements, below.

Results of Operations

 Year Ended December 31, 2001 Compared to Year Ended December31, 2000*Sales. 2001 sales were $15.7 million, up $7.6 millionfrom 2000. Sales to Abbott and Tzamal for 2001 were $6.1 million and $2 million,up $6.1 million and $1.7 million from 2000.

 
*Cost of Products Sold. Cost of products sold for 2001 was$19.1 million, up $12.4 million from 2000. The increase was primarilyattributable to a 141% increase in volume ($9.6 million) and an increase in unitproduction cost ($1.6 million). The unit production cost increased as we rapidlyexpanded capacity by modifying equipment for increased volume and by addingshifts, resulting in training and other start-up cost. We anticipate that as thevolume-related modifications are assimilated and staff is fully trained, ourunit production cost will decrease. However, we cannot assure that this willoccur.

 
*Research and Development Expense. Research anddevelopment expense for 2001 was $10.3 million, up $2.7 million from 2000.Genomics research and development was $2 million of the increase; oncology wasthe other $700,000.

 
*General and Administrative Expense. General andadministrative expense for 2001 was $10.9 million, up $3.1 million from 2000.The increase is attributable primarily to increased regulatory expense ($1.3million), increased compensation ($800,000) and increased consulting expense($600,000).

 
*Asset Writedowns. Asset writedowns for 2001 were $1.9million, down $300,000 from 2000. In 2001 we recorded a $1 million writedown ofproduction equipment in the Boulder extraction facility related to operationsthat we have transferred to a lower cost third party vendor. We expensedpreliminary engineering and design cost of a considered new production facilitywhen we determined that we could expand capacity in our existing facilitiessufficiently to meet demand in at least the near future ($900,000).

 

The 2000 amount was attributable to prior construction costthat was not applicable in the redesign of the manufacturing facilities inBoulder, Colorado.

 
*License Fee Income. License fees for 2001 were $1.1million. There was no similar amount in 2000. Although license fees andmilestone payments are unusual and may be non-recurring, $7.5 million wasreceived under the Faulding European agreement and $1.5 million under the JCRPharmaceutical Japanese agreement. The 2001 income represents amortization ofthese payments.

 
*Interest Income. Interest income for 2001 was $800,000,up $400,000 from 2000. The increase was primarily attributable to higher overallbalances of interest bearing investments.

 
*Interest Expense. Interest expense for 2001 was $1.1million, up $300,000 from 2000. The increase was primarily attributable to a $5million higher balance on the Abbott loan.

 

Year Ended December 31, 2000 Compared to Year Ended December31, 1999
*Sales. 2000 sales were $8.1 million, up $500,000 from1999. Sales to Faulding for 2000 were $7.7 million, up $2.6 million from 1999.The increase was mainly due to an increase in the number of countries in whichFaulding was licensed to sell paclitaxel. Sales to Ivax ended in 1999.

 
*Cost of Products Sold. Cost of products sold for 2000 was$6.7 million, up $400,000 from 1999. The increase was primarily attributable toa 29% increase in volume ($1.2 million) and start-up cost associated with theextraction facility ($800,000), offset by a reduction in unit production cost($1.5 million).

 
*Research and Development Expense. Research anddevelopment expense for 2000 was $7.6 million, up $1.8 million from 1999.Oncology research and development was $1.7 million of the increase; genomics wasthe other $100,000.

 
*General and Administrative Expense. General andadministrative expense for 2000 was $7.8 million, up $1.6 million from 1999. Theincrease is attributable primarily to increased compensation, increasedregulatory expense and increased recruiting expense.
*Asset Writedowns. Asset writedowns for 2000 were $2.2million, up $2.1 million from 1999. The increase was attributable to priorconstruction cost that had no applicability in the redesign of the manufacturingfacilities in Boulder, Colorado.

 
*License Fee Income. License fees for 1999 were $2.3million. There was no similar amount in 2000. The 1999 amount included $1million in milestone payments under the Abbott agreement. The remainder of the1999 license fees were paid by Ivax Corporation. We expect no further paymentsfrom Ivax.

 
*Interest Income. Interest income for 2000 was $400,000,up $100,000 from 1999. The increase is primarily attributable to higher overallbalances of interest bearing investments.

 
*Interest Expense. Interest and other expense for 2000 was$800,000, the same as 1999. Decreased interest on the senior convertible debtbecause of the final conversion was offset by interest on the Abbott loan.

 

Liquidity and Capital Resources

 Our capital requirements have been, and will continue to be,significant. As of December 31, 2001, we had a working capital balance of $13.6million compared to a working capital balance of $23.2 million as of December31, 2000. To date, we have funded our capital requirements primarily with thenet proceeds of public offerings of common stock of approximately $21.1 million,with private placements of equity securities of approximately $54.8 million,with the exercise of warrants and options of $7.8 million and with net borrowingof $20 million.

 

In February 2002 we sold privately $8 million of common stockissued at $9.00 per share and $8 million principal value of five-year 4%debentures convertible into common stock at $15 per share. No placement agentwas involved in the transaction. Our net proceeds were $15,725,000. Wesubsequently filed with the SEC to register the resale of the shares under theSecurities Act of 1933. We may pay the debenture interest in cash or commonstock at our option. The debentures automatically convert into common stockduring the first two years if the average price of the common stock for 15trading days is $22, and during the last three years if the average price for 30trading days is $16. If we have insufficient funds to repay the debentures infull at maturity or upon acceleration, the holders of the debentures may electto convert the outstanding principal balance and any unpaid accrued interest onthe debentures into shares of common stock at a conversion price equal to thethen current twenty (20) day average trading price of the common stock. Theconversion price of the common stock in such a circumstance could be materiallybelow the price at which we otherwise would be willing to issue our commonstock. Issuance of common stock at such a price could result in substantialdilution to our other stockholders and could have a material adverse effect onthe market price of our common stock.

 

We believe existing capital and projected 2002 sales willprovide adequate capital to fund our operations and capital expenditures in2002. However, pharmaceutical development is a costly and time consumingprocess. We may in-license or purchase new products or technologies. The cost ofacquiring and developing such resources, and related capital expenditures, maybe very large. As a result, we may seek additional capital. If U.S. approval ofour ANDA for paclitaxel is significantly delayed, we may need to seek additionalcapital. We cannot assure that we will be able to obtain such capital.

 

Working Capital and Cash Flow Cash and cash equivalentsdecreased $8.8 million to $10.1 million for the year ended December 31, 2001from $19 million at December 31, 2000. Net cash used by 2001 operations of $11.2million and by investing activity of $8.8 million was offset by financingactivity of $11.2 million.

 

Inventory was $8.1 million at December 31, 2001. The amountof work-in-process inventory and finished goods inventory is dependent on anumber of factors, including the shipping requirements of our strategicpartners, our production planning for meeting those needs, and the timing ofseasonal biomass harvests. Inventory balances may vary significantly duringproduct development and launch periods.

 

We anticipate that the level of our accounts receivable mayincrease significantly as we anticipate the regulatory approval to sellpaclitaxel in the U.S.

 

Capital Expenditures We spent $8.8 million during 2001for capital projects. These expenditures primarily included manufacturingcapacity expansion, plantation cost, laboratory equipment purchases and landacquisition.

 

The amount and timing of future capital expenditures willdepend upon numerous factors, including:

 

the cost of manufacturing expansion for paclitaxel;

the development of new products;

the acquisition of new products or technologies;

the cost of manufacturing resources for new products;

the nature of our relationship with our strategic partners;

the progress of our research and development programs;

changes in manufacturing processes;

the magnitude and scope of these activities;

competing technological and marketing developments; and

changes in or terminations of existing strategic  relationships.

 

In 2002 we anticipate significant expenditures for improving efficiency andexpanding capacity at our existing facilities. The expanded scope of ourresearch and development activity will require significant additions tolaboratory equipment. All of these factors, and others, lead us to expect acontinued high level in capital expenditures in 2002. Although we may seekadditional long-term financing to fund the increases in capital expenditures, wecannot assure that we can obtain such financing on terms which are acceptable tous.

 

Net Operating Loss Carryforwards As of December 31, 2001, we hadapproximately $82 million of net operating loss carryforwards to offset futuretaxable income. Tax law provides limits on the utilization of net operating losscarryforwards if there has been a "change of ownership" as describedin Section 382 of the Internal Revenue Code. Such a change of ownership maylimit our utilization of our net operating loss carryforwards, and could betriggered by sales of securities by us or our stockholders.

Critical Accounting Policies

We have identified certain accounting policies as critical to our businessoperations and the understanding of our results of operations. The impact andany associated risks related to these policies on our business operations isdiscussed throughout this Item 7 where such policies affect our reported andexpected financial results. For a detailed discussion on the application ofthese and other accounting policies, see Note 1 in the Notes to our ConsolidatedFinancial Statements.

Use of Estimates: Policy: In preparing financial statements in conformitywith generally accepted accounting principles we use estimates and assumptions.Actual results could vary from the estimates we use. Comment: Our accountingprocesses require us to make estimates and assumptions that affect the reportedamount of assets and liabilities, and the reported amounts of expense during thereporting period. We cannot assure that actual results will not differ fromthose estimates.

Inventory: Policy: We state inventory at the lower of cost (first-in,first-out method) or market.

Plantation Cost: Policy: We have determined the cultivation of renewablesources of biomass to be used in the manufacture of paclitaxel is a technicallyfeasible business strategy. Paclitaxel is a naturally occurring cancer-fightingcompound found in certain species of yew (*Taxus*) trees. We capitalizeplantation expenditures incurred prior to the first commercial harvest on eachplanting of trees. Plantation expenditures include the acquisition cost of treesand the related cost of planting and growing. We deplete such cost usingestimated units of production over the expected number of annual harvests, sixto eight. The number and timing of harvests can vary depending on productdemand. The recovery of plantation cost may be dependent on approval by the U.S.Food and Drug Administration, or FDA, of our paclitaxel. Delay or lack of FDAapproval (among other circumstances) could cause us to consider the possibilityof impairment of our plantation cost in accordance with Financial AccountingStandards Board, or FASB, Statement 121. Any such impairment could be materialto our financial position and results of operations.

Long-Lived Assets: Policy: We review the carrying amount of long-lived assetswhen facts and circumstances suggest they may be impaired. If this reviewindicates long-lived assets will not be recoverable as determined based on theundiscounted cash flow estimated to be generated by these assets, we reduce thecarrying amount of these long-lived assets to estimated fair value or discountedcash flow, as appropriate.

Comment on Inventory, Plantation Cost and other Long-Lived Assets policies:We have invested substantial amounts of capital in these assets. Our accuratemeasurement and evaluation of these assets is important to the fair presentationof our financial position and results of operations. We follow very specific anddetailed guidelines regarding capitalization of cost, market valuation, andpotential impairment of these assets, and provide any necessary allowances asrequired.

The table below summarizes our future contractual obligations.

 

Total
Less than

1 year
1-3

years
4-5

years
After 5

years
Notes Payable
$20,030,000
$ 184,000
$19,846,000
$                 -
$                 -
Operating leases
5,121,000
1,479,000
2,914,000
586,000
142,000
Total
$25,151,000      =========
$1,663,000      =========
$22,760,000      =========
$ 586,000      =========
$ 142,000      =========
Special Note Regarding Forward-looking Statements

This report contains forward-looking statements that involve known andunknown risks, including, without limitation, statements containing the words"believes", "anticipates", "estimates","may" and words of similar import or statements of management'sopinion or statements that are not historical fact. Such forward-lookingstatements include, among others:

statements concerning our plans, objectives and future economic prospects,  such as matters relative to developing new products;

the availability of patent and other protection for our intellectual  property;

the completion of preclinical studies, clinical trials and regulatoryfilings;

the prospects for, and timing of, regulatory approvals;

the need and plans for, and availability of, additional capital;

the amount and timing of capital expenditures;

the timing of product introductions and sales;

the availability of raw materials;

prospects for future operations; and

other statements of expectations, beliefs, future plans and strategies,  anticipated events or trends and similar expressions concerning matters that  are not historical facts.

Such forward-looking statements involve known and unknown risks,uncertainties and other factors which may cause our actual results, performanceor achievements, or industry results, to be materially different from any futureresults, performance or achievements expressed or implied by suchforward-looking statements. Such factors include, among other things, thefollowing:

the inability to obtain regulatory approvals for paclitaxel or a delay insuch approvals;

competition from Bristol, IVAX, Mylan, Bedford, and other producers of  paclitaxel and other drugs;

technological advances in cancer treatment and drug development that mayobsolesce paclitaxel;

the risks associated with patent litigation;

the ability to obtain rights to technology;

the ability to obtain, maintain and enforce patents;

the ability to maintain trade secrets;

the ability to obtain raw materials and commercialize manufacturing  processes;

the effectiveness of our paclitaxel and other pharmaceuticals we develop in  treating disease;

the results of preclinical and clinical studies;

the results of research and development activities;

the ability to purchase or license new products;

the successful development of new products;

the business abilities and judgment of our management and other personnel;

the ability to hire skilled personnel to perform research and development  and to run our manufacturing operations;

the ability of contract manufacturers to perform adequately under  anticipated contracts;

the decision-making processes of regulatory agencies;

changes in and compliance with governmental regulations;

the effect of capital market conditions and other factors on capital  availability;

the ability of Abbott, Faulding, Tzamal and JCR to perform their  obligations under their existing agreements with us;

our ability to perform our obligations under our existing and future  agreements;

our limited relevant operating history upon which an evaluation of our  prospects can be made;

the effect on sales, cash flow and earnings from foreign exchange rate  fluctuations;

adverse economic and general business conditions;

and other factors referenced in this report.

These factors are not intended to be an all-inclusive enumeration of thebusiness risks we face. Reference is also made to the risk factors discussed inAmendment No. 1 to our Registration Statement (No. 333-82810) filed with theSecurities and Exchange Commission on April 1, 2002. The forward-lookingstatements included in this report represent our view as of the date of thisreport. The reader should not assume that the statements made herein remainaccurate at any future date. We do not intend to update these statements andundertake no duty to any person to make any update under any circumstance.

 

Item 7A

 

Quantitative and Qualitative Disclosures about Market Risk.

 

During 2001, we sold a significant amount of paclitaxel toFaulding. Under the Faulding agreement, Faulding pays us a fixed percentage oftheir sales price for paclitaxel. Each year, Faulding estimates the sales priceit will receive in the upcoming year, and, based upon that estimate, wedetermine the price we will charge Faulding. We recognize the correspondingsales at the time of shipment to Faulding. However, Faulding's actual sellingprice may differ from that estimated. In the summer, Faulding provides us withtheir calculation of the actual sales price for sales made during the precedingyear, and an adjustment is calculated that may increase or decrease our sales ofproducts to Faulding during that year.

 

Faulding's sales are made in the currencies of each of thecountries in which it sells paclitaxel. As a result, our sales are affected byfluctuations in the value of these various foreign currencies relative to theU.S. dollar. In the past, currency fluctuations were a significant factor inreductions in the price we charged Faulding. If changes in foreign currencymarkets continue to cause a decrease in the price per gram we receive fromFaulding, there could be a material adverse effect on our earnings and cashflow. Our sales to JCR, if any, are subject to the same risk.

 

Certain statements set forth in Item 7A may constitute"forward-looking statements". See "Special Note RegardingForward-looking Statements."

 

Item 8

 

Financial Statements  and Supplementary Data

 

The information required by this item begins at Page F-1.

 

Item 9

 

Changes in and  Disagreements with Accountants

 

Not Applicable.

 

Part III

 

Item 10

 

Directors and Executive Officers

 

The information concerning our directors and executiveofficers is incorporated by reference to the section entitled "Election ofDirectors" in our definitive Proxy Statement with respect to our 2002Annual Meeting of Stockholders (the "Proxy Statement").

 

Item 11

 

Executive Compensation

 

The section entitled "Executive Compensation"appearing in our Proxy Statement is incorporated herein by reference, except forsuch information as need not be incorporated by reference under rulespromulgated by the SEC.

 

Item 12

 

Security Ownership of Certain Beneficial Owners and Management

 

The section labeled "Security Ownership of Directors andExecutive Officers and Certain Beneficial Owners" appearing in our ProxyStatement is incorporated herein by reference.

 

Item 13

 

Certain Relationships and Related Transactions

 

The section labeled "Certain Relationships and RelatedTransactions" appearing in our Proxy Statement is incorporated herein byreference.

 

 

Part IV

 

Item 14

 

Exhibits, Financial Statement Schedules, and Reports on Form8-K

 

Financial Statements

 

The Financial Statement Index is on Page F-1.

 

Financial Statement Schedules

 

All schedules are omitted because they are not applicable ornot required or because the information is included in the consolidatedfinancial statements or the notes thereto.

 

Exhibits and Reports on Form 8-K

 

We filed a Current Report on Form 8-K dated February 14, 2002reporting the private sale of $16,000,000 of securities.

 
Exhibit NumberDescription of Exhibit3.1 Amended and Restated Certificate of Incorporation of  the Company, as amended August 2, 1996 (1)3.2 
 Certificate of Amendment dated September 29, 1998 to  the Amended and Restated Certificate of Incorporation of the Company (2)
3.3
Certificate of Amendment dated September 13, 2000 to  the Amended and Restated Certificate of Incorporation of the Company (3)
3.4
Bylaws of the Company as amended through December 2000  (4)
3.5
Certificate of Designation for Convertible PreferredStock, Series A (5)
3.6
Certificate of Designation for Series B JuniorParticipating Preferred Stock (6)
3.7 
 Certificate of Designation for Series C SeniorConvertible Preferred Stock (7)
4.1
Common Stock Certificate (8)
4.2
Amended and Restated Rights Agreement dated September  25, 2001 between the Company and American Stock Transfer and Trust Company, as  Rights Agent (9)
4.3
Form of 4% Convertible Subordinated Debenture due 2007(10)
6
The Certificate of Incorporation and Bylaws of the Companyare included as Exhibits 3.1 - 3.4
10.1*
Company's 1993 Stock Option Plan (8)
10.2* 
 Amendment dated December 11, 2000 to the Company's    1993 Stock Option Plan (4)
10.3*
Company's 1994 Long-Term Performance Incentive Plan,as amended and restated effective June 21, 2001 (11)
10.4
Company's1998 Stock Incentive Plan as amended andrestated effective September 25, 2001 (11)
10.5* 
 Employment Agreement effective October 1, 2001    between the Company and Leonard Shaykin
10.6*
Employment Agreement effective October 1, 2001    between the Company and Sterling Ainsworth
10.7*
Employment Agreement effective October 1, 2001    between the Company and Patricia Pilia
10.8*
Employment Agreement effective October 1, 2001    between the Company and Gordon Link
10.9*
Employment Agreement effective October 1, 2001    between the Company and Kai Larson
10.10*
Employment Agreement effective October 1, 2001    between the Company and David Denny
10.11*
Employment Agreement effective October 1, 2001    between the Company and James McChesney
10.12*
Employment Agreement effective October 1, 2001 betweenthe Company and Steve Bannister
10.13*
Employment Agreement effective October 1, 2001 betweenthe Company and Brenda Fielding
10.14
Second Amended and Restated Master Agreement dated    June 5, 2000 between the Company and F.H. Faulding & Co., Ltd. (12)
10.15 
 European Agreement dated March 2, 2001 between theCompany and F.H. Faulding & Co., Ltd. (4)
10.16
Development, License and Supply Agreement dated    July 23, 1999 by and between the Company and Abbott Laboratories. (14)
10.17
Loan and Security Agreement dated July 23, 1999 by    and between the Company and Abbott Laboratories. (14)
10.18
Stock Purchase Agreement dated July 23, 1999 by and    between the Company and Abbott Laboratories. (14)
10.19
Amendment dated June 23, 2000 to Development,    License and Supply Agreement by and between the Company and Abbott    Laboratories. (15)
10.20
Amendment dated June 23, 2000 to Stock Purchase    Agreement by and between the Company and Abbott Laboratories. (15)
10.21
Amendment dated November 28, 2001 to Development,License and Supply Agreement by and between the Company and Abbott Laboratories.
10.22
License Agreement dated November 21, 2000 by and    between the Company and The University of Delaware and Thomas Jefferson    University. (4)
10.23+
Release and License Agreement dated November 28, 2001by and between Bristol-Meyers Squibb Co. and the Company.
10.24
Lease dated October 16, 1995 between the Company andGunbarrel Facility L.L.C. (13)
 10.25
First Amendment to Lease November 27, 1995 between    the Company and Gunbarrel Facility L.L.C. (13)
10.26
Form of Subscription Agreement including    Registration Rights (4)
10.27
Securities Purchase Agreement dated February 13, 2002between T/L Ventures, Inc. and the Company (10)
10.28
Registration Rights Agreement dated February 13, 2002between T/L Ventures, Inc. and the Company (10)
10.29
Agreement dated November 7, 2001 between R. J. ReynoldsTobacco Company and the Company.
21.1
List of Subsidiaries
23.1
Consent of Ernst & Young LLP

--------------------------------------------------------------
*
 A management compensation plan.
+
Portions have been omitted pursuant to a request forconfidential treatment.(1)
 Incorporated herein by reference to the Company's  Annual Report on Form 10-K filed with the Commission for the year ended  December 31, 1996 (File No. 0-24320).
(2)
 Incorporated herein by reference to the Company's  Annual Report on Form 10-K for the year ended December 31, 1998 (File No.  0-24320).
(3) 
 Incorporated herein by reference to the Company's  Quarterly Report on Form 10-Q for the period ending September 30, 2000. (File  No. 0-24320).
(4) 
 Incorporated herein by reference to the Company'sAnnual Report on Form 10-K for theyear ended December 31, 2000 (File No. 0-24320).(5)
 Incorporated herein by reference to the Company'sQuarterly Report on Form 10-Q for the quarter ending June 20, 1995 (File No.0-24320)
(6)
 Incorporated herein by reference to the Company'sCurrent Report on Form 8-K dated November 8, 1996 (File No. 0-24320).
(7)
 Incorporated herein by reference to the Company'sRegistration Statement on Form S-3 filed on December 16, 1997 (File No.333-42419)
(8)
 Incorporated herein by reference to the Registration    Statement on Form S-1 of the Company, filed with the Commission on July 24,    1994 (File No. 33-78016).
(9)
 Incorporated herein by reference to the RegistrationStatement on Form 8-A12G/A of the Company, filed with the Commission on October23, 2001 (File No. 0-24320)
(10)
 Incorporated herein by reference to the Company'sCurrent Report on Form 8-K, dated February 13, 2002 (File No. 0-24320).
(11)
 Incorporated herein by reference to the Company'sQuarterly Report on Form 10-Q forthe period ending September 30, 2001 (File No. 0-24320).(12)
 Incorporated herein by reference to the Company's    Quarterly Report on Form 10-Q for the period ending June 30, 2000 (File No.    0-24320).
(13) 
 Incorporated herein by reference to the Company's    Annual Report on Form 10-K for the year ended December 31, 1995 (File No.    0-24320).
(14) 
 Incorporated herein by reference to the Company's    Current Report on Form 8-K, dated July 23, 1999 (File No. 0-24320).
(15)
 Incorporated herein by reference to the Company's    Quarterly Report on Form 10-Q for the period ending June 30, 2000 (File No.    0-24320).

 

 

Signatures

 

Pursuant to Section 13 of the Securities Exchange Act of1934, NaPro caused this report on Form 10-K to be signed on its behalf.

 

NAPRO BIOTHERAPEUTICS, INC.

 
By: /s/ Leonard P. Shaykin Leonard P. ShaykinChairman of the Board of Directors,Chief Executive OfficerMarch 29, 2002
Pursuant to the Exchange Act, this report has been signed onbehalf of NaPro andin the capacities indicated.
 
/s/ Leonard P. Shaykin Leonard P. ShaykinChairman of the Board ofDirectors, Chief Executive Officer March 29, 2002/s/ Sterling K. AinsworthSterling K. Ainsworth, Ph.D.Vice Chairman, President, Chief Scientific Officer,Director March29, 2002/s/ Patricia A. Pilia Patricia A. Pilia, Ph.D.Executive Vice President,  Director March 29,2002s/ Gordon H. Link, Jr. Gordon H. Link, JrVice President,  Chief Financial Officer(Principal Financial Officer) March 29, 2002/s/ Robert L. Poley Robert L. PoleyController  (Principal Accounting Officer) March 29, 2002/s/ Edward L. EricksonEdward L. EricksonDirector  March 29, 2002/s/ Arthur H. Hayes, Jr. Arthur H. Hayes, Jr., M.D.Director  March 29, 2002/s/ Marc J. OstroMarc J. OstroDirector  March 29, 2002/s/ Richard N. PerleThe Honorable Richard N. PerleDirector  March 29, 2002/s/ Robert E. Pollack Robert E. Pollack, Ph.D.Director  March 29, 2002
 

 

 

NaPro BioTherapeutics, Inc. and Subsidiaries

Financial Statements

 Years ended December 31, 2001, 2000 and 1999

 

 

Index to Financial Statements

Report of Independent Auditors

Audited Consolidated Financial Statements

Consolidated Balance Sheet

Consolidated Operations Statement

ConsolidatedStockholders' Equity Statement 

Consolidated Cash Flow Statement

Notes to Consolidated Financial Statements

 

 

Report of Independent Auditors

 

The Board of Directors and Stockholders

NaPro BioTherapeutics, Inc.

 

We have audited the accompanying consolidated balance sheetof NaPro BioTherapeutics, Inc. and subsidiaries as of December 31, 2001 and2000, and the related consolidated operations statement, stockholders' equitystatement, and cash flow statement for each of the three years in the periodended December 31, 2001. These financial statements are the responsibility ofthe Company's management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits in accordance with auditing standardsgenerally accepted in the United States. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the consolidated financial position ofNaPro BioTherapeutics, Inc. and subsidiaries at December 31, 2001 and 2000, andthe consolidated results of its operations and its cash flow for each of thethree years in the period ended December 31, 2001 in conformity with accountingprinciples generally accepted in the United States.

 

 

ERNST & YOUNG LLP

 

Denver, Colorado

February 22, 2002

 

 

NaPro BioTherapeutics, Inc. and Subsidiaries

 Consolidated Balance Sheet

 

 
                                                                                        December 31,                                                                               2001                   2000                                                                               ----                   ----AssetsCurrent assets:       Cash and cash equivalents                                             $10,144,000           $18,982,000       Accounts receivable                                                     3,745,000             1,413,000       Inventory:              Raw materials                                                    4,685,000             2,409,000              Work-in-process                                                  1,486,000             1,438,000              Finished goods                                                   1,927,000             1,926,000                                                                            ------------          ------------                                                                               8,098,000             5,773,000       Prepaid expense and other                                               1,165,000             1,461,000                                                                            ------------          ------------Total current assets                                                          23,152,000            27,629,000Property and equipment, at cost:       Plantation cost                                                         5,916,000             5,465,000       Laboratory equipment                                                    6,967,000             5,267,000       Leasehold improvements                                                  3,057,000             5,962,000       Other                                                                   1,287,000               782,000       Construction in progress                                                  386,000               398,000                                                                           -------------         -------------                                                                              17,613,000            17,874,000       Accumulated depreciation                                                4,159,000             8,237,000                                                                            ------------          ------------Property and equipment, net                                                   13,454,000             9,637,000Inventory, raw materials                                                            -                  484,000Other assets                                                                     455,000               251,000                                                                             -----------           -----------Total assets                                                                 $37,061,000           $38,001,000                                                                             ===========           ===========
 

NaPro BioTherapeutics, Inc. and Subsidiaries

 Consolidated Balance Sheet

 

 
                                                                                        December 31,                                                                                2001                  2000                                                                                ----                  ----Liabilities and stockholders' equity Current liabilities:       Accounts payable                                                     $ 6,513,000           $ 3,371,000       Accrued payroll and payroll taxes                                      1,473,000               955,000       Notes payable--current (Note 2)                                          184,000               135,000       Deferred income                                                        1,400,000                 -                                                                            ------------    ------------------Total current liabilities                                                     9,570,000             4,461,000Notes payable--long term (Note 2)                                            19,846,000            14,953,000Deferred income--long term                                                    6,508,000                 -Commitments and contingencies (Note 9)Stockholders' equity (Note 6):       Preferred stock,$.001 par value:              Authorized shares--2,000,000                                        -                     -       Nonvoting common stock, convertible on disposition              into voting common stock, $.0075 par value:              Authorized shares--1,000,000              Issued and outstanding shares--0 in 2001 and              395,000 in 2000                                                     -                     3,000       Common stock, $.0075 par value:              Authorized shares--45,000,000 in 2001 and 2000              Issued shares--28,706,195 in 2001,              26,758,144 in 2000                                                215,000               201,000       Additional paid-in capital                                            96,776,000            88,970,000       Accumulated deficit                                                  (95,013,000)          (69,245,000)       Treasury stock--254,306 shares in 2001;              405,885 shares in 2000                                           (841,000)           (1,342,000)                                                                          --------------         -------------Total stockholders' equity                                                    1,137,000            18,587,000                                                                           -------------         -------------Total liabilities and stockholders' equity                                  $37,061,000           $38,001,000                                                                             ===========          ============
  

See accompanying notes.

NaPro BioTherapeutics, Inc. and Subsidiaries

 Consolidated Operations Statement

 
                                                                         Year Ended December 31,                                                         2001                    2000                     1999                                                         ----                    ----                     ----Product sales                                        $ 15,711,000            $  8,148,000             $  7,592,000                                                      ------------           -------------            -------------Expense:       Cost of products sold                           19,134,000               6,749,000                6,291,000       Research and development                        10,331,000               7,586,000                5,756,000       General and administrative                      10,797,000               7,815,000                6,188,000       Asset writedowns                                 1,966,000               2,245,000                  146,000                                                    --------------          --------------           --------------                                                       42,228,000              24,395,000               18,381,000                                                     -------------           -------------            -------------       Operating loss                                 (26,517,000)            (16,247,000)             (10,789,000)Other income (expense):       License fees                                     1,092,000                    -                   2,320,000       Interest income                                    793,000                 372,000                  309,000       Interest expense                                (1,136,000)               (750,000)                (842,000)                                                    --------------         ---------------           --------------Net loss                                             $(25,768,000)           $(16,625,000)            $ (9,002,000)                                                     =============           =============            =============Net loss attributable to common       stockholders                                  $(25,768,000)           $(16,625,000)            $(10,213,000)                                                     =============           =============            =============Basic and diluted net loss per share                 $      (0.93)           $      (0.69)            $      (0.50)                                                     =============           =============            =============Weighted average shares outstanding                    27,584,957              23,923,506               20,553,557                                                     =============           =============            =============
See accompanying notes.

 

NaPro BioTherapeutics, Inc. and Subsidiaries

Consolidated Stockholders' Equity Statement

Years Ended December 31, 1999, 2000 and 2001

      Nonvoting      CommonStock
      CommonStock
Number of      Common      Shares              Issued
      Additional      Paid-inCapital
      AccumulatedDeficit
      TreasuryStock 
      Total
Balance as of December 31, 1998
$ 3,000 
$ 134,000 
17,902,407 
$ 58,045,000 
$(43,618,000)
$ (3,680,000)
$ 10,884,000 
Issuance of option grants to purchase 42,795 shares of      common stock at prices ranging from $1.72 to $2.25      per share in exchange for consulting services

 

-
 

-
 

-
 

65,000 
 

-
 

-
 

65,000 
Issuance of 6,761 shares of common stock in payment      for dividends on convertible preferred stock at prices      ranging from $1.16 to $1.96 per share

 

-
 

-
 

6,761 
 

-
 

-
 

-
 

-
Issuance of 173,991 shares of common stock      for compensation

      -
      1,000 
      173,991 
      369,000 
      -
      -
      370,000 
Exercise of employee stock options for 60,476      shares of common stock at prices ranging from      $0.19 to $2.00 per share

 

-
 

1,000 
 

60,476 
 

80,000 
 

-
 

-
 

81,000 
Issuance of 400,000 shares of common stock at      $5.00 per share net of issue cost of $294,000

      -
      3,000 
      400,000 
      1,703,000 
      -
      -
      1,706,000 
Issuance of 19,234 shares of common stock in      payment for interest on debt at prices ranging      from $1.07 to $1.80 per share

 

-
 

-
 

19,234 
 

27,000 
 

-
 

-
 

27,000 
Conversion of senior convertible notes to 3,585,203      shares of common stock at prices ranging from      $1.07 to $1.80 per share

 

-
 

27,000 
 

3,585,203 
 

4,931,000 
 

-
 

-
 

4,958,000 
Accretion of offering cost, conversion rights and value      of warrant as preferred dividends on redeemable      preferred stock

 

-
 

-
 

-
 

(298,000)
 

-
 

-
 

(298,000)
Conversion of redeemable, convertible preferred stock      to 1,299,085 shares of common stock at prices ranging      from $1.16 to $1.96

 

-
 

10,000 
 

1,299,085 
 

2,093,000 
 

-
 

-
 

2,103,000 
      Nonvoting      CommonStock
      CommonStock
Number of      Common      Shares              Issued
      Additional      Paid-inCapital
      AccumulatedDeficit
      TreasuryStock      Total
Payment of convertible preferred stock dividends in      cash

      -
      -
      -
      (98,000)
      -
      -
      (98,000)
Contribution of 574,658 shares of common stock from      the treasury at $2.00 per share to retirement plans

      -
      -
      -
      (770,000)
      -
      1,896,000 
      1,126,000
Premium on redemption of 2,000 shares of redeemable      convertible preferred stock

      -
      -
      -
      (805,000)
      -
      -
      (805,000)
Issuance of 35,514 shares of common stock for cash      and cashless exercises of 170,504 warrants

      -
      -
      35,514 
      16,000 
      -
      -
      16,000 
Net loss
             -        
             -        
             -        
             -        
(9,002,000)
             -        
(9,002,000)
Balance as of December 31, 1999
$ 3,000 
$ 176,000 
23,482,671 
$ 65,358,000 
$ (52,620,000)
$ (1,784,000)
$ 11,133,000 
Contribution of 133,982 shares of common stock from      the treasury at $6.44 per share to retirement plans

      -
      -
      -
      420,000 
      -
      442,000 
      862,000 
Issuance of 25,000 shares of common stock at $7.44 to      retirement plan

      -
      -
      25,000 
      186,000 
      -
      -
      186,000 
Issuance of 711,111 shares of common stock at $5.63      per share upon completion of milestone

      -
      5,000 
      711,111 
      3,995,000 
      -
      -
      4,000,000 
Issuance of options to purchase 38,830 shares of      common stock at prices ranging from $2.00 to $7.38      per share in exchange for consulting services

 

-
 

-
 

-
 

27,000 
 

-
 

-
 

27,000 
Exercise of warrants on 170,000 shares of common      stock at $2.00 per share

      -
      1,000 
      170,000 
      339,000 
      -
      -
      340,000 
Private placement of 2,000,000 shares of common       stockat $8.75 per share net of issue cost of      $1,152,000

 

-
 

15,000 
 

2,000,000 
 

15,741,000 
 

-
 

-
 

15,756,000 
Issuance of 100,000 warrants in connection with above      private placement

      -
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