Cautionary Statement Regarding Forward-Looking Statements

The following discussion and analysis is provided to further the reader's understanding of the condensed consolidated financial statements, financial condition and results of operations of NPS in this Quarterly Report on Form 10-Q. This discussion should be read in conjunction with the Consolidated Financial Statements and the accompanying notes included in our filings with the SEC, including our 2008 Annual Report on Form 10-K.

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

Our ability to effectively outsource activities critical to the advancement of our product candidates and manage those companies to whom such activities are outsourced;

our ability to secure additional funds;

the successful continuation of our strategic collaborations, our and our collaborators' ability to successfully complete clinical trials, receive required regulatory approvals and the length, time and cost of obtaining such regulatory approvals and commercialize products;

competitive factors;

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

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

changes in our relationships with our collaborators;

variability of our royalty, license and other revenues;

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

the demand for securities of pharmaceutical and biotechnology companies in general and our common stock in particular;

uncertainty regarding our patents and patent rights;

compliance with current or prospective governmental regulation;

technological change; and

general economic and market conditions.

You should also consider carefully the statements set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008 as well as Item 1A in part II of subsequent Quarterly Reports on Form 10-Q entitled "Risk Factors" which address these and additional factors that could cause results or events to differ materially from those set forth in the forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Given these

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to all such reports are available, free of charge, on our Internet website under "Investors-SEC Filings," as soon as reasonably practicable after we file electronically such reports with, or furnish such reports to, the SEC. Our Internet website address is http://www.npsp.com. Information on our website does not constitute a part of this Quarterly Report on Form 10-Q.

Overview

We are a biopharmaceutical company focused on the development of new treatment options for patients with rare gastrointestinal and endocrine disorders and serious unmet medical needs. Our lead clinical programs involve two proprietary therapeutic proteins to restore or replace biological function: teduglutide and NPSP558 (parathyroid hormone (PTH 1-84)). Teduglutide is our analog of GLP-2, a peptide involved in the regeneration and repair of the intestinal lining, and is in Phase 3 clinical development for parenteral nutrition (PN) dependent short bowel syndrome (SBS). SBS is a highly disabling condition that results from surgical resection, congenital defect or disease-associated loss of absorption and the subsequent inability to maintain fluid, electrolyte, and nutrient balances on a conventional diet. NPSP558 is our recombinant full-length human parathyroid hormone (PTH 1-84) that is in Phase 3 clinical development for hypoparathyroidism, a rare condition in which the body does not maintain normal calcium levels in the blood due to insufficient levels of parathyroid hormone.

We have incurred cumulative losses from inception through September 30, 2009 of approximately $920.8 million. We expect to continue to incur significant operating losses over at least the next several years as we continue our current and anticipated development projects. Activities that will increase our future operating losses include activities to obtain FDA approval to market teduglutide and NPSP558 in the U.S.; current and future clinical trials with teduglutide and NPSP558; and clinical and manufacturing costs for teduglutide and NPSP558 in the U.S.

Results of Operations

Three Months Ended September 30, 2009 and 2008

The following table summarizes selected operating statement data for the three
months ended September 30, 2009 and 2008 (amounts in thousands):

                                                      Three Months Ended
                                                         September 30,
                                                     ---------------------
                                                       2009         2008
                                                     --------      -------
          Revenues:
             Royalties                             $  20,112     $ 21,703
             Product sales                                 -            -
             Milestones and license fees                   7        4,372
                                                     --------      -------
          Total revenues                           $  20,119     $ 26,075

          Operating expenses:
             Cost of royalties                     $     500     $  1,705
                % of royalties                             2  %         8  %
             Cost of license fees                  $       -     $    885
                % of milestones and license fees           -           20  %
             Research and development              $   9,828     $  5,273
                % of total revenue                        49  %        20  %
             General and administrative            $   5,827     $  3,667
                % of total revenue                        29  %        14  %

                                                          Three Months Ended
                                                             September 30,
                                                         ---------------------
                                                           2009         2008
                                                         --------      -------
        Royalties:
           Sensipar and Mimpara (cinacalcet HC1)       $  16,461     $ 19,016
           Preotact (parathyroid hormone (PTH 1-84))       2,538        2,156
           Regpara (cinacalcet HCl)                        1,019          531
           Nucynta (tapentadol)                               94            -
                                                         --------      -------
        Total royalties                                   20,112       21,703

        Product sales                                          -            -

        Milestones and license fees:
           Teduglutide                                         -        4,365
           Preotact                                            -            -
           Other                                               7            7
                                                         --------      -------
        Total milestones and license fees                      7        4,372

        Total revenues                                 $  20,119     $ 26,075
                                                         --------      -------

The decrease in royalty revenue earned from Amgen for the three months ended September 30, 2009 is due to Amgen's achievement of certain annual cumulative sales thresholds which occurred during the three months ended June 30, 2009 as compared to Amgen achieving this sales threshold during the three months ended September 30, 2008. Achievement of this cumulative sales threshold increases the royalty rate earned for all sales during the year in the period that threshold is reached. This decrease was partially offset by continued sales growth of Sensipar (cinacalcet HCl) during the quarter. Amgen pays royalties on sales of Sensipar directly to a wholly owned subsidiary of NPS and the royalties are used to repay the non-recourse debt issued in August 2007 and December 2004.

For the three months ended September 30, 2009 and 2008, our revenues related to our agreement with Nycomed for Preotact were $2.5 million and $2.2 million in royalty revenue, respectively. In July 2007, we sold our right to receive certain future royalty payments from Nycomed's sale of Preotact in Europe to DRI Capital.

During the three months ended September 30, 2009 and 2008, we recognized royalty revenue of $1.0 million and $531,000, respectively, from Kyowa Kirin (formerly Kirin Pharma) for sales of Regpara, which was launched in the first quarter of 2008.

During the three months ended September 30, 2009 and 2008, we recognized royalty revenue of $94,000 and $0, respectively, from Ortho-McNeil-Janssen Pharmaceutical, Inc. ("Ortho") for sales of Nucynta, which was launched in the second quarter of 2009.

For the three months ended September 30, 2009 and 2008, our revenues related to our agreement with Nycomed for teduglutide were $0 and $4.4 million, respectively. In September 2007, we entered into an agreement with Nycomed for the rights to develop and commercialize teduglutide in territories outside of North America for gastrointestinal disorders. In connection with this agreement, we received a $35.0 million up-front license fee under the Nycomed agreement. Due to our continued involvement under the agreement we recognized revenue over the estimated performance period and at June 30, 2009 we had fully recognized the deferred revenue.

Cost of License Fees. Our cost of license fees primarily relate to fees owed to a third party resulting from the licensing of teduglutide to Nycomed in September 2007. We recorded cost of license fees of $0 and $885,000 during the three months ended September 30, 2009 and 2008, respectively. Under the third party licensing agreement, we have made cash payments of approximately $6.6 million to date, related to the Nycomed teduglutide agreement. All of the cost of license fees related to teduglutide have been recognized as expense as of June 30, 2009 in conjunction with the related deferred revenue.

Research and Development. Our research and development expenses are primarily comprised of personnel-related costs for our employees who are dedicated to development activities, and from the fees paid and costs reimbursed to outside professionals to conduct research, preclinical and clinical trials, and to manufacture drug compounds and related supplies prior to FDA approval. For the three months ended September 30, 2009 our research and development expenses increased to $9.8 million from $5.3 million for the three months ended September 30, 2008. The increase in research and development expenses primarily related to a $4.3 million increase in outside services primarily due to higher levels of activity in our ongoing clinical studies and commercial supply chain management. The increase was partially offset by a $481,000 reduction of research and development expenses due to our agreement with Nycomed where we agreed to share equally in both companies' external costs for the clinical trial for teduglutide in SBS.

General and Administrative. Our general and administrative expenses consist primarily of the costs of our management and administrative staff, business insurance, property taxes, professional fees, legal fees and product marketing activities. Our general and administrative expenses increased to $5.8 million for the three months ended September 30, 2009 from $3.7 million for the comparative period in 2008. The increase in general and administrative expenses for 2009 primarily related to a $637,000 increase in personnel costs primarily related to an increase in severance and share-based compensation costs during the three months ended September 30, 2009 and a $1.2 million increase in outside costs, which includes a $724,000 increase in legal fees and $613,000 in strategic and marketing consulting costs, partially offset by a decrease in general outside costs in the three months ended September 30, 2009.

Interest Income. Interest income decreased to $374,000 for the three months ended September 30, 2009 from $983,000 from the comparative period in 2008, primarily due to lower interest rates on our investments and lower average cash, cash equivalent and marketable investment securities balances in 2009 compared with 2008.

Interest Expense. Our interest expense decreased to $12.1 million for the three months ended September 30, 2009 from $16.4 million for the comparable period in 2008. Our long-term royalty forecasts for Sensipar and Preotact are used in conjunction with the calculation of interest expense related to our non-recourse debt. The decrease in interest expense is due primarily to a lower effective interest rate ($4.3 million decrease) related to the Class A Notes resulting from a decrease in the forecast of Sensipar royalties, ($706,000 decrease) resulting from a $35.3 million principal payment on the Class A Notes in April 2009 and a lower effective interest rate related to DRI Capital's purchase of our Preotact royalty, accounted for as debt ($18,000 decrease) due to a decrease in forecasted Preotact royalties. The decrease was partially offset by increased interest expense on the Class B notes ($759,000 increase) due to an increased balance on the notes due to the issuance of paid-in-kind notes for interest accrued.

Loss on Impairment of Marketable Investment Securities. We recorded impairment charges in earnings of $0 and $10.8 million for the three months ended September 30, 2009 and 2008, respectively, related to other-than-temporary declines in fair value of our ARS. (See Liquidity and Capital Resources)

Nine Months Ended September 30, 2009 and 2008

The following table summarizes selected operating statement data for the nine
months ended September 30, 2009 and 2008 (amounts in thousands):

                                                       Nine Months Ended
                                                         September 30,
                                                      --------------------
                                                        2009        2008
                                                      --------     -------
           Revenues:
              Royalties                             $  57,347    $ 51,894
              Product sales                                 8       1,684
              Milestones and license fees               4,742      24,636
                                                      --------     -------
           Total revenues                           $  62,097    $ 78,214

           Operating expenses:
              Cost of royalties                     $     500    $  4,690
                 % of royalties                             1  %         9 %
              Cost of goods sold                    $       -    $  1,350
                 % of product sales                         -  %        80 %
              Cost of license fees                  $     481    $  4,724
                 % of milestones and license fees           10 %       19  %
              Research and development              $  22,087    $ 14,128
                 % of total revenue                        36  %       18  %
              General and administrative            $  15,361    $ 17,355
                 % of total revenue                        25  %       22  %

Revenues. Our revenues were $62.1 million for the nine months ended September 30, 2009 compared to $78.2 million for the nine months ended September 30, 2008. We recognized revenue under our research and license agreements during the nine months ended September 30, 2009 and 2008, respectively, as follows (amounts in thousands):

                                                          Nine Months Ended
                                                            September 30,
                                                         --------------------
                                                           2009        2008
                                                         --------     -------
        Royalties:
           Sensipar and Mimpara (cinacalcet HC1)       $  47,464    $ 44,560
           Preotact (parathyroid hormone (PTH 1-84))       7,017       6,198
           Regpara (cinacalcet HCl)                        2,603       1,136
           Nucynta (tapentadol)                              261           -
           Other                                               2           -
                                                         --------     -------
        Total royalties                                   57,347      51,894

        Product sales:
           Preotact                                            -       1,684
           Teduglutide                                         8           -
                                                         --------     -------
        Total product sales                                    8       1,684

        Milestones and license fees:
           Teduglutide                                     2,494      23,297
           Preotact                                        2,203       1,283
           Other                                              45          56
                                                         --------     -------
        Total milestones and license fees                  4,742      24,636

        Total revenues                                 $  62,097    $ 78,214
                                                         --------     -------

For the nine months ended September 30, 2009, our revenues related to our agreement with Nycomed for Preotact were comprised of $7.0 million in royalty revenue and $2.2 million in milestone revenue related to Preotact achieving a certain cumulative sales threshold during the year. For the nine months ended September 30, 2008, our revenues related to our agreement with Nycomed for Preotact were comprised of (i) $6.2 million in royalty revenue; (ii) $1.7 million in product sales; and (iii) $1.3 million in license fee and milestone revenue. Under our agreement with Nycomed for Preotact, Nycomed has assumed the responsibility for manufacturing Preotact in the first quarter of 2008. Therefore, we will no longer recognize product sale revenue in the future under this arrangement.

During the nine months ended September 30, 2009 and 2008, we recognized royalty revenue of $2.6 million and $1.1 million, respectively, from Kyowa Kirin (formerly Kirin Pharma) for sales of Regpara, which was launched in the first quarter of 2008.

During the nine months ended September 30, 2009 and 2008, we recognized royalty revenue of $261,000 and $0, respectively, from Ortho for sales of Nucynta, which was launched in the second quarter of 2009, which was launched in the second quarter of 2009.

For the nine months ended September 30, 2009 and 2008, we recognized $2.5 million and $23.3 million, respectively. In September 2007, we entered into an agreement with Nycomed for the rights to develop and commercialize teduglutide in territories outside of North America for gastrointestinal disorders. In connection with this agreement, we received a $35.0 million up-front license fee under the Nycomed agreement. Due to our continued involvement under the agreement we recognized revenue over the estimated performance period and at June 30, 2009 we had fully recognized the deferred revenue.

Cost of Royalties. Our cost of royalties consists of royalties owed under an agreement with a third party based on reaching certain cumulative sales milestones of Preotact and our agreement with the Brigham and Women's Hospital on sales of cinacalcet HCl in the three months ended September 30, 2009 and 2008, respectively. We recorded cost of royalties of $500,000 and $4.7 million during the nine months ended September 30, 2009 and 2008, respectively. The decrease in cost of royalties is due to meeting the lifetime contractual obligations under the agreement with the Brigham and Women's Hospital during the fourth quarter of 2008 offset by achieving a threshold for cumulative sales of Preotact which resulted in us owing a $500,000 milestone during the third quarter of 2009. Under our agreement with the Brigham and Women's Hospital, our lifetime royalty obligation was fulfilled when cumulative royalty expense reached $15.0 million in the fourth quarter of 2008.

Cost of Goods Sold. Our cost of goods sold of $1.4 million for the nine months ended September 30, 2008 consists of the cost of inventory, subsequent to the April 2006 approval of Preotact in the EU, for product sales to Nycomed. Prior to the approval of Preotact in the EU, we expensed the costs associated with inventory as research and development expense. Nycomed assumed the responsibility for manufacturing Preotact during the first quarter of 2008, which resulted in no subsequent Preotact product sales or cost of goods sold.

Cost of License Fees. Our cost of license fees primarily relate to fees owed to a third party resulting from the licensing of teduglutide to Nycomed in September 2007. We recorded cost of license fees of $481,000 and $4.7 million during the nine months ended September 30, 2009 and 2008, respectively. Under the third party licensing agreement, we have made cash payments of approximately $6.6 million to date, related to the Nycomed teduglutide agreement. All of the cost of license fees related to teduglutide have been recognized as expense as of June 30, 2009 in conjunction with the related deferred revenue.

Research and Development. For the nine months ended September 30, 2009 our research and development expenses increased to $22.1 million from $14.1 million for the nine months ended September 30, 2008. The increase in research and development expenses primarily related to a $8.5 million increase in outside services primarily due to higher levels of activity in our ongoing clinical studies and commercial supply chain management and a $936,000 increase in personnel and related costs primarily due to the advancement of our registration programs for teduglutide and NPSP558. The increase was partially offset by a $1.6 million reduction of research and development expenses due to our agreement with Nycomed where we agreed to share equally in both companies' external costs for the clinical trial for teduglutide in SBS.

Interest Income. Interest income decreased to $1.4 million for the nine months ended September 30, 2009 from $3.8 million from the comparative period in 2008, primarily due to lower interest rates on our investments and lower average cash, cash equivalent and marketable investment securities balances in 2009 compared with 2008.

Interest Expense. Our interest expense decreased to $39.6 million for the nine months ended September 30, 2009 from $49.0 million for the comparable period in . . .