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 2010 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, any anticipated timelines for making FDA or other regulatory filings or submissions, or with respect to completion of milestones or targets with respect to regulatory filings, clinical studies, pre-clinical work and related matters, 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 or to discover new drugs in the future 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 described 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;

• our and our collaborators' ability to successfully complete clinical trials, timely make regulatory submissions, and receive required regulatory approvals and the length, time and cost of obtaining such regulatory approvals and commercializing products;

• our ability to secure additional funds;

• the successful completion of our strategic collaborations or changes in our relationships with our collaborators;

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

• 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;

• any concerns about the safety of our products or product candidates;

• 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, 2010 entitled "Risk Factors," which address these and additional factors that could cause results or events to differ 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 risks

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 clinical-stage biopharmaceutical company focused on the development of orphan products for patients with rare gastrointestinal and endocrine disorders. Our lead clinical programs involve two proprietary therapeutic proteins to restore or replace biological function: (a) teduglutide, our analog of GLP-2, a peptide involved in the regeneration and repair of the intestinal lining, that is in Phase 3 clinical development as GATTEX® (planned brand name) for short bowel syndrome ("SBS") and (b) NPSP558, our recombinant full-length human parathyroid hormone (rhPTH (1-84)) that is in Phase 3 clinical development as a hormone replacement therapy for hypoparathyroidism, a rare hormone deficiency disorder in which patients are physiologically unable to regulate the levels of calcium and phosphates in their blood due to insufficient levels of endogenous parathyroid hormone ("PTH").

While SBS and hypoparathyroidism are relatively rare disorders, we believe these indications represent substantial commercial opportunities to us due to the significant unmet need and lack of effective therapies, as well as the serious complications and chronic nature of both disorders.

We have incurred cumulative losses from inception through June 30, 2011 of approximately $969.5 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 current and future clinical trials with teduglutide and NPSP558; activities to obtain FDA approval to market teduglutide and NPSP558 in the U.S.; and manufacturing and commercial-readiness costs for teduglutide and NPSP558 in the U.S.

Results of Operations

Three Months Ended June 30, 2011 and 2010

The following table summarizes selected operating statement data for the three
months ended June 30, 2011 and 2010 (amounts in thousands):

                                                  Three Months Ended
                                                       June 30,
                                                   2011         2010
               Revenues:
                  Royalties                    $  27,210     $ 23,969
                  Product sales                        -           50
               Milestones and license fees             -            -
               Total revenues                  $  27,210     $ 24,019

               Operating expenses:
                  Cost of royalties            $     500     $      -
                  Research and development     $  17,135     $ 15,799
                     % of total revenues              63  %        66  %
                  General and administrative   $   5,539     $  4,193
                     % of total revenues              20  %        17  %

                                                          Three Months Ended
                                                               June 30,
                                                           2011         2010
        Royalties:
           Sensipar and Mimpara (cinacalcet HC1)       $  22,604     $ 20,290
           Preotact (parathyroid hormone (PTH 1-84))       2,258        2,054
           Regpara (cinacalcet HCl)                        1,854        1,338
           Nucynta (tapentadol)                              494          287
        Total royalties                                   27,210       23,969

        Product sales                                          -           50


        Total revenues                                 $  27,210     $ 24,019

The increase in royalty revenue earned from Amgen's sales of Sensipar and Mimpara (cinacalcet HCl) for the three months ended June 30, 2011 was primarily due to increased demand. Amgen pays royalties on sales of Sensipar and Mimpara directly to a wholly owned subsidiary of NPS and the royalties are used to repay non-recourse debt issued in August 2007; therefore, we do not receive any such royalty payments.

For the three months ended June 30, 2011 and 2010, our revenues related to our agreement with Nycomed for Preotact were $2.3 million and $2.1 million in royalty revenue, respectively. The increase was primarily due to changes in foreign exchange that favorably impacted royalty revenue earned from Nycomed's sales of Preotact in the three months ended June 30, 2011. The increase was partially offset by decreased demand and reductions in the reimbursement rates of Preotact in certain European countries. In July 2007, we sold our rights to receive certain future royalty payments from Nycomed's sale of Preotact in Europe to DRI Capital ("DRI"), therefore we do not receive any such royalty payments.

During the three months ended June 30, 2011 and 2010, we recognized royalty revenue of $1.9 million and $1.3 million, respectively, from Kyowa Hakko Kirin for sales of REGPARA. In February 2010, we sold our rights to receive certain future royalty payments from Kyowa Hakko Kirin's sale of REGPARA to an affiliate of DRI. The agreement provides DRI with the right to receive payments related to sales of REGPARA occurring on or after July 1, 2009.

During the three months ended June 30, 2011 and 2010, we recognized royalty revenue of $494,000 and $287,000, respectively, from Ortho-McNeil Pharmaceutical, Inc. for sales of Nucynta.

Cost of Royalties. We recorded cost of royalties of $500,000 and $0 during the three months ended June 30, 2011 and 2010, respectively. The cost of royalties during the three months ended June 30, 2011 is due to the achievement of a threshold for cumulative sales of Preotact which resulted in us owing a $500,000 milestone during the second quarter of 2011.

Research and Development. Our research and development expenses are primarily comprised of 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, as well as personnel-related costs for our employees related to development activities. For the three months ended June 30, 2011, our research and development expenses increased to $17.1 million from $15.8 million for the three months ended June 30, 2010. The increase in research and development expenses primarily related to a $2.8 million increase in outside services principally due to higher levels of activity in our ongoing clinical studies and a $804,000 increase in personnel and related costs primarily due to the advancement of our registration programs for teduglutide and NPSP558. These costs were partially offset by a reduction of $2.9 million due to the timing of production runs of commercial-scale batches for the three months ended June 30, 2011.

Interest Income. Interest income increased to $109,000 for the three months ended June 30, 2011 from $89,000 from the comparative period in 2010, primarily due to higher average cash, cash equivalent and marketable investment securities balances in 2011 compared with 2010.

Interest Expense. Our interest expense for the three months ended June 30, 2011 decreased to $10.3 million compared to $11.2 million for the three months ended June 30, 2010. Our long-term royalty forecasts for Sensipar and Mimpara, Preotact and REGPARA are used in conjunction with the calculation of interest expense related to our non-recourse debt. Interest expense decreased primarily due to (i) the final principal payment of $46.2 million on March 30, 2011 on the Class A Bonds ($1.1 million) and (ii) a reduction in principal outstanding due to the conversion of $30.6 million of our 5.75% convertible notes ($425,000). These decreases in interest expense were partially offset by increases in interest expense due to (i) an increased balance on the notes Class B Notes due to the issuance of paid-in-kind notes for interest accrued during 2010 ($328,000) and (ii) a higher effective interest rate due to an increase in the forecast of Preotact royalties on non-recourse debt associated with our Preotact royalties ($223,000).

Six Months Ended June 30, 2011 and 2010

The following table summarizes selected operating statement data for the six
months ended June 30, 2011 and 2010 (amounts in thousands):

                                                   Six Months Ended
                                                       June 30,
                                                   2011        2010
               Revenues:
                  Royalties                     $ 45,761    $ 41,758
                  Product sales                        -         534
                  Milestones and license fees      5,025       2,025
               Total revenues                   $ 50,786    $ 44,317

               Operating expenses:
                  Cost of royalties             $    500    $      -
                  Cost of license fees          $  2,538    $      6
                  Research and development      $ 32,040    $ 25,307
                     % of total revenue               63  %       57  %
                  General and administrative    $ 10,615    $  8,490
                     % of total revenue               21  %       19  %

                                                           Six Months Ended
                                                               June 30,
                                                           2011        2010
         Royalties:
            Sensipar and Mimpara (cinacalcet HC1)       $ 36,869    $ 34,364
            Preotact (parathyroid hormone (PTH 1-84))      4,495       4,428
            Regpara (cinacalcet HCl)                       3,452       2,456
            Nucynta (tapentadol)                             943         509
            Other                                              2           1
         Total royalties                                  45,761      41,758

         Product sales                                         -         534

         Milestones and license fees:
            Sensipar and Mimpara                               -       2,000
            Teduglutide                                    5,000           -
            Other                                             25          25
         Total milestones and license fees                 5,025       2,025

         Total revenues                                 $ 50,786    $ 44,317

The increase in royalty revenue earned from Amgen's sales of Sensipar and Mimpara (cinacalcet HCl) for the six months ended June 30, 2011 was primarily due to demand. The $2.0 million milestone revenue earned from Amgen for Sensipar and Mimpara during the six months ended June 30, 2010 was for their initiation of a Phase 3 study of Sensipar in primary hyperparathyroidism in March 2010.

For the six months ended June 30, 2011 and 2010, our revenues related to our agreement with Nycomed for Preotact were $4.5 million and $4.4 million in royalty revenue, respectively. The increase was primarily due to changes in foreign exchange that favorably impacted royalty revenue earned from Nycomed's sales of Preotact in the six months ended June 30, 2011. The increase was partially offset by decreased demand and reductions in the reimbursement rates of Preotact in certain European countries.

For the six months ended June 30, 2011 and 2010, our revenues related to our agreement with Nycomed for teduglutide were $5.0 million and $0 in milestone and license fees, respectively. The $5.0 million milestone revenue earned during the six months ended June 30, 2011, was for Nycomed's submission of a Marketing Authorization Application (MAA) to the European Medicines Agency (EMA) for clearance to market teduglutide (Revestive®) as a once-daily subcutaneous treatment for short bowel syndrome (SBS).

During the six months ended June 30, 2011 and 2010, we recognized royalty revenue of $3.5 million and $2.5 million, respectively, from Kyowa Hakko Kirin for sales of REGPARA. In February 2010, we sold our rights to receive certain future royalty payments from Kyowa Hakko Kirin's sale of REGPARA to an affiliate of DRI. The agreement provides DRI with the right to receive payments related to sales of REGPARA occurring on or after July 1, 2009.

During the six months ended June 30, 2011 and 2010, we recognized royalty revenue of $943,000 and $509,000, respectively, from Ortho for sales of Nucynta, which was launched in the second quarter of 2009.

Cost of Royalties. We recorded cost of royalties of $500,000 and $0 during the six months ended June 30, 2011 and 2010, respectively. The cost of royalties during the six months ended June 30, 2011 is due to the achievement of a threshold for cumulative sales of Preotact which resulted in us owing a $500,000 milestone during the second quarter of 2011.

Cost of License Fees. Our cost of license fees primarily relate to fees owed to third parties for the licensing of teduglutide to Nycomed. We recorded cost of license fees of $2.5 million and $6,000 during the six months ended June 30, 2011 and 2010, respectively.

General and Administrative. Our general and administrative expenses consist primarily of professional fees, the costs of our management and administrative staff and administrative expenses. Our general and administrative expenses increased to $10.6 million for the six months ended June 30, 2011 from $8.5 million for the six months ended June 30, 2010. The increase in general and administrative expenses primarily related to a $1.1 million increase in market research and a $596,000 increase in other outside administrative costs for the six months ended June 30, 2011.

Interest Income. Interest income decreased to $190,000 for the six months ended June 30, 2011 from $239,000 from the comparative period in 2010, primarily due to lower interest rates on our investments.

Interest Expense. Our interest expense decreased to $20.6 million for the six months ended June 30, 2011 from $24.5 million for the comparable period in 2010. Our long-term royalty forecasts for Sensipar and Mimpara, Preotact and REGPARA 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 (i) the final payment of the Class A Notes of $46.2 million on March 30, 2011 ($5.5 million), (ii) a lower effective interest rate due to a decrease in the forecast of Preotact royalties on non-recourse debt associated with our Preotact royalties ($674,000) and (iii) a reduction in principal outstanding due to the conversion of $33.5 million of our 5.75% convertible notes ($453,000). These reductions were partially offset by increased interest expense on the (i) Class B Notes ($1.3 million) due to an increased balance on the notes due to the issuance of paid-in-kind notes for interest accrued and (ii) non-recourse debt associated with the sale of certain of our REGPARA royalty rights in February 2010 ($1.4 million).

Gain on Sale of Marketable Investment Securities. We recorded a gain on sale of marketable investment securities of $0 and $3.8 million for the six months ended June 30, 2011 and 2010, respectively, related primarily to the sale of certain auction rate securities.

Liquidity and Capital Resources

The following table summarizes selected financial data (amounts in thousands):

                                                          June 30,        December 31,
                                                            2011              2010
Cash, cash equivalents, and marketable investment
securities                                           $       202,366    $     133,771
Total assets                                                 253,272          228,905
Current debt                                                  17,175           55,843
Non-current debt                                             235,207          294,256
Stockholders' deficit                                $       (27,317)   $    (155,275)

Currently, we are not a self-sustaining business and certain economic, operational and strategic factors may require us to secure additional funds. If we are unable to obtain sufficient funding at any time in the future, we may not be able to develop or commercialize our products, take advantage of business opportunities or respond to competitive pressures. Our current and anticipated operations require substantial capital. We expect that our existing capital resources including interest earned thereon will be sufficient to fund our current and planned operations through at least the next twelve months; however, our actual needs will depend on numerous factors, including the progress and scope of our internally funded development and commercialization activities; our ability to comply with the terms of our research funding agreements; our ability to maintain existing collaborations; our decision to seek additional collaborators; the success of our collaborators in developing and marketing products under their respective collaborations with us; our success in producing clinical and commercial supplies of our product candidates on a timely basis sufficient to meet the needs of our clinical trials and commercial launch; the costs we incur in obtaining and enforcing patent and other proprietary rights or gaining the freedom to operate under the patents of others; and our success in acquiring and integrating complementary products, technologies or businesses. Our clinical trials may be modified or terminated for

We will need to raise additional funds to support our long-term research, product development, and commercialization programs. We regularly consider various fund raising alternatives, including, for example, partnering of existing programs, monetizing of potential revenue streams, debt or equity financing and merger and acquisition alternatives. We may also seek additional funding through strategic alliances, collaborations, or license agreements and other financing mechanisms. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research and development programs, or to obtain funds through arrangements with licensees or others that may require us to relinquish rights to certain of our technologies or product candidates that we may otherwise seek to develop or commercialize on our own.

We require cash to fund our operating expenses, to make capital expenditures, acquisitions and investments and to service our debt. We have financed operations since inception primarily through payments received under collaborative research and license agreements, the private and public issuance . . .