References within the Papers PDF Reader have several annotation features available. You can highlight, underline, strikethrough, use the draw/freehand-write tool or add a sticky note:
To use an annotation tool simply click on "Annotate" in the top right corner of the reader and select an option you want to use and drag the cursor over the text you want to annotate.
Alternately, you can first select the text you want to annotate, right-click on it and a menu will appear allowing you to select which option should be applied to it:
To delete an unwanted annotation simply click on it and select the "Delete" option at the bottom of the reader:
All annotations made in the PDF will be visible in the "Notes" section of the left-hand sidebar when you click on the reader menu (three lines in the top left corner):