Summary of NEXMED INC - Yahoo! Finance

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Disclosures Regarding Forward-Looking Statements.

The following should be read in conjunction with the unaudited consolidated financial statements and the related notes that appear elsewhere in this document as well as in conjunction with the Risk Factors section herein and in our Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission on March 12, 2008. This report includes forward-looking statements made based on current management expectations pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual outcomes may differ materially from what is expressed or forecast. There are many factors that affect our business, consolidated financial position, results of operations and cash flows, including but not limited to, our ability to enter into partnering agreements or raise financing on acceptable terms, successful completion of clinical development programs, regulatory review and approval, product development and acceptance, manufacturing, competition, and/or other factors, many of which are outside our control.

General.

We are a Nevada corporation and have been in existence since 1987. Since 1994, we have positioned ourselves as a pharmaceutical and medical technology company with a focus on developing and commercializing therapeutic products based on proprietary delivery systems. We are currently focusing our efforts on new and patented topical pharmaceutical products based on a penetration enhancement drug delivery technology known as NexACT®, which may enable an active drug to be better absorbed through the skin.

The NexACT® transdermal drug delivery technology is designed to enhance the absorption of an active drug through the skin, overcoming the skin's natural barrier properties and enabling high concentrations of the active drug to rapidly penetrate the desired site of the skin or extremity. Successful application of the NexACT® technology would improve therapeutic outcomes and reduce systemic side effects that often accompany oral and injectable medications. We have applied the NexACT® technology to a variety of compatible drug compounds and delivery systems, and, on our own or through development partnerships, are in various stages of developing new topical treatments for male and female sexual dysfunction, nail fungus, psoriasis, and other dermatological conditions. We intend to continue our efforts developing topical treatments based on the application of NexACT® technology to drugs: (1) previously approved by the FDA, (2) with proven efficacy and safety profiles,
(3) with patents expiring or expired and (4) with proven market track records and potential.

On June 18, 2007, Vivian H. Liu was appointed as our Chief Executive Officer. Ms. Liu succeeded Richard J. Berman, who was elected by the Board to serve as its non-executive Chairman. Mr. Berman was our interim Chief Executive Officer from January 2006 through June 2007 and has served as a Director of NexMed since 2002. At the Annual Meeting of Stockholders on June 18, 2007, Ms. Liu was also elected to serve on the Board of Directors for a three-year term. On November 2, 2007, we announced the appointment of Mr. Hemanshu Pandya to the position of Vice President and Chief Operating Officer. In addition, we have formed a Scientific Advisory Board headed by Dr. David Tierney, who also serves as a Director on the Board of Directors. The focus of the Scientific Advisory Board is to assist us in evaluating our current pipeline consisting of early stage NexACT® based products under development, and also assist us in identifying and evaluating new product development opportunities going forward.

We have an exclusive global licensing agreement with Novartis International Pharmaceutical Ltd. ("Novartis") for NM100060, our proprietary topical nail solution for the treatment of onychomycosis (nail fungal infection). Under the agreement, Novartis acquired the exclusive worldwide rights to NM100060 and has assumed all further development, regulatory, manufacturing and commercialization responsibilities as well as costs. Novartis agreed to pay us up to $51 million in upfront and milestone payments on the achievement of specific development and regulatory milestones, including an initial cash payment of $4 million at signing. In addition, we are eligible to receive royalties based upon the level of sales achieved.

The completion of patient enrollment in the Phase 3 clinical trials for NM100060 triggered a $3 million milestone payment from Novartis. Pursuant to the terms of the licensing agreement with Novartis, this payment was due on February 4, 2008, or 7 months after the last patient enrolled in the Phase 3 studies. However, the agreement also provides that clinical milestones paid to us by Novartis shall be reduced by 50% until we receive an approved patent claim on the NM100060 patent application which we filed with the U.S. patent office in November 2004. As such, we received only $1.5 million from Novartis on March 4, 2008.

On October 17, 2008, the U.S. Patent and Trademark Office issued the Notice of Allowance on our patent application for NM100060. Upon payment of the patent issuance fee on October 22, 2008, we triggered a $2 million milestone payment from Novartis. Additionally, we also invoiced Novartis $1.5 million for the remaining 50% of the patient enrollment milestone that was held by Novartis as discussed previously. We received the payment of $3.5 million from Novartis on October 30, 2008.

In July 2008, Novartis completed testing for the Phase 3 clinical trials for NM100060. The Phase 3 program required for the filing of the NDA in the U.S. for NM100060 consisted of two pivotal, randomized, double-blind, placebo-controlled studies. The parallel studies were designed to assess the efficacy, safety and tolerability of NM100060 in patients with mild to moderate toenail onychomycosis. Approximately 1,000 patients completed testing in the two studies, which took place in the U.S., Europe, Canada and Iceland. On August 26, 2008, we announced that based on First Interpretable Results of these two Phase 3 studies, Novartis had decided not to submit the NDA at this time. As a result of this decision, we will not receive the $6 million for positive Phase 3 results. The $7 million milestone payment for the filing of the NDA has been postponed indefinitely.

Novartis has confirmed that it intends to complete patient testing in the ongoing comparator study which they had initiated in March 2007 in ten European countries. Over 900 patients with mild to moderate onychomycosis are participating in this open-label study, which is designed to assess the safety and tolerability of NM100060 (terbinafine 10% topical formulation) versus Loceryl® (amorolfine) 5% nail lacquer, a topical treatment for onychomycosis that is approved in Europe. The comparator study is expected to be completed by early 2009 and the data will be available in mid-2009. As of now, we cannot confirm Novartis' plan for the product. If Novartis decides to terminate the global licensing agreement, which it can do at any time, the rights to NM100060 would revert back to us with no compensation for termination.

The most advanced of our products under development is our topical alprostadil-based cream treatment intended for patients with erectile dysfunction ("Vitaros®"), which was previously known as Alprox-TD®. Our NDA was filed and accepted for review by the FDA in September and November 2007, respectively. During a teleconference with the FDA in early July 2008, our use of the name Vitaros® for the ED Product was verbally approved by the FDA.

On July 21, 2008, we received a not approvable action letter (the "Action Letter") from the FDA in response to our NDA. The major regulatory issues raised by the FDA were related to the results of the transgenic ("TgAC") mouse carcinogenicity study which NexMed completed in 2002. The TgAC concern raised by the FDA is product specific, and does not affect the dermatological products in our pipeline, specifically NM100060.

On October 15, 2008, we met with the FDA to discussthe major deficiencies cited in the Action Letter and to reach consensus on the necessary actions for addressing these deficiencies for our Vitaros® NDA. Several key regulatory concerns were addressed and agreements were reached at the meeting. The FDA agreed to our request for a review of this assessment by the Carcinogenicity Advisory Committee (CAC) prior to our Class 2 resubmission in reply to the Action Letter. The CAC will review the 2 two year carcinogenicity studies which were recently completed. We will also submit a briefing package to the CAC for review, which incorporates the results from the entire carcinogenicity program, relevance and utility of the TgAC model and concludes that the weight of evidence of the entire carcinogenicity program can alleviate the FDA's concerns over the positive results from the TgAC study. NexMed plans to submit this briefing package for CAC review by the end of the year. In terms of an assessment of the transfer to the partner of the NexACT® technology, the FDA agreed with our proposal to conduct one Phase 1 study in healthy volunteers with the design of the trial to be determined. Finally, in terms of the assessment of transmission of sexually transmitted diseases, the FDA and Nexmed agreed on a plan to conduct one animal study with the animal model to be determined. The FDA also confirmed the revision on the status of our manufacturing facility from "withhold" to "acceptable", based on our adequately addressing the deficiencies cited in their Pre-Approval Inspection ("PAI") of our facility in January 2008. The purpose of the PAI is to ensure that our facility is in compliance with Good Manufacturing Practices ("GMP") as defined by FDA regulations and to determine if we have the ability to begin commercial manufacturing upon approval of the NDA. It was also made clear by the FDA that a one-year open-label safety study would no longer be required for regulatory approval.

On November 1, 2007, we licensed the U.S. rights of Vitaros® to Warner Chilcott Company, Inc. ("Warner"). Warner paid us $500,000 upon signing and agreed to pay us up to $12.5 million on the achievement of specific regulatory milestones and will undertake the manufacturing investment and any other investment for further product development that may be required for product approval, including an estimated $2 million for improvements to our East Windsor manufacturing facility in order for the facility to be ready for commercial manufacturing. Additionally, Warner is responsible for the commercialization and manufacturing of Vitaros®. While Warner intends to manufacture Vitaros® in the future, our facility is listed as the manufacturing and quality control laboratory in the NDA and may be the initial site for commercial manufacturing of Vitaros® upon its approval for commercialization. However, Warner could also decide to shift manufacturing for Vitaros® to a third party facility.

On February 21, 2007, the Canadian regulatory authority, Health Canada, informed us that the lack of a completed 12-month open label safety study would not preclude them from accepting and reviewing our New Drug Submission ("NDS") in Canada which was accepted for review on February 15, 2008. On May 2, 2008, we announced that our manufacturing facility received a GMP compliance certification from Health Canada, which is essential for the ultimate approval and marketing of Vitaros® in Canada. Based on our discussions to date with Health Canada, we expect to receive a Letter of Deficiencies which will cite similar regulatory issues as previously cited by the FDA. We will have up to 90 days to reply to the Letter of Deficiencies when it is received from Health Canada, and believe that we will be able to satisfactorily address the concerns cited. However, the risk remains that we may not be successful in convincing them to approve our product for marketing.

On April 20, 2007, the United Kingdom regulatory authority, Medicines and Healthcare Products Regulatory Agency (the "MHRA") also informed us that the safety data that we have compiled to date was sufficient for the Marketing Authorization Application ("MAA") to be filed and accepted for review in the United Kingdom. We had another guidance meeting with the MHRA in January 2008 and received additional input for the preparation of our MAA. However, the MHRA informed us at that time that due to the backlog of MAA filings, they would not be able to receive and start reviewing our MAA until February 2009. Even though we are encouraged by the initial positive feedback from the MHRA, the risk remains that we may not be successful in convincing the MHRA and other European regulatory authorities to approve our product for marketing.

We are also developing Femprox®, which is an alprostadil-based cream product intended for the treatment of female sexual arousal disorder. We have completed nine clinical studies to date, including one 98-patient Phase 2 study in the U.S. for Femprox®, and also a 400-patient study for Femprox® in China, where the cost for conducting clinical studies is significantly lower than in the U.S. We do not intend to conduct additional studies for this product until we have secured a co-development partner, which we are actively seeking.

We have also continued early stage development work for our product pipeline with the goal of focusing our attention on product opportunities that would replicate the model of our licensed anti-fungal nail treatment. Our current efforts are focused on the development of viable topical treatments for psoriasis, a common dermatological condition.

Liquidity, Capital Resources and Financial Condition.

We have experienced net losses and negative cash flows from operations each year since our inception. Through September 30, 2008, we had an accumulated deficit of $140,829,106. Our operations have principally been financed through private placements of equity securities and debt financing. Funds raised in past periods should not be considered an indication of our ability to raise additional funds in any future periods.

As a result of our losses to date and accumulated deficit, there is doubt as to our ability to continue as a going concern, and, accordingly, our independent registered public accounting firm has modified its report on our December 31, 2007 consolidated financial statements included in our Annual Report on Form 10-K in the form of an explanatory paragraph describing the events that have given rise to this uncertainty. These factors may make it more difficult for us to obtain additional funding to meet our obligations. Our ability to continue as a going concern is based on our ability to generate or obtain sufficient cash to meet our obligations on a timely basis and ultimately become profitable.

At September 30, 2008 we had cash and cash equivalents and short term investments of approximately $1.4 million as compared to $3.5 million at December 31, 2007. Our cash used in operations in the first nine months of 2008 is due to our average fixed monthly overhead costs of approximately $525,000 per month, in addition to approximately $600,000 for 2007 bonuses which were paid to employees in March 2008. Additionally, we spent approximately $493,000 in direct costs to support our NDA and NDS filings for Vitaros®, $76,000 in direct expenses on our psoriasis project, $95,000 for legal fees in connection with a patent lawsuit whereby we are the plaintiff suing for patent infringement on our herpes treatment medical device, and approximately $106,000 in closing costs related to the convertible notes closed on June 30 as discussed in Note 5 of the Consolidated Financial Statements. This cash usage in 2008 was mostly offset by the receipt of a $1.5 million milestone payment from Novartis on March 4, 2008 for the completion of patient enrollment in the Phase 3 trials of NM100060, as discussed in Note 11 of the Consolidated Financial Statements and the net proceeds of approximately $2.6 million received upon the issuance of the convertible notes on June 30, 2008 as discussed in Note 5 of the Consolidated Financial Statements. On October 22, 2008, we triggered a $2 million milestone with Novartis which also resulted in the release of the balance of $1.5 million patient enrollment milestone payment. The total $3.5 million payment was received from Novartis on October 30, 2008.

On September 9, 2008, we were approved by the State of New Jersey to sell a portion of our state tax credits and net operating losses ("NOLs") pursuant to the Technology Tax Certificate Transfer Program ("Program"). We currently have approximately $1.9 million in tax credits and NOLs available to sell. We have not yet been informed of the exact amount of tax credits and NOLs that we will be permitted to sell for 2008 but based on a recent discussion with the Program administrators; we expect to receive at least $600,000 in net proceeds from such sale. For the past three years, we were approved to sell NOLs in the amounts of $905,515 in 2007, $637,525 in 2006, and $540,580 in 2005, and received net proceeds of $805,909, $567,397, and $481,116 respectively.

Our current cash reserves as of the date of this report combined with the $3.5 million received from Novartis on October 30, 2008 along with the anticipated proceeds from the sale of NOLs for 2008 should provide us with sufficient cash to fund our operations through the second quarter of 2009 based on our current monthly operating expenditures of $525,000 and the $1 million mortgage payment due on December 31, 2008 as discussed in Note 5 of the Consolidated Financial Statements. However, we are evaluating ways to cut our monthly expenditures with the goal of reducing our current monthly operating expenses by 30% or to $350,000 per month. Measures being considered include selling our facility, freezing expenses, and further limiting our research and development activities. If we are successful in reducing our monthly operating expenses to $350,000 per month by the end of 2008 and renegotiating or refinancing our mortgage payment due on December 31, 2008 our current cash reserves should provide us with sufficient cash to fund our operations through 2009, even if we do not receive any further cash infusions from our current or future licensing partners.

At September 30, 2008, we had $1,308,000 in accounts payable and accrued expenses as compared to $621,668 at December 31, 2007. The increase is attributable to approximately $892,000 accrued and expensed at September 30, 2008 for a cancellation fee related to the cancellation of a clinical research agreement for a one-year open-label study that will no longer be required by the FDA for regulatory approval of Vitaros®, as discussed in Note 10 of the Consolidated Financial Statements.

At September 30, 2008, we had $138,421 in payroll related liabilities as compared to $693,774 at December 31, 2007. The decrease is attributable to the payment of 2007 bonuses in March 2008. Our bonuses were accrued and expensed in 2007 but were not paid until the first quarter of 2008.

At September 30, 2008 we had convertible notes of $5,750,000. As discussed in Note 5 of the Consolidated Financial Statements we issued $5,750,000 of the convertible notes on June 30, 2008.

At December 31, 2007, we had a note payable of $2,538,705. The note was paid in cash on June 30, 2008 with the proceeds received from the convertible notes discussed above. Therefore, at September 30, 2008, there is no remaining balance due to the holder of the note.

To date, we have spent approximately $71.7 million on our Vitaros® development program. Pursuant to our license agreement signed on November 1, 2007, Warner will undertake the manufacturing investment and any other investment for further product development that may be required for product approval in the United States. We anticipate that the remaining cost to prepare all of the relevant dossiers and assemble the regulatory approval applications in Europe will be approximately $500,000. We do not intend to trigger those expenses until we significantly improve our cash reserves or engage a partner in Europe to undertake these expenses.

Critical Accounting Estimates.

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. Actual results could differ from these estimates. There have been no material changes to our Critical Accounting Policies described in our Form 10-K filed with the Securities and Exchange Commission on March 12, 2008.

Comparison of Results of Operations Between the Three Months Ended September 30, 2008 and 2007.

Revenue, principally license fee revenue. We recorded $305,943 in revenue during the third quarter of 2008, as compared to $296,390 in revenue during the second quarter of 2007.

Research and Development Expenses. Our research and development expenses for the third quarter of 2008 and 2007 were $1,875,474 and $1,266,792, respectively. Research and development expenses in the third quarter of 2008 increased primarily due to the expense of approximately $892,000 for a cancellation fee related to the cancellation of a clinical research agreement for a one-year open-label study that will no longer be required by the FDA for regulatory approval of Vitaros® as discussed in Note 10 of the Consolidated Financial Statements. This increase was partially offset by reduced spending in 2008 on our development programs including approximately $178,000 attributable to Vitaros®, as compared to approximately $521,000 for Vitaros® during the same period in 2007. We have continued to spend modestly on the early stage development of our topical treatment for psoriasis. During the third quarter of 2008 we have spent approximately $95,000 on the psoriasis project. We have budgeted approximately $800,000 in direct expenditures in 2008 for early stage product development. However, we will continue to spend modestly on these products and do not intend to trigger the direct expenditures budgeted until we have significantly improved our cash position.

General and Administrative Expenses. Our general and administrative expenses were $1,327,260 during the third quarter of 2008 as compared to $1,037,421 during the same period in 2007. The increase is primarily due to an increase in stock compensation expense of approximately $266,000 due to the addition of our Chief Operating Officer in late 2007 and the revised stock compensation package for directors approved in August, 2008 whereby the annual fees for service were increased for non-employee Directors.

Interest Expense, Net. We had net interest expense of $143,303 during the third quarter of 2008, as compared to $54,555 during the same period in 2007. The increase is primarily due to the interest on $5,750,000 principal amount of convertible notes during the third quarter of 2008 as compared to interest expense on lesser debt of $2,000,000 during the same period in 2007.

Net Loss. The net loss was $3,040,094 or $0.04 per share and $2,062,378 or $0.02 per share in the third quarter of 2008 and 2007, respectively. The increase in net loss is primarily attributable to the third quarter 2008 expense of $892,000 for a cancellation fee related to the cancellation of a clinical research agreement for a one-year open-label study that will no longer be required by the FDA for regulatory approval of Vitaros®. We also had an increase in stock compensation expense in the third quarter of 2008 as a result of the addition of our Chief Operating Officer in late 2007 and the revised stock compensation package for directors approved in August, 2008 whereby the annual fees for service were increased for non-employee directors.

Comparison of Results of Operations Between the Nine Months Ended September 30 of 2008 and of 2007.

Revenue, principally license fee revenue. We recorded $2,457,342 in revenue at September 30, 2008, as compared to $866,766 in revenue during the same period in 2007. The increase in revenue is primarily due to the $1.5 million in revenue recognized on receipt of a milestone payment from Novartis on March 4, 2008 as discussed in Note 11 of the Consolidated Financial Statements. Additionally, the increase in revenue in 2008 is the result of the $390,000 in revenue recognized in 2008 attributable to the up-front payment of $500,000 received in November 2007 from Warner as discussed in Note 11 of the Consolidated Financial Statements.

Research and Development Expenses. Our research and development expenses at September 30, 2008 and 2007 were $4,140,967 and $3,459,390, respectively. Research and development expenses in the third quarter of 2008 increased primarily due to the expense of approximately $892,000 for a cancellation fee related to the cancellation of a clinical research agreement for a one-year open-label study that will no longer be required by the FDA for regulatory approval of Vitaros® as discussed in Note 10 of the Consolidated Financial Statements. This increase was partially offset by reduced spending in 2008 on our development programs including approximately $871,000 attributable to Vitaros®, as compared to approximately $1.4 million for Vitaros® during the same period in 2007. We have begun to spend modestly on the early stage development of our topical treatment for psoriasis. As of September 30, 2008 we have spent approximately $271,000 on the psoriasis project, to fund mostly internal development efforts. We have budgeted approximately $800,000 in direct expenditures in 2008 for early stage product development. However, we will continue to spend modestly on these products and do not intend to trigger the direct expenditures budgeted until we have significantly improved our cash position.

General and Administrative Expenses. Our general and administrative expenses were $3,824,037 for the nine months of operations in 2008 as compared to $3,414,246 during the same period in 2007. The increase is primarily due to an increase in stock compensation expense of approximately $373,000 due to the addition of our Chief Operating Officer in late 2007 and the revised stock compensation package for Directors approved in August, 2008 whereby the annual fees for service were increased for non-employee Directors.

Interest Expense, Net. We had net interest expense of $803,342 during the nine months of 2008, as compared to $85,838 during the same period in 2007. The increase is primarily due to the interest expense on $5,750,000 principal amount of convertible notes issued in June 2008 and the $3 million mortgage note executed in October 2007 and paid in June 2008 as discussed in Note 6 of the Consolidated Financial Statements and amortization of $461,291 of the note discount on the mortgage note in 2008 as a result of writing off the balance remaining of such note discount upon repayment of the note on June 30, 2008. Interest income was not significant in either period.

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