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, 2008 filed with the Securities and Exchange Commission on March 16, 2009. 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 U.S. Food and Drug Administration ("FDA"), (2) with proven efficacy and safety profiles, (3) with patents expiring or expired and
(4) with proven market track records and potential.

NM100060 Anti-Fungal Treatment

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 to be paid 7 months after the last patient enrolled in the Phase 3 studies. However, the agreement also provided that clinical milestones paid to us by Novartis would be reduced by 50% until we received an approved patent claim on the NM100060. As such, we initially received only $1.5 million from Novartis.

On October 17, 2008, the U.S. Patent and Trademark Office issued the Notice of Allowance on our patent application for NM100060. This triggered a $2 million milestone payment from Novartis. On October 30, 2008 we received a payment of $3.5 million from Novartis consisting of the balance of $1.5 million of the patient enrollment milestone and the $2 million patent milestone.

In July 2008, Novartis completed testing for the Phase 3 clinical trials for NM100060. The Phase 3 program required for the filing of the New Drug Application ("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 that time. As a result of this decision, we did not receive a $6 million milestone payment for positive Phase 3 results and a $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 an ongoing comparator study which it 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. Patient testing has been completed and the data will be available in mid-2009. If the results of the comparator study are positive and the total clinical database is deemed to be sufficient for filing, we expect Novartis to begin filing for marketing approval in selected European countries while they develop a new plan of action for the U.S. market. If the results are negative, we expect Novartis to terminate the global licensing agreement, which it can do at any time, and the rights to NM100060 would revert back to us with no compensation for termination.

Vitaros®

We also have under development a 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 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 to undertake the manufacturing investment and any other investment for further product development that may be required for product approval. Additionally, Warner was responsible for the commercialization and manufacturing of Vitaros®.

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 discuss the 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: (a) a review by the Carcinogenicity Advisory Committee (CAC) of the 2 two-year carcinogenicity studies which were recently completed; (b) one Phase 1 study in healthy volunteers to assess any transfer to the partner of the NexACT® technology and (c) one animal study to assess the transmission of sexually transmitted diseases with the design of the study to be determined. The FDA also confirmed the revision on the status of our manufacturing facility from "withhold" to "acceptable", based on our having adequately addressed the deficiencies cited in their Pre-Approval Inspection ("PAI") of our facility in January 2008. It is also our understanding that at this time the FDA does not require a one-year open-label safety study for regulatory approval. After the meeting we estimated that an additional $4 to $5 million would be needed to be spent to complete the abovementioned requirements prior to the resubmission of the NDA.

On February 3, 2009, we announced the sale of the U.S. rights for Vitaros® and the specific U.S. patents covering Vitaros® to Warner which terminated the previous licensing agreement. Under the terms of the agreement, we received gross proceeds of $2.5 million as an up-front payment and are eligible to receive an additional payment of $2.5 million upon Warner's receipt of an NDA approval from the FDA. In addition, Warner will pay a total of $350,000 for the manufacturing equipment for Vitaros®. The purchase agreement with Warner gives us the right to reference their work on Vitaros® in our future filings outside the U.S. This is important as we move ahead with international partnering opportunities because the additional data may further validate the safety of the product and enhance its potential value. While it is our understanding that Warner is currently moving forward in pursuing NDA approval for Vitaros®, it is not obligated by the purchase agreement to continue with the development of Vitaros® and the filing of the NDA.

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. We received a Letter of Deficiences ("LOD") on November 12, 2008 which cited similar regulatory issues as previously cited by the FDA. On February 18, 2009 we responded to the LOD but anticipate that Health Canada will require further information from us before they can complete their review and approval process. While we remain positive about the prospects for approval in Canada, the risk remains that we may not be successful in obtaining Health Canada approval of 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 has recently informed us that due to the backlog of MAA filings, they would not be able to receive and start reviewing our MAA until October 2010. Even though we are encouraged by the initial positive feedback from the MHRA, the risk remains that we may not be successful in obtaining MHRA and other European regulatory authorities approval of our product for marketing.

Femprox® and Other Products

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 was 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.

Restructuring Plans

In December 2008, we began to implement a restructuring program with the goal of reducing costs and outsourcing basic research and development. As part of our restructuring plan, we announced on January 22, 2009 a memorandum of understanding ("MOU") with Pharmaceutics International, Inc. or Pii. The purpose of this collaboration is to broaden the promotion of our technology as well as permit us access to Pii's research and development and commercial manufacturing infrastructure. Pii is a privately-held contract research and manufacturing organization with over 400 employees located near Baltimore, Maryland. Their capabilities range from product research and development to commercial manufacturing. Pursuant to our MOU, Pii will promote our NexACT® technology to its clients and may independently identify new product development opportunities for this collaboration with NexMed. We will provide technical guidance and oversight in the development of new products. In addition, as part of our restructuring plan, we are discussing with Pii the opportunity to co-develop our early stage products which will enable us to further reduce our monthly overhead expenses.

The partnership with Pii allows us to continue the development of our early stage projects while we reduce our research and development staff and infrastructure. As a result, our monthly operating overhead burn rate has been reduced to approximately $300,000 per month. Access to Pii's state of the art facilities also allows us to further improve our cash position by selling our facility and redundant equipment. We have initiated efforts to sell our facility which, if successful, would further reduce our monthly operating expenses to approximately $200,000 per month after the sale of the facility is completed.

During 2009, we plan to work with Pii to complete the development of the psoriasis project and then license the product to a co-development and marketing partner. We also plan to license the rights to Vitaros® for territories outside the U.S., including Canada, South America, and Europe. The purchase agreement with Warner gives us the right to reference their work on Vitaros® in our future filings outside the U.S. This is important as we move ahead with international partnering opportunities because the additional data may further validate the safety of the product and enhance its potential value. Additionally, the future work done by Warner regarding the safety of Vitaros® may enhance the value of Femprox® as we work to find a marketing and co-development partner during 2009. In addition, we remain open to opportunities to co-develop products utilizing our NexACT® technology and we will be actively pursuing strategic opportunities that would leverage our NexACT® platform and generate partnership revenues to fund our development efforts.

On April 14, 2009, we engaged FTN Equity Capital Markets Corp. ("FTN") as our financial advisor to assist us in exploring and evaluating strategic alternatives. We are currently exploring and considering various opportunities available to us, including merger or acquisition transactions with the overall goal of enhancing value and maximizing the return on investment for our shareholders. While we have engaged FTN to help us explore all possible transactions for the Company, there can be no assurances that this process will result in any specific transactions and no decision has been made to pursue any specific strategic alternative at this time.

Liquidity, Capital Resources and Financial Condition.

We have experienced net losses and negative cash flows from operations each year since our inception. Through March 31, 2009, we had an accumulated deficit of $139,004,528. 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, 2008 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 March 31, 2009 we had cash and cash equivalents of approximately $3.8 million as compared to $2.9 million at December 31, 2008. During the first quarter of 2009, we received $2,675,000 from Warner from the sale of Vitaros® as discussed above. The receipt of this cash in 2009 was offset by our cash used in operations in the first quarter of 2009. We spent approximately $1.8 million consisting of our average fixed monthly overhead costs of approximately $350,000 per month in addition to $300,000 towards a cancellation fee as discussed in Note 9 of the Notes to Unaudited Consolidated Financial Statements. Additionally we spent approximately $210,000 in severance and accrued vacation paid as part of our restructuring program implemented in December 2008, $125,000 for the 2008 financial statement audit fee, $28,000 for the Nasdaq annual listing fee, $36,000 in legal fees related to the execution of the Warner asset purchase agreement as discussed in Note 10 of the Notes to Unaudited Consolidated Financial Statements and $39,000 for legal fees in connection with a patent lawsuit in which we are the plaintiff suing for patent infringement on our herpes treatment medical device.

Our current cash reserves of approximately $3.4 million as of the date of this report, along with the anticipated near term payments from Warner as discussed in Note 10 of the Notes to Unaudited Consolidated Financial Statements, should provide us with sufficient cash to fund our operations into the first quarter of 2010. This projection is based on the restructuring plan we implemented in December 2008 whereby we have reduced our current monthly operating expenditures to approximately $300,000 per month. In addition, as part of our restructuring plan, we are discussing with Pii the opportunity to co-develop our early stage products which will enable us to further reduce our monthly overhead expenses and allow us to sell our facility and redundant equipment. We have also initiated efforts to sell the facility housing our corporate office, research and development laboratories and manufacturing plant located in East Windsor, New Jersey. If we can successfully sell our facility and repay the existing mortgage, we should be able to reduce our monthly operating expenditures to approximately $200,000 per month. However, there is no assurance that we will be able to sell our facility at an acceptable price or otherwise successfully complete our restructuring plan.

At March 31, 2009 we had an Other receivable of $175,000 as a result of the sale of manufacturing equipment to Warner in February 2009, as discussed in Note 10 of the Notes to Unaudited Consolidated Financial Statements.

At March 31, 2009, we had $727,252 in accounts payable and accrued expenses as compared to $1,029,486 at December 31, 2008. The decrease is primarily attributable to a $300,000 payment made during the first quarter of 2009 toward approximately $592,000 that was included in accrued expenses at December 31, 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 Notes to Unaudited Consolidated Financial Statements.

At March 31, 2009, we had $100,300 in deferred revenue as a result of the licensing of our patents to Warner as part of the Asset Purchase Agreement signed in February 2009, as discussed in Note 10 of the Notes to Unaudited Consolidated Financial Statements.

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 16, 2009.

Comparison of Results of Operations Between the Three Months Ended March 31, 2009 and 2008.

Revenue, principally license fee revenue. We recorded $2,466,670 in revenue during the first quarter of 2009, as compared to $951,787 in revenue during the first quarter of 2008. The increase is attributable to the sale of the U.S. rights of Vitaros® to Warner as discussed in Note 9 of the Notes to Unaudited Consolidated Financial Statements. The $951,787 of revenue in the first quarter of 2008 consisted of revenue recognized related to the $1.5 million milestone payment received from Novartis on March 4, 2008 as discussed in Note 10 of the Notes to Unaudited Consolidated Financial Statements.

Research and Development Expenses. Our research and development expenses for the first quarters of 2009 and 2008 were $602,366 and $1,169,091, respectively. Research and development expenses in the first quarter of 2009 decreased primarily due to reduced spending in 2009 on our development programs as part of our restructuring program. During the first quarter of 2009 we reduced our research and development staff and infrastructure while maintaining our ability to continue the development of our early stage projects by entering into a partnership with Pii as discussed earlier. We plan to spend considerably less on research and development in 2009 as we actively seek co-development partners for our early stage products under development, including our topical treatment for psoriasis.

General and Administrative Expenses. Our general and administrative expenses were $1,091,047 during the first quarter of 2009 as compared to $1,303,398 during the same period in 2008. The decrease is primarily due to a reduction in staff costs as a result of our restructuring program implemented in December 2008 along with a reduction in legal fees related to our patents as we expended over $100,000 during the first quarter of 2008 for one-time national filings of patent applications related to Vitaros®.

Interest Expense, Net. We had net interest expense of $88,485 during the first quarter of 2009, as compared to $121,485 during the same period in 2008. The decrease is primarily due to higher interest expense recorded in 2008 as a result of the amortization of the debt discount related to the existing debt during 2008 as discussed in Note 6 of the Notes to Unaudited Consolidated Fnancial Statements. There was no such amortization of debt discount during the same period in 2009.

Net Income (Loss). The net income was $684,772 or $0.01 per share in the first quarter of 2009 as compared to a net loss of ($1,642,187) or ($0.02) per share in the same period in 2008. The increase in net income is primarily attributable to the sale of the U.S. rights of Vitaros® to Warner as discussed in Note 10 of the Notes to Unaudited Consolidated Financial Statements. However, we anticipate a net loss for the year ended December 31, 2009.