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 are actively seeking co-development partners for topical treatments for male and female sexual dysfunction, nail fungus, psoriasis, and other dermatological conditions that are in various stages of development. We intend to continue our efforts developing topical treatments on our own or through development partnerships 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 had 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 had 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 were 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.

In July 2009, Novartis completed final analysis of the comparator study which they had initiated in March 2007 in ten European countries. The study results were insufficient to support marketing approval in Europe. As such, on July 8, 2009, we announced the mutual decision reached with Novartis to terminate the licensing agreement. In accordance with the terms of the termination agreement, Novartis has provided us with all of the requested reports to date for the three Phase 3 studies that they conducted for NM100060 and is assisting and supporting us in connection with the assignment, transfer and delivery to us of all know-how and data relating to the product.

In consideration of such assistance and support, we will pay to Novartis 15% of any upfront and/or milestone payments that we receive from any future third party licensee of NM100060, as well as a royalty fee ranging from 2.8% to 6.5% of annual net sales of products developed from NM100060 (collectively, "Products"), with such royalty fee varying based on volume of such annual net sales. In the event that the Company, or a substantial part of our assets, is sold, we will pay to Novartis 15% of any upfront and/or milestone payments received by us or our successor relating to the Products, as well as a royalty fee ranging from 3% to 6.5% of annual net sales of any Products, with such royalty fee varying based on volume of such annual net sales. If the acquirer makes no upfront or milestone payments, the royalty fees payable to Novartis will range from 4% to 6.5% of annual net sales of any Products.

We have completed our analysis of the two pivotal Phase 3 studies completed by Novartis. The analysis supports our belief in the product's potential for treating patients with mild onychomycosis and warrants further studies for regulatory approval. We are sharing the clinical database and our conclusion with potential partners interested in licensing NM100060 for further development.

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 above mentioned 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 has paid us 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 Warner is not obligated by the purchase agreement to continue with the development of Vitaros® and the filing of the NDA, as of the date of this report, Warner is in the process of completing the CAC assessment package for submission to the FDA for review. This process was delayed due to Warner's decision to include additional data which supported the safety of the product. We expect, based on recent discussions, that the package should be submitted in the near future. However, since the submission is being made by Warner, we are unable to provide a specific timeframe.

Our New Drug Submission ("NDS") in Canada 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 Notice of Deficiencies ("NOD") on November 12, 2008 which cited similar regulatory issues as previously cited by the FDA. On February 18, 2009 we responded to the NOD and have continued to respond to requests by Health Canada for further information as they continue 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

Our product pipeline also includes 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 previously licensed anti-fungal nail treatment. We have in our pipeline a viable topical treatment 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 would provide technical guidance and oversight in the development of new products.

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 ultimately result in any specific transactions.

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, 2009, we had an accumulated deficit of $141,621,302. 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 September 30, 2009 we had cash and cash equivalents of approximately $1.5 million as compared to $2.9 million at December 31, 2008. During the first nine months of 2009, we received $3,000,000 from Warner from the sale of the U.S. rights to Vitaros® and the related facility license fees as discussed above. The receipt of this cash in 2009 was offset by our cash used in operations in the first nine months of 2009. We spent approximately $4.4 million consisting of our average fixed monthly overhead costs of approximately $325,000 per month in addition to $592,000 towards a cancellation fee as discussed in Note 9 of the Notes to Unaudited Consolidated Financial Statements. Additionally we spent approximately $276,475 in severance and accrued vacation paid as part of our restructuring program implemented in December 2008, $58,000 for Nasdaq annual listing fees, $50,000 of principal on convertible notes repaid as discussed in Note 5 of the Notes to Unaudited Consolidated Financial Statements, $50,000 in investment banker fees to FTN for advisory services to assist us in exploring and evaluating strategic alternatives, $42,000 in legal fees and $175,000 in consulting 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 $141,300 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 $1.1 million as of the date of this report 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 operating expenditures to approximately $225,000 per month. We anticipate a potential cash infusion from the sale of a portion of our New Jersey State net operating losses, pursuant to the Technology Tax Certificate Transfer Program sponsored by the State. Based on amounts received in previous years, we expect to receive $600,000 before the end of 2009. We have also initiated efforts to lease or 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, which would then provide us with additional cash to fund our operations. In October 2009, we entered into a non-binding term sheet and are currently in late stage contract negotiations with a potential lessee to lease our facility for a ten year period with an option to buy the facility at any time during the lease. If we successfully close this transaction, our monthly cash burn will drop significantly. The tenant will assume all building expenses and the rental income will exceed our mortgage obligations, thereby resulting in a positive cash flow for us. However, there is no assurance that we will be able to successfully negotiate lease terms, sell our facility at an acceptable price or otherwise successfully complete our restructuring plan.

At September 30, 2009, we had $95,200 in deferred revenue as a result of the licensing of our patents to Warner in connection with the Asset Purchase Agreement, as amended, 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 September 30, 2009 and 2008.

Revenue. We recorded $109,590 in revenue during the third quarter of 2009, as compared to $305,943 in revenue during the third quarter of 2008. The 2008 revenue primarily consists of $250,000 of revenue recognized in the third quarter of 2008 related to the $1.5 million milestone payment received from Novartis on March 4, 2008 as discussed in Note 10 of the Consolidated Financial Statements. Additionally, revenue in 2008 is the result of the $55,556 in revenue recognized in 2008 attributable to the up-front payment received in November 2007 from Warner as discussed in Note 10 of the Consolidated Financial Statements. The 2009 revenue consists of facility license fees for the use of our manufacturing facility and related manufacturing know-how related 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.

Research and Development Expenses. Our research and development expenses for the third quarter of 2009 and 2008 were $309,989 and $1,875,474, respectively. While 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, we continued to incur minimal research and development expenses during the third quarter of 2009. During the quarter we incurred costs to support our NDS in Canada for Vitaros® as well as some costs related to the initial analysis of the clinical data derived from the Phase 3 clinical trial program completed by Novartis for NM100060. For the remainder of 2009 we expect to continue incurring costs related to the support of our regulatory filing in Canada and continued analysis of the NM100060 clinical data.

General and Administrative Expenses. Our general and administrative expenses were $714,039 during the third quarter of 2009 as compared to $1,327,260 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.

Interest Expense, Net. We had net interest expense of $276,178 during the third quarter of 2009, as compared to $143,303 during the same period in 2008. The increase is primarily due to higher interest expense recorded in 2009 as a result of the imputed interest recorded on the conversions of the convertible notes payable to Common Stock at a discount to the then market price of the Common Stock as discussed in Note 5 of the Notes to Unaudited Consolidated Financial Statements. There were no such conversions of convertible notes payable to Common Stock during the same period in 2009.

Net Loss. The net loss was $1,190,616 or $0.01 per share and $3,040,094 or $0.04 per share in the third quarter of 2009 and 2008, respectively. The decrease in net loss is primarily attributable to a reduction in overall expenses as part of our restructuring program implemented in December 2008 which has been partially offset by a decrease in revenue during the third quarter of 2009 as discussed above.

Comparison of Results of Operations Between the Nine Months Ended September 30, 2009 and 2008.

Revenue. We recorded $2,678,873 in revenue during the first nine months of 2009, as compared to $2,457,342 in revenue during the same period in 2008. The slight increase is attributable to the sale to Warner of the U.S. rights to Vitaros® as discussed in Note 10 of the Notes to Unaudited Consolidated Financial Statements. The $2,457,342 of revenue in the first nine months of 2008 consisted of revenue recognized related to the $1.5 million milestone payment received from Novartis on March 4, 2008 and amortization of the up-front payment received from Warner in 2007 over its expected term 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 nine months of 2009 and 2008 were $1,628,808 and $4,140,967, respectively. Research and development expenses in the first nine months of 2009 decreased significantly due to reduced spending in 2009 on our development programs as part of our restructuring program. During the first nine months 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 $2,499,835 during the first nine months of 2009 as compared to $3,824,037 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 2008 for one-time national filings of patent applications related to Vitaros®.

Interest Expense, Net. We had net interest expense of $482,232 during the first nine months of 2009, as compared to $803,342 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 5 of the Notes to Unaudited Consolidated Financial Statements. There was no such amortization of debt discount during the same period in 2009.

Net Loss. The net loss was $1,932,002 or $0.02 per share in the first nine months of 2009 as compared to $6,311,004 or $0.08 per share in the same period in 2008. The significant decrease in net loss is primarily attributable to our . . .