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NGSX > SEC Filings for NGSX > Form 10-Q on 10-Aug-2012All Recent SEC Filings

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Form 10-Q for NEUROGESX INC


10-Aug-2012

Quarterly Report


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

This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report. Operating results are not necessarily indicative of results that may occur in future periods.

This report contains forward-looking statements that are based upon current expectations within the meaning of the Private Securities Reform Act of 1995. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to, statements about or relating to:

• anticipated development of NGX-1998, including the potential entry of such product candidate into Phase 3 clinical trials;

• potential benefits of NGX-1998 as compared to Qutenza, including broader sites of application, timing and method of treatment necessary to obtain therapeutic benefits, treatment settings and potential additional indications for treatment;

• potential benefits of cross application of our development experience with Qutenza for the development of NGX-1998;

• our plans with regard to the commercialization of Qutenza in the United States and the plans of Astellas Pharma Europe Ltd., or Astellas, for commercialization of Qutenza pursuant to the terms of the Distribution, Marketing Agreement and License Agreement, or the Astellas Agreement;

• timing of completion of clinical trials for Qutenza being conducted by Astellas, and potential efforts for label expansion for Qutenza in the United States and the European Union that may be carried out if such trials are successful;

• expectations with respect to potential entry into commercial strategic partnerships for Qutenza and potential entry into development and commercial strategic partnerships for NGX-1998;

• maintenance of availability of Qutenza in the marketplace;

• expectations with respect to revenues for Qutenza as a result of our restructuring of commercial operations;

• sufficiency of existing resources to fund our operations into 2013;

• capital requirements and our needs for additional financing including the potential forms such financing may take, including our needs for additional financing to fund development of NGX-1998;

• anticipated development of other potential product candidates;

• losses, costs, expenses, expenditures and cash flows:

• potential competitors and competitive products;

• future payments under lease obligations and equipment financing lines;

• patents and our and others' intellectual property; and

• expected future sources of revenue and capital.


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We undertake no obligation to, and expressly disclaim any obligation to, revise or update the forward-looking statements made herein or the risk factors whether as a result of new information, future events or otherwise. Forward-looking statements involve risks and uncertainties, which are more fully described in the section of this quarterly report entitled "Risk Factors", including, but not limited to, those risks and uncertainties relating to:

• difficulties or inability to meet our obligations and covenants under our debt arrangements, including our arrangements with Hercules Technology Growth Capital, Inc., or Hercules, and Healthcare Royalty Partners, L.P., or HRP;

• difficulties or delays in development, testing, obtaining regulatory approval for, and undertaking production and marketing of NGX-1998, and in potential label expansion development efforts for Qutenza;

• unexpected adverse side effects or inadequate therapeutic efficacy of our product candidates, including NGX-1998 and Qutenza, could slow or prevent product approval or approval for particular indications (including the risk that current and past results of clinical trials or preclinical studies are not indicative of future results of clinical trials, and the difficulties associated with clinical trials for pain indications);

• positive results in clinical trials may not be sufficient to obtain FDA or European regulatory approval for NGX-1998 or for label expansion for Qutenza;

• physician or patient reluctance to use Qutenza or payer coverage for Qutenza and for the procedure to administer it, which may impact physician utilization of Qutenza;

• our inability to obtain additional financing if necessary;

• changing standards of care and the introduction of products by competitors or alternative therapies for the treatment of indications we target;

• the uncertainty of protection for our intellectual property, through patents, trade secrets or otherwise; and

• potential infringement of the intellectual property rights or trade secrets of third parties.

When used in this quarterly report, unless otherwise indicated, "NeurogesX," "the Company," "we," "our" and "us" refers to NeurogesX, Inc. and its subsidiaries.

Qutenza ฎ and NeurogesXฎ are registered trademarks in the United States. We have also applied for these trademarks in several other countries. Other service marks, trademarks and trade names referred to in this quarterly report are the property of their respective owners.

The following discussion should be read in conjunction with the section of this quarterly report entitled "Risk Factors."

Overview

We are a specialty pharmaceutical company focused on developing and commercializing a portfolio of novel non-opioid, pain management therapies to address unmet medical needs and improve patients' quality of life.

Our first commercial product, Qutenza, became commercially available in the United States and in certain European countries in the first half of 2010. Qutenza is a dermal delivery system designed to topically administer capsaicin to treat certain neuropathic pain conditions and was approved by the FDA in November 2009 for the management of neuropathic pain associated with postherpetic neuralgia, or PHN. Qutenza is the first prescription strength capsaicin product approved in the United States. Qutenza is also approved in the European Union for the treatment of peripheral neuropathic pain in non-diabetic adults.

Our most advanced drug candidate is NGX-1998. NGX-1998 is a topical liquid formulation of high concentration capsaicin that we are developing to treat neuropathic pain conditions. In November 2011, we announced positive top-line results from our Phase 2 clinical study of NGX-1998, in patients with PHN. The 12-week, multicenter, randomized, double-blinded, placebo-controlled clinical trial met its protocol-specified objectives, which include the primary endpoint of a percentage change from baseline as compared to placebo in a patient-reported numeric pain rating scale, score during weeks


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two through eight of the trial. We believe that the Phase 2 data support moving forward to a NGX-1998 Phase 3 clinical trial. We are presently examining a range of potential indications for NGX-1998, including but not limited to PHN, HIV associated peripheral neuropathy, or HIV-PN, painful diabetic peripheral neuropathy, or DPN, Chemotherapy-induced peripheral neuropathy, and post-traumatic (e.g. surgical) pain. Our decision as to which indications to pursue in Phase 3 clinical trials is expected to be based on a number of criteria including, but not limited to, our assessments of probability of clinical development success, market size and potential regulatory pathways to possible approval.

We believe that NGX-1998 has the potential to represent a significant improvement over Qutenza. To date, the clinical data suggests that NGX-1998 does not require pre-treatment with a topical anesthetic and administration of NGX-1998 for five minutes may provide a similar response to that experienced with Qutenza after a 60-minute application, that is, that a patient may experience meaningful pain relief for up to 12 weeks from that single five minute application. As a result, we believe that NGX-1998 has the potential to be more readily accepted by physicians and may also demonstrate efficacy in a number of neuropathic pain conditions. Additionally, we believe that the liquid formulation represents a more versatile delivery model which is well suited for treating hard to reach places on the body. Further, we believe that our experience in conducting clinical trials with capsaicin and the approval of Qutenza may benefit our efforts to obtain clinical success of NGX-1998. Finally, in May 2011, a patent protecting NGX-1998 was granted in the United States, entitled "Methods and Compositions for Administration of TRPV1 Agonists." The issued claims include method of use, formulation and system claims. The term of this patent, including Patent Term Adjustment, expires in 2027. We have also received notices of allowance from the U.S. Patent and Trademark Office for another two patent applications relating to NGX-1998. The allowed claims in these applications provide additional layers of protection for NGX-1998. Patents including claims similar to those issued in the United States have also been issued in Canada and Eurasia, and most recently in Japan in June 2012. A similar patent application is also under review in the European Union.

In March 2012, we decided to focus our resources on the preparation for advancing NGX-1998 into a Phase 3 clinical trial, as a result of the opportunity we believe exists with NGX-1998. To do so, we significantly restructured our operations, including eliminating most of sales and marketing expenditures in support of Qutenza, while continuing to maintain product availability of Qutenza for patients and physicians. While we believe a market opportunity exists for Qutenza, we believe that the resources required to attain that potential are better utilized to speed the development of NGX-1998. We are evaluating a number of alternative commercialization strategies which include the potential to license Qutenza to a commercialization partner in the United States and in other territories of the world outside of the territory addressed by Astellas.

In September 2011, we submitted a supplemental new drug application, or sNDA, to the FDA regarding potentially expanding the Qutenza label to include treatment of pain associated with HIV-PN. On February 9, 2012, the Anesthetic and Analgesic Drug Product Advisory Committee of the FDA Panel voted unanimously against approval of Qutenza in such indication as the committee determined that the data did not represent adequate evidence of efficacy. In March 2012, we received a complete response from the FDA regarding our sNDA. The complete response letter indicated that in order to gain approval for the use of Qutenza for the proposed indication, we would need to submit additional clinical data from at least one adequate and well-controlled Phase 3 clinical trial to support the proposed indication. However, we do not anticipate investing in further clinical trials for Qutenza at this time.

Although we are limiting our investment in Qutenza in the United States, Astellas continues to conduct studies with Qutenza for its Licensed Territory for commercialization of Qutenza which includes the 27 countries of the European Union, Iceland, Norway, and Liechtenstein as well as Switzerland, certain countries in Eastern Europe, the Middle East and Africa, which we refer to as the Licensed Territory. Astellas is currently conducting three clinical trials in response to follow up measures requested by the European Medicines Agency. These studies include a long-term safety study in on-label indications and two studies, a long-term safety study and an efficacy study, in patients with DPN. The results of these studies are not expected until sometime in 2013. However, if the DPN clinical trials are successful, we plan to explore the potential for such trials to support further label expansion opportunity in the United States. Additionally, we plan to evaluate the potential for these studies to support a potential regulatory approval for NGV-1998 in the United States.

The Astellas Agreement, described below, provides Astellas an option to exclusively license NGX-1998 in the Licensed Territory. If Astellas was to exercise its option, they would collaborate with us on the Phase 3 clinical trials and share equally in certain of Phase 3 development costs that benefit the regulatory process in their territory. We are also exploring the possibility of a strategic alliance for development and commercialization of NGX-1998 in the United States and, potentially, other world markets.

In addition to Qutenza and NGX-1998, we have a series of compounds which represent an early stage pipeline of potential product candidates consisting of prodrugs of acetaminophen for potential use in acute pain, including traumatic pain, post-surgical pain and fever. These product candidates are in the pre-clinical stage of development and may or may not be the subject of further development in 2012 or beyond.


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To date, we have not generated any significant product revenue and have funded our operations primarily by selling equity securities, establishing debt facilities and through the Astellas Agreement. Our accumulated deficit as of June 30, 2012 was $322.7 million. We had cash, cash equivalents and short-term investments totaling $21.7 million at June 30, 2012 and during the six months ended June 30, 2012, we used cash of $15.3 million in operating activities. We expect to continue to incur annual operating losses for the foreseeable future as we support the continued availability of Qutenza in the United States and work to complete the NGX-1998 development program.

In April 2010, we borrowed $40.0 million from HRP, and agreed to repay HRP up to $106 million by assigning HRP one hundred percent of royalty, milestone, option and other payments that we may receive under the Astellas Agreement until our repayment obligation is satisfied in full.

In August 2011, we entered into a loan agreement with Hercules Technology Growth Capital, Inc., or Hercules, which includes both a $5.0 million accounts receivable line and a $15.0 million term loan. Under the terms of the loan agreement, the $15.0 million term loan is required to be repaid over the course of the 42-month maturity period, which includes a 12-month interest only period at the beginning of the term. In May 2012 we terminated the $5.0 million accounts receivable line.

In connection with our entry into the loan agreement, we issued to Hercules a warrant for 791,667 shares of our common stock. The warrant has a term of five years, contains a net-exercise provision, and has an exercise price of $1.80 per share. The fair value of the original warrants issued was approximately $1.1 million. In March 2012, we entered into an amendment to the Hercules warrant, in which we amended the covenant with respect to the requirement to maintain our listing on the NASDAQ Global Market. The amendment allows for the NASDAQ Capital Market and certain over the counter markets to be permissible alternative markets on which we can list our shares of common stock. Under the terms of the amendment, the number of shares underlying the warrant was increased to 1,950,000 and the exercise price per share of common stock was reduced to $0.50. Under the Black-Scholes option pricing model, the value of the amended warrant did not result in incremental value. The loan agreement also contains customary negative covenants and is subject to customary events of default, such as a failure to make a scheduled principal or interest payment, insolvency, and breaches of covenants under loan agreement and agreements and instruments entered into in connection with the loan agreement, including covenants in the Hercules warrant. In May 2012, we terminated the accounts receivable line and expensed $0.2 million of the remaining issuance costs and debt discount attributed to the accounts receivable line to interest expense.

In February 2012, we completed a private placement of our common stock under a Securities Purchase Agreement pursuant to which we issued shares of common stock for an aggregate purchase price of $3.0 million, at a per share price of $1.01. The price of each share of common stock is based on the January 31, 2012 consolidated closing bid price of our common stock on the NASDAQ Global Market of $1.01 per share. The total number of shares of common stock issued in connection with the transaction is 2,969,685. The net proceeds to us, after deducting expenses of $0.1 million, were $2.9 million.

We received a notice of market capitalization insufficiency from the NASDAQ Global Market on October 18, 2011 as our market value of listed shares had remained below the $50 million minimum listing requirement for more than 30 consecutive business days. We received notices of additional deficiencies under other NASDAQ listing rules on January 27, 2012 and May 3, 2012 with respect to our minimum bid price and market value of publicly held shares, respectively. The grace period to regain compliance with the minimum market value of listed securities requirement expired on April 16, 2012, and, in connection with such expiration, we requested a hearing with NASDAQ to seek additional time to come into compliance with NASDAQ listing rules. Subsequent to the hearing, we received notice from NASDAQ that it had determined to delist us, and on June 29, 2012 we were de-listed from the NASDAQ Global Market and began to be quoted on the OTC Bulletin Board.

We anticipate that our existing cash will be sufficient to meet our projected operating requirements into 2013.

On April 23, 2012, we received a copy of a complaint, Maritime Asset Management, LLC on Behalf of Itself and All Others Similarly Situated v. NeurogesX, Inc., Anthony A. DiTonno, Stephen F. Ghiglieri and Jeffrey K. Tobias, M.D., filed by Maritime Asset Management, LLC with the United States District Court Southern District of New York against us and certain current and former executive officers. The complaint alleges, among other things, violations of
Section 10(b), Section 20(a) and Rule 10b-5 of the Securities and Exchange Act of 1934, breach of contract, fraud and aiding and abetting arising out of disclosures made prior to the departure of our former Chief Medical Officer and Executive Vice President of Research and Development, Dr. Jeffrey K. Tobias. The challenged disclosures were made in connection with our July 26, 2011 private placement of common stock and common stock warrants and our periodic reports filed pursuant to the Exchange Act from May 9, 2011 through September 27, 2011.


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The complaint states that the plaintiff is seeking monetary damages, but no amounts are specified. Our board of directors and management believe the claims are without merit and intend to vigorously defend against the action.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates.

While our significant accounting policies are described in more detail in Note 2 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

Effective January 1, 2011, we adopted the provisions of Accounting Standards Update, or ASU, 2009-13, Multiple-Deliverable Revenue Arrangements, or ASU 2009-13, which is included within the Codification as Revenue Recognition-Multiple Element Arrangements, on a prospective basis. Under the provisions of ASU 2009-13, we no longer rely on objective and reliable evidence of the fair value of the elements in a revenue arrangement in order to separate a deliverable into a separate unit of accounting, and the use of the residual method has been eliminated. We instead use a selling price hierarchy for determining the selling price of a deliverable, which is used to determine the allocation of consideration to each unit of accounting under an arrangement. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. As of June 30, 2012, we had not applied the provisions of ASU 2009-13 to any of our revenue arrangements as we had not entered into any new, or materially modified any of our existing, revenue arrangements since our adoption of ASU 2009-13. Therefore, there was no material impact on our financial position or results of operations from adopting ASU 2009-13. However, the provisions of ASU 2009-13 could have a material impact on the revenue recognized from any collaboration agreements that we enter into, or materially modify, in future periods.

Product Revenue

In April 2010, we made Qutenza commercially available in the United States to our specialty distributor and specialty pharmacy customers. Under the agreements with our customers, the customers take title to the product upon shipment and only have the right to return damaged product, product shipped in error and expired or short-dated product. As Qutenza was new to the marketplace, we have been recognizing Qutenza product revenues, and related product costs, at the later of:

• the time the product is shipped by the customer to healthcare professionals, and

• the date of cash collection.

We believe that healthcare professionals are generally ordering Qutenza in small quantities only after they have identified a patient for treatment. We believe that revenue recognition upon the later of customer shipment to the end user and the date of cash collection is appropriate until we had sufficient data on cash collection and return patterns of our customers. We have been performing additional procedures to further analyze shipments made by our customers by utilizing shipping data provided by our customers to determine when product is shipped by the customers to healthcare professionals and have been evaluating ending inventory levels at our customers each month to assess the risk of product returns. To date, product returns have not been material.


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We have established terms pursuant to distribution agreements with our specialty distributor customers providing for payment within 120 days of the date of shipment to our specialty distributor customers and 30 days of the date of shipment to our specialty pharmacy customers. Such distribution agreements have terms ranging from one to three years.

We had gross shipments to our distributor customers of $0.5 million and $1.4 million for the three and six months ended June 30, 2012, respectively, compared to $0.8 million and $1.4 million for the three and six months ended June 30, 2011, respectively. The application of our revenue recognition policy resulted in the recognition of net revenue of $0.8 million and $1.7 million for the three and six months ended June 30, 2012, respectively, compared to $0.5 million and $1.1 million for the three and six months ended June 30, 2011, respectively. Our gross shipments are reduced for chargebacks, certain fees paid to distributors and product sales allowances including allowance for returns and rebates to qualifying federal and state government programs. At June 30, 2012, net deferred product revenues totaled $0.6 million.

Revenue from the Astellas Agreement

In June 2009, we entered into the Astellas Agreement which provides for an exclusive license by us to Astellas for the promotion, distribution and marketing of Qutenza in the Licensed Territory, an option to license NGX-1998, in the Licensed Territory, participation on a joint steering committee and, through a related supply agreement entered into with Astellas, supply of product until direct supply arrangements between Astellas and third-party manufacturers are established, some of which we anticipate to occur in 2012. Revenue under this arrangement includes upfront non-refundable fees and may also include additional option payments for the development of and license to NGX-1998, milestone payments upon achievement of certain product sales levels and royalties on product sales.

On January 1, 2011, we adopted ASU No. 2009-13, Multiple Deliverable Revenue Arrangements. This update amends the guidance on accounting for arrangements with multiple deliverables to require that each deliverable be evaluated to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone value to the customer. This update also establishes a selling price hierarchy for determining how to allocate arrangement consideration to identified units of accounting. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, or VSOE, if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. We may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and the estimated selling price of identified units of accounting for new agreements.

Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the performance obligations are estimated to be completed. In addition, if we are involved in a joint steering committee as part of a multiple-element arrangement that is accounted for as a single unit of accounting, an assessment is made as to whether the involvement in the steering committee constitutes a performance obligation or a right to participate.

Revenue recognition of non-refundable upfront license fees commences when there is a contractual right to receive such payment, the contract price is fixed or determinable, the collection of the resulting receivable is reasonably assured and there are no further performance obligations under the license agreement.

We view the Astellas Agreement and related agreements, as a multiple-element arrangement with the key deliverables consisting of an exclusive license to Qutenza in the Licensed Territory, an obligation to conduct certain development activities associated with NGX-1998, participation on a joint steering committee and supply of Qutenza components to Astellas until such time that Astellas can establish a direct supply relationship with product vendors. Because not all of these elements have both standalone value and objective and reliable evidence of fair value, we are accounting for such elements as a single unit of accounting. Further, the agreement provides for our mandatory participation in a joint steering committee, which we believe represents a substantive performance obligation and also the estimated last delivered element under the Astellas Agreement and related agreements. Therefore, we are recognizing revenue associated with upfront payments and license fees ratably over the term of the joint steering committee performance obligation. We estimate this performance obligation will be delivered ratably through June 2016.

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