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APRI > SEC Filings for APRI > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for APRICUS BIOSCIENCES, INC.

Form 10-Q for APRICUS BIOSCIENCES, INC.


8-Nov-2012

Quarterly Report


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 condensed consolidated financial statements (unaudited) 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, 2011 filed with the SEC on March 13, 2012. These reports include forward-looking statements made based on current management expectations pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial conditions or state other "forward-looking" information. Those statements include statements regarding the intent, belief or current expectations of Apricus Biosciences, Inc. and its subsidiaries ("we," "us," "our" or the "Company") and our management team. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements. In light of the significant risks and uncertainties inherent in the forward-looking statements included in this report, the inclusion of such statements should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. 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, anticipated revenue growth, manufacturing, competition, and/or other factors, many of which are outside our control.

The Company operates in a rapidly changing business, and new risk factors emerge from time to time. Management cannot predict every risk factor, nor can it assess the impact, if any, of all such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Corporate History

We are a Nevada corporation and have been in existence since 1987. We have operated in the pharmaceutical industry since 1995. Our pipeline of approved and late-stage NexACT® based product candidates includes Vitaros®, which is approved in Canada for the treatment of ED, Femprox® for female sexual arousal disorder, MycoVaTM for onychomycosis, RayVaTM for Raynaud's Syndrome and PrevOncoTM for liver cancer.

On December 14, 2009, we acquired Bio-Quant, a private CRO in San Diego, California that was focused on providing drug development research services to other companies. On September 10, 2010, the Company changed its name from "NexMed, Inc." to "Apricus Biosciences, Inc." In June 2011, we sold Bio-Quant to BioTox, a San Diego-based CRO. In December 2011, we entered into the specialty pharmaceutical business with the acquisition of Topotarget USA, Inc., renamed Apricus Pharmaceuticals USA, Inc. We continue to grow our specialty pharmaceutical products business with the addition of the products Totect® in 2011, and Granisol®, AquoralTM and NitroMist TM in early 2012.

On December 29, 2011, the Company acquired Topotarget, a subsidiary of Topotarget A/S, for the purpose of acquiring all existing rights to Totect®in North America and South America and their respective territories and possessions. Following the acquisition, the Company changed the name of Topotarget USA, Inc. to Apricus Pharmaceuticals USA, Inc. and began the expansion of its oncology supportive care business for sale of products in the U.S. Beginning in February of 2012, the Company added additional products to the portfolio including Granisol® and AquoralTM.

While the Company's marketing authorization for our lead product Vitaros® is under review in Europe, we also expanded our growth strategy internationally and made the decision to start European operations in France, one of the largest ED markets and the largest alprostadil market in Europe. On July 12, 2012, the Company accepted, by way of contribution, one hundred percent of all outstanding common stock of Finesco SAS and its wholly owned subsidiary Scomedica. Scomedica is a company with approximately eighty pharmaceutical sales representatives that have successfully marketed drugs in France for global pharmaceutical companies like Novartis. The Company does not intend to continue using Scomedica as solely a contract sales force, but intends to also use its French sales force as a base for the Company's commercial operations in Europe, starting with the launch of Vitaros® if and when approved in Europe for the treatment of ED. The Company believes bringing Finesco and Scomedica into the Company as subsidiaries will enable the Company to bring its own drugs and additional partnered drugs to the key French market to build a meaningful commercial presence in Europe.

Growth Strategy

We are a pharmaceutical company focused in the areas of sexual dysfunction, oncology, autoimmune and anti-infectives, among others. Our pipeline is made up of drugs and drug candidates developed internally, as well as, drugs that we acquire or in-license from third parties. In the U.S. and France, we sell some of our drugs using our sales force, while in selected markets we have partnered with other pharmaceutical companies for commercializing our products in areas where we do not have a sales force.

We transformed from a clinical-stage development company into a pharmaceutical company with our acquisition of Topotarget, the U.S. subsidiary of Topotarget AS, and its drug Totect® (marketed in the U.S. and approved for anthracycline extravasation) in late December 2011. The acquisition of Topotarget, now named Apricus Pharmaceuticals USA, Inc., provided a foundation for our commercial operations in the U.S. We added to our product offerings in early 2012 by acquiring co-promotion rights to Granisol® (marketed in the U.S. and approved as an anti-emeteic following chemotherapy and radiotherapy) and AquoralTM (marketed in the U.S. and approved for management of Xerostomia), as well as ex-North American rights to NitroMistTM (approved in the U.S. for acute angina). We intend to expand our commercialization activities in the U.S. and France, and to establish commercial capabilities in selected markets outside the U.S. and France, with the addition of other products, including outside of the oncology and oncology supportive care markets.

Our strategy for growth is to acquire, in-license or promote marketed drugs that we believe are underperforming commercially, re-launch and commercialize them using our small but growing sales forces in the U.S. and our large and experienced sales force in France to increase sales and revenues. Our sales force in the U.S. is comprised of hospital sales representatives, on-call hospital nurses and a call center. In France, our sales force is comprised of a primary care physician, rheumatology, urology, diabetes and cardiology sales representatives. In addition, we have an extensive pre-clinical and late stage clinical NexACT® pipeline that we are actively promoting for partnerships to support the development and commercialization of these drug candidates.

In the coming months, we expect that our commercial partner, Abbott, will launch commercial sales of Vitaros®, our product for ED in the Canadian market. At the same time, we expect to expand our presence in the U.S. through sales of our oncology supportive care products by our sales force.

Revenue Sources

License Revenue. The Company entered into five license agreements in the first nine months of 2012, three for Vitaros® and two for MycoVaTM. Pursuant to these agreements, the Company recorded approximately $4.3 million in license revenue for upfront fees and related milestone payments in the first nine months of 2012. We are continuing to pursue new licenses for Vitaros®, as well as the Company's drug candidates and NexACT® platform technology. The timing for these new agreements is inherently uncertain. Additionally, the timing of milestone payments under existing license agreements is similarly uncertain and can vary significantly from quarter to quarter. Accordingly, although we expect an overall increase in license revenue in future periods, the amount and timing of these increases is unknown at this time.

Product Revenue. The Company generates product revenues from the sale of its approved oncology supportive care products sold in the U.S. as well as from the sale of diagnostic kits through its wholly-owned subsidiary BQ Kits, Inc.

Contract Service Revenue. Beginning in July of 2012, the Company provides, through its Finesco subsidiary in France, sales and marketing services for global pharmaceutical companies. The Company earns service fees for every meeting that the Company sales representatives conduct with doctors in the territory and additionally, the Company earns incentives and bonuses based on agreed sales and marketing targets. The contracts with the pharmaceutical customers are generally short-term in nature and are subject to changes based on market conditions.

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, 2012, we had an accumulated deficit of $231.5 million and our operations have principally been financed through public offerings of our Common Stock and other equity instruments, private placements of equity securities, debt financing and up-front license fees received from commercial partners. Funds raised in recent periods, include approximately $18.4 million in net proceeds from our February 2012 follow-on public offering and approximately $1.1 million during 2012 from the sale of Common Stock through our "at-the-market" stock sales facility. These recent transactions should not necessarily be considered an indication of our ability to raise additional funds in any future periods.

Our cash and cash equivalents at September 30, 2012 were approximately $16.9 million. We expect our cash inflows during the remainder of 2012 will be from licensing and milestone revenues received from commercial partners for our late stage NexACT®product candidates, from product revenues from the sale of our oncology supportive care products sold in the U.S. and from contract sales revenues realized in France relating to existing third party customers. We expect our most significant expenditures for the remainder of 2012 will include development expenditures including filing for market authorization for multiple drugs in multiple territories, product re-launches, inventory purchases to support product sales and Vitaros® manufacturing and for the overall expansion of the commercial operations of the Company.

At December 31, 2012, we are obligated to pay the aggregate principal amount of $4.0 million in convertible notes which mature on that date. The notes are secured by a first priority mortgage on our facility in East Windsor, New Jersey. The facility is currently leased to an unrelated third party and we do not expect to utilize the facility for our research or manufacturing activities for the foreseeable future. If the Company were to sell the facility in 2012, the Company expects that the cash proceeds would be available to pay all of the principal amount of the mortgage amount due on December 31, 2012. The facility is currently being marketed for cash sale to a third party.

Even if we are successful in obtaining additional partners who will support further development of our products, we may still encounter additional obstacles such as our development activities may not be successful, our products may not prove to be safe and effective, clinical development work may not be completed in a timely manner or at all, and the anticipated products may not be commercially viable or successfully marketed. Should we not be able to find development partners in 2012 and not achieve our product sales expectations, we would require additional external financing to fund our operations and we may not achieve our goals of being cash flow positive exiting 2013. Additionally, our business could require additional financing if we choose to accelerate product development expenditures in advance of receiving up-front payments from development and commercial partners. The timing of receipts of up-front and milestone payments are difficult to estimate and we would seek to obtain additional outside equity capital as necessary to support the commercial opportunities for our product portfolio.

At September 30, 2012, we had cash and cash equivalents of approximately $16.9 million, compared to $7.4 million at December 31, 2011. During the first nine months of 2012, we received net proceeds of approximately $19.5 million as a result of sales of our Common Stock. The receipt of this cash during the nine months of 2012 was offset by our cash used in operations. Our net cash outflow from operations during the first nine months of 2012 was approximately $11.6 million which resulted from the increase in expenditures for licenses for oncology supportive care products, commercialization of these products and research and development activities while we prepare Vitaros®for commercialization in the Canadian market and obtain market approval in other regions. Our operational structure with a minimum number of employees and limited space needs allows us to closely regulate our level of expenditures and to quickly adjust our spending rates as commercial opportunities develop. We operate in a rapidly changing and highly regulated marketplace and we expect to adjust our capital needs and financing plans as market conditions dictate.

Following the addition of approximately 95 employees from the Scomedica French operation in July of 2012, we increased our operating costs as we added the necessary sales and marketing personnel who currently generate contract sales from third parties. In the future these sales and marketing personnel will serve as the sales force for our marketed products to be sold in France. The operating costs of the French sales operations in recent periods have approximated €8.0 million per year.

Application of Critical Accounting Policies

Our discussion and analysis of the financial condition and results of operations are based upon our condensed consolidated financial statements (unaudited), which have been prepared in accordance with accounting principles generally accepted in the U.S.. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, our actual results may differ significantly from our estimates.

The following new critical accounting policies have been applied by the Company in preparing its consolidated financial statements since the annual report on Form 10-K was issued on March 13, 2012. The financial information as of September 30, 2012 should be read in conjunction with the financial statements for the year ended December 31, 2011, contained in our annual report on Form 10-K filed on March 13, 2012.

Assets Held For Sale

In August of 2012, the Company decided to sell its facility in East Windsor, New Jersey and as a result, in the third quarter of 2012, the land, building and machinery associated with the facility were reclassified to assets held for sale. The monthly depreciation and amortization previously attributed to the assets were ceased as the net book value has been fixed. Any gain or loss on the eventual sale of the facility will be calculated from the fixed net book value of the assets. The property is currently leased to a long-term tenant and the estimated fair value is expected to approximate the net book value and accordingly no impairment is considered necessary. The fair value measurement is based on a recent offer received by the Company, which is an observable input and represents a Level 2 measurement within the fair value hierarchy.

Deferred Compensation

The Company is paying compensation on a deferred basis to a former executive. The liability of $876,319 is based on the estimated present value of the obligation. Additionally, Finesco, through its Scomedica subsidiary, has an accrued retirement benefit liability of $668,562, which is a defined benefit mandated by the French Works Council that consists of one lump-sum paid on the last working day when the employee retires and has been included within the Deferred Compensation line item within the Balance Sheets. The amount of the payment is based on the length of service and earnings of the retiree. The cost of the defined benefit is estimated using the present value of the defined benefit obligation at the end of the reporting period (Scomedica has no plan assets). Actuarial estimates for defined benefit obligations are performed annually. The discount rate applied in the computation of the present value of the retirement liability corresponds to the yield on high quality corporate bonds denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related retirement liability.

Foreign Currency Translation

The functional currency of our wholly-owned subsidiaries in France is the Euro. Accordingly, all assets and liabilities of this subsidiary are translated to U.S. dollars based on the then applicable exchange rate on the balance sheet date. Revenue and expense components are translated to U.S. dollars at weighted-average exchange rates in effect during the period. Gains and losses resulting from foreign currency translation are reported as a separate component of accumulated other comprehensive income on the statement of operations and other comprehensive income and in the stockholders' equity section of our consolidated balance sheets. Foreign currency transaction gains and losses are included in our results of operations and, to date, have not been significant.

Revenue Recognition

Contract Service Revenue . For research services, we determine the period over which the performance obligation occurs. We recognize revenue using the proportional performance method when the level of effort to complete our performance obligations under an arrangement can be reasonably estimated. Direct costs are typically used as the measurement of performance. For contract sales services, revenue is based on the number of medical visits plus an incentive based on the sales growth of the targeted pharmaceutical products. Revenue associated with medical visits is recognized in the accounting period in which services are rendered. Revenue associated with incentives is recognized when the amount of revenue is fixed and determinable.

For a further discussion of our critical accounting policies, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K filed on March 13, 2012.

Comparison of Results of Operations between the Three Months Ended September 30, 2012 and 2011

Revenue. Revenues of the Company are mainly derived from license fees. As such, our revenue will vary significantly between quarters. Consolidated net revenue increased by $4,352,294 to $5,151,713 in the third quarter of 2012 or 544% as compared to $799,419 in the third quarter of 2011. Licensing fee revenues in the third quarter of 2012 increased to $3,625,782. The increase in license fee revenue was primarily attributable to recognizing upfront fees from Abbott and Takeda for $2,500,000 and $1,000,414, respectively. Sales also increased due to the acceptance of ownership of Finesco (See Note 4) in July 2012, which generated $1,151,021 in contract service revenue in the third quarter of 2012. In addition, in the third quarter of 2012, the Company started selling Totect® in the U.S., which generated sales of $140,459. The Company also recognized $113,767 in revenue under the Warner Chilcott Supply Agreement for contract service provided in the third quarter of 2012. In 2011, the Company received $483,438 in federal grant revenue. We have not applied for any grants in 2012.

Cost of Sales. The amounts reflected in cost of sales are attributable to contract services and product sales. The addition of cost of service is due to the acceptance of ownership of Finesco (See Note 4) in July 2012, which included $1,499,776 in cost of service related to contract sales in the third quarter of 2012. The increase in costs of services is also due to the costs related to the Warner Chilcott agreement for the contract service revenue for $86,045. The increase in cost of product sales is due to the Company recognizing the cost of products for the first sales of Totect® of $34,346 in the third quarter of 2012.

Research and Development Expenses. The amounts reflected in research and development expenses are in the Pharmaceuticals segment and mainly related to manufacturing commercial validation batches of Vitaros® which increased spending by $1,607,496 or 259% to $2,228,822 for the third quarter in 2012 as compared to $621,326 in the same period in 2011. Our increased research and development expenditures in the third quarter of 2012 reflect an increase in expenditures for our development pipeline including Vitaros® manufacturing activities and expenses related to regulatory filings in Europe for Vitaros® as a treatment for patients with ED. We expect to see an overall increase in research and development spending for the remainder 2012 as a result of the expansion of our pharmaceutical products and as we prepare for regulatory filings around the world for Vitaros® and our other late stage product candidates:
Femprox®, PrevOncoTM, MycoVaTM, RayVaTM, Totect®, Granisol®, and NitroMistTM.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased by $2,166,766 or 95% to $4,438,221 during the third quarter of 2012 from $2,271,455 during the same period in 2011. $1,145,725 of the increase is due to the acceptance of ownership of Finesco (See Note 4) in July 2012. Expenses also increased due to the addition of a sales team and increased marketing expenses of approximately $426,000, increased recruiting expenses of approximately $100,000 and an increase in stock compensation of $122,569.

Loss (recovery) on sale of Bio-Quant Subsidiary. On June 30, 2011 we sold Bio-Quant to BioTox and incurred a non cash loss of $2,759,920 during the second quarter of 2011 (See Note 4). In the third quarter of 2012 the Company received $125,000 on the sale.

Interest Income (expense), net. We had interest income of $123,925 for the three months ended September 30, 2012 as compared to an expense of $75,039 during the same period in 2011, an increase of $198,964 or 265%. The increase in the third quarter of 2012 is primarily due to $71,556 of interest expense for the mortgage on our building which was offset by a reversal of interest expense or gain of $269,412 that resulted from a change in the anticipated timelines on meeting certain milestones in our contingent consideration due to Topotarget A/S.

Benefit from Income Taxes. We had a benefit from income taxes of $362,302 for the three months ended September 30, 2012 as compared to $0 for the same period in 2011. The tax benefit is derived by computing the tax effect of the taxable loss from operations in France for the period. The operating loss in France for this period was the result of generally lower revenues in the region during the months of July and August and non-recurring costs related to the acquisition of the business recorded during the period.

Comparison of Results of Operations between the Nine Months Ended September 30, 2012 and 2011

Revenue. Consolidated net revenue increased by $2,071,191 or 52% to $6,052,827 during the first nine months of 2012 as compared to $3,981,636 during the first nine months of 2011. Licensing fee revenues during the first nine months of 2012 increased by $3,425,377 or 392% to $4,299,376 from $873,999. The change in license fee revenue was primarily attributable to recognizing upfront fees from Abbott and Takeda for $2,500,000 and $1,000,414, respectively. In 2011, the Company recognized an upfront license fee of approximately $669,000 from Bracco SpA for a license to Vitaros for the Italian market. Sales also increased due to the acceptance of ownership of Finesco in July 2012 (See Note 4), which generated $1,151,021 in contract service revenue during the third quarter of 2012. During the first nine months of 2012, the Company started selling Totect® in the U.S., which generated sales of $140,459. The Company also recognized $113,767 in revenue under the Warner Chilcott Supply Agreement for contract service provided in the third quarter of 2012. The decrease in revenue from the Diagnostic Sales segment (which included Bio-Quant CRO service in the first half of 2011) was $2,280,232 or 87% to $343,967 during the first nine months of 2012 from $2,624,199 during the first nine months of 2011. The decrease in revenue is mainly as a result of the sale of Bio-Quant (See Note 4). As a result of the sale of Bio-Quant, we are no longer generating revenues related to Bio-Quant's CRO business. In 2011, the Company received $483,438 for grants awarded to us under the QTDP program. We have not applied for any grants in 2012.

Cost of Sales. The amounts reflected in cost of sales are attributable to contract services and product sales. The addition of cost of service is due to the acceptance of ownership of Finesco in July 2012 (See Note 4), which included $1,499,776 in cost of services related to contract sales during the third quarter in 2012. The increase in cost of services in the Pharmaceuticals segment is due to the costs related to the Warner Chilcott Supply Agreement for the contract service revenue of $86,045. The cost of sales for the Diagnostic Sales segment (which included Bio-Quant CRO service in the first half of 2011) decreased by $1,905,669 or 89% to $240,282 during the first nine months of 2012 as compared to $2,145,951 in the same period in 2011. The decrease in cost of sales is primarily attributable to the reduction in the third quarter in cost of services as a result of the sale of the Bio-Quant CRO business on June 30, 2011 (See Note 4). As a result of the sale of this business, we are no longer incurring service costs related to Bio-Quant's CRO business. The increase in cost of product sales is due to the Company recognizing the cost of products for Totect® of $34,346 in the third quarter of 2012.

Research and Development Expenses. The amounts reflected in research and development expenses are in the Pharmaceuticals segment mainly related to manufacturing commercial validation batches of Vitaros® which increased spending during the first nine months of 2012 by $1,045,384 or 28% to $4,739,088 as compared to $3,693,704 in the same period in 2011. Our increased research and development expenditures during the first nine months of 2012 reflect an increase in expenditures for our development pipeline including Vitaros® manufacturing activities and expenses related to regulatory filings in Europe for Vitaros® as a treatment for patients with ED. We expect to continue to see an increase in research and development spending in the remainder of 2012 as a result of the expansion of our pharmaceutical products and as we prepare for regulatory filings around the world for Vitaros ® and our other late stage product candidates: Femprox®, PrevOnco®, MycoVaTM , RayVaTM, Totect®, Granisol®, and NitroMistTM.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased $3,320,950 or 37% to $12,185,699 during the first nine months of 2012 as compared to $8,864,749 during the same period in 2011. $1,145,725 of the increase is due to the acceptance of ownership of Finesco (See Note 4) in July 2012. Expenses also increased due to the addition . . .

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