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ACCP > SEC Filings for ACCP > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for ACCESS PHARMACEUTICALS INC

Form 10-Q for ACCESS PHARMACEUTICALS INC


14-Nov-2012

Quarterly Report


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

OVERVIEW

Access Pharmaceuticals, Inc. (together with our subsidiaries, "We", "Access" or the "Company") is a Delaware corporation. We are an emerging biopharmaceutical company focused on developing a range of pharmaceutical and medical device products primarily based upon our nanopolymer chemistry technologies and other drug delivery technologies. We currently have one marketed product, one product at Phase 2 of clinical development and several products in pre-clinical development. The success of our low priority clinical and pre-clinical programs will be dependent on our ability to enter into collaboration arrangements. Certain of our development programs are currently on hold and are dependent upon our ability to secure approved funding for such projects.


Marketed Product
· MuGard™ is our marketed product for the management of oral mucositis, a frequent side-effect of cancer therapy for which there is no established treatment. The market for mucositis treatment is estimated to be in excess of $1 billion world-wide. MuGard, a proprietary nanopolymer formulation, has received marketing allowance in the U.S. from the FDA. We launched MuGard in the United States in the fourth quarter of 2010. We are continuing the training of our third-party MuGard representatives on the product, the oral mucositis condition and our sales strategy. MuGard prescriptions are growing quarterly and we have placed emphasis on our sampling and marketing efforts to build demand, grow oncologist awareness and increase payer uptake. MuGard has been launched in Germany, Italy, the UK, Greece and the Nordic countries by SpePharm, formerly our commercial partner in the E.U. By mutual agreement, the partner agreement with SpePharm has been terminated. Per terms of the agreement, MuGard will continue to be commercially available for up to six months in Europe through SpePharm. We are actively seeking a new European commercial partner for MuGard. Our China partners have received an acceptance letter from the State Food and Drug Administration of the People's Republic of China which provides marketing approval in China. MuGard has been manufactured in the U.S. and shipped to China for sale. Our China partners anticipate commencing sales of MuGard in China in the first quarter of 2013.

Product Candidates
· Our lead development candidate for the treatment of cancer is ProLindac™, a nanopolymer DACH-platinum prodrug. We initiated a study of ProLindac combined with Paclitaxel in second line treatment of platinum pretreated advanced ovarian cancer patients in the fourth quarter of 2010. This multi-center study of up to 25 evaluable patients is being conducted in France. A second combination study was initiated in the fourth quarter of 2011 combining ProLindac with gemcitabine for the treatment of cholangiocarcinoma. We are currently evaluating data from the trials to decide on how to proceed. Clinical studies of other indications including liver, colorectal and ovarian cancer are under consideration by Jiangsu Aosaikang Pharmaceutical Co., Ltd, our licensee for ProLindac in China. The DACH-platinum incorporated in ProLindac is the same active moiety as that in oxaliplatin (Eloxatin; Sanofi-Aventis), which has had annual sales in excess of $2.0 billion.

· CobOral® is our proprietary preclinical nanopolymer oral drug delivery technology based on the natural vitamin B12 oral uptake mechanism. We were developing a product for the oral delivery of insulin, and had conducted sponsored development of a product for oral delivery of a number of peptides and RNAi therapeutics. We are currently searching for partners to license this technology.

· CobaCyte®-mediated targeted delivery is a preclinical technology which makes use of the fact that cell surface receptors for vitamins such as B12 are often overexpressed by certain cells, including many cancers. This technology uses nanopolymer constructs to deliver more anti-cancer drug to tumors while protecting normal tissues. We are currently searching for partners to license this technology.


Thiarabine, or 4-thio Ara-C, a next generation nucleoside analog which was licensed from Southern Research Institute. Previously named SR9025 and OSI-7836, the compound has been in two Phase 1/2 solid tumor human clinical trials and was shown to have anti-tumor activity. We were working with leukemia and lymphoma specialists at MD Anderson Cancer Center in Houston and had initiated additional Phase 2 clinical trials in adult AML, ALL and other indications. In the third quarter we terminated our license with Southern Research Institute, terminated the trial and are no longer proceeding with this product.

Products and Product Candidates

We use our drug delivery technologies to develop the following products and
product candidates:

Access Drug Portfolio
                                                                           Clinical
Compound                          Originator   Technology     Indication   Stage (1)

MuGard™                           Access       Mucoadhesive   Mucositis    Launched
                                               liquid                       U.S. and EU
                                                                           Regulatory
                                                                            Approval
                                                                            China

ProLindacTM (Polymer              Access /     Synthetic      Cancer       Phase 2
  Platinate, AP5346) (2)          Univ of      polymer
                                  London

Oral Insulin                      Access       Cobalamin      Diabetes     Pre-clinical

CobOral® Delivery System          Access       Cobalamin      Various      Pre-clinical

CobaCyte®-Targeted Therapeutics   Access       Cobalamin      Anti-tumor   Pre-clinical

(1) For more information, see "Government Regulation" for description of clinical stages.
(2) Licensed from the School of Pharmacy, The University of London.

RECENT EVENTS

On October 25, 2012, we entered into a Preferred Stock and Warrant Purchase Agreement (the "Purchase Agreement") with existing investors whereby we agreed to sell 1,000 shares of a newly created series of our preferred stock, designated "Series B Cumulative Convertible Preferred Stock", par value $0.01 per share, for an issue price of $10,000 per share, (the "Series B Preferred Stock") and issued warrants to purchase 20,000,000 shares of our common stock at an exercise price of $0.50 per share, for an aggregate purchase price of $10,000,000 (collectively, "the Series B Financing"). The Series B Financing consisted of $4,703,000 of new cash investment and the capital conversion of approximately $5,297,000 of outstanding dividends payable on our Series A Preferred Stock into shares of Series B Preferred Stock. Certain terms of the Series B Preferred Stock are senior in right to the Company's outstanding Series A Preferred Stock. The Series B Financing was approved by the requisite percentage of the holders of the Company's Series A Preferred Stock and closed on October 25, 2012.

On June 28, 2012, Dr. Ron Allison of Carolina Radiation Medicine presented interim results from our ongoing MuGard post marketing clinical trial in oral mucositis at the Multinational Association of Supportive Care in Cancer (MASCC) Conference in New York City. The presentation summarized data from 70 cancer patients undergoing mouth and throat soreness, which demonstrated a statistically significant delay to onset of oral mucositis as measured in days or cumulative radiation, and statistically significant reductions in weight loss during therapy and in the use of opioid pain medication.


Two patient populations were analyzed in the trial; all patients who had completed MuGard treatments (the EFF population) and all patients randomized to participate (FAS). Patients taking MuGard throughout their treatment regimen had a statistically significant reduction in pain. MuGard patients in the EFF and FAS populations both experienced a statistically significant delay to onset of oral mucositis (p=0.020 and p=0.007, respectively). MuGard patients in the EFF and FAS populations both experienced a statistically significant delay in time to first occurrence p=0.022 and p=0.009, respectively). MuGard patients in the EFF population experienced a statistically significant reduction in weight loss (p=0.036) between their start and completion of radiation treatment.

On March 5, 2012, we announced that our MuGard partner in China, Rhei Pharmaceuticals HK Ltd. ("Rhei"), received regulatory and marketing approval for MuGard from the State Food and Drug Administration to treat oral mucositis in cancer patients.

On February 16, 2012, we announced that Children's Hospital of Colorado has added MuGard to its hospital pharmacy formulary. Children and young adults undergoing cancer treatment will now have direct access to MuGard from the first day of cancer treatment to manage oral mucositis, characterized by inflammation and erythema or ulcerations throughout the oral mucosa.

On February 10, 2012, we entered into amendment agreements for 4,581,816 outstanding warrants that extended the expiration dates of such warrants to February 16, 2015 for 3,818,180 warrants; to October 24, 2015 for 386,364 warrants; and to December 6, 2015 for 377,272 warrants. The holders of such warrants include unaffiliated warrant holders as well as SCO Capital Partners LLC, Lake End Capital LLC and Beach Capital LLC. Such holders may be deemed to be affiliates of Jeffrey B. Davis and Steven H. Rouhandeh, our Chief Executive Officer and a director, respectively. The warrants that were amended were for the purchase of an aggregate of 4,581,816 shares of our common stock. In connection with the amendments, the holders of such warrants agreed to waive any damages that they may have incurred relating to the Company's inability to register the shares of common stock issuable upon exercise of the warrants, other than liquidated damages that may have already accrued relating to such inability to register such shares.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations primarily through private sales of common stock, preferred stock, convertible notes and through licensing agreements. Our principal source of liquidity is cash and cash equivalents. Product sales and royalty revenues provided limited funding for operations during the nine months ended September 30, 2012. As of September 30, 2012, our cash and cash equivalents were $106,000 and our net cash burn rate for the nine months ended September 30, 2012, was approximately $231,000 per month. As of September 30, 2012, our working capital deficit was $8,135,000. Our working capital deficit at September 30, 2012 represented a decrease of $742,000 as compared to our working capital deficit as of December 31, 2011 of $8,877,000. The increase in the working capital deficit at September 30, 2012 reflects nine months of net operating costs. As of September 30, 2012, we had one secured promissory note outstanding in the principal amount of $2.75 million that was due on September 13, 2012. On November 2, 2012 we repaid in full to such promissory note in the principal amount of $2.75 million, plus accrued interest. The note and the security agreement are terminated and no further amounts are owed under the note or the security agreement.


On October 25, 2012, we entered into a Preferred Stock and Warrant Purchase Agreement (the "Purchase Agreement") with existing investors whereby we agreed to sell 1,000 shares of a newly created series of our preferred stock, designated "Series B Cumulative Convertible Preferred Stock", par value $0.01 per share, for an issue price of $10,000 per share, (the "Series B Preferred Stock") and issued warrants to purchase 20,000,000 shares of our common stock at an exercise price of $0.50 per share, for an aggregate purchase price of $10,000,000. The financing consisted of $4,703,000 of new cash investment and the capital conversion of approximately $5,297,000 of outstanding dividends payable on our Series A Preferred Stock into shares of Series B Preferred Stock. Certain terms of the Series B Preferred Stock are senior in right to the Company's outstanding Series A Preferred Stock. The Series B Financing was approved by the requisite percentage of the holders of the Company's Series A Preferred Stock and closed on October 25, 2012.

As of November 14, 2012, we did not have enough capital to achieve our long-term goals. If we raise additional funds by selling equity securities, the relative equity ownership of our existing investors will be diluted and the new investors could obtain terms more favorable than previous investors. A failure to obtain necessary additional capital in the future could jeopardize our operations and our ability to continue as a going concern.

We reduced staff through layoffs, reduced hours for other staff and the executive officers have deferred a portion of their salary in order to conserve cash for operations.

We have incurred negative cash flows from operations since inception, and have expended, and expect to continue to expend in the future, substantial funds to complete our planned product development efforts. Since inception, our expenses have significantly exceeded revenues, resulting in an accumulated deficit as of September 30, 2012 of $287,123,000. We expect that our capital resources, revenues from MuGard sales and expected receipts due under our license agreements will be adequate to fund our current level of operations into the 4th quarter of 2013. Our ability to fund operations over this time could change significantly depending upon changes to future operational funding obligations or capital expenditures. As a result, we are required to seek additional financing sources. We cannot assure you that we will ever be able to generate significant product revenue or achieve or sustain profitability.

Since our inception, we have devoted our resources primarily to fund our research and development programs. We have been unprofitable since inception and to date have received limited revenues from the sale of products. We cannot assure you that we will be able to generate sufficient product revenues to attain profitability on a sustained basis or at all. We expect to incur losses for the next several years as we continue to invest in product research and development, preclinical studies, clinical trials and regulatory compliance.

THIRD QUARTER 2012 COMPARED TO THIRD QUARTER 2011

Product sales of MuGard in the United States totaled $781,000 for the third quarter of 2012 as compared with $82,000 for the same period of 2011, an increase of $699,000, due to increased sales and acceptance of our product. See sales table in Critical Accounting Policies and Estimates Relating to MuGard.


Our licensing revenue for the third quarter of 2012 was $62,000 as compared to $936,000 for the same period of 2011, a decrease of $874,000. We recognize licensing revenue over the period of the performance obligation under our licensing agreements. In 2011 we recorded a one-time recognition of license revenue from the termination of our license with Korean partner.

We recorded royalty revenue for MuGard in Europe of $28,000 for third quarter of 2012 as compared to $23,000 for the same period of 2011, an increase of $5,000.

Total research and development spending for the third quarter of 2012 was $308,000, as compared to $906,000 for the same period of 2011, a decrease of $598,000. The decrease in expenses was primarily due to:

· decreased clinical development with trials for ProLindac, MuGard and Thiarabine ($296,000);

· decreased salary and related costs ($127,000) from reduced scientific staff;

· decreased stock compensation expense for lower expense of option grants for research and development employees ($98,000);

· decreased scientific consulting costs ($67,000); and

· other net decreases in research spending ($10,000).

Product costs for MuGard in the United States were $79,000 for the third quarter of 2012 as compared to $61,000 for the same period in 2011, an increase of $18,000.

Total selling, general and administrative expenses were $1,422,000 for the third quarter of 2012, a decrease of $380,000 compared to the same period in 2011 of $1,802,000. The decrease in expenses was due primarily to the following:

· decreased general business consulting expenses due to less use of outside consultants in 2012 ($394,000) versus the same period in 2011;

· decreased stock compensation expense for lower expense of option grants for selling, general and administrative employees ($161,000);

· decreased salary and related costs ($140,000) from reduced general and administrative staff;

· decreased net other general and administrative expenses ($46,000); and

· increased MuGard product selling expenses ($361,000).

Depreciation and amortization was $18,000 for the third quarter of 2012 as compared to $56,000 for the same period in 2011, a decrease of $38,000, due to assets being fully depreciated.

Total operating expenses for the third quarter of 2012 were $1,827,000 as compared to total operating expenses of $2,825,000 for the same period of 2011, a decrease of $998,000 for the reasons listed above.

Interest and miscellaneous income was $111,000 for the third quarter of 2012 as compared to $1,283,000 for the same period of 2011, a decrease of $1,172,000. Miscellaneous income was higher in 2011 due to negotiated payables and write-offs of other accounts payable that occurred in 2011.


Interest and other expense was $186,000 for the third quarter of 2012 as compared to $237,000 in the same period of 2011, a decrease of $51,000. The decrease in interest and other expense was due to a pay down in the secured promissory note of $2.75 million.

We recorded a gain related to warrants classified as derivative liabilities of $64,000 for the third quarter of 2012 as compared to $1,138,000 for the same period of 2011. We recorded a derivative for warrants in 2009 when the fair value of the warrants that were issued with our Series A Convertible Preferred Stock were reclassified from equity per the requirements of accounting guidance as a result of the repricing feature.

We recorded a loss for the derivative liability related to preferred stock of $13,900,000 for the third quarter of 2012 and a loss of $50,000 for the same period of 2011. We recorded a derivative in 2010 per the requirements of accounting guidance due to the possibility of repricing our Series A Convertible Preferred Stock if we sold our common stock at a price below the original conversion price.

Preferred stock dividends of $444,000 were accrued for the third quarter of 2012 and $447,000 for the same period of 2011, a decrease of $3,000. Dividends are due semi-annually in either cash or common stock.

Net loss allocable to common stockholders for the third quarter of 2012 was $15,311,000, or a $0.63 basic and diluted loss per common share, compared with a net loss of $97,000, or a $0.00 basic and diluted loss per common share, for the same period in 2011, an increased loss of $15,214,000.

NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2011

Product sales of MuGard in the United States totaled $1,950,000 for the first nine months of 2012 as compared to $137,000 for the same period of 2011, an increase of $1,813,000 due to increased sales and acceptance of our product. See sales table in Critical Accounting Policies and Estimates Relating to MuGard.

Our licensing revenue for the first nine months of 2012 was $1,384,000 as compared to $1,110,000 for 2011, an increase of $274,000. We recognize licensing revenue over the period of the performance obligation under our licensing agreements. In the first quarter of 2012, we finalized the negotiations for the termination of the license with SpePharm for MuGard and recognized all of the previously received license fees ($706,000) that were recorded in deferred revenue and a $500,000 termination fee.

We recorded royalty revenue for MuGard in Europe of $64,000 for the first nine months of 2012 as compared to $64,000 for 2011.

Sponsored research and development revenues were $30,000 for the first nine months of 2011 with no revenues for the same period of 2012. The revenues in 2011 are for research collaborations on our CobOral and CobaCyte projects.

Total research and development spending for the first nine months of 2012 was $1,712,000, as compared to $2,822,000 for 2011, a decrease of $1,110,000. The decrease in expenses was primarily due to:


· decreased clinical development with trials for ProLindac, MuGard and Thiarabine ($625,000);

· decreased stock compensation expense for lower expense of option grants for research and development employees ($202,000);

· decreased scientific consulting costs ($196,000);

· lower external development expenses ($84,000); and

· other net decreases in research spending ($3,000).

Product costs for MuGard in the United States were $201,000 for the first nine months of 2012 as compared to $107,000 for the same period in 2011, an increase of $94,000.

Total selling, general and administrative expenses were $4,491,000 for the first nine months of 2012, an increase of $69,000 compared to the same period in 2011 of $4,422,000. The increase in expenses was due primarily to the following:

· increased MuGard product selling expenses ($1,060,000);

· increased salary and related costs ($99,000);

· increased net other general and administrative expenses ($10,000);

· decreased general business consulting expenses due to the higher use of outside consultants in 2011 ($842,000) versus the same period in 2012;

· decreased sock compensation expense due to lower expense of option grants for selling, general and administrative employees and directors ($258,000); and

Depreciation and amortization was $91,000 for the first nine months of 2012 as compared to $176,000 for 2011, a decrease of $85,000.

Total operating expenses for the first nine months of 2012 were $6,495,000 as compared to total operating expenses of $7,527,000 for 2011, a decrease of $1,032,000 for the reasons listed above.

Interest and miscellaneous income was $112,000 for the first nine months of 2012 as compared to $1,291,000 for 2011, a decrease of $1,179,000. Miscellaneous income was higher in 2011 due to negotiated payables and write-offs of other accounts payable that occurred in 2011.

Interest and other expense was $524,000 for the first nine months of 2012 as compared to $760,000 in 2011, a decrease of $236,000. The decrease in interest and other expense was due to the repayment in full of the secured promissory note of $2.75 million plus accrued interest.

We recorded an expense of $2,316,000 in the first quarter of 2012 for amendment agreements for 4,581,816 currently outstanding warrants which extended the expiration dates of such warrants to February 16, 2015 for 3,818,180 warrants; to October 24, 2015 for 386,364 warrants; and to December 6, 2015 for 377,272 warrants. The holders of such warrants include unaffiliated warrant holders as well as SCO Capital Partners LLC, Lake End Capital LLC and Beach Capital LLC. Such holders may be deemed to be affiliates of Jeffrey B. Davis and Steven H. Rouhandeh, our Chief Executive Officer and a director, respectively. The warrants that were amended were for the purchase of an aggregate of 4,581,816 shares of our common stock. In connection with the amendments, the holders of such warrants agreed to waive any damages that they may have incurred relating to the Company's inability to register the shares of common stock issuable upon exercise of the warrants, other than liquidated damages that may have already accrued relating to such inability to register such shares.


We recorded a gain related to warrants classified as derivative liabilities of $1,236,000 for the first nine months of 2012 as compared to $3,312,000 for the same period of 2011. We recorded a derivative for warrants in 2009 when the fair value of the warrants that were issued with our Series A Convertible Preferred Stock were reclassified from equity per the requirements of accounting guidance as a result of the repricing feature.

We recorded a loss for the derivative liability related to preferred stock of $25,770,000 for the first nine months of 2012 and a loss of $470,000 for the same period of 2011. We recorded a derivative in 2010 per the requirements of accounting guidance due to the possibility of repricing our Series A Convertible Preferred Stock if we sold our common stock at a price below the original conversion price.

Preferred stock dividends of $1,323,000 were accrued for the first nine months of 2012 and $1,327,000 for 2011, a decrease of $4,000.

Net loss allocable to common stockholders for the first nine months of 2012 was $31,682,000, or a $1.31 basic and diluted loss per common share, compared with net loss of $4,140,000, or a $0.21 basic and diluted loss per common share for the same period in 2011, an increased loss of $27,542,000.

Critical Accounting Policies and Estimates relating to MuGard

Product sales and allowances

We sell MuGard to wholesalers, and specialty and retail pharmacies. We began shipping to customers in September 2010.

We recognize product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements with customers, rebates or discounts taken. If actual future results vary from our estimates, we may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. Our product sales allowances include:

· Wholesaler and Specialty and Retail Pharmacy Discounts - we offer contractually determined discounts to certain wholesale distributors and specialty and retail pharmacies that purchase directly from us. These discounts are either taken off the invoice at the time of shipment or paid to the customer on a monthly or quarterly basis.

· Prompt Pay Discounts - we offer cash discounts to our customers, generally 2% of the sales price, as an incentive for prompt payment. Based on our experience many of the customers comply with the payment terms to earn the cash discount.

· Patient Discount Programs - we offer discount card programs in which patients receive certain discounts off their prescription.

· Managed Care Rebates - we offer discounts under contracts with certain managed care providers who do not purchase directly from us.


We believe our estimates related to gross-to-net sales adjustments for MuGard do not have a high degree of estimation complexity or uncertainty as the related amounts are settled within a short period of time.

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