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ACCP > SEC Filings for ACCP > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for ACCESS PHARMACEUTICALS INC


15-May-2013

Quarterly Report


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


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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 products primarily based upon our nanopolymer chemistry technologies and other drug delivery technologies. We currently have one marketed product, one product in Phase 2 of clinical development and several products in pre-clinical development.

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 $2.1 billion world-wide. MuGard, a proprietary nanopolymer formulation, has received marketing allowance in the U.S. from the FDA. We launched MuGard in the U.S. 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. 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 that sales of MuGard will begin in China in the second quarter of 2013. We are actively seeking partners to license MuGard.

Product Candidates
·? Our candidate for the treatment of cancer is ProLindac™, a nanopolymer Diamino Cyclohexane ("DACH")-platinum prodrug. ProLindac is in Phase 2 of clinical development, and we have completed and evaluated data from several clinical trials with ProLindac. No additional trials have been initiated this year in the U.S. or in Europe as the Company is focusing its resources on growing sales of MuGard. We are working with our partners in China towards the initiation of clinical trials of ProLindac in China. 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 (e.g. Eloxatin; Sanofi-Aventis), which has had annual sales in excess of $2.0 billion. We are currently seeking partners to license this technology.

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

? CobaCyte®-mediated targeted delivery is a preclinical technology that 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 seeking partners to license this technology.


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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" in our Annual Report on Form 10-K for description of clinical stages.
(2) Licensed from the School of Pharmacy, The University of London.

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 three months ended March 31, 2013. As of March 31, 2013, our cash and cash equivalents were $50,000 and our net cash burn rate for the quarter ended March 31, 2013, was approximately $160,000 per month. As of March 31, 2013, our working capital deficit was $6,072,000. Our working capital deficit at March 31, 2013 represented an increase of $1,124,000 as compared to our working capital deficit as of December 31, 2012 of $4,948,000. The increase in the working capital deficit at March 31, 2013 reflects three months of net operating costs and changes in current assets and liabilities.

As of May 15, 2013, 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 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 March 31, 2013 of $264,618,000. 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 third quarter of 2013. However, 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 within the next twelve months. We cannot provide assurance that we will ever be able to generate sufficient product revenue or achieve profitability on a sustained basis at all.


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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 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.

FIRST QUARTER 2013 COMPARED TO FIRST QUARTER 2012

Product sales of MuGard in the United States totaled $1,162,000 for the first quarter of 2013 as compared with $554,000 for the same period of 2012, an increase of $608,000, due to increased sales and acceptance of MuGard. See sales table in "Critical Accounting Policies and Estimates Relating to MuGard" below.

Our licensing revenue for the first quarter of 2013 was $62,000 as compared to $1,262,000 for the same period of 2012, a decrease of $1,200,000. 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 from our European partner 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 $21,000 for first quarter of 2012 and none in the same period of 2013. In the first quarter of 2012, we finalized the negotiations for the termination of the license from our European partner for MuGard.

Total research and development spending for the first quarter of 2013 was $323,000, as compared to $750,000 for the same period of 2012, a decrease of $427,000. The decrease in expenses was primarily due to:

· decreased salary and related costs ($265,000) from reduced scientific staff;

· decreased clinical development with trials for ProLindac and Thiarabine ($99,000);

· decreased stock compensation expense from lower expense of option grants for research and development employees ($32,000); and

· other net decreases in research spending ($31,000).

Product costs for MuGard in the United States were $65,000 for the first quarter of 2013 as compared to $59,000 for the same period in 2012, an increase of $6,000 due to increased sales.

Total selling, general and administrative expenses were $1,338,000 for the first quarter of 2013, as compared to $1,663,000 for the same period of 2012, a decrease of $325,000. The decrease in expenses was due primarily to the following:

· decreased salary and related costs ($216,000) from reduced general and administrative staff;

· lower patent fees ($55,000) due to no new patents being filed in 2013;

· decreased director fees ($45,000) due to the fact that 2012 fees were paid in stock because directors had not been paid fees for several years;

· decreased general business consulting expenses due to less use of outside consultants in 2013 ($31,000) versus the same period in 2012;

· decreased net other general and administrative expenses ($73,000); and

· increased MuGard product selling expenses ($95,000).


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Depreciation and amortization was $1,000 for the first quarter of 2013 as compared to $54,000 for the same period in 2012, a decrease of $53,000, due to assets being fully depreciated.

Total operating expenses for the first quarter of 2013 were $1,727,000 as compared to total operating expenses of $2,526,000 for the same period of 2012, a decrease of $799,000 for the reasons listed above.

Interest and miscellaneous income was $94,000 for the first quarter of 2013 as compared to $1,000 for the same period of 2012, an increase of $93,000. Miscellaneous income was higher in 2013 due to sale of certain platinum inventory.

Interest and other expense was $43,000 for the first quarter of 2013 as compared to $169,000 in the same period of 2012, a decrease of $126,000. The decrease in interest and other expense was due to the pay-off of the secured promissory note of $2.75 million in November 2012. For the first quarter of 2013 the $43,000 represents interest on unpaid dividends.

We recorded a one-time 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 loss related to warrants classified as derivative liabilities of $247,000 for the first quarter of 2013 as compared to a gain of $741,000 for the same period of 2012. We recorded a derivative for warrants in 2009 when the fair value of the warrants that were issued with our Series A Preferred Stock were reclassified from equity per the requirements of accounting guidance as a result of the repricing feature.

We recorded a gain for the derivative liability related to preferred stock of $4,780,000 for the first quarter of 2013 and a loss of $2,460,000 for the same period of 2012. We recorded a derivative in 2010 per the requirements of accounting guidance due to the possibility of repricing our Series A Preferred Stock if we sold our common stock at a price below the original conversion price.


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Preferred stock dividends of $727,000 were accrued for the first quarter of 2013 and $440,000 for the same period of 2012, an increase of $287,000 due to the issuance of the Series B Preferred Stock. Dividends are due semi-annually in either cash or common stock for the Series A Preferred Stock and due quarterly in either cash or preferred stock for the Series B Preferred Stock.

Net income allocable to common stockholders for the first quarter of 2013 was $3,354,000, or a $0.14 basic income per common share and a $0.13 diluted income per common share as compared to a net loss of $5,332,000, or a $0.22 basic and diluted loss per common share, for the same period in 2012, an increased income of $8,686,000.

Critical Accounting Policies and Estimates Relating to MuGard

We sell MuGard to wholesalers, and specialty and retail pharmacies. We began shipping to customers in September 2010. We recognize revenue for MuGard product sales at the time title transfers to our customers, which occurs at the time product is shipped to our customers.

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 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.

                     Three months ended       Three months ended
(in thousands)         March 31, 2013           March 31, 2012
Gross sales          $             1,255     $                577
Cash discounts                        10                        5
Contract discounts                    83                       18
                     $             1,162     $                554

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