Business Context and Reporting Period
Company: A.P. Pharma, Inc., which stockholders approved renaming to Heron Therapeutics, Inc. in September 2013. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013.
The company is a specialty pharmaceutical developer using its Biochronomer polymer-based drug-delivery platform. Its lead candidate, APF530, is intended to prevent acute and delayed chemotherapy-induced nausea and vomiting through a single subcutaneous injection designed to maintain therapeutic levels for five days. The company had no product revenue reported in the filing and remains dependent on regulatory approval and commercialization of APF530.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Research and development expense | $5.9 million, versus $3.6 million | $23.2 million, versus $10.0 million |
| General and administrative expense | $6.8 million, versus $2.4 million | $17.4 million, versus $5.2 million |
| Total operating expenses | $12.7 million, versus $6.1 million | $40.6 million, versus $15.2 million |
| Operating loss | $12.7 million, versus $6.1 million | $40.6 million, versus $15.2 million |
| Net loss | $12.9 million, versus $6.1 million | $41.2 million, versus $15.6 million |
| Basic and diluted loss per share | $0.04, versus $0.02 | $0.13, versus $0.07 |
| Net cash used in operating activities | Not separately provided | $31.1 million, versus $10.9 million |
The filing does not provide a clear gross margin or operating margin because the company reported no operating revenue and its results primarily consisted of research and development and general and administrative expenses.
Cash and cash equivalents were $22.6 million at September 30, 2013, compared with $53.5 million at December 31, 2012. Total assets were $26.4 million and stockholders’ equity was $20.9 million at September 30, 2013.
Convertible notes had a carrying value of approximately $0.9 million, representing $5.0 million of principal less a $4.1 million debt discount. The notes bear a 6% stated interest rate, mature in 2021, are secured by substantially all company assets, and may be subject to holder-requested prepayment. The company reported compliance with debt covenants.
Cash used in investing activities was $1.5 million, primarily for property and equipment. Financing activities provided $1.7 million, including $0.6 million from warrant exercises and $1.1 million from stock option exercises. No common-stock or convertible-note financing proceeds were received in the 2013 nine-month period.
Material Changes Versus the Prior Comparable Period
- Research and development expense increased $2.3 million, or approximately 62%, in the third quarter and $13.2 million, or approximately 131%, for the nine-month period. Increases reflected higher headcount, APF530 project spending, manufacturing-process validation, and production scale-up efforts.
- General and administrative expense increased $4.4 million in the third quarter and $12.2 million for the nine-month period. The increases included higher headcount, market research, consulting and professional fees, pre-commercialization activities, and costs associated with the resignation of the former chief executive officer.
- Stock-based compensation increased to $4.1 million in the third quarter and $8.3 million for the nine-month period, compared with $2.0 million and $3.8 million, respectively. Third-quarter expense included accelerated vesting of options related to the former chief executive officer’s resignation.
- Net cash used in operations increased $20.2 million for the nine-month period, while financing cash inflows declined $51.8 million because the prior-year period included $50.5 million of common-stock proceeds and $3.0 million of convertible-note proceeds.
- The accumulated deficit increased to $224.8 million from $183.6 million at December 31, 2012.
- In February 2013, an arbitrator ruled that no additional amount was owed under a discontinued-business gross-profit guaranty. The company had reversed the related $1.1 million accrual as of December 31, 2012; discontinued operations had no material effect on 2013 results.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The FDA issued a Complete Response Letter on March 28, 2013 identifying issues that prevented approval of the APF530 NDA in its then-current form. Management stated that it expected to resubmit the NDA in the first quarter of 2014, but cautioned that approval and timing were uncertain.
- The cited regulatory issues included manufacturing, administration, and analysis of efficacy data under more recent chemotherapy classifications. Third-party manufacturing deficiencies were also identified as a potential approval obstacle.
- Management expected 2013 research and development and general and administrative expenses to exceed 2012 levels because of manufacturing work, FDA-response activities, increased support costs, and pre-commercialization efforts.
- Management believed existing working capital was sufficient to fund planned operations into 2014, but stated that additional capital would be required for development and operating activities. Failure to obtain financing could require reduced or deferred activities and could materially impair operations.
- The company planned to commercialize APF530 in the United States independently and was building commercial infrastructure, but had no established pharmaceutical sales organization and no manufacturing facilities.
- In November 2013, after the reporting period, the company announced a broader sustained-release pipeline, including a post-surgical pain program, and planned a post-approval APF530 label-expansion effort for delayed CINV associated with highly emetogenic chemotherapy.
- Stockholders authorized the board to implement a reverse stock split from 1-for-10 to 1-for-20 within twelve months of September 19, 2013. The proposed purpose was to increase the trading price and support a potential Nasdaq relisting.
- The common stock was trading on the OTC Bulletin Board after Nasdaq delisting in 2011 for failure to meet the minimum bid-price requirement. The company warned that a reverse split, continued penny-stock status, equity issuance, warrant exercises, and note conversion could increase volatility or dilute existing holders.
- Operating lease obligations totaled approximately $2.7 million, including $1.0 million due within one year and $1.6 million due in years two through three. The company reported no off-balance-sheet arrangements and no material changes to previously disclosed legal proceedings.
Important Facts for Investors to Verify
- Whether the APF530 NDA was resubmitted in the first quarter of 2014 and the outcome of subsequent FDA review.
- The scope and remediation status of manufacturing, administration, and efficacy-analysis issues identified in the Complete Response Letter.
- The company’s actual cash runway, additional financing requirements, and any subsequent equity or debt financing and related dilution.
- Whether the board implemented the authorized reverse stock split and whether the company regained Nasdaq listing.
- The status, terms, and potential dilution from the convertible notes, approximately 79.4 million outstanding warrants, and approximately 125.4 million outstanding options reported for the nine-month period.
- Progress and costs associated with commercial infrastructure, third-party manufacturing scale-up, and any planned APF530 label-expansion or post-surgical pain programs.
- Whether the company generated any product revenue, achieved regulatory approval, or reported material changes in liquidity after September 30, 2013.