A.P. Pharma, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013; filed August 8, 2013. The source filing identifies the registrant as A.P. Pharma, Inc., not Heron Therapeutics, Inc.
Business Context
A.P. Pharma was a specialty pharmaceutical company developing injectable drug-delivery products using its Biochronomer polymer platform. Its lead candidate, APF530, contained granisetron and was intended to prevent acute and delayed chemotherapy-induced nausea and vomiting through a single subcutaneous injection lasting approximately five days. The company owned worldwide rights and was beginning to build a U.S. commercial infrastructure.
Financial Position and Results
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Research and development expense | $10.5 million in 2013 vs. $3.1 million in 2012 | $17.3 million vs. $6.4 million |
| General and administrative expense | $4.7 million vs. $1.3 million | $10.7 million vs. $2.8 million |
| Total operating expenses | $15.2 million vs. $4.4 million | $28.0 million vs. $9.1 million |
| Net loss | $15.4 million vs. $4.6 million | $28.4 million vs. $9.5 million |
| Net loss per share | $0.05 vs. $0.02 | $0.09 vs. $0.05 |
The company had no reported product revenue in the periods presented. Operating margins are not meaningful because the company generated operating losses and reported no revenue. Interest expense was $0.2 million for the quarter and $0.4 million for the six months, compared with $0.1 million and $0.2 million, respectively, in the prior-year periods.
- Cash and cash equivalents were $34.8 million at June 30, 2013, down from $53.5 million at December 31, 2012.
- Net cash used in operating activities was $18.8 million for the six months, compared with $8.1 million in 2012.
- Net cash used in investing activities was $0.5 million, primarily for property and equipment.
- Net cash provided by financing activities was $0.7 million, including $0.6 million from warrant exercises, compared with $3.0 million in 2012 from convertible-note financing.
- Accumulated deficit was $212.0 million at June 30, 2013.
- Current liabilities were $9.6 million, including $0.8 million of convertible notes payable at carrying value. The related notes had approximately $4.9 million of principal outstanding, secured substantially all company assets, and could be required to be prepaid at the holders’ option.
- The company reported $2.8 million of operating lease obligations, including $0.9 million due within one year.
Material Changes Versus the Prior Comparable Period
- R&D expense increased 115% for the quarter and 171% for the six-month period, primarily because of higher headcount, APF530 manufacturing-process validation, production scale-up, and related development activities.
- G&A expense increased 256% for the quarter and 287% for the six months, driven by higher headcount-related costs, stock compensation, market research, consulting, professional fees, and pre-commercialization activity.
- Six-month net loss nearly tripled year over year, and operating cash burn increased by $10.7 million.
- Stock-based compensation increased to $4.2 million for the six months from $1.8 million in 2012 and represented a significant portion of operating expenses.
- The weighted-average shares used for loss per share increased to approximately 305.4 million for the six months from 200.1 million, reflecting prior equity financings.
- Loss from discontinued operations ended in 2013. An arbitrator ruled in February 2013 that no additional amounts were owed under the former gross-profit guaranty, and the related $1.1 million accrual had been reversed at December 31, 2012.
Guidance, Outlook, Risks, and Unusual Items
- On March 28, 2013, the FDA issued a Complete Response Letter identifying issues that prevented approval of the APF530 NDA in its current form. Management believed the issues were addressable and planned to resubmit the NDA in the first quarter of 2014.
- Management expected 2013 R&D expense to exceed 2012 levels because of manufacturing-related costs and work responding to the FDA letter. G&A expense was also expected to increase because of NDA-support and full-year pre-commercialization activities.
- The company believed existing working capital was sufficient to fund planned operations into 2014, but stated that additional capital might be needed depending on regulatory, manufacturing, clinical, commercialization, and market developments.
- Failure to obtain additional financing on acceptable terms could require significant operating reductions or unfavorable financing, supply, or collaboration arrangements. Future equity financing could dilute existing stockholders.
- APF530 approval, resubmission timing, manufacturing scale-up, commercialization, market acceptance, competition, intellectual-property protection, clinical progress, and strategic collaborations were identified as important uncertainties.
- Convertible notes carried a fixed 6% stated interest rate, were secured, matured in 2021, and were convertible into approximately 122.1 million shares based on principal outstanding. Holders could require prepayment beginning May 2, 2012.
- The company reported no off-balance-sheet arrangements, no material changes to previously reported legal proceedings, and compliance with debt covenants as of June 30, 2013.
- John Whelan was removed as President and Chief Executive Officer on May 1, 2013. Amendments to his management agreement addressed potential severance rights and incentives for him to remain Chief Financial Officer through August 15, 2013.
Important Facts for Investors to Verify
- Confirm that the intended issuer is A.P. Pharma, Inc.; the supplied filing is not identified as a Heron Therapeutics filing.
- Review the FDA Complete Response Letter issues and determine whether the planned first-quarter 2014 APF530 resubmission occurred and what additional costs or studies were required.
- Assess cash runway using the $18.8 million six-month operating cash burn, the $34.8 million cash balance, and the company’s stated expectation of funding into 2014.
- Evaluate dilution and repayment risk from approximately 122.1 million potential shares underlying the convertible notes, approximately 81.0 million warrants, and approximately 134.9 million outstanding options.
- Review the terms and enforceability of the secured convertible notes, including the holders’ optional prepayment rights and the company’s ability to raise additional capital.
- Verify the effects of the CEO transition, retention agreement amendments, and increasing stock-based compensation on future expenses and governance.