A.P. Pharma, Inc. 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011; filed March 26, 2012. The supplied filing is for A.P. Pharma, Inc., not Heron Therapeutics, Inc. The filing includes unaudited fourth-quarter 2011 results.
Business context
A.P. Pharma was a development-stage specialty pharmaceutical company focused on its Biochronomer polymer-based drug-delivery technology. Its lead candidate, APF530, was a long-acting injectable formulation of granisetron intended to prevent acute and delayed chemotherapy-induced nausea and vomiting. The company had no approved or commercialized products and relied on contract manufacturers and potential partners.
The FDA issued a Complete Response Letter for the APF530 NDA in March 2010. Management expected to resubmit the NDA in mid-2012 after addressing dosing-system, manufacturing, sterilization, analytical, clinical-data, bioavailability, metabolism and thorough-QT requirements.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Contract revenue | $0.6 million | $1.3 million | Down 50% |
| Research and development expense | $8.2 million | $7.3 million | Up 13% |
| General and administrative expense | $3.5 million | $4.0 million | Down 12% |
| Operating loss | $11.1 million | $9.9 million | Loss increased $1.1 million |
| Loss from continuing operations | $11.4 million | $7.2 million | Loss increased $4.2 million |
| Net loss | $11.8 million | $7.3 million | Loss increased $4.5 million |
| Net loss per share | $0.10 | $0.19 | Improved due primarily to share issuance |
| Net cash used in operating activities | $7.7 million | $5.5 million | Use increased $2.2 million |
| Cash and cash equivalents at year-end | $18.0 million | $2.1 million | Increased $15.9 million |
| Accumulated deficit | $160.2 million | $148.4 million | Increased $11.8 million |
Operating expenses totaled $11.7 million, producing an operating margin of approximately negative 1,712% on limited contract revenue. The filing does not provide a meaningful gross margin because revenue was primarily contract revenue and no product sales were reported.
Financing activities generated $24.1 million, including approximately $22.8 million net proceeds from a July 2011 equity-and-warrant financing and approximately $1.3 million net proceeds from convertible notes. Investing activities used $0.5 million, primarily for equipment purchases. Management stated that year-end cash was expected to fund planned operations into 2013, excluding a potential commercial launch of APF530.
At December 31, 2011, current liabilities were $3.7 million and stockholders’ equity was $15.8 million. Convertible notes had a carrying value of approximately $0.1 million after substantial debt discount, with approximately $1.6 million of principal outstanding. The notes were secured, initially carried a 20% interest rate that was reduced to 6% effective July 1, 2011, and holders could require prepayment beginning May 2, 2012.
Fourth-quarter 2011 results
| Metric | Q4 2011 |
|---|---|
| Revenue | None |
| Operating expenses | $4.1 million |
| Loss from continuing operations | $4.2 million |
| Discontinued operations loss | $0.1 million |
| Net loss | $4.3 million |
| Net loss per share | $0.02 |
Material changes versus the prior comparable period
- Contract revenue fell by $0.7 million because the Merial collaboration was terminated in August 2011; all 2011 contract revenue came from that relationship.
- Research and development spending rose by $0.9 million as the company worked on FDA-requested APF530 activities. Management expected 2012 R&D and general and administrative expenses to increase further due to NDA-resubmission support.
- The company raised approximately $24.1 million in net financing proceeds, increasing cash from $2.1 million to $18.0 million, but substantially increasing dilution and potential future dilution.
- Shares outstanding increased from approximately 40.1 million at December 31, 2010 to 200.0 million at December 31, 2011. Additional dilution was possible from approximately 84.1 million warrants, stock options and convertible-note conversion rights.
- The company’s common stock was delisted from Nasdaq for failure to meet the minimum bid-price requirement and traded on the OTC Bulletin Board, subject to penny-stock restrictions.
- Pipeline development for APF112 and APF580 remained deferred while resources were concentrated on APF530.
Guidance, outlook, risks and unusual items
- Regulatory outlook: Management expected to resubmit the APF530 NDA in mid-2012. The filing did not provide assurance of approval or a commercial launch date.
- Clinical and regulatory work: A thorough-QT study and a human metabolism study were completed in the first quarter of 2012. The QT study met its primary endpoint, but FDA review could still require additional work or issue another Complete Response Letter.
- Commercialization funding: The company did not have sufficient resources to launch APF530 independently and expected to require a commercialization partner or additional financing.
- Manufacturing: FDA-identified deficiencies at the company and contract-manufacturing facilities remained material approval risks. APF530 also required manufacturing scale-up and validation for commercial quantities.
- Liquidity: The company expected cash to fund planned operations into 2013, but continued losses, NDA costs, launch costs and potential note repayment obligations could require additional capital.
- Discontinued operations liability: The company accrued approximately $1.1 million related to a disputed gross-profit guarantee from the discontinued cosmeceutical and toiletry business. The dispute was submitted to an independent accountant, and the guarantee could extend through July 1, 2013.
- Tax assets: Deferred tax assets of approximately $10.3 million were fully offset by a valuation allowance. Certain net operating losses and tax credits were subject to ownership-change limitations and could expire unused.
- Market and competitive risks: APF530 would compete with Aloxi, generic granisetron and ondansetron, and other drug-delivery products. The company had no internal commercial sales organization.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied filing is A.P. Pharma, Inc., despite the request identifying Heron Therapeutics, Inc.
- Verify the status and outcome of the planned mid-2012 APF530 NDA resubmission, including FDA manufacturing and dosing-system requirements.
- Assess cash runway after 2011, including NDA-resubmission expenses, commercial-launch costs and the potential May 2012 note prepayment right.
- Review dilution from the 2011 equity financing, 80.0 million warrants, approximately 50.1 million stock options and convertible-note conversion rights.
- Verify the resolution and final amount of the disputed $1.1 million gross-profit guarantee.
- Evaluate whether APF530 can be manufactured at commercial scale and at competitive cost through third-party suppliers.
- Assess the company’s ability to secure a commercialization partner or additional financing before any product launch.