Business Context and Reporting Period
This Form 10-Q covers A.P. Pharma, Inc. for the quarter and nine months ended September 30, 2011. The company was a specialty pharmaceutical developer focused primarily on APF530, a long-acting treatment intended to prevent chemotherapy-induced nausea and vomiting using its Biochronomer technology. The filing identifies the registrant as A.P. Pharma, Inc., although the request metadata names Heron Therapeutics, Inc.
APF530 received an FDA Complete Response Letter in March 2010. Following meetings with the FDA in February and March 2011, management expected to resubmit the NDA during the first half of 2012. Development of other pipeline products was temporarily deferred to focus resources on APF530.
Financial Highlights
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Contract revenue | $0.0 million in 2011 versus $0.4 million in 2010 | $0.6 million versus $1.1 million |
| Operating loss | $4.1 million versus $1.6 million | $6.9 million versus $8.2 million |
| Net loss | $4.2 million versus $1.7 million | $7.6 million versus $5.8 million |
| Net loss per share | $0.02 versus $0.04 | $0.08 versus $0.15 |
| Net cash used in operating activities | Not presented for the quarter | $5.2 million versus $4.6 million |
Research and development expense was $2.9 million in the quarter and $5.4 million for the nine months, compared with $1.5 million and $5.8 million, respectively, in the prior-year periods. General and administrative expense was $1.2 million and $2.2 million, compared with $0.4 million and $3.6 million.
Cash and cash equivalents were $21.0 million at September 30, 2011, compared with $2.1 million at December 31, 2010. Financing activities provided $24.3 million during the first nine months, including approximately $22.8 million net proceeds from a July private placement and approximately $1.5 million from convertible notes. Total assets were $21.8 million and total liabilities were $2.6 million.
The company had an accumulated deficit of $156.0 million. Convertible notes had a carrying value of approximately $64,000, reflecting $1.55 million of principal less a $1.486 million debt discount. The notes were secured by substantially all company assets, initially carried a 20% interest rate, and were amended to 6% effective July 1, 2011. The company reported compliance with debt covenants.
Material Changes Versus Prior Comparable Period
- Quarterly revenue declined to zero following Merial Limited’s May 2011 termination of its animal-health development agreement. The company did not expect contract revenue in the second half of 2011.
- Quarterly R&D expense increased by $1.4 million, reflecting increased APF530 work addressing FDA issues and higher stock-based compensation.
- Quarterly G&A expense increased by $0.8 million due primarily to higher consulting costs, professional fees, and stock compensation; nine-month G&A declined by $1.4 million because the prior year included compensation related to the former chief executive officer’s resignation.
- Net loss increased by $2.5 million for the nine-month period, partly because the 2010 period included a $2.5 million royalty-related milestone gain.
- Common shares outstanding increased substantially following issuance of 160.0 million shares and warrants to purchase 80.0 million shares in the July 2011 private placement. At October 31, 2011, 200.0 million common shares were outstanding.
- Options outstanding increased to approximately 49.8 million, and warrants outstanding totaled approximately 84.1 million at September 30, 2011, creating significant potential dilution.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected APF530 NDA resubmission in the first half of 2012 and believed financing proceeds were sufficient to fund planned operations into 2013.
- The company did not have sufficient resources to launch APF530 independently. Commercialization would require a partnership or additional financing if approval is obtained.
- There was no assurance that the FDA would approve APF530, that additional FDA work would not be required, or that a commercialization partner or additional capital could be secured on acceptable terms.
- R&D expense was expected to be higher in 2011 than in 2010 because of NDA-resubmission activities; G&A expense was expected to be lower.
- The discontinued cosmeceutical and toiletry business generated losses of $51,000 for the quarter and $283,000 for the nine months, primarily from changes in estimates related to a gross profit guaranty. A $1.0 million liability was recorded at September 30, 2011, and the guaranty could extend through July 2013.
- Merial’s termination eliminated a significant source of collaborative revenue and reflected concerns about the related product’s commercial potential.
- The company reported $3.7 million of remaining operating lease obligations within one year and total operating lease obligations of $3.7 million. No off-balance-sheet arrangements were reported.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level, with no significant changes in internal control during the quarter.
Important Facts for Investors to Verify
- Confirm that the filing issuer is A.P. Pharma, Inc. and reconcile this with the requested company name, Heron Therapeutics, Inc.
- Track the FDA’s response to the planned APF530 NDA resubmission and any additional clinical, manufacturing, or regulatory requirements.
- Assess whether the reported $21.0 million cash balance and stated runway into 2013 remain adequate relative to ongoing APF530 expenditures.
- Evaluate dilution from the 160.0 million shares issued, 80.0 million placement warrants, approximately 49.8 million options, and convertible-note conversion rights.
- Review the secured convertible notes, including the 6% interest rate, collateral, conversion terms, default provisions, and potential additional issuances.
- Monitor the $1.0 million gross profit guaranty liability and any further obligations related to the discontinued business.
- Verify the effect of Merial’s termination on future contract revenue and collaborative development funding.