Business Context and Reporting Period
A.P. Pharma, Inc. (the registrant named in the filing; now associated with Heron Therapeutics) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The company was developing injectable drug-delivery products using its Biochronomer platform. Its lead candidate, APF530, was intended to prevent acute- and delayed-onset chemotherapy-induced nausea and vomiting.
In September 2012, the company resubmitted APF530’s NDA to the FDA. The FDA established a PDUFA action date of March 27, 2013. The company owned worldwide APF530 rights, was developing U.S. commercialization capabilities, and was seeking international partners.
Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Contract revenue | $0.0 million in 2012; $0.0 million in 2011 | $0.0 million in 2012; $0.6 million in 2011 |
| Research and development expense | $3.6 million; $2.9 million prior year | $10.0 million; $5.4 million prior year |
| General and administrative expense | $2.4 million; $1.2 million prior year | $5.2 million; $2.2 million prior year |
| Operating loss | $(6.1) million; $(4.1) million prior year | $(15.2) million; $(6.9) million prior year |
| Net loss | $(6.1) million; $(4.2) million prior year | $(15.6) million; $(7.6) million prior year |
| Net loss per share | $(0.02); $(0.02) prior year | $(0.07); $(0.08) prior year |
| Net cash used in operating activities | Not provided for the quarter | $(10.9) million; $(5.2) million prior year |
At September 30, 2012, cash and cash equivalents were $60.0 million, compared with $18.0 million at December 31, 2011. Total assets were $61.8 million and stockholders’ equity was $57.5 million. The accumulated deficit was $175.9 million.
Current liabilities were $4.2 million, including $0.4 million of convertible notes payable recorded net of discount. The notes had $4.7 million of principal outstanding, were secured by substantially all company assets, bore a 6% stated interest rate, and were subject to holder-optional prepayment beginning May 2, 2012. The notes could be converted into common stock, subject to ownership limitations.
Net cash provided by financing activities was $53.5 million for the nine months, primarily from $50.5 million of net proceeds from a July 2012 common-stock financing and $3.0 million from additional convertible notes. Capital expenditures were $0.5 million. The company reported no off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Revenue declined to zero from $0.6 million for the first nine months of 2011 after Merial terminated its animal-health development agreement.
- Nine-month research and development expense increased $4.6 million, primarily because of higher APF530 project spending, personnel costs, and work addressing FDA issues.
- Nine-month general and administrative expense increased $3.0 million, driven mainly by higher stock compensation, consulting, professional fees, NDA-resubmission support, and pre-commercialization activity.
- Nine-month operating loss increased $8.3 million and net loss increased $8.1 million compared with the prior year.
- Cash increased $42.1 million, primarily because of the July 2012 equity financing and May 2012 convertible-note proceeds, partially offset by operating cash use and capital expenditures.
- Stock-based compensation increased to $3.8 million from $1.1 million for the first nine months, including $2.7 million in general and administrative expense.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that existing cash was expected to fund planned operations through an anticipated 2013 APF530 launch, assuming FDA approval.
- Future capital needs depend on FDA timing and outcome, launch costs, product acceptance, development programs, clinical and regulatory costs, partnerships, and commercialization infrastructure.
- The company warned that it might be unable to raise additional capital on favorable terms; future equity financing could dilute stockholders, while insufficient funding could require significant operating reductions or unfavorable financing, supply, or collaboration arrangements.
- A $1.1 million accrued disposition cost related to a disputed gross-profit guaranty remained on the balance sheet. The dispute with Amcol had been submitted to an independent accountant for resolution, and the company had not paid the claimed amount because it could not substantiate the underlying costs.
- Discontinued operations produced income of $0.1 million for the quarter and a loss of less than $0.1 million for the nine months, compared with losses in the prior-year periods.
- Operating lease obligations totaled $3.1 million, including $0.7 million due within one year.
- Key risks included FDA rejection or delay, clinical and development uncertainty, commercialization and market-acceptance risks, dependence on financing and strategic partners, intellectual-property risks, and common-stock price volatility.
- Management concluded that disclosure controls and procedures were effective at the reasonable-assurance level as of September 30, 2012, with no significant changes in internal control reported during the quarter.
Important Facts for Investors to Verify
- Confirm the subsequent FDA decision on the APF530 NDA and whether the anticipated 2013 launch occurred.
- Assess whether the $60.0 million cash balance and operating cash-burn rate were sufficient without additional financing.
- Review the terms, conversion potential, security interests, and prepayment rights associated with the convertible notes.
- Quantify potential dilution from outstanding options, warrants, and convertible notes; the filing disclosed approximately 67.9 million options, 84.4 million warrants, and 116.8 million shares underlying convertible notes for the nine-month 2012 period.
- Monitor resolution of the $1.1 million Amcol gross-profit-guaranty dispute and any change in the related liability.
- Verify the company-name continuity because the filing identifies the registrant as A.P. Pharma, Inc., while the request identifies Heron Therapeutics, Inc.