UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
Commission File Number 0-9314
ACCESS PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 83-0221517
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(State of Incorporation) (I.R.S. Employer I.D. No.)
2600 Stemmons Frwy, Suite 176, Dallas, TX 75207
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(Address of principal executive offices)
Telephone Number (214) 905-5100
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No
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The number of shares outstanding of the issuer's common stock,
as of August 13, 2004, was 15,469,787 shares, $0.01 par value
per share.
Total No. of Pages 28
ACCESS PHARMACEUTICALS, INC.
INDEX
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Page No.
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RISK FACTORS 2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at
June 30, 2004 and December 31, 2003 24
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three and six months ended
June 30, 2004 and June 30, 2003 25
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2004 and June 30, 2003 26
Notes to Unaudited Condensed Consolidated Financial Statements 27
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in Securities 20
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 23
PART I -- FINANCIAL INFORMATION
Risk Factors
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This Quarterly Report on Form 10-Q contains certain statements
that are forward-looking within the meaning of Section 27a of
the Securities Act of 1933 and that involve risks and
uncertainties, including, but not limited to the uncertainties
associated with research and development activities, clinical
trials, our ability to raise capital, the integration of
acquired companies and technologies, the timing of and our
ability to achieve regulatory approvals, dependence on others to
market our licensed products, collaborations, future cash flow,
the timing and receipt of licensing and milestone revenues, the
future success of our marketed products and products in
development, our ability to manufacture amlexanox products in
commercial quantities, our sales projections, and the sales
projections of our licensing partners, our ability to achieve
licensing milestones and other risks described below as well as
those discussed elsewhere in this Form 10-Q, the Annual Report
on Form 10-K as of December 31, 2003, documents incorporated by
reference, and other documents and reports that we file
periodically with the Securities and Exchange Commission.
Forward-looking statements contained in this Form 10-Q include,
but are not limited to our plan to complete full scale
production of and to re-launch Aphthasol(R) in the third quarter
of 2004, our planned start of a Phase III trial for our
mucoadhesive liquid technology in the third quarter of 2004, and
our net cash burn rate for the next twelve months to be
approximately $400,000 per month.
We have experienced a history of losses and we expect to incur
future losses.
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We have recorded minimal revenue to date and we have incurred a
cumulative operating loss of approximately $59.1 million through
June 30, 2004. Losses for the years ended 2003, 2002 and 2001
were $6,935,000, $9,384,000 and $6,027,000, respectively. Our
losses have resulted principally from costs incurred in research
and development activities related to our efforts to develop
clinical candidates and from the associated administrative
costs. We expect to incur additional operating losses over the
next several years. We also expect cumulative losses to increase
due to expanded research and development efforts and preclinical
and clinical trials. Our net cash burn rate for the first six
months of 2004 was $700,000 per month. We project our net cash
burn rate for the next twelve months to be approximately
$400,000 per month. Capital expenditures are forecasted to be
minor for the next twelve months since most of our new equipment
is leased and the lease expense is included in the calculation
of the net cash burn rate.
We do not have significant operating revenue and we may never
attain profitability.
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To date, we have funded our operations primarily through private
sales of common stock and convertible notes. Contract research
payments and licensing fees from corporate alliances and mergers
have also provided funding for our operations. Our ability to
achieve significant revenue or profitability depends upon our
ability to successfully complete the development of drug
candidates, to develop and obtain patent protection and
regulatory approvals for our drug candidates and to manufacture
and commercialize the resulting drugs. We have not received
significant royalties for sales of amlexanox or Zindaclin(R)
products to date and we may not generate significant revenues or
profits from the sale of these products in the future.
Furthermore, we may not be able to ever successfully identify,
develop, commercialize, patent, manufacture, obtain required
regulatory approvals and market any additional products.
Moreover, even if we do identify, develop, commercialize,
patent, manufacture, and obtain required regulatory
2
approvals to market additional products, we may not generate revenues
or royalties from commercial sales of these products for a
significant number of years, if at all. Therefore, our proposed
operations are subject to all the risks inherent in the
establishment of a new business enterprise. In the next few
years, our revenues may be limited to minimal product sales and
royalties, any amounts that we receive under strategic
partnerships and research or drug development collaborations
that we may establish and, as a result, we may be unable to
achieve or maintain profitability in the future or to achieve
significant revenues in order to fund our operations.
We may not successfully commercialize our drug candidates.
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Our drug candidates are subject to the risks of failure inherent
in the development of pharmaceutical products based on new
technologies and our failure to develop safe, commercially
viable drugs would severely limit our ability to become
profitable or to achieve significant revenues. We may be unable
to successfully commercialize our drug candidates because:
* some or all of our drug candidates may be found to be unsafe
or ineffective or otherwise fail to meet applicable regulatory
standards or receive necessary regulatory clearances;
* our drug candidates, if safe and effective, may be too
difficult to develop into commercially viable drugs;
* it may be difficult to manufacture or market our drug
candidates on a large scale;
* proprietary rights of third parties may preclude us from
marketing our drug candidates; and
* third parties may market superior or equivalent drugs.
The success of our research and development activities, upon
which we primarily focus, is uncertain.
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Our primary focus is on our research and development activities
and the commercialization of compounds covered by proprietary
biopharmaceutical patents and patent applications. Research and
development activities, by their nature, preclude definitive
statements as to the time required and costs involved in
reaching certain objectives. Actual research and development
costs, therefore, could exceed budgeted amounts and estimated
time frames may require extension. Cost overruns, unanticipated
regulatory delays or demands, unexpected adverse side effects or
insufficient therapeutic efficacy will prevent or substantially
slow our research and development effort and our business could
ultimately suffer. We anticipate that we will remain principally
engaged in research and development activities for an
indeterminate, but substantial, period of time.
We may be unable to obtain necessary additional capital to fund
operations in the future.
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We require substantial capital for our development programs and
operating expenses, to pursue regulatory clearances and to
prosecute and defend our intellectual property rights. Although
we believe that our existing capital resources, interest income,
product sales, royalties and revenue from possible licensing
agreements and collaborative agreements will be sufficient to
fund our currently expected operating expenses and capital
requirements through 2005, we may need to raise substantial
additional capital during that period to support our ongoing
operations because our actual cash requirements may vary
materially from those now planned and will depend upon numerous
factors, including :
3
* the sales levels of our marketed products;
* the results of our research and development programs;
* the timing and results of preclinical and clinical trials;
* our ability to maintain existing and establish new
collaborative agreements with other companies to provide funding
to us;
* technological advances; and
* activities of competitors and other factors.
If we do raise additional funds by issuing equity securities,
further dilution to existing stockholders would result and
future investors may be granted rights superior to those of
existing stockholders. If adequate funds are not available to us
through additional equity offerings, we may be required to
delay, reduce the scope of or eliminate one or more of our
research and development programs or to obtain funds by entering
into arrangements with collaborative partners or others that
require us to issue additional equity securities or to
relinquish rights to certain technologies or drug candidates
that we would not otherwise issue or relinquish in order to
continue independent operations.
We may be unable to successfully develop, market, or
commercialize our products or our product candidates without
establishing new relationships and maintaining current
relationships.
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Our strategy for the research, development and commercialization
of our potential pharmaceutical products may require us to enter
into various arrangements with corporate and academic
collaborators, licensors, licensees and others, in addition to
our existing relationships with other parties. Specifically, if
we successfully develop any commercially marketable
pharmaceutical products, we may seek to joint venture,
sublicense or enter other marketing arrangements with parties
that have an established marketing capability or we may choose
to pursue the commercialization of such products on our own. We
may, however, be unable to establish such additional
collaborative arrangements, license agreements, or marketing
agreements as we may deem necessary to develop, commercialize
and market our potential pharmaceutical products on acceptable
terms. Furthermore, if we maintain and establish arrangements or
relationships with third parties, our business may depend upon
the successful performance by these third parties of their
responsibilities under those arrangements and relationships. For
our commercialized products we currently rely upon the following
relationships in the following marketing territories:
* amlexanox 5% paste
o Strakan Ltd. - United Kingdom and Ireland manufacturing and
marketing rights
o Zambon Group - France, Germany, Holland, Belgium, Luxembourg,
Switzerland, Brazil, Colombia and Italy manufacturing and
marketing rights
o Laboratories Dr. Esteve SA - Spain, Portugal and Greece
manufacturing and marketing rights
o Meda, AB for Scandinavia, the Baltic states and Iceland
marketing rights
o Mipharm SpA for Italy manufacturing and marketing rights
o Paladin Labs, Inc. for Canada manufacturing and marketing rights
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* Zindaclin(R) and Residerm(R)
o Strakan Ltd. - worldwide manufacturing and marketing rights
o Fujisawa GmbH - sublicensed continental Europe marketing
rights
o Taro - sublicensed Israel marketing rights
o Pliva dd Hrvatska - sublicensed Crotia marketing rights
o Various companies for other smaller countries - sublicensed
marketing rights
For one of our OraDisc(TM) products in development, on January
6, 2004, we entered into an exclusive license and supply
agreement with Wyeth for sales of the product in North America.
If this product is marketed, we will be dependent upon Wyeth for
sales of such product in this territory.
Our ability to successfully commercialize, and market our
products and product candidates could be limited if a number of
these existing relationships were terminated.
Furthermore, our strategy with respect to our polymer platinate
program is to enter into a licensing agreement with a
pharmaceutical company pursuant to which the further costs of
developing a product would be shared with our licensing partner.
Although we have had discussions with potential licensing
partners with respect to our polymer platinate program, to date
we have not entered into any licensing arrangement. We may be
unable to execute our licensing strategy for polymer platinate.
Our strategy with respect to our other OraDisc(TM) products is
to enter into a licensing agreement with a pharmaceutical
company pursuant to which the further costs of developing a
product would be shared with our licensing partner. Although we
have had discussions with potential licensing partners with
respect to our other OraDisc(TM) products, to date we have not
entered into any licensing arrangement. We may be unable to
execute our licensing strategy for our other OraDisc(TM)
products.
We may be unable to successfully manufacture our products and
our product candidates in clinical quantities or for commercial
purposes without the assistance of contract manufacturers,
which may be difficult for us to obtain and maintain.
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We have limited experience in the manufacture of pharmaceutical
products in clinical quantities or for commercial purposes and
we may not be able to manufacture any new pharmaceutical
products that we may develop. As a result, we have established,
and in the future intend to establish arrangements with contract
manufacturers to supply sufficient quantities of products to
conduct clinical trials and for the manufacture, packaging,
labeling and distribution of finished pharmaceutical products if
any of our potential products are approved for
commercialization. If we are unable to contract for a sufficient
supply of our potential pharmaceutical products on acceptable
terms, our preclinical and human clinical testing schedule may
be delayed, resulting in the delay of our submission of products
for regulatory approval and initiation of new development
programs, which could cause our business to suffer. Delays or
difficulties in establishing relationships with manufacturers to
produce, package, label and distribute our finished
pharmaceutical or other medical products, if any, market
introduction and subsequent sales of such products could cause
our business to suffer. Moreover, contract manufacturers that we
may use must adhere to current Good Manufacturing Practices, as
required by the FDA. In
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this regard, the FDA will not issue a
pre-market approval or product and establishment licenses, where
applicable, to a manufacturing facility for the products until
after the manufacturing facility passes a pre-approval plant
inspection. If we are unable to obtain or retain third party
manufacturing on commercially acceptable terms, we may not be
able to commercialize our products as planned. Our potential
dependence upon third parties for the manufacture of our
products may adversely affect our ability to generate profits or
acceptable profit margins and our ability to develop and deliver
such products on a timely and competitive basis.
Our amlexanox 5% paste is marketed in the US as Aphthasol(R).
Block Drug Company had manufactured the 5% amlexanox paste since
the product was approved by the FDA in 1996 in a Puerto Rico
facility certified by the FDA for Good Manufacturing Practices.
We acquired the rights to amlexanox 5% paste from Block Drug
Company on July 22, 2002. Also when we acquired the US rights to
Aphthasol(R) we entered into a Supply Agreement whereby Block
Drug Company was to produce Aphthasol(R) for us for a defined
period of time at its Puerto Rico facility. We were subsequently
advised by Block Drug Company that it was unable to comply with
the terms of the Supply Agreement and that it would not be able
to produce Aphthasol(R) for us. Due to Block Drug Company's
production failure, we had sufficient product to supply
wholesalers only through June 2003. We do not anticipate further
sales of the product until the third quarter of 2004. We have
selected Contract Pharmaceuticals Ltd. Canada as our new
manufacturer of amlexanox 5% paste and it has produced initial
qualifying batches of the product approved for manufacture in
the US and Europe. Full scale production commenced in the first
quarter of 2004.
Amlexanox 5% paste was approved by regulatory authorities for
sale in the UK and is currently in the approval process in the
remaining EU countries. We licensed manufacturing rights to
Strakan, Zambon, Esteve and Mipharm for specific countries in
Europe. Contract Pharmaceuticals Ltd. Canada has also been
selected as our European supplier of amlexanox 5% paste and
this facility has been approved for European supply.
We licensed our patents for worldwide manufacturing and
marketing for Zindaclin(R) and our ResiDerm(R) technology to
Strakan Ltd. for the period of the patents. We receive a share
of the licensing revenues and royalty on the sales of the
product. Strakan has a contract manufacturer for Zindaclin(R) in
a European Union approved facility. Zindaclin(R) was approved in
the UK and seven additional European Union countries and is
currently under review for approval in the remaining EU
countries.
OraDisc(TM) A was manufactured by a third party for our Phase
III clinical trials. Enough product was manufactured to cover
the needs of the clinical trials and testing. We have finalized
with a third party a contract for manufacturing our product if
our OraDisc(TM) A gains regulatory approval.
AP5280 and AP5346 are manufactured by a third parties for our
Phase I/II clinical trials. Manufacturing is ongoing for the
current clinical trials. Certain manufacturing steps are
conducted by the Company to enable significant cost savings to
be realized.
Our mucoadhesive technology is manufactured by a third party for
our clinical trials.
6
We are subject to extensive governmental regulation which
increases our cost of doing business and may affect our ability
to commercialize any new products that we may develop.
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The FDA and comparable agencies in foreign countries impose
substantial requirements upon the introduction of pharmaceutical
products through lengthy and detailed laboratory, preclinical
and clinical testing procedures and other costly and time-
consuming procedures to establish their safety and efficacy. All
of our drug candidates require governmental approvals for
commercialization. Preclinical and clinical trials and
manufacturing of our drug candidates will be subject to the
rigorous testing and approval processes of the FDA and
corresponding foreign regulatory authorities. Satisfaction of
these requirements typically takes a significant number of years
and can vary substantially based upon the type, complexity and
novelty of the product. The status of our principal products is
as follows:
* 5% amlexanox paste is an approved product for sale in the US
(Aphthasol(R)); approved in the UK and Canada but not yet sold;
and, in the approval process in the EU.
* Zindaclin(R) is an approved product for sale in the UK and
seven additional European Union countries; in the approval
process in the remaining EU countries and other markets.
* OraDisc(TM) A has completed a Phase III clinical trial in the
US and we filed an NDA in December 2003 with the FDA.
* Our other OraDisc(TM) products are currently in the pre-
clinical phase.
* AP5280 has completed Phase I of its Phase I/II trial in Europe.
* AP5346 is currently in a Phase I trial in Europe.
* Mucoadhesive liquid technology is planned to start a clinical trial in
the US in the third quarter of 2004.
* Vitamin mediated delivery technology is currently in the pre-
clinical phase.
* We also have other products in the preclinical phase.
Due to the time consuming and uncertain nature of the drug
candidate development process and the governmental approval
process described above, we cannot assure you when we,
independently or with our collaborative partners, might submit
a New Drug Application, or "NDA", for FDA or other regulatory
review.
Government regulation also affects the manufacturing and
marketing of pharmaceutical products. Government regulations may
delay marketing of our potential drugs for a considerable or
indefinite period of time, impose costly procedural requirements
upon our activities and furnish a competitive advantage to
larger companies or companies more experienced in regulatory
affairs. Delays in obtaining governmental regulatory approval
could adversely affect our marketing as well as our ability to
generate significant revenues from commercial sales. Our drug
candidates may not receive FDA or other regulatory approvals on
a timely basis or at all. Moreover, if regulatory approval of a
drug candidate is granted, such approval may impose limitations
on the indicated use for which such drug may be marketed. Even
if we obtain initial regulatory approvals for our drug
candidates, Access, our drugs and our manufacturing
facilities would be subject to continual review and periodic
inspection, and later discovery of previously unknown problems
with a drug, manufacturer or facility may result in restrictions
on the marketing or manufacture of such drug, including
withdrawal of the drug from the market. The FDA and other
regulatory authorities stringently apply regulatory standards
and failure to comply with regulatory
7
standards can, among other things, result in fines, denial or withdrawal
of regulatory approvals, product recalls or seizures, operating
restrictions and criminal prosecution.
The uncertainty associated with preclinical and clinical testing
may affect our ability to successfully commercialize new
products.
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Before we can obtain regulatory approvals for the commercial
sale of any of our potential drugs, the drug candidates will be
subject to extensive preclinical and clinical trials to
demonstrate their safety and efficacy in humans. Preclinical or
clinical trials of any of our future drug candidates may not
demonstrate the safety and efficacy of such drug candidates at
all or to the extent necessary to obtain regulatory approvals.
In this regard, for example, adverse side effects can occur
during the clinical testing of a new drug on humans which may
delay ultimate FDA approval or even lead us to terminate our
efforts to develop the drug for commercial use. Companies in the
biotechnology industry have suffered significant setbacks in
advanced clinical trials, even after demonstrating promising
results in earlier trials. In particular, OraDisc(TM) and
AP5280 have taken longer to progress through clinical trials
than originally planned. This extra time has not been related to
concerns of the formulations but rather due to the lengthy
regulatory process. The failure to adequately demonstrate the
safety and efficacy of a drug candidate under development could
delay or prevent regulatory approval of the drug candidate. A
delay or failure to receive regulatory approval for any of our
drug candidates could prevent us from successfully
commercializing such candidates and we could incur substantial
additional expenses in our attempts to further develop such
candidates and obtain future regulatory approval.
We may incur substantial product liability expenses due to the
use or misuse of our products for which we may be unable to
obtain insurance coverage.
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Our business exposes us to potential liability risks that are
inherent in the testing, manufacturing and marketing of
pharmaceutical products. These risks will expand with respect to
our drug candidates, if any, that receive regulatory approval
for commercial sale and we may face substantial liability for
damages in the event of adverse side effects or product defects
identified with any of our products that are used in clinical
tests or marketed to the public. We generally procure product
liability insurance for drug candidates that are undergoing
human clinical trials. Product liability insurance for the
biotechnology industry is generally expensive, if available at
all, and as a result, we may be unable to obtain insurance
coverage at acceptable costs or in a sufficient amount in the
future, if at all. We may be unable to satisfy any claims for
which we may be held liable as a result of the use or misuse of
products which we have developed, manufactured or sold and any
such product liability claim could adversely affect our
business, operating results or financial condition.
We may incur significant liabilities if we fail to comply with
stringent environmental regulations or if we did not comply with
these regulations in the past.
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Our research and development processes involve the controlled
use of hazardous materials. We are subject to a variety of
federal, state and local governmental laws and regulations
related to the use, manufacture, storage, handling and disposal
of such material and certain waste products. Although we believe
that our activities and our safety procedures for storing,
using, handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of
accidental contamination or injury from these materials cannot
be completely eliminated. In the event of such accident, we
could be held liable for any damages that result and
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any such liability could exceed our resources.
Intense competition may limit our ability to successfully
develop and market commercial products.
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The biotechnology and pharmaceutical industries are intensely
competitive and subject to rapid and significant technological
change. Our competitors in the United States and elsewhere are
numerous and include, among others, major multinational
pharmaceutical and chemical companies, specialized biotechnology
firms and universities and other research institutions.
The following products may compete with polymer platinum
(AP5280) and DACH platinum (AP5346):
* Cisplatin, marketed by Bristol-Myers-Squibb, the originator of
the drug, and several generic manufacturers;
* Carboplatin, marketed exclusively by Bristol-Myers-Squibb in
the US; and
* Oxaliplatin, marketed exclusively by Sanofi-Synthelabo.
The following companies are working on therapies and
formulations that may be competitive with our polymer platinum
(AP5280) and DACH platinum (AP5346):
* Antigenics is developing liposomal formulations; and
* Ameican Pharmaceutical Partners, Cell Therapeutics, Daiichi, Enzon
and Inhale are developing alternate drugs in combination with polymers
and other delivery drug systems.
The following products may compete with our Residerm(R) products:
* Benzamycin, marketed by a subsidiary of Aventis;
* Cleocin-T and a generic topical clindamycin, marketed by
Pharmacia;
* Benzac, marketed by a subsidiary of L'Oreal; and
* Triaz, marketed by Medicis Pharmaceutical Corp.
Technology and prescription steroids such as Kenalog in OraBase,
developed by Bristol-Myers Squibb, may compete with our
commercialized Aphthasol(R) product. OTC products including
Orajel - Del Laboratories and Anbesol - Wyeth Consumer
Healthcare also compete in the aphthous ulcer market.
Companies working on therapies and formulations that may be
competitive with our vitamin mediated drug delivery system are
Bristol-Myers-Squibb, Centocor (acquired by Johnson & Johnson),
GlaxoSmithKline, Imclone and Xoma which are developing targeted
monoclonal antibody therapy.
Aesgen, Amgen, CuraGen, RxKinetics and Sinclair are developing products
to treat mucositis that may compete with our mucoadhesive liquid
technology.
Emisphere Technologies, Inc., Biovail Corporation, CIMA Labs,
Inc., Depomed Inc. and Flamel Technologies are developing
products which compete with our oral drug delivery system.
Many of these competitors have and employ greater financial and
other resources, including
9
larger research and development staffs and more effective marketing
and manufacturing organizations, than us or our collaborative partners.
As a result, our competitors may successfully develop technologies
and drugs that are more effective or less costly than any that
we are developing or which would render our technology and
future products obsolete and noncompetitive.
In addition, some of our competitors have greater experience
than we do in conducting preclinical and clinical trials and
obtaining FDA and other regulatory approvals. Accordingly, our
competitors may succeed in obtaining FDA or other regulatory
approvals for drug candidates more rapidly than we do. Companies
that complete clinical trials, obtain required regulatory agency
approvals and commence commercial sale of their drugs before
their competitors may achieve a significant competitive
advantage. Drugs resulting from our research and development
efforts or from our joint efforts with collaborative partners
therefore may not be commercially competitive with our
competitors' existing products or products under development.
Our ability to successfully develop and commercialize our drug
candidates will substantially depend upon the availability of
reimbursement funds for the costs of the resulting drugs and
related treatments.
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The successful commercialization of, and the interest of
potential collaborative partners to invest in the development of
our drug candidates, may depend substantially upon reimbursement
of the costs of the resulting drugs and related treatments at
acceptable levels from government authorities, private health
insurers and other organizations, including health maintenance
organizations, or HMOs. To date, the costs of our marketed
products Aphthasol(R) and Zindaclin(R) generally have been
reimbursed at acceptable levels, however, the amount of such
reimbursement in the United States or elsewhere may be decreased
in the future or may be unavailable for any drugs that we may
develop in the future. Limited reimbursement for the cost of any
drugs that we develop may reduce the demand for, or price of
such drugs, which would hamper our ability to obtain
collaborative partners to commercialize our drugs, or to obtain
a sufficient financial return on our own manufacture and
commercialization of any future drugs.
The market may not accept any pharmaceutical products that we
successfully develop.
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The drugs that we are attempting to develop may compete with a
number of well-established drugs manufactured and marketed by
major pharmaceutical companies. The degree of market acceptance
of any drugs developed by us will depend on a number of factors,
including the establishment and demonstration of the clinical
efficacy and safety of our drug candidates, the potential
advantage of our drug candidates over existing therapies and the
reimbursement policies of government and third-party payers.
Physicians, patients or the medical community in general may not
accept or use any drugs that we may develop independently or
with our collaborative partners and if they do not, our business
could suffer.
In 1996, the 5% amlexanox paste product was approved for sale in
the United States. To date, the product sales have not been siginifcant.
On July 22, 2002, we acquired the rights to it from Block Drug
Company and we intend to re-launch it in the third quarter of
2004. The product has been approved in the UK and Canada but has
not been launched in any markets other than the United States.
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Trends toward managed health care and downward price pressures
on medical products and services may limit our ability to
profitably sell any drugs that we may develop.
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Lower prices for pharmaceutical products may result from:
* third-party payers' increasing challenges to the prices
charged for medical products and services;
* the trend toward managed health care in the United States and
the concurrent growth of HMOs and similar organizations that can
control or significantly influence the purchase of healthcare
services and products; and
* legislative proposals to reform healthcare or reduce
government insurance programs.
The cost containment measures that healthcare providers are
instituting, including practice protocols and guidelines and
clinical pathways, and the effect of any healthcare reform,
could limit our ability to profitably sell any drugs that we may
successfully develop. Moreover, any future legislation or
regulation, if any, relating to the healthcare industry or
third-party coverage and reimbursement, may cause our business
to suffer.
We may not be successful in protecting our intellectual property
and proprietary rights.
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Our success depends, in part, on our ability to obtain U.S. and
foreign patent protection for our drug candidates and processes,
preserve our trade secrets and operate our business without
infringing the proprietary rights of third parties. Legal
standards relating to the validity of patents covering
pharmaceutical and biotechnological inventions and the scope of
claims made under such patents are still developing and there is
no consistent policy regarding the breadth of claims allowed in
biotechnology patents. The patent position of a biotechnology
firm is highly uncertain and involves complex legal and factual
questions. We cannot assure you that any existing or future
patents issued to, or licensed by, us will not subsequently be
challenged, infringed upon, invalidated or circumvented by
others. As a result, although we, together with our
subsidiaries, are either the owner or licensee of technology to
26 U.S. patents and to 17 U.S. patent applications now pending,
and 9 European patents and 15 European patent applications, we
cannot assure you that any additional patents will issue from
any of the patent applications owned by, or licensed to, us.
Furthermore, any rights that we may have under issued patents
may not provide us with significant protection against
competitive products or otherwise be commercially viable.
Our patents for the following technologies expire in the years
and during the date ranges indicated below:
* 5% amlexanox paste in 2011
* Zindaclin(R) and Residerm(R) between 2007 and 2011
* OraDisc(TM) in 2020
* AP5280 in 2021
* AP5346 in 2021
* Mucoadhesive technology, patents are pending
* Vitamin mediated technology between 2004 and 2019
11
In addition, patents may have been granted to third parties or
may be granted covering products or processes that are necessary
or useful to the development of our drug candidates. If our drug
candidates or processes are found to infringe upon the patents
or otherwise impermissibly utilize the intellectual property of
others, our development, manufacture and sale of such drug
candidates could be severely restricted or prohibited. In such
event, we may be required to obtain licenses from third parties
to utilize the patents or proprietary rights of others. We
cannot assure you that we will be able to obtain such licenses
on acceptable terms, if at all. If we become involved in
litigation regarding our intellectual property rights or the
intellectual property rights of others, the potential cost of
such litigation, regardless of the strength of our legal
position, and the potential damages that we could be required to
pay could be substantial.
Our business could suffer if we lose the services of, or fail to
attract, key personnel.
- ----------------------------------------------------------------
We are highly dependent upon the efforts of our senior
management and scientific team, including our President and
Chief Executive Officer, Kerry Gray. The loss of the services of
one or more of these individuals could delay or prevent the
achievement of our research, development, marketing, or product
commercialization objectives. While we have employment
agreements with Mr. Gray and David Nowotnik, PhD our Senior Vice
President Research and Development, their employment may be
terminated by them or us at any time. Mr. Gray's and Dr.
Nowotnik's agreements expire within one year and are extendable
each year on the anniversary date. We do not have employment
contracts with our other key personnel. We do not maintain any
"key-man" insurance policies on any of our key employees and we
do not intend to obtain such insurance. In addition, due to the
specialized scientific nature of our business, we are highly
dependent upon our ability to attract and retain qualified
scientific and technical personnel. In view of the stage of our
development and our research and development programs, we have
restricted our hiring to research scientists and a small
administrative staff and we have made only limited investments
in manufacturing, production, marketing, product sales or
regulatory compliance resources. If we develop pharmaceutical
products that we will commercialize ourselves, however, we will
need to hire additional personnel skilled in the clinical
testing and regulatory compliance process and in marketing and
product sales. There is intense competition among major
pharmaceutical and chemical companies, specialized biotechnology
firms and universities and other research institutions for
qualified personnel in the areas of our activities, however, and
we may be unsuccessful in attracting and retaining these
personnel.
Ownership of our shares is concentrated, to some extent, in the
hands of a few investors which could limit the ability of our
other stockholders to influence the direction of the company.
- ---------------------------------------------------------------
Larry N. Feinberg (Oracle Partners LP, Oracle Institutional
Partners LP and Oracle Investment Management Inc.) and Heartland
Advisors, Inc. each beneficially owned approximately 12.1% and
11.7%, respectively, of our common stock as of August 13, 2004.
Accordingly, they collectively may have the ability to
significantly influence or determine the election of all of our
directors or the outcome of most corporate actions requiring
stockholder approval. They may exercise this ability in a manner
that advances their best interests and not necessarily those of
our other stockholders.
Provisions of our charter documents could discourage an
acquisition of our company that would benefit our stockholders
and may have the effect of entrenching, and making it difficult
to remove, management.
- ----------------------------------------------------------------
12
Provisions of our Certificate of Incorporation, By-laws and
Stockholders Rights Plan may make it more difficult for a third
party to acquire control of our company, even if a change in
control would benefit our stockholders. In particular, shares of
our preferred stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and
having such rights, privileges and preferences, as our Board of
Directors may determine, including, for example, rights to
convert into our common stock. The rights of the holders of our
common stock will be subject to, and may be adversely affected
by, the rights of the holders of any of our preferred stock that
may be issued in the future. The issuance of our preferred
stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to
acquire control of us. This could limit the price that certain
investors might be willing to pay in the future for shares of
our common stock and discourage these investors from acquiring
a majority of our common stock. Further, the existence of these
corporate governance provisions could have the effect of
entrenching management and making it more difficult to change
our management.
Substantial sales of our common stock could lower our stock
price.
- ------------------------------------------------------------
The market price for our common stock could drop as a result of
sales of a large number of our presently outstanding shares. All
of the 15,469,787 shares of our common stock that are
outstanding as of August 13, 2004, are unrestricted and freely
tradable or tradable pursuant to a resale registration statement
or under Rule 144 of the Securities Act.
ITEM 1 FINANCIAL STATEMENTS
The response to this Item is submitted as a separate section of
this report.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain statements
that are forward-looking within the meaning of Section 27a of
the Securities Act of 1933 and that involve risks and
uncertainties, including, but not limited to the uncertainties
associated with research and development activities, clinical
trials, our ability to raise capital, the timing of and our
ability to achieve regulatory approvals, dependence on others to
market our products, collaborations, future cash flow, the
timing and receipt of licensing and milestone revenues, the
future success of our marketed products and products in
development, our ability to manufacture amlexanox products in
commercial quantities, our sales projections, and the sales
projections of our licensing partners, our ability to achieve
licensing milestones and other risks described below as well as
those discussed elsewhere in this Form 10-Q, our Annual Report
on Form 10-K as of December 31, 2003 and documents incorporated
by reference and other documents and other documents and reports
that we file periodically with the Securities and Exchange
Commission. Forward-looking statements contained in this Form
10-Q include, but are not limited to our plan to complete full
scale production of and to re-launch Aphthasol(R) in the United
States in the third quarter of 2004, our planned start of a
Phase III trial in the United States for our mucoadhesive liquid
technology and our net cash burn rate for the next twelve months
to be approximately $400,000 per month.
13
OVERVIEW
We are an emerging pharmaceutical company focused on developing
both novel low development risk product candidates and
technologies with longer-term major product opportunities. We
are a Delaware corporation.
Together with our subsidiaries, we have proprietary patents or
rights to eight drug delivery technology platforms:
* synthetic polymer targeted delivery,
* vitamin mediated targeted delivery,
* vitamin mediated oral delivery,
* bioerodible hydrogel technology,
* erodible mucoadhesive oral film technology,
* hydrogel particle aggregate technology,
* Residerm(R) topical delivery and
* carbohydrate targeting technology.
In addition, we plan to re-introduce Aphthasol(R) into United
States market, which is the first FDA approved product for the
treatment of canker sores. We are developing new formulations
and delivery forms of amlexanox, including mucoadhesive disc
delivery.
Also, Strakan Limited, our United Kingdom partner, uses our
patented Residerm(R) technology to produce and sell zinc
clindamycin for the treatment of acne. Strakan began marketing
zinc clindamycin in the United Kingdom under the trade name
Zindaclin(R) in March 2002. The process to achieve marketing
authorization for Zindaclin(R) throughout Europe has been
initiated, with approvals in eight European Union countries to
date and activities ongoing to expand approval throughout the
European Union.
Since our inception, we have devoted our resources primarily to
fund our research and development programs. We have been
unprofitable since inception and to date have received limited
revenues from the sale of products. We cannot assure you that we
will be able to generate sufficient product revenues to attain
profitability on a sustained basis or at all. We expect to incur
losses for the next several years as we continue to invest in
product research and development, preclinical studies, clinical
trials and regulatory compliance. As of June 30, 2004, our
accumulated deficit was $59,134,000, of which $8,894,000 was the
result of the write-off of excess purchase price.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through private sales of
common stock and convertible notes and our principal source of
liquidity is cash and cash equivalents. Contract research
payments, licensing fees and milestone payments from corporate
alliances and mergers have also provided funding for operations.
As of June 30, 2004 our cash and cash equivalents were
$7,117,000 and our working capital was $5,753,000. Our working
capital at June 30, 2004 represented an increase of $4,547,000
as compared to our working capital as of December 31, 2003 of
$1,206,000. The increase in working capital was due to a private
placement of common stock and warrants raising $9.1 million of
net proceeds offset by the loss from operations for the six
months ended June 30, 2004.
14
We have generally incurred negative cash flows from operations
since inception, and have expended, and expect to continue to
expend in the future, substantial funds to complete our planned
product development efforts. Since inception, our expenses have
significantly exceeded revenues, resulting in an accumulated
deficit as of June 30, 2004 of $59,134,000. We expect that our
existing capital resources will be adequate to fund our current
level of operations through the end of 2005 excluding debt
service. We cannot assure you that we will ever be able to
generate significant product revenue or achieve or sustain
profitability.
We will expend substantial funds to conduct research and
development programs, preclinical studies and clinical trials of
potential products, including research and development with
respect to our acquired and developed technology. Our future
capital requirements and adequacy of available funds will depend
on many factors, including:
* the successful commercialization of amlexanox and Zindaclin(R);
* the ability to establish and maintain collaborative
arrangements with corporate partners for the research,
development and commercialization of products;
* continued scientific progress in our research and development programs;
* the magnitude, scope and results of preclinical testing and clinical trials;
* the costs involved in filing, prosecuting and enforcing patent claims;
* the costs involved in conducting clinical trials;
* competing technological developments;
* the cost of manufacturing and scale-up;
* the ability to establish and maintain effective
commercialization arrangements and activities; and
* successful regulatory filings.
We have issued an aggregate of $13,530,000 of convertible notes,
which are due in two parts -$8,030,000 is due on September 13,
2005 and $5,500,000 is due on September 13, 2007. The notes
which bear interest at a rate of 7.7% per annum with $1,042,000
of interest due annually on each September 13, may convert to
common stock at a conversion price of $5.50 per share. Should
the holders of the notes not elect to convert them to common
stock, or if we are not able to force the conversion of the
notes by their terms, we must repay the amounts on the dates
described herein. We currently do not have the funds available
to repay the convertible notes. We may need to restructure the
terms of the notes as we near the due date for repayment. Any
such restructuring could have a significant impact on our
capital structure and liquidity.
SECOND QUARTER 2004 COMPARED TO SECOND QUARTER 2003
Our licensing revenue in the second quarter of 2004 was $44,000,
as compared to licensing revenue of $447,000 in same quarter of
2003, a decrease of $403,000 due to one time initial licensing
fees received in 2003. We recognize licensing revenue over the
period of the performance obligation under our licensing
agreements. Licensing revenue recognized in both 2004 and 2003
was from several agreements, including agreements related to
various amlexanox projects and Residerm(R).
15
There were no product sales of Aphthasol(R) in the second quarter
of 2004 due to a supply interruption, as compared to $229,000 in
sales in the second quarter of 2003. Currently, new supplies are
in the manufacturing process and sales are expected to commence in
the third quarter of 2004.
Royalty income in the second quarter of 2004 was $24,000, as
compared to $7,000 in the first quarter of 2003, and increase of $17,000.
Total research spending for the second quarter of 2004 was
$1,281,000, as compared to $1,497,000 for the same period in
2003, a decrease of $216,000. The decrease in expenses was
primarily the result of lower clinical costs ($277,000) for our
OraDisc(TM) clinical trial which was completed in 2003 and is
currently under FDA review and ($83,000) for the AP5280 and
AP5346 polymer platinate clinical trials of which the AP5280
trial was competed in 2003 and of which the AP5346 trial is still ongoing.
The decrease in expenses was partially offset by:
* higher production and testing costs for Aphthasol(R) which is
currently in production ($86,000); and
* higher expenses at our Australian laboratory ($44,000); and
* other net decreases ($14,000).
Our cost of product sales was $31,000 in the second quarter of
2004, as compared to $104,000 in the second quarter of 2003, a
decrease of $73,000. The decrease in cost of product sales was
due to the amlexanox supply interruption.
Total general and administrative expenses were $772,000 for the
second quarter of 2004, an increase of $142,000 as compared to
the same period in 2003. The increase in spending was due
primarily to the following:
* higher preofessional expenses ($169,000) principally due to increased
legal fees associated with compliance with the Sarbanes-Oxley
Act, new contracts and legal proceedings;
* higher business consulting expenses for new business
development activities ($32,000);
* offset by lower patent expenses ($51,000); and
* other net decreases ($8,000).
Depreciation and amortization was $160,000 for the second
quarter of 2004 as compared to $146,000 for the same period in
2003 reflecting an increase of $14,000. The increase in
depreciation and amortization was due to increased depreciation
resulting from the acquisition of additional capital assets.
Total operating expenses in the second quarter of 2004 were
$2,244,000 as compared to total operating expenses of $2,377,000
for the same period in 2003, a decrease of $133,000.
Loss from operations in the second quarter of 2004 was
$2,176,000 as compared to a loss of $1,694,000 for the same
period in 2003, an increased loss of $482,000.
16
Interest and miscellaneous income was $35,000 for the second
quarter of 2004 as compared to $2,334,000 for the same period in
2003, a decrease of $2,299,000. The decrease in miscellaneous
income ($2,280,000) was due to a one time settlement agreement
with Block Drug Company in 2003. The decrease in interest income
was due to lower interest rates in 2004 as compared with 2003.
Interest and other expense was $412,000 for the second quarter
of 2004 as compared to $324,000 for the same period in 2004, an
increase of $88,000 dur principally to the write-down of an
investment in a publically traded stock associated with a
product development agreement.
Net loss in the second quarter of 2004 was $2,553,000, or a
$0.17 basic and diluted loss per common share, compared with net
income of $316,000, or a $0.02 basic and diluted income per
common share for the same period in 2003, a decrease of
$2,869,000.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Our licensing revenue in the first six months of 2004 was
$48,000, as compared to licensing revenue of $533,000 in the
same period of 2003, a decrease of $485,000 due to one time
initial licensing fess received in 2003. We recognize licensing
revenue over the period of the performance obligation under our
licensing agreements. Licensing revenue recognized in both 2004
and 2003 was from several agreements including agreements
related to various amlexanox projects and ResiDerm(R).
There were no product sales of Aphthasol(R) in the first six
months of 2004 due to a supply interruption, as compared to
$532,000 in sales in the same period of 2003. Currently, new
supplies are in the manufacturing process.
Royalty income for the first six months of 2004 was $40,000, as
compared to $11,000 in the same period of 2003, an increase of $29,000.
Total research spending for the first six months of 2004 was
$2,425,000, as compared to $3,294,000 for the same period in
2003, a decrease of $869,000. The decrease in expenses was the
result of:
* lower clinical costs for our OraDisc(TM) A clinical trial
($698,000) which was completed in 2003 and is currently under FDA
review and ($472,000) for the AP5280 and AP5346 polymer
platinate clinical trials of which the AP5280 trial was
completed in 2003 and of which the AP5346 trial is still ongoing; and
* other net decreases ($87,000).
The decrease in expenses was partially offset by:
* higher product development costs ($163,000) for products made
for our clinical trials and product testing;
* higher scientific salary costs ($114,000) principally due to
the hiring of additional employees; and
* higher expenses associated with our Australian laboratory ($111,000).
Our cost of product sales was $57,000 for the first six months
of 2004, as compared to $213,000 in
17
the same period of 2003, a decrease of $156,000. The decrease in cost of
product sales was due to the amlexanox supply interruption.
Total general and administrative expenses were $1,526,000 for
the first six months of 2004, an increase of $359,000 as
compared to the same period in 2003. The increase in general and
administrative expenses was due primarily to the following:
* higher professional expenses ($271,000) principally due to increased
legal fees associated with compliance with the Sarbanes-Oxley
Act, new contracts and legal proceedings;
* higher business consulting expenses for new business
development activities ($61,000);
* higher patent expenses ($12,000); and
* other net increases ($15,000).
Depreciation and amortization was $320,000 for the first six
months of 2004 as compared to $290,000 for the same period in
2003 reflecting an increase of $30,000. The increase in
depreciation and amortization was due to increased depreciation
resulting from the acquisition of additional capital assets.
Total operating expenses in the first six months of 2004 were
$4,328,000 as compared to total operating expenses of $4,964,000
for the same period in 2003, a decrease of $636,000.
Loss from operations in the first six months of 2004 was
$4,240,000 as compared to a loss of $3,888,000 for the same
period in 2003, an increase of $352,000.
Interest and miscellaneous income was $68,000 for the first six
months of 2004 as compared to $2,432,000 for the same period in
2003, a decrease of $2,500,000. The decrease in miscellaneous
income was due to a one-time settlement agreement with Block
Drug Company in 2003. The decrease in interest income was due to
lower interest rates in 2004 as compared with 2003.
Interest and other expense was $732,000 for the first six months
of 2004 as compared to $639,000 for the same period in 2003, an
increase of $93,000 due principally to the write-down of an
investment in a publicly traded stock associated with a
product development agreement.
Net loss in the first six months of 2004 was $4,904,000, or a
$0.33 basic and diluted loss per common share, compared with a
loss of $2,095,000, or a $0.16 basic and diluted loss per common
share for the same period in 2003, a decrease of $2,809,000.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our excess cash and short-term investments in
certificates of deposit, corporate securities with high quality
ratings, and U.S. government securities. These investments are
not held for trading or other speculative purposes. These
financial investment securities all mature in 2004 and 2005 and
their estimated fair value approximates cost. Changes in
interest rates affect the investment income we earn on our
investments and, therefore, impact our cash flows and results of
operations. A hypothetical 50 basis point decrease in interest
rates would result in a decrease in annual interest income and
a corresponding increase in net loss of approximately $39,000.
The estimated effect assumes no changes in our short-term
investments at June 30,
18
2004. We do not believe that we are exposed to any other market risks, as
defined. We are not exposed to risks for changes in commodity prices, or
any other market risks.
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation Of Disclosure Controls And Procedures: We
maintain disclosure controls and procedures designed to ensure
that we are able to collect the information that we are required
to disclose in the reports we file with the Securities and
Exchange Commission, or the SEC, and to process, summarize and
disclose this information within the time periods specified in
the rules of the SEC. Based on their evaluation of our
disclosure controls and procedures (defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of June 30, 2004, our Chief
Executive and Chief Financial Officers have concluded that such
disclosure controls and procedures are effective to ensure that
information required to be disclosed in our periodic reports
filed under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified by the SEC's
rules and regulations.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any within the Company
have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of
controls also is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under
all potential future conditions; over time, control may become
inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate.
While we believe that our disclosure controls and procedures are
effective to provide a reasonable assurance of reaching our
desired disclosure controls objective, because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
(b) Changes In Internal Controls: No changes in our internal
controls over financial reporting occurred during the quarter
ended June 30, 2004 that have materially affected, or are
reasonably likely to materially affect, our internal controls
over financial reporting.
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
William Hall ("Hall") filed suit against Access, and certain
officers of Access, in Dallas County, Texas, District Court, on
or about February 7, 2003. Although the claims in Hall's
complaint were not clearly delineated, he appeared to bring
claims for fraud, conspiracy, and theft against all defendants,
and a claim for breach of contract against Access. Each of the
allegations related to an allegedly unfulfilled contractual
obligation to deliver to Hall 45,000 warrants to purchase our
stock. Hall alleged in his complaint and in a subsequent letter
that the warrants, had they been delivered, could have been
worth as much as $540,000. He sought as damages this amount, his
attorney's fees, and an unstated amount of punitive damages.
We answered Hall's complaint on March 3, 2003, and brought
counterclaims against him relating to certain alleged
misrepresentations, his failure to perform certain obligations
to Access, and his
19
interference with the our right to enjoy certain contractual benefits.
All claims were dismissed with prejudice on June 22, 2004.
Mipharm S.p.A. ("Mipharm") filed an arbitration against Access
in the International Court of Arbitration of the International
Chamber of Commerce (the "ICC") on or about October 23, 2003.
Mipharm claims that we breached certain license agreements that
existed between Mipharm and Access by failing to (1) make
commercially reasonable efforts to obtain European Union
regulatory approval for certain pharmaceutical products and (2)
inform Mipharm of all significant news and actions relating to
the approval process. Mipharm seeks damages of approximately
$350,000, and an order compelling us to perform pursuant to the
license agreements.
We answered Mipharm's arbitration demand and simultaneously
asserted counterclaims against Mipharm. In the counterclaims, we
allege, inter alia, that Mipharm has itself breached the license
agreements and that Mipharm is pursuing claims that it had
previously agreed to release in exchange for valuable
consideration. We believe that the claims in Mipharm's complaint
are without merit and intend to be vigorous in both our defense
of Mipharm's claims and in the pursuit of our counterclaims.
On January 16, 2004, Mipharm commenced a related lawsuit in
Texas Federal Court, in which it alleged that one of Access's
counterclaims should have been brought before a different
arbitral body. The Texas Court dismissed that action on April
20, 2004. On or about May 4, 2004, Mipharm filed a motion
seeking reconsideration of the Court's decision or,
alternatively, for leave to file an amended complaint, which we
opposed. On or about July 23, 2004, the Texas court denied
Mipharm's motion and upheld the dismissal of the Texas action.
Mipharm has now filed a Notice of Appeal of the Texas Federal
Court judgment. We believe that Mipharm's appeal would be
frivolous and intend to be vigorous in our defense.
Del Pharmaceuticals, Inc. ("Del"), filed a complaint against
Access on or about March 12, 2004, in the Court of Chancery in
New Castle County, Delaware. The complaint purports to state
claims for specific performance, breach of contract, unjust
enrichment, promissory estoppel, breach of a duty of good faith,
and misappropriation of trade secrets. Each of the allegations
relates to allegedly unfulfilled or breached contractual
obligations that Del claims arose from two confidentiality
agreements and from negotiations related to a proposed license
and supply agreement. The complaint seeks equitable relief and
money damages. We filed a motion to dismiss all counts on
several grounds on April 5, 2004. Del filed an opposition on
June 14, 2004. On July 16, 2004, the court granted our motion to
dismiss all of Del's claims and entered judgment in our favor.
On May 11, 2004, we filed a complaint against Del in the Supreme
Court of the State of New York, County of Nassau, alleging
breach of contract. Del counterclaimed on June 25, 2004,
bringing the same claims that it had brought in the Delaware
action. On August 6, the parties filed a stipulation of
dismissal of all claims with the court.
ITEM 2 CHANGES IN SECURITIES
None
20
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 19, 2004 in
New York, NY. At that meeting the following matters were
submitted to a vote of the stockholders of record. The proposals
were approved by the stockholders, as follows:
Three directors were re-elected for three year terms with the
following votes:
* Herbert H. McDade, Jr.; 11,486,182- For; and 353,537- Withheld
Authority
* Kerry P. Gray - 11,764,184- For; and 75,535- Withheld Authority
* J. Michael Flinn; 11,764,183- For; and 75,536- Withheld Authority
The terms of office as a director of Access of each of Stuart M.
Duty, Stephen B. Howell, Max Link, and John J. Meakem, Jr.
continued after the meeting.
A proposal to ratify the appointment of Grant Thornton LLP as
independent certified public accountants for the Company for the
fiscal year ending December 31, 2004 was approved with
11,813,501- For; 10,513- Against; and 15,705- Abstain.
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
31.1 Certification of Chief Executive Officer of Access
Pharmaceuticals, Inc. pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer of Access
Pharmaceuticals, Inc. pursuant to Rule 13a-14(a)/15d-14(a)
32.1* Certification of Chief Executive Officer of Access
Pharmaceuticals, Inc. pursuant to 18 U.S.C. Section 1350
32.2* Certification of Chief Financial Officer of Access
Pharmaceuticals, Inc. pursuant to 18 U.S.C. Section 1350
______________
* This exhibit shall not be deemed "filed" for purposes of
Section 18 of the Securities Exchange Act of 1934 or otherwise
subject to the liabilities of that Section, nor shall it be
deemed incorporated by reference in any filings under the
Securities Act of 1933 or the Securities and Exchange Act of
1934, whether made before or after the date hereof and
irrespective of any general incorporation language
21
in any filings.
Reports on Form 8-K:
On May 17, 2004, we filed a Current Report on Form 8-K (Item 9)
furnishing a press release announcing our financial results for
the first quarter ended March 31, 2004.
22
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ACCESS PHARMACEUTICALS, INC.
Date: August 16, 2004 By: /s/ Kerry P. Gray
--------------- -------------------
Kerry P. Gray
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 16, 2004 By: /s/ Stephen B. Thompson
--------------- -------------------------
Stephen B. Thompson
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
23
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2004 December 31, 2003
-------------- --------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ 6,148,000 $ 727,000
Short term investments, at cost 969,000 1,860,000
Accounts receivable 1,128,000 1,149,000
Inventory 108,000 108,000
Prepaid expenses and other current assets 938,000 975,000
-------------- --------------
Total current assets 9,291,000 4,819,000
Property and equipment, net 981,000 1,004,000
Debt issuance costs, net 221,000 313,000
Patents, net 2,484,000 2,652,000
Licenses, net 325,000 367,000
Goodwill, net 1,868,000 1,868,000
Other assets 630,000 788,000
-------------- --------------
Total assets $15,800,000 $11,811,000
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued expenses $ 1,194,000 $ 1,780,000
Accrued interest payable 832,000 311,000
Deferred revenues 1,177,000 1,184,000
Current portion of note payable and
other future obligations 335,000 338,000
-------------- --------------
Total current liabilities 3,538,000 3,613,000
Long-term obligations for purchased patents - 158,000
Note payable, net of current portion 247,000 335,000
Convertible notes 13,530,000 13,530,000
-------------- --------------
Total liabilities 17,315,000 17,636,000
Commitments and contingencies - -
Stockholders' equity
Preferred stock - $.01 par value;
authorized 2,000,000 shares;
none issued or outstanding - -
Common stock - $.01 par value;
authorized 50,000,000 shares;
issued, 15,465,215 at June 30, 2004
and 13,397,034 at December 31, 2003 155,000 134,000
Additional paid-in capital 58,884,000 45,597,000
Notes receivable from stockholders (1,045,000) (1,045,000)
Unamortized value of restricted
stock grants (370,000) (294,000)
Treasury stock, at cost - 819 shares (4,000) (4,000)
Accumulated other comprehensive loss (1,000) 14,000
Accumulated deficit (59,134,000) (54,227,000)
-------------- --------------
Total stockholders' deficit (1,515,000) (5,825,000)
-------------- --------------
Total liabilities and stockholders'
deficit $15,800,000 $11,811,000
============== ==============
The accompanying notes are an integral part of these statements.
24
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and
Comprehensive Loss
(unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues
Licensing revenues $ 44,000 $ 447,000 $ 48,000 $ 533,000
Product sales - 229,000 - 532,000
Royalty income 24,000 7,000 40,000 11,000
------------ ------------ ------------ ------------
Total revenues 68,000 683,000 88,000 1,076,000
Expenses
Research and development 1,281,000 1,497,000 2,425,000 3,294,000
Cost of product sales 31,000 104,000 57,000 213,000
General and administrative 772,000 630,000 1,526,000 1,167,000
Depreciation and amortization 160,000 146,000 320,000 290,000
------------ ------------ ------------ ------------
Total expenses 2,244,000 2,377,000 4,328,000 4,964,000
------------ ------------ ------------ ------------
Loss from operations (2,176,000) (1,694,000) (4,240,000) (3,888,000)
Other income (expense)
Interest and miscellaneous
income 35,000 2,334,000 68,000 2,432,000
Interest and other expense (412,000) (324,000) (732,000) (639,000)
------------ ------------ ----------- -------------
(377,000) 2,010,000 (664,000) 1,793,000
------------ ------------ ----------- -------------
Net income (loss) $(2,553,000) $316,000 $(4,904,000) $(2,095,000)
============ ============ =========== =============
Basic and diluted income
(loss) per common share $(0.17) $0.02 $(0.33) $(0.16)
============ ============ =========== =============
Weighted average basic
common shares outstanding 15,449,603 13,218,747 14,824,938 13,209,375
============ ============ =========== =============
Weighted average diluted
common shares outstanding 15,449,603 18,965,077 14,824,938 13,209,375
============ ============ =========== =============
Net income (loss) $(2,553,000) $ 316,000 $(4,904,000) $(2,095,000)
Other comprehensive income (loss)
Foreign currency translation
adjustment (25,000) 8,000 (15,000) 3,000
------------ ------------ ------------ ------------
Comprehensive income (loss) $(2,578,000) $324,000 $(4,919,000) $(2,092,000)
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
25
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six Months ended June 30,
-----------------------------
2004 2003
-------------- --------------
Cash flows from operating activities:
Net loss $ (4,904,000) $ (2,095,000)
Adjustments to reconcile net loss to cash used
in operating activities:
Warrants issued in payment of consulting expenses 42,000 30,000
Amortization of restricted stock grants 60,000 45,000
Depreciation and amortization 320,000 291,000
Amortization of debt costs 92,000 92,000
Change in operating assets and liabilities:
Accounts receivable 21,000 180,000
Accrued interest receivable - 12,000
Inventory - 256,000
Prepaid expenses and other current assets 37,000 261,000
Other assets 158,000 56,000
Accounts payable and accrued expenses (586,000) (916,000)
Accrued interest payable 521,000 521,000
Deferred revenues (7,000) (207,000)
-------------- --------------
Net cash used in operating activities (4,246,000) (1,474,000)
-------------- --------------
Cash flows from investing activities:
Capital expenditures (87,000) (306,000)
Redemptions of short term investments and
certificates of deposit 891,000 4,151,000
-------------- --------------
Net cash provided by investing activities 804,000 3,845,000
-------------- --------------
Cash flows from financing activities:
Payments of notes payable and long-term
obligations (249,000) (717,000)
Proceeds from stock issuances, net of
costs of $647,000 9,130,000 189,000
-------------- --------------
Net cash provided by (used in) financing activities 8,881,000 (528,000)
-------------- --------------
Net increase in cash and cash equivalents 5,439,000 1,843,000
Effect of exchange rate changes on cash (18,000) 3,000
Cash and cash equivalents at beginning of period 727,000 1,444,000
-------------- --------------
Cash and cash equivalents at end of period $ 6,148,000 $ 3,290,000
============== ==============
Cash paid for interest $15,000 $18,000
Supplemental disclosure of noncash transactions
Assets acquired from Block Drug settlement - 244,000
Value of restricted stock grants 136,000 -
The accompanying notes are an integral part of these statements.
26
Access Pharmaceuticals, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2004 and 2003
(unaudited)
(1) Interim Financial Statements
The consolidated balance sheet as of June 30, 2004 and the
consolidated statements of operations and cash flows for the
three and six months ended June 30, 2004 and 2003 were prepared
by management without audit. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments,
except as otherwise disclosed, necessary for the fair
presentation of the financial position, results of operations,
and changes in financial position for such periods, have been made.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
have been condensed or omitted. It is suggested that these
interim financial statements be read in conjunction with the
financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2003. The
results of operations for the period ended June 30, 2004 are not
necessarily indicative of the operating results which may be
expected for a full year. The consolidated balance sheet as of
December 31, 2003 contains financial information taken from the
audited financial statements as of that date.
(2) Intangible Assets
Intangible assets consist of the following (in thousands):
June 30, 2004 December 31, 2003
------------------------ ------------------------
Gross Gross
carrying Accumulated carrying Accumulated
value amortization value amortization
----------- ------------ ----------- ------------
Amortizable intangible assets
Patents $ 3,178 $ 830 $ 3,178 $ 526
Licenses 830 505 830 463
----------- ------------ ----------- ------------
Total $ 4,008 $ 1,199 $ 4,008 $ 989
27
Amortization expense related to intangible assets totaled
$105,000 and $106,000 for the three months ended June 30, 2004
and 2003, respectively and totaled $210,000 and $211,000 for the
six months ended June 30, 2004 and 2003, respectively. The aggregate
estimated amortization expense for intangible assets remaining
as of June 30, 2004 is as follows (in thousands):
2004 $ 211
2005 421
2006 421
2007 395
2008 370
Thereafter 991
--------
Total $ 2,809
========
(3) Stock-Based Compensation
The following table illustrates the effect on net loss and loss
per share if we had applied the fair value recognition
provisions of FASB Statement 123, Accounting for Stock-Based
Compensation, using assumptions described in Form 10-K, Note 1,
to our stock-based employee plans.
Three months ended June 30, Six months ended June 30,
------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income (loss)
as reported $(2,553,000) $ 316,000 $(4,904,000) $(2,095,000)
Deduct: Stock-based
employee compensation
expense determined
under fair value based
method (129,000) (309,000) (299,000) (604,000)
------------ ------------ ------------ ------------
Pro forma $(2,682,000) $ 7,000 $(5,203,000) $(2,699,000)
============ ============ ============ ============
Basic and diluted income
(loss) per share:
As reported $(0.17) $0.02 $(0.33) $(0.16)
Pro forma (0.17) 0.00 (0.35) (0.20)
The effect of our outstanding options and warrants are anti-
dilutive because we have a net loss. The fully diluted shares are"
Three months ended June 30, Six Months ended June 30,
------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Fully diluted shares 20,756,672 18,007,411 20,,132,027 17,998,039
28