News Column

ACCESS PHARMACEUTICALS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 14, 2014

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OVERVIEW

Access Pharmaceuticals, Inc. (together with our subsidiaries, "We," "Access" or the "Company") is a Delaware corporation. We are an emerging biopharmaceutical company focused on developing a range of pharmaceutical products primarily based upon our nanopolymer chemistry technologies and other drug delivery technologies. We currently have one marketed product licensed in the U.S., China and Korea. We also have additional products and platform technologies in various stages of development where we are seeking partners to continue development and/or to license the technology.

Marketed Product • MuGard® is our marketed product for the management of oral mucositis, a frequent side-effect of cancer therapy for which there is no established treatment. The market for mucositis treatment is estimated to be in excess of $1.0 billion world-wide. MuGard, a proprietary nanopolymer formulation, has received marketing allowance in the U.S. from the FDA. We launched MuGard in the U.S. in 2010. On June 6, 2013 we entered into an exclusive license agreement with AMAG Pharmaceuticals, Inc., or AMAG, related to the commercialization of MuGard in the U.S. and its territories. Under the terms of the licensing agreement we received an upfront licensing fee of $3.3 million and a tiered, double-digit royalty on net sales of MuGard in the licensed territory. We receive quarterly royalty payments from AMAG.

We licensed MuGard to RHEI Pharmaceuticals, or RHEI for commercialization in China. Our China partners have received an acceptance letter from the State Food and Drug Administration of the People's Republic of China, which provides marketing approval in China. MuGard has been manufactured in the U.S. and shipped to China for sale. Our partners have also licensed MuGard in other Southeast Asian countries.

On March 11, 2014, we announced we had entered into an exclusive license agreement with Hanmi Pharmaceutical Co. Ltd., or Hanmi, (KSE: 128940) related to MuGard commercialization in South Korea.

On August 7, 2014, we announced that we entered into an exclusive license agreement with Norgine B.V., for the commercialization of MuGard in Europe. Under the terms of the licensing agreement we will receive up to $10 million in milestone payments and an escalating double digit royalty on the net sales of MuGard in the licensed territories. Norgine will develop, manufacture and commercialize MuGard in the European Union, Switzerland, Norway, Iceland and Lichtenstein. Norgine anticipates launching MuGard in 2015.

We are actively seeking partners to license MuGard in other territories.

Product Candidates • ProctiGard™ is our product being developed for the management of radiation proctitis, a frequent side effect of radiation treatment to the pelvic region. Radiation proctitis, or RP, is the inflammation and damage to the lower portion of the colon after exposure to x-rays or ionizing radiation as part of radiation therapy. RP is most common after treatments for cancer, such as cervical, colon and prostate cancer. RP can be acute, occurring within weeks of initiation of therapy, or can occur months or years after treatment. Access intends to develop ProctiGard in a manner similar to the development of MuGard, which may include confirmatory clinical trials, with the objective of commercialization in collaboration with marketing partners globally.

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On July 22, 2014, we announced that we had received 510(K) marketing clearance from the FDA for ProctiGard™.

• LexaGard™, is our proprietary formulation of the generic pharmaceutical agent, amlexanox, a drug with known anti-inflammatory and anti-allergic properties that has been approved and used in the US, Japan and other countries. Access is positioning LexaGard for treatment of conditions of the upper gastrointestinal tract including Barrett's esophagus and esophagitis.

• We are also working on additional products using our proprietary mucoadhesive hydrogel technology as a mucoprotectant and/or delivery vehicle.

• CobOral™ is our proprietary preclinical nanopolymer oral drug delivery technology based on the natural vitamin B12 oral uptake mechanism. We have developed product candidates based upon the CobOral delivery technology, and have conducted sponsored product development for oral delivery of a number of peptides and RNAi therapeutics. The CobOral platform technology is available for partnering.

• CobaCyte™ mediated targeted delivery is a preclinical technology that makes use of the fact that cell surface receptors for vitamins such as B12 are often overexpressed by certain cells including many cancers. This technology uses nanopolymer constructs to deliver more anti-cancer drug to tumors while protecting normal tissues. The CobaCyte platform technology is available for partnering. Access Drug Portfolio Compound Originator Technology Indication Clinical Stage (1) MuGard® Access Mucoadhesive Mucositis - Launched in U.S. liquid - Licensed to AMAG - U.S. rights - Licensed to RHEI - China rights - Licensed to Hanmi - South Korea rights - Licensed to Norgine - European Union rights ProctiGard™ Access Mucoadhesive Radiation Received 510(K) hydrogel proctitis clearance from FDA technology LexaGard™ Access Mucoadhesive Inflammatory Filings being hydrogel and ulcerative reviewed at FDA technology conditions of the esophagus Mucoadhesive hydrogel Access Mucoadhesive Various Various stages technology hydrogel technology CobOral™ Delivery Access Cobalamin Various Pre-clinical System CobaCyte™-Targeted Access Cobalamin Anti-tumor Pre-clinical Therapeutics __________________________



(1) For more information, see "Government Regulation" in our Annual Report on

Form 10-K for description for description of clinical stages.

RECENT EVENTS

On August 7, 2014, we announced that we entered into an exclusive license agreement with Norgine B.V., for the commercialization of MuGard in Europe. Under the terms of the licensing

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agreement we will receive up to $10 million in milestone payments and an escalating double digit royalty on the net sales of MuGard in the licensed territories. Norgine will develop, manufacture and commercialize MuGard in the European Union, Switzerland, Norway, Iceland and Lichtenstein. Norgine anticipates launching MuGard in 2015.

On July 22, 2014, we announced that we had received 510(K) marketing clearance from the FDA for ProctiGard™, our novel treatment for symptomatic management of rectal mucositis.

On July 8, 2014, we announced we received notification from the Hong Kong Patent Office that a patent for MuGard® has been granted.

On April 8, 2014, we provided an update on our new formulation of the anti-inflammatory drug amlexanox, called LexaGard™, for the treatment of inflammatory and ulcerative conditions of the esophagus. By formulating amlexanox in our proprietary mucoadhesive polymer hydrogel delivery system, we have a patented and protectable formulation of this pharmaceutical active.

On April 1, 2014, we provided investors with a strategic update on our programs and plans for our proprietary hydrogel technology. Our patented technology surrounds a unique aqueous pseudoplastic liquid with a defined viscosity range, which is beneficial to the treatment of disorders of mucosal tissue, and includes the ability to act as a delivery system for a variety of active agents, including drugs.

On March 26, 2014, we announced that we are leveraging our proprietary CobaCyte™ drug delivery platform technology to create new formulations of active pharmaceutical agents. We submitted an additional patent application to protect improvements in the technology and expand applications and are actively seeking development partners.

On March 21, 2014, we announced we have advanced development of a new proprietary product, called ProctiGard™, for the treatment of radiation proctitis. Radiation proctitis ("RP") is a significant unmet medical need, with no well-established standard of care. It is estimated that there are in excess of 250,000 new cases of prostate, cervical, rectal, testicular, bladder and endometrial cancer diagnosed each year. Approximately 50% of these patients require radiation therapy, and roughly 75% of patients undergoing pelvic irradiation experience radiation proctitis. We are actively seeking marketing partners globally for ProctiGard™.

On March 11, 2014, we announced we had entered into an exclusive license agreement with Hanmi related to MuGard commercialization in South Korea. Under the terms of the agreement, we received an upfront licensing fee and double digit royalties on sales of MuGard in the licensed territory.

On February 18, 2014, we announced the online publication of the final results of our post-approval marketing study of MuGard in Cancer, the journal of the American Cancer Society. The publication, entitled "Multi-Institutional, Randomized, Double-Blind, Placebo-Controlled Trial to Assess the Efficacy of a Mucoadhesive Hydrogel (MuGard) in Mitigating Oral Mucositis Symptoms in Patients Being Treated With Chemoradiation Therapy for Cancers of the Head and Neck" is available at http://onlinelibrary.wiley.com/doi/10.1002/cncr.28553/full. The publication discusses the results of this post-marketing clinical trial, providing further evidence of the efficacy of MuGard in controlling symptoms caused by oral mucositis in 120 patients receiving chemoradiation therapy for the treatment of cancers of the head and neck.

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LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations primarily through private sales of common stock, preferred stock, convertible notes and through licensing agreements. Our principal source of liquidity is cash and cash equivalents. Licensing payments and royalty revenues provided limited funding for operations during the period ended June 30, 2014. As of June 30, 2014, our cash and cash equivalents were $55,000 and our net cash expenditures for the period ended June 30, 2014, was approximately $65,000 per month. As of June 30, 2014, our working capital deficit was $10,969,000. Our working capital deficit at June 30, 2014 represented an increase of $2,583,000 as compared to our working capital deficit as of December 31, 2013 of $8,386,000. The increase in the working capital deficit at June 30, 2014 reflects six months of net operating costs and changes in current assets and liabilities, partially offset by the license fee from Hanmi.

As of August 14, 2014, we did not have enough capital to achieve our long-term goals. If we raise additional funds by selling equity securities, the relative equity ownership of our existing investors will be diluted and the new investors could obtain terms more favorable than previous investors. A failure to obtain necessary additional capital in the future could jeopardize our operations and our ability to continue as a going concern.

We have 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, 2014 of $281,238,000. We expect that our capital resources, revenues from MuGard sales and expected receipts due under our license agreements will be adequate to fund our current level of operations into the first quarter of 2015. However, our ability to fund operations over this time could change significantly depending upon changes to future operational funding obligations or capital expenditures. As a result, we may be required to seek additional financing sources within the next twelve months. We cannot provide assurance that we will ever be able to generate sufficient product revenue or royalty revenue to achieve profitability on a sustained basis or at all.

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 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.

SECOND QUARTER 2014 COMPARED TO SECOND QUARTER 2013

Product sales of MuGard in the United States totaled $380,000 for the second quarter of 2013. There were no Access sales of MuGard in 2014 since MuGard was licensed to AMAG on June 6, 2013. Access is currently receiving royalties from AMAG for sale of MuGard.

Our licensing revenue for the second quarter of 2014 was $150,000 as compared to $84,000 for the same period of 2013, an increase of $66,000. We recognize licensing revenue over the period of the performance obligation under our licensing agreements.

We recorded royalty revenue for MuGard of $97,000 for second quarter of 2014 and $3,000 royalties in the same period of 2013. We licensed MuGard to AMAG on June 6, 2013 and currently receive quarterly royalties from AMAG under our agreement.

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Total research and development spending for the second quarter of 2014 was $81,000, as compared to $197,000 for the same period of 2013, a decrease of $116,000. The decrease in expenses was primarily due to:

· decreased clinical development with trials for MuGard ($55,000);

· decreased salary and related costs ($78,000) from reduced scientific staff;

· offset by increased scientific consulting expense ($76,000); and

· other net decreases in research spending ($59,000).

Product costs for MuGard in the United States were $53,000 for the second quarter of 2013. There were no product costs in 2014 due to no Access sales of MuGard.

Total selling, general and administrative expenses were $868,000 for the second quarter of 2014, as compared to $2,137,000 for the same period of 2013, a decrease of $1,269,000. The decrease in expenses was due primarily to the following:

· decreased net MuGard product selling expenses ($485,000) which includes an

increase of $125,000 of MuGard product returns;

· decreased legal fees ($354,000);

· decreased salary and related costs ($263,000) from reduced general and

administrative staff; and

· net decrease other general and administrative expenses ($167,000).

Depreciation and amortization was $1,000 for the second quarter of 2014 as compared to $1,000 for the same period in 2013.

Total operating expenses for the second quarter of 2014 were $950,000 as compared to total operating expenses of $2,388,000 for the same period of 2013, a decrease of $1,438,000 for the reasons listed above.

Interest and miscellaneous income was $26,000 for the second quarter of 2014 as compared to $75,000 for the same period of 2013, a decrease of $49,000. Miscellaneous income was higher in 2013 due to sale of certain platinum inventory.

Interest and other expense was $137,000 for the second quarter of 2014 as compared to $43,000 in the same period of 2013, an increase of $94,000. The interest represents interest accrued on unpaid dividends. No dividends have been paid in 2013 or 2014.

We recorded a gain related to warrants classified as derivative liabilities of $219,000 for the second quarter of 2013. The warrants expired in November 2013 and February 2014 so there was no derivative liability or loss during the second quarter of 2014.

We recorded a loss for the derivative liability related to preferred stock of $11,693,000 for the second quarter of 2014 and a gain of $3,270,000 for the same period of 2013. We recorded a derivative liability in 2010 per the requirements of accounting guidance due to the possibility of repricing our Series A Preferred Stock if we sold our common stock at a price below the original conversion price.

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Preferred stock dividends of $726,000 were accrued for the second quarter of 2014 and $733,000 for the same period of 2013, a decrease of $7,000. Dividends are due semi-annually in either cash or common stock for the Series A Preferred Stock and due quarterly in either cash or common stock for the Series B Preferred Stock.

Net loss allocable to common stockholders for the second quarter of 2014 was $13,233,000, or a $0.51 basic and diluted loss per common share as compared to a net income of $867,000, or a $0.03 basic and diluted income per common share, for the same period in 2013, an increased loss of $14,100,000.

SIX MONTHS ENDED JUNE 30, 2014 COMPARED TO SIX MONTHS ENDED JUNE 30, 2013

Product sales of MuGard in the United States totaled $1,542,000 for the first six months of 2013. There were no Access sales of MuGard in 2014 since MuGard was licensed to AMAG on June 6, 2013. Access is currently receiving royalties from AMAG for sale of MuGard.

Our licensing revenue for the first six months of 2014 was $296,000 as compared to $146,000 for the same period of 2013, an increase of $150,000. We recognize licensing revenue over the period of the performance obligation under our licensing agreements.

We recorded royalty revenue for MuGard of $159,000 for first six months of 2014 and $3,000 royalties in the same period of 2013. We licensed MuGard to AMAG on June 6, 2013 and currently receive quarterly royalties from AMAG under our agreement.

Total research and development spending for the first six months of 2014 was $225,000, as compared to $520,000 for the same period of 2013, a decrease of $295,000. The decrease in research and development expenses was primarily due to:

· decreased clinical development with trials for MuGard ($226,000);

· decreased salary and related costs ($149,000) from reduced scientific staff;

· offset by increased scientific consulting expense ($194,000); and

· other net decreases in research spending ($114,000).

Product costs for MuGard in the United States were $119,000 for the first six months of 2013. There were no product costs in 2014 due to no Access sales of MuGard.

Total selling, general and administrative expenses were $2,260,000 for the first six months of 2014, as compared to $3,475,000 for the same period of 2013, a decrease of $1,215,000. The decrease in expenses was due primarily to the following:

· decreased net MuGard product selling expenses ($954,000) which includes an

increase of $212,000 of MuGard product returns;

· decreased salary and related costs ($458,000) from reduced general and

administrative staff;

· decreased legal fees ($405,000); offset by

· net increase other general and administrative expenses ($19,000); and

· increased stock compensation expense for options granted to employees,

officers, directors and consultants ($583,000), options were granted in 2014 and no options were granted in 2013. 8



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Depreciation and amortization was $1,000 for the first six months of 2014 as compared to $1,000 for the same period in 2013.

Total operating expenses for the first six months of 2014 were $2,486,000 as compared to total operating expenses of $4,115,000 for the same period of 2013, a decrease of $1,629,000 for the reasons listed above.

Interest and miscellaneous income was $34,000 for the first six months of 2014 as compared to $169,000 for the same period of 2013, a decrease of $135,000. Miscellaneous income was higher in 2013 due to sale of certain platinum inventory and to write-offs of certain accounts payables.

Interest and other expense was $259,000 for the first six months of 2014 as compared to $86,000 in the same period of 2013, an increase of $173,000. The interest represents interest accrued on unpaid dividends. No dividends have been paid in 2013 or 2014.

We recorded a loss related to warrants classified as derivative liabilities of $28,000 for the first six months of 2013. The warrants expired in November 2013 and February 2014 so there was no derivative liability or loss during the first six months of 2014.

We recorded a loss for the derivative liability related to preferred stock of $11,110,000 for the first six months of 2014 and a gain of $8,050,000 for the same period of 2013. We recorded a derivative liability per the requirements of accounting guidance due to the possibility of resetting the conversion price of our Series A Preferred Stock if we sold our common stock at a price below the original price.

Preferred stock dividends of $1,451,000 were accrued for the first six months of 2014 and $1,460,000 for the same period of 2013, a decrease of $9,000. Dividends are due semi-annually in either cash or common stock for the Series A Preferred Stock and due quarterly in either cash or preferred stock for the Series B Preferred Stock.

Net loss allocable to common stockholders for the first six months of 2014 was $14,817,000, or a $0.57 basic and diluted loss per common share as compared to a net income of $4,221,000, or a $0.17 basic and diluted income per common share, for the same period in 2013, an increased loss of $19,038,000.


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Source: Edgar Glimpses


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