UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2002
or
/ / Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from __________ to _______
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 Freeway, Suite 176, Dallas, TX 75207
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (214) 905-5100
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, One Cent ($0.01) Par Value Per Share American Stock Exchange
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(Title of Class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
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 requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. _____
Indicate by check mark whether the registrant is an Accelerated Filer (as
defined in Exchange Act Rule 12b-2). Yes _____ No _____
The aggregate market value of the outstanding voting stock held by non-
affiliates of the registrant as of June 28, 2002 was approximately
$18,023,000.
As of March 28, 2003 there were 13,159,119 shares of Access
Pharmaceuticals, Inc. Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of Registrant's Definitive
Proxy Statement filed with the Commission pursuant to Regulation 14A in
connection with the 2003 Annual Meeting are incorporated herein by reference
into Part III of this report. Other references incorporated are listed in
the exhibit list in Part IV of this report.
PART I
ITEM 1. BUSINESS
This Form 10-K contains forward-looking statements that involve risks
and uncertainties. These statements relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects,"
"plans," "could", "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors,
including the risks outlined under "Risk Factors," that may cause our or
our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by such
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update
any of the forward-looking statements after the date of this Form 10-K to
conform such statements to actual results.
Business
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Access Pharmaceuticals, Inc. (Access) is a Delaware corporation. We are
an emerging pharmaceutical company focused on developing both novel
low development risk product candidates and technologies with longer-
term major product opportunities.
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,
* nanoparticles and nanoparticle networks,
* hydrogel particle aggregate technology,
* Residerm(R) topical delivery, and
* carbohydrate targeting technology.
In addition, we have acquired the amlexanox patents and technology for
the treatment of mucosal and skin disorders, and certain rights to the use
of Topoisomerase I inhibitors in the treatment of HIV infection.
We use our proprietary technology to develop products and product
candidates. Our patents and trade secrets protect our marketed products,
amlexanox 5% paste (marketed under the trade names Aphthasol(R) and
Aptheal(R)) and Zindaclin(R), and our product candidates that are
currently in the drug development phase, polymer platinate (AP 5280),
DACH platinum (AP 5346), OraDisc(TM), and our mucoadhesive liquid
technology.
We are marketing amlexanox 5% paste, the first U.S. Food and Drug
Administration (FDA) approved product for the treatment of canker sores,
under the trade name Aphthasol(R) in the United States. In September
2001, Strakan Limited, our United Kingdom partner, received marketing
authorization to market amlexanox 5% paste in the U. K. under the trade
name Aptheal(R). We are developing new formulations and delivery
forms of amlexanox for use in additional clinical indications, including
mucoadhesive disc delivery.
In addition, Strakan has used our patented Residerm(R) technology to
develop 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.
(R) - Registered trademark
(TM) - Trademark
1
Key Developments
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On July 22, 2002, we acquired from GlaxoSmithKline the patents,
trademarks and technology covering the use of amlexanox for the
treatment of mucosal and skin disorders. The two major components of
the acquisition are the US marketing rights to amlexanox 5% paste which
is currently marketed for the treatment of canker sores under the
trademark Aphthasol(R), and the remaining worldwide marketing rights
for this indication which were the subject of a prior licensing agreement
between us and GlaxoSmithKline. Under the terms of the agreement, we
made an initial upfront payment of $750,000 and an additional payment
of $250,000 on January 22, 2003. We will make an additional payment
of $250,000 on July 22, 2003, in addition to future possible milestone
payments based on the commercial success of amlexanox. The commercial
terms of our prior mucositis agreement between the companies, which
granted us worldwide rights for this indication, remain in place.
Our wholly owned subsidiary, Access Pharmaceuticals Australia Pty.
Limited acquired the vitamin-mediated drug delivery technologies business
of Biotech Australia Pty. Ltd. under an Asset Sale Agreement dated
February 26, 2002. Under the terms of the Asset Sale Agreement, Access
Pharmaceuticals Australia Pty. Limited acquired the patents to three
targeted therapeutics technologies and retained the scientific group that has
developed this technology. The total consideration payable by us will be
paid in a combination of cash and stock over a three-year period and is
dependent on the achievement of certain technology milestones. We paid
$500,000 at closing and are required to make additional payments of up
to $525,000 over a three-year period. We also issued 172,584
shares of our common stock and warrants to purchase 25,000 shares of
our common stock at an exercise price of $5.00 per share.
The three patented targeted therapeutic technologies acquired are:
* folate conjugates of polymer therapeutics, to enhance tumor delivery by
targeting folate receptors which are upregulated in certain tumor types;
* the use of vitamin B12 to target the transcobalamin II receptor which
is upregulated in numerous diseases including cancer, rheumatoid arthritis
and certain neurological and autoimmune disorders; and
* oral delivery of a wide variety of molecules, which cannot otherwise
be orally administered, using the active transport mechanism which
transports vitamin B12 into the systemic circulation.
In addition, we acquired through the acquisition an internal capability to
perform biological studies which we previously out-sourced. We expect
that this capability will enhance our ability to identify lead compounds
more rapidly and develop the necessary preclinical data for regulatory
filings.
We were incorporated in Wyoming in 1974 as Chemex Corporation, and
in 1983 we changed our name to Chemex Pharmaceuticals, Inc. We
changed our state of incorporation from Wyoming to Delaware on June
30, 1989. In 1996 we merged with Access Pharmaceuticals, Inc., a
private Texas corporation, and changed our name to Access
Pharmaceuticals, Inc. Our principal executive office is located at 2600
Stemmons Freeway, Suite 176, Dallas, Texas 75207; our telephone
number is (214) 905-5100.
Products
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We have used our drug delivery technology platforms to develop the
following products and product candidates:
Marketed Products
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Aphthasol(R) and Aptheal(R) (Amlexanox 5% Paste)
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Amlexanox 5% paste currently is the only drug approved by the
FDA for the treatment of canker sores. Independent market research that
we sponsored indicates that more than 7 million patients visit doctors or
dentists per year in the United States with complaints of canker sores.
Current estimates indicate that approximately 20% of the U.S. adult
population suffers from canker sores, of which 15 million patients claim
that their canker sores recur.
We completed a Phase IV study in Ireland in November 2000 to determine
if the application of amlexanox 5% paste at the first sign or symptom of
canker sores can abort ulcer formation or further accelerate healing. The
results confirmed that amlexanox 5% paste was effective in preventing the
formation of an ulcer when used at the first sign
2
or symptom of the disease. If this label extension is approved by regulatory
authorities it could provide a major marketing opportunity to expand use of
the product and to attract sufferers of canker sores to contact medical
practitioners to request the product.
On July 22, 2002, we acquired from GlaxoSmithKline the patents,
trademarks and technology covering the use of amlexanox for the
treatment of mucosal and skin disorders. The two major components of
the acquisition are the US marketing rights to amlexanox 5% paste, which
is currently marketed for the treatment of canker sores under the
trademark Aphthasol(R), and the remaining worldwide marketing rights
for this indication which were the subject of a prior licensing agreement
between the companies.
In addition to the Asset Purchase Agreement, whereby Access purchased
certain patents, trademarks and intellectual property relating to amlexanox
from Block Drug Company, a subsidiary of GlaxoSmithKline, the
companies entered into a Supply Agreement. Under the terms of the
Supply Agreement Block Drug Company was to produce Aphthasol(R)
for Access for a defined period of time at its Puerto Rico facility. Access
has been advised by Block Drug Company that is unable to comply with
the terms of the Supply Agreement and will not be able to produce
Aphthasol(R) for Access. Access has notified Block Drug Company that
it is in breach of the Supply Agreement and is conducting discussions with
Block Drug Company to resolve this issue. Based on the current sales
volumes of Aphthasol(R), Access believes that it has sufficient product
to supply wholesalers through June 2003. An alternative supplier has been
identified and Access is in the process of negotiating a contract for the
supply of Aphthasol(R). In the event that Block Drug Company remains
in breach of the Supply Agreement (which Access anticipates) and does
not supply Aphthasol(R) to Access, there will be an interruption of supply
to the wholesaler until an alternate manufacturer of Aphthasol(R) is able
to produce the product. Wholesaler inventories may enable a continuing
supply of the product to the consumer, although there is no guarantee that
such inventory will be sufficient. Until the product supply issues are
resolved our planned marketing relaunch of Aphthasol(R) will be delayed.
We licensed the exclusive United Kingdom and Ireland rights for the sale
and marketing of amlexanox 5% paste for the treatment of canker sores
to Strakan in August 1998. Under the terms of this license, Strakan is
responsible for and will bear all costs associated with the regulatory
approval process, including product registration, for amlexanox in the
United Kingdom and the European Union. Additionally, Strakan will make
milestone payments to us on achievement of performance objectives and
we will receive royalties on product sales of amlexanox.
Strakan, received marketing authorization for amlexanox 5% paste in the
United Kingdom in September 2001. Strakan's trade name for the product
is Aptheal(R). We anticipate that the amlexanox 5% paste product should
receive approval throughout Europe in 2003.
An international outlicensing program for amlexanox is ongoing. In
addition to our license agreement with Strakan, licensing agreements have
been executed with Zambon Group for France, Germany, Holland,
Belgium, Luxembourg, Switzerland, Brazil, Columbia and Italy; Meda AB
for Scandinavia, the Baltic states and Iceland; Laboratorios Esteve for
Spain, Portugal and Greece; Mipharm S.p.A. for Italy; and Paladin Labs
Inc. for Canada.
The Therapeutic Products Programme, the Canadian equivalent of the
FDA, has issued a notice of compliance permitting the sale of amlexanox
5% paste, called Apthera(R), in Canada to Paladin Labs Inc.
Residerm(R) A gel - Zindaclin(R) (Zinc-Clindamycin)
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The complexing of zinc to a drug has the effect of enhancing the
penetration of the drug into the skin and the retention of the drug in the
skin. This phenomenon is called the "reservoir effect," and it makes zinc
potentially effective for the delivery of dermatological drugs. We have a
broad patent covering the use of zinc for such purposes. This technology
is called ResiDerm(R).
The first zinc drug complex that we have developed, in conjunction with
Strakan, is zinc clindamycin for the treatment of acne which is marketed
under the trade name Zindaclin(R). Topical acne drugs constitute an
approximately $750 million per year market and clindamycin is a widely
prescribed drug for the treatment of acne. Clinical studies indicate that the
addition of zinc results in Zindaclin(R) being as effective applied once
daily as the market leading clindamycin product applied twice daily. The
activity of zinc and clindamycin, the improved stability of the product and
the potential for zinc to overcome certain bacterial resistance are other
potential product benefits.
3
In February 1998, we licensed the exclusive worldwide rights for the
manufacturing, sales and marketing of zinc clindamycin pursuant to a
license agreement with Strakan. Under the terms of the license agreement,
Strakan has agreed to fund the development costs of zinc clindamycin and
any additional compounds developed utilizing our zinc patent, including
product registrations. We will share equally in all milestone payments
received from the sublicensing of the compound. In addition, we will
receive a royalty on sales of products based on this technology. The
license agreement also provides that Strakan will make milestone payments
to us on achievement of commercial objectives and that we will receive
royalties on sales of products based on our Residerm(R) topical delivery
technology.
Strakan currently is marketing zinc clindamycin in the United Kingdom
under the trade name Zindaclin(R). 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. In addition, in May
2002 Strakan signed a Licensing Agreement with Fujisawa GmbH, which
granted a license to Fujisawa for rights to Zindaclin(R) for continental
western Europe.
Products in Development Status
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Polymer Platinate (AP 5280)
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Chemotherapy, surgery and radiation are the major components in the
clinical management of cancer patients. Chemotherapy is usually the
primary treatment of hematologic malignancies, which cannot be excised
by surgery. Chemotherapy is increasingly used as an adjunct to radiation
and surgery to improve their effectiveness and serves as the primary
therapy for some solid tumors and metastases. For chemotherapeutic
agents to be effective in treating cancer patients, however, the agent must
reach the target cells in effective quantities with minimal toxicity in
normal tissues.
The current optimal strategy for chemotherapy involves exposing patients
to the most intensive cytotoxic regimens that they can tolerate and
clinicians attempt to design a combination of chemotherapeutic drugs, a
dosing schedule and a method of administration to increase the probability
that cancerous cells will be destroyed while minimizing the harm to
healthy cells. Notwithstanding clinicians' efforts, most current
chemotherapeutic drugs have significant shortcomings that limit the
efficacy of chemotherapy. For example, certain cancers are inherently
unresponsive to chemotherapeutic agents. Alternatively, other cancers may
initially respond, but subgroups of cancer cells acquire resistance to the
drug during the course of therapy and the resistant cells may survive and
cause a relapse. Serious toxicity, including bone marrow suppression,
neuropathy, or irreversible cardiotoxicity, is another limitation of current
anti-cancer drugs that can prevent their administration in curative doses.
Currently, platinum compounds are one of the largest selling categories
of chemotherapeutic agents, with annual sales in excess of $1.2 billion. As
is the case with all chemotherapeutic drugs, the use of such compounds
is associated with serious systemic side effects. The drug delivery goal
therefore is to enhance delivery of the drug to the tumor and minimize the
amount of drug affecting normal organs in the body.
AP5280 is a chemotherapeutic agent that we believe has the potential to
have significantly superior effectiveness in treating numerous cancers
compared to platinum compounds currently in use. Our patented AP5280
product seeks to achieve this goal by attaching a small platinum molecule
to a large polymer. This method exploits the usually leaky or
hyperpermeable, nature of the cells that line the walls of blood vessels that
feed tumors. The large AP5280 molecule enters the tumor in preference
to other tissues, which do not have leaky or hyperpermeable blood
vessels. In addition, the capillary/lymphatic drainage system of tumors is
not well developed and limited. Thus effective drug delivery combined
with inefficient drainage results in a higher concentration of platinum in
the tumor. This dual effect is called enhanced permeability and retention,
or EPR. In addition, the polymer is designed to shield the platinum from
interactions with normal cells while the drug circulates within the body,
thereby reducing toxicity. The proposed mechanism of how AP5280 is
taken up by tumor cells bypasses known membrane-associated mechanisms
for development of tumor resistance, a common cause of failure of chemo-
therapeutic drugs over the course of treatment.
In animal models, our AP5280 compounds have delivered up to 70 times
the amount of platinum to tumors compared with cisplatin, the standard
platinum formulation used in chemotherapy, at the maximum tolerated
dose. AP5280 was approximately as effective in inhibiting tumor growth
as cisplatin alone at doses up to 10 times less toxic. In terms of dosing,
in animal studies, up to 70 times more platinum has been injected using
our AP5280,
4
which could be clinically significant as platinum has a steep
dose response curve. Consequently, clinical outcome of platinum
chemotherapy could be greatly improved as a result of the ability to
deliver additional amounts of the drug to the tumor. In addition, the anti-
tumor effect of platinum drugs is generated by the platinum binding to the
DNA, which initiates the process of tumor cell death. In a B16 melanoma
rodent model, it was demonstrated that AP5280 formed at least 11 times
more platinum DNA complexes in tumors than did Carboplatin, the
market leading platinum chemotherapy drug, when both agents were
administered intraveneously at doses which generated equal toxicity.
We have developed the AP5280 clinical formulation, defined the
manufacturing and analytical methods and produced material for clinical
trials. We completed our Phase I human clinical trials for AP5280. The
initial Phase I study protocol was designed to determine the maximum
tolerated dose of AP5280, where the dose-limiting toxicity was identified
using the standard once every three weeks platinum dosing regimen. This
study was conducted at two European sites. The Phase I study findings
confirmed the preclinical data. AP5280 was well tolerated at platinum
doses significantly greater than the clinical doses of currently marketed
platinum drugs.
Based on the results achieved in the Phase I study and preclinical data,
which indicated that AP5280 efficacy was maximized when administered
on a more frequent dosing regimen, Access commenced enrollment in a
Phase I/II study based a weekly dosing regimen. Utilizing the previous
Phase I data to commence dosing at 1/3rd of the maximum tolerated
dosing every three weeks, the initial phase will determine the weekly
clinical dosing. The Phase II study will assess the clinical efficacy of
AP5280 as a single therapy in ovarian cancer patients. The study is a
multi-center study being conducted in Europe, and will enroll 50 patients.
The study started in the fourth quarter 2002 and is expected to be
completed in early 2004.
DACH Platinum
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The extensive experience we have gained developing AP5280 has been
applied to extend the platinum developments to include the DACH form
of platinum.
Oxaliplatin, another form of DACH platinum, which was initially
approved in France and in Europe in 1999 for the treatment of colorectal
cancer is now also being marketed in the United States and is generating
worldwide sales in excess of $400 million annually. Carboplatin and Cisplatin,
the most widely prescribed platinum chemotherapy drugs, are not indicated for
the treatment of metastatic colorectal cancer. Oxaliplatin, in combination with
5-flurouracil and folinic acid is indicated for the first-line treatment of
metastatic colorectal cancer in Europe. The colorectal cancer market is a
significant opportunity as there are over 500,000 reported new cases
annually in the developed world, increasing at a rate of approximately
three percent per year.
In May 2001 we announced the expansion of our polymer platinate
activities to include a development program for the prodrug of oxaliplatin.
We have developed a number of formulations, and initial in vitro, acute
toxicity and efficacy data has lead to our selection of the lead compound
AP5346. We believe that this data is very encouraging and we have
completed the necessary preclinical development package. We commenced
Phase I clinical studies in a multi-center study being conducted in Europe
in the first quarter of 2003, and will enroll approximately 20 patients. The
study is expected to be completed in in the first quarter of 2004.
OraDisc (TM) (Amlexanox)
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We are working to develop a mucoadhesive disc that adheres to the
mucosa at the site of canker sores and slowly erodes over time locally
releasing amlexanox at the site of the canker sore.
This OraDisc(TM) formulation is an improved delivery vehicle for the
oral delivery of amlexanox which potentially overcomes the difficulties
encountered in using conventional paste and gel formulations for
conditions in the mouth, that is, applying the drug and keeping it in place
over time. Utilizing this technology, we anticipate that higher drug
concentrations will be achieved at the disease site increasing the
effectiveness of the product.
A Phase I tolerance study to evaluate skin irritation of this formulation
was successfully completed in 1999 and a pilot Phase II study evaluating
the oral wound healing capacity of OraDisc(TM) was completed in
January 2000 with both studies generating positive results.
5
An Investigational New Drug Application, or IND, was filed with the
FDA in April 2000 and a 400 patient placebo-controlled multi-center study
evaluating OraDisc(TM) for the treatment of established canker sores
was completed in December 2000. In the study, three groups were
evaluated; approximately 160 patients were treated with active OraDisc(TM),
while 160 patients received a placebo disc and 80 patients received
no treatment. The primary clinical endpoint which evaluated complete
healing on day 5 was achieved, with accelerated healing with OraDisc(TM)
being statistically significant, compared with both the placebo and
no treatment groups.
A second Phase III study evaluating OraDisc(TM) for the treatment of
established canker sores has now completed enrollment. The Phase III
study enrolled 700 patients at 28 sites throughout the US. The study is
double-blind placebo controlled study with three arms which compares the
active disc to placebo and to no treatment. Pediatric patients were enrolled
in this study with the objective of expanding the label to include use in
patients 12 years and older. In addition to the Phase III study a 28 day
safety study and a pharmacokinetic study have also been conducted. Upon
successful completion of these studies we plan to submit a new drug
application to the FDA.
Mucoadhesive Liquid Technology (MLT)
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Mucositis is a debilitating condition involving extensive inflammation of
mouth tissue that affects an estimated 550,000 cancer patients in the
United States undergoing chemotherapy and radiation treatment. Any
treatment that would accelerate healing and/or diminish the rate of
appearance would have a significant beneficial impact on the quality of life
of these patients and may allow for more aggressive chemotherapy. The
potential worldwide market size for products to treat mucositis is
estimated to be in excess of $1.5 billion.
We filed an IND with the FDA in December 1999 and developed a Phase
II protocol to investigate a mouthwash formulation, MLT, for the
prevention and treatment of mucositis in head and neck cancer patients
treated with radiation with or without chemotherapy. Over 90% of head
and neck cancer patients treated with radiation and chemotherapy
experience mucositis. This study commenced in the first quarter of 2000.
We enrolled 58 patients in the initial study which was performed at
multiple sites throughout the United States.
In July 2001, we announced results from our Phase II randomized clinical
study of MLT for the prevention and treatment of mucositis. The data
developed confirms that the mucoadhesive liquid technology could be a
platform technology and appears to represent an important advancement
in the management and prevention of mucositis.
The data were retrospectively compared with two historical patient
databases to evaluate the potential advantages that this technology may
represent in the prevention, treatment and management of mucositis. The
patient evaluation was conducted using the oral mucositis assessment
scale, which qualifies the disease severity on a scale of 0-5. Key
highlights of the comparison with the historical patient databases are as
follows:
* the average severity of the disease was reduced by approximately 40%;
* the maximum intensity of the mucositis was approximately 35% lower; and
* the median peak intensity was approximately 50% lower.
Given the results achieved with our mucoadhesive liquid technology, and
the fact that in the study an amlexanox rise showed no additional benefit,
we do not plan to conduct additional clinical studies evaluating amlexanox as
a preventative product candidate for mucositis. Following the completion
of the Phase II study we conducted additional formulation development
work to optimize the MLT technology prior to advancing clinical
development. The topical application of the MLT was tested for its ability
to attenuate the course of radiation-induced oral mucositis in an
established hamster model. The study results clearly indicate the ability to
prevent the onset of ulcerative mucositis, or delay the onset and reduce the
severity of mucositis. We have met with the FDA to determine the most
expeditious way to advance our mucositis clinical development program.
Prior to finalizing the pivotal clinical study protocol, the primary clinical
endpoint has to be agreed with the FDA.
We are, however, evaluating the possibility of developing a range of
products utilizing our mucoadhesive liquid technology for the management
of the various phases of the disease. In addition to our prevention product
candidate, we are exploring the incorporation into our mucoadhesive
liquid technology of an analgesic for pain management or compounds for
the treatment of bacterial or fungal infections.
We are currently planning an additional clinical trial for mucositis in 2003.
6
Viral Disease Technology
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We acquired our viral disease technology through our acquisition of
Virologix. This technology is targeted for the prevention and treatment of
viral diseases, including HIV. These compounds target a critical enzyme
involved in viral infection and replication, analogous to reverse
transcriptase and protease inhibitors that have shown effectiveness against
HIV. We also have technology for treating HTLV type I and II infection.
We acquired a part of this technology through a licensing agreement with
the National Institute of Health.
Drug Development Strategy
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A part of our integrated drug development strategy is to form creative
alliances with centers of excellence in order to obtain alternative lead
compounds while minimizing the overall cost of research. We have signed
agreements with Strakan for the delivery of topical therapeutic agents
which exploit our zinc patent and the University of North Texas for
nanoparticles and nanoparticle network technology. Additionally, certain
of our polymer platinate technology has resulted in part from a research
collaboration with The School of Pharmacy, University of London.
Our strategy is to initially focus on utilizing our technology in
combination with approved drug substances to develop novel patentable
formulations of existing therapeutic and diagnostic products. We believe
that this will expedite product development, both preclinical and clinical,
and ultimately product approval. To reduce financial risk and equity
financing requirements, we are directing our resources to the preclinical
and early clinical phases of development. Where the size of the necessary
clinical studies and cost associated with the later clinical development
phases are significant we plan to outlicense to, or co-develop with,
marketing partners our current product candidates.
We will continue to expand our internal core capabilities of chemistry,
formulation, analytical methods development, clinical development,
biology and project management to maximize product opportunities in a
timely manner. We will, however, contract the manufacturing scaleup,
certain preclinical testing and product production to research
organizations, contract manufacturers and strategic partners. There will be
some instances where there may be significant cost savings for us to do
some manufacturing scaleup and preclinical testing. We will evaluate those
instances and may do the work ourselves in order to achieve cost savings.
Given the current cost containment and managed care environment both
in the United States and overseas and the difficulty for a small company
to effectively market its products, we do not currently plan to become a
fully integrated pharmaceutical company.
Consequently, we expect to form strategic alliances for product
development and to outlicense the commercial rights to development
partners. By forming strategic alliances with major pharmaceutical and
diagnostic companies, we believe that our technology can be more rapidly
developed and successfully introduced into the marketplace.
Scientific Background
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The ultimate criterion for effective drug delivery is to control and
optimize the localized release of the drug at the target site and rapidly
clear the non-targeted fraction. Conventional drug delivery systems such
as controlled release, sustained release, transdermal systems and others are
designed for delivering active product into the systemic circulation over
time with the objective of improving patient compliance. These systems
do not address the biologically relevant issues such as site targeting,
localized release and clearance of drug. The major factors that impact the
achievement of this ultimate drug delivery goal are the physical
characteristics of the drug and the biological characteristics of the disease
target sites. The physical characteristics of the drug affect solubility in
biological systems, its biodistribution throughout the body, and its
interactions with the intended pharmacological target sites and undesired
areas of toxicity. The biological characteristics of the diseased area impact
the ability of the drug to selectively interact with the intended target site
to allow the drug to express the desired pharmacological activity.
We believe that our drug delivery technology platforms are differentiated
from conventional drug delivery systems in that they seek to apply a
disease-specific approach to improve the drug delivery process with
formulations to significantly enhance the therapeutic efficacy and reduce
toxicity of a broad spectrum of products.
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Core Drug Delivery Technology Platforms
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Our current drug delivery technology platforms that we are using to
selectively deliver drugs to target sites for use in cancer chemotherapy,
dermatology and oral disease are:
* Synthetic Polymer Targeted Drug Delivery Technology;
* Vitamin Mediated Targeted Delivery Technology;
* Vitamin Mediated Oral Delivery Technology;
* Bioerodeable Hydrogel Delivery Technology;
* Nanoparticle Network Delivery Technology;
* Hydrogel Particle Aggregate Technology;
* Residerm(R) Topical Delivery Technology; and
* Carbohydrate Targeting Drug Delivery Technology
We also are developing agents for the prevention and treatment of viral
disease. Each of these platforms is discussed below:
Synthetic Polymer Targeted Drug Delivery Technology
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In collaboration with The School of Pharmacy, University of London, we
have developed a synthetic polymer technology, which utilizes
hydroxypropylmethacrylamide with platinum, designed to exploit enhanced
permeability and retention, or EPR, at tumor sites to selectively
accumulate drug and control drug release. Many solid tumor cells possess
vasculature that is hyperpermeable, or leaky, to macromolecules. In
addition to this enhanced permeability, tumors usually lack effective
lymphatic and/or capillary drainage. Consequently, tumors selectively
accumulate circulating macromolecules, including, for example, up to
10% of an intravenous dose in mice. This effect has been termed EPR,
and is thought to constitute the mechanism of action of styrene-
maleic/anhydride-neocarzinostatin, or SMANCS, which is in regular
clinical use in Japan for the treatment of hepatoma. These polymers take
advantage of endothelial permeability as the drug carrying polymers are
trapped in tumors and then taken up by tumor cells. Linkages between the
polymer and drug can be designed to be cleaved extracellularly or
intracellularly. The drug is released inside the tumor mass while
polymer/drug not delivered to tumors is renally cleared from the body.
Data generated in animal studies have shown that the polymer/drug
complexes are far less toxic than free drug alone and that greater efficacy
can be achieved. Thus, these polymer complexes have demonstrated
significant improvement in the therapeutic index of anti-cancer drugs,
including, for example, platinum.
Vitamin Mediated Targeted Delivery Technology
- ---------------------------------------------
Most drugs are effective only when they reach a certain minimum
concentration in the region of disease, yet are well distributed throughout
the body contributing to undesirable side-effects. It is therefore
advantageous to alter the natural biodistribution of a drug to have it more
localized where it is needed. Our vitamin mediated targeted delivery
technology utilizes the fact that in many diseases where there is rapid
growth and/or cell division, the demand for certain vitamins increases. By
coupling the drug to an appropriate vitamin, the vitamin serves as a
carrier to increase the amount of drug at the disease site relative to its
normal distribution.
One application of this technology is in tumor targeting. The use of
cytotoxic drugs is one of the most common methods for treating a variety
of malignancies including solid and non-solid tumors. The drawbacks of
chemotherapeutic treatments, which include tumor resistance, cancer
relapse and toxicity from severe damage to healthy tissues, has fuelled a
scientific quest for novel treatments that are specifically targeted to
malignant cells thus reducing damage to collateral tissues.
8
The design of targeted therapies involves exploitation of the difference
between the structure and function of normal cells compared with
malignant cells. Differences include the increased levels of surface
molecules on cancer cells, which makes them more sensitive to treatment
regimes that target surface molecules and differences in blood supply
within and around tumor cells compared with normal cells.
Two basic types of targeting approaches are utilized, passive tumor
targeting and active tumor targeting.
* passive tumor targeting involves transporting anti-cancer agents or
specific genes through the bloodstream to tumor cells using a "carrier"
molecule. Many different carrier molecules, which can take a variety of
forms (micelles, nanoparticles, liposomes and polymers), are being
investigated as each provides advantages such as specificity and protection
of the anti-cancer drug from degradation due to their structure, size
(molecular weights) and particular interactions with tumor cells. The
polymer platinate program is a passive tumor targeting technology.
* active tumor targeting involves attaching an additional fragment to the
anticancer drug and the carrier molecule to create a new "targeted" agent
that will actively seek a complementary surface molecule to which it binds
(preferentially located on the exterior of the tumor cells). The theory is
that the targeting of the anti-cancer agent through active means to the
affected cells should allow more of the anti-cancer drug or gene to enter
the tumor cell thus amplifying the response to the treatment and reducing
the toxic effect on bystander, normal tissue.
Examples of active targeting fragments include antibodies, growth factors
and vitamins. Our scientists have specifically focused on using vitamin
B12 and folate to more effectively target anti-cancer drugs to solid tumors.
It has been known for some time that vitamin B12 and folic acid are
essential for tumor growth and as a result, receptors for these vitamins are
up-regulated in certain tumors. Vitamin B12 receptor over-expression
occurs in breast, lung leukemic cells, lymphoma cells, bone, thyroid,
colon, prostate and brain cancers and some other tumor lines, while folate
receptor over-expression occurs in breast, lung, ovarian, endometrial,
renal, colon, brain and cancers of myeloid hemotopoietic cells and
methotrexate-sensitive tumors.
Vitamin Mediated Oral Delivery Technology
- -----------------------------------------
Oral delivery is the preferred method of administration of drugs where
either long-term or daily use (or both) is required. However many
therapeutics, including peptide and protein drugs, are poorly absorbed
when given orally. With more and more peptide and protein based
biopharmaceuticals entering the market, there is an increasing need to
develop an effective oral delivery system for them, as well as for long-
standing injected drugs such as insulin.
The difficulty in administering proteins orally is their susceptibility to
degradation by digestive enzymes, their inability to cross the intestinal
wall and their rapid excretion by the body. Over the years, many different
methodologies for making protein drugs available orally have been
attempted. Most of the oral protein delivery technologies involve
protecting the protein degradation in the intestine. More recently,
strategies have been developed which involve attaching the protein or
peptide to a molecule which transports the protein across the gut wall.
However, the field of oral drug delivery of proteins and peptides has yet
to achieve successful commercialization of a product (although positive
results have been achieved in early clinical trials for some products under
development).
Many pharmaceutically active compounds such as proteins, peptides and
cytotoxic agents cannot be administered orally due to their instability in
the gastrointestinal tract or their inability to be absorbed and transferred
to the bloodstream. A technology which would allow many of these
actives to be taken orally would greatly enhance their acceptance and
value. Several technologies for the protection of sensitive actives in the
gastro-intestinal tract and/or enhancement of gastro-intestinal absorption
have been explored and many have failed.
Our proprietary technology for oral drug delivery utilizes the body's
natural vitamin B12 (VB12) transport system in the gut. The absorption
of VB12 in the intestine occurs by way of a receptor-mediated
endocytosis. Initially, VB12 binds to intrinsic factor (IF) in the small
intestine, and the VB12-IF complex then binds to the IF receptor on the
surface of the intestine. Receptor-mediated endocytosis then allows the
transport the VB12 across the gut wall. After binding to another VB12-
binding protein, transcobalamin II (TcII), VB12 is transferred to the
bloodstream.
9
Our scientists discovered that VB12 will still be transported by this
process even when drugs, macromolecules, or nanoparticles are coupled
to VB12. Thus VB12 serves as a carrier to transfer these materials from
the intestinal lumen to the bloodstream. For drugs and macromolecules
which are stable in the gastro-intestinal tract, the drug or macromolecule
can be coupled directly (or via a linker) to VB12. If the capacity of the
VB12 transport system is inadequate to provide an effective blood
concentration of the active, transport can be amplified by attaching many
molecules of the drug to a polymer, to which VB12 is also attached. For
drugs which are unstable in the stomach, but stable in the intestinal tract,
the VB12 conjugate can be incorporated in an enteric coated capsule. A
further option, especially for drugs and macromolecules which are
unstable in the intestine, is to formulate the drug in a nanoparticle which
is then coated with VB12. Once in the bloodstream, the active is released
by diffusion and/or erosion of the nanoparticle. Utilization of
nanoparticles also serves to "amplify" delivery by transporting many
molecules at one time due to the inherently large surface area.
Our proprietary position in this technology involves the conjugation of
vitamin B12 and/or folic acid (or their analogs) to a polymer to which is
also attached the drug to be delivered, or attached to a nanoparticle in
which the drug is incorporated. Since many molecules of the drug are
attached to a single polymer strand, or are incorporated in a single
nanoparticle, disease targeting is amplified compared to simpler conjugates
involving one molecule of the vitamin with one drug molecule. However,
in situations when such a simple conjugate might be preferred, our patents
also encompass these VB12-drug conjugates.
Bioerodeable Hydrogel Delivery Technology
- -----------------------------------------
Our scientists have developed a novel series of bioerodeable hydrogels
which have the potential to be utilized in a number of drug delivery
applications as well as several non-pharmaceutical applications. Hydrogels
are very large molecules with complex three-dimensional structures
capable of storing either small molecule drugs or much larger peptide and
protein therapeutics. These molecules are stored within the matrix of the
hydrogel. Most hydrogels are not bioerodeable, therefore they deliver
their payload of drug by diffusion of these molecules through the
interconnecting chambers of the hydrogel. Once all of the drug has been
delivered, non-bioerodible hydrogels remain in the body (unless surgically
removed) as they cannot be broken down and eliminated. By comparison,
our hydrogels possess bioerodeable linking groups with well-defined rates
of degradation in biological systems, and so release their payload of drugs
by both diffusion and erosion of the hydrogel matrix. By selecting linkers
with appropriate degradation rates, much greater control of drug release
rates can be achieved. Once the drug has been released, erosion of the
hydrogel continues until no solid hydrogel remains, eliminating the need
to use an additional procedure to remove the drug delivery device. The
hydrogel erodes to form much smaller water-soluble fractions which are
readily eliminated from the body.
A number of possible drug delivery systems can be developed using the
Access bioerodible hydrogel technology, ranging from nanoparticles for
intravenous administration, to larger devices which may be implanted,
wound packaging materials, medicated and non-medicated for decubitus
and vascular ulcers, medicated films and gels for topical applications, burn
dressing and dressing for skin donor sites.
We have a U.S. patent for our bioerodeable hydrogel technology. Our
bioerodeable hydrogel technology has the following properties:
* contains a network polymer that swells in water;
* it has cleavable bonds in a linear polymer backbone;
* breakdown occurs in a biological or aqueous environment;
* controlled degradation rates ranging from hours to months can be
achieved; and
* offers the ability to control drug incorporation and release by the choice
of polymer, crosslink density and link degradation rate.
10
Nanoparticle Network Delivery Technology
- ----------------------------------------
Our nanoparticles network delivery system involves first producing
hydrogel nanoparticles and then bonding them together resulting in a new
class of gels with two levels of engineered structural difference: the
primary network and the secondary network. The primary network is
crosslinked polymer chains inside each nanoparticle, while the secondary
network is a crosslinked system of the nanoparticles themselves. As a
result, the nanoparticle network could be used to entrap and deliver small
and/or very large biomolecules or other active compounds with its primary
and secondary structures, respectively. These unique properties will
enhance the versatility of polymer gel nanoparticle networks as potential
carriers to provide controlled delivery of a variety of active compounds.
In addition, such nanostructured gels have new and novel properties that
conventional gels do not possess. These properties include a high surface
area, a unique and distinguishable color at room temperature, and the
ability to be easily combined together if desired to yield heterogeneous
networks consisting of diversified physical and chemical properties. Our
research and development efforts may lead to creating opportunities in a
variety of technological applications, including controlled delivery of
drugs or other actives, optical and colorimetric sensors, interferometer
systems, holographic or interference gratings, integrated circuit
lithography, optical displays, environmental cleanup agents and bio-
adhesives.
Hydrogel Particle Aggregate Technology
- --------------------------------------
Our hydrogel particle aggregate technology provides unique materials with
a broad range of properties and potential applications. While a
conventional bulk hydrogel is an "infinite" network of loosely crosslinked
hydrophilic polymers that swells when placed in polar solvents, we have
discovered that a variety of unique biomaterials can be formed through the
aggregation of hydrogel nano or micro-particles. This concept takes
advantage of the inherent biocompatibility of hydrogels while overcoming
problems with local stress and strain, which cause bulk hydrogels to
shear. Unlike bulk hydrogels, these hydrogel particle aggregates are shape
retentive, can be extruded or molded and offer properties suitable for use
in a variety of in vivo medical devices, and in novel drug delivery
systems, by providing tailored regions of drug incorporation and release.
The polymers used in the hydrogel particle aggregate technology have
been extensively researched by the academic and scientific community and
commercialized into several major medical products. They are generally
accepted as safe, non-toxic and biocompatible.
This technology utilizes the inherent physical attractive forces between
nanoparticles themselves and between nanoparticles and a polar solvent.
These particles form bulk materials that can have the same size as infinite
bulk networks but allow chemical variability and much greater resistance
to permanent mechanical deformation. The aggregate demonstrates many
physical properties identical to those of a bulk hydrogel.
However, there are important differences between
aggregates and bulk materials. For example, "tough" elastomeric
hydrogels used in tissue engineering constructs typically fail
catastrophically when placed under high strain or shear forces. As the
network begins to fail under stress, the material physically breaks down.
Hydrogel nanoparticle aggregates exhibit superior performance compared
to bulk materials under stress as the nanoparticles can slip past each other
allowing local deformation and repair.
Another major advantage of the hydrogel particle aggregate technology is
the ability to tailor the degradation of hydrogel nanoparticles and hydrogel
nanoparticle aggregates. Our degradable crosslinker technology can be
incorporated into the hydrogel nanoparticles allowing the formation of
nanoparticles containing drug with degradation and drug release at specific
rates. Potentially, aggregate materials can be formulated containing
mixtures of particles degrading at different rates, and/or formulations
containing different drugs each released at a predefined controlled rate.
A second level of controlled degradation is provided by the ability to tailor
the rate of particle erosion from the physically coalesced aggregate. The
hydrogel can be formulated such that the aggregate is extremely tough and
resilient, or formulated so that it can slowly erode at controlled rates. This
is achieved through simple compositional changes during nanoparticle
synthesis. The spaces between nanoparticles, or holes in the lattice, can be
tailored by varying the nanoparticle size. These spaces have been used to
encapsulate proteins during aggregate formation. The ability to trap a wide
range of bioactive compounds between these particles in the presence of
water solutions offers another major advantage, since this media is less
deleterious to many compounds than solvents typically used with other
drug delivery materials. These aggregates can easily be designed to remain
11
together indefinitely in vivo, or break apart at specific rates.
Pharmaceutically-active compounds trapped in a non-degradable aggregate
will be released from the hydrogel by diffusion, while release is controlled
by both diffusion and rate of erosion in degradable aggregates.
This technology has a variety of potential applications, such as in-dwelling
medicated catheters, medicated stents, artificial discs, tissue scaffold and
controlled-release drug delivery systems. We continue to develop the
technology and specific applications utilizing this technology, while
seeking to establish collaborations and partnerships to explore other
applications.
Residerm(R) Topical Delivery Technology
- ---------------------------------------
We have granted a license to Strakan for the development of compounds
that utilize our zinc technology. The use of zinc ions to formulate topical
products produces a reservoir of drug in the skin to increase the
effectiveness of topically applied products and to reduce toxicity. There
are many localized disease conditions, which are effectively treated by
topical application of suitable pharmaceutical agents. In order for such
treatments to be maximally effective, it is necessary that as much of the
active agent as possible be absorbed into the skin where it can make
contact with the disease condition in the dermal tissue without being lost
by rubbing off on clothing or evaporation. At the same time, the agent
must not penetrate so effectively through the skin that it is absorbed into
the systemic circulation. This latter factor is especially important in order
to minimize unwanted side-effects of the pharmacologically active agent.
The ideal vehicle for topically applied pharmaceuticals is one which can
rapidly penetrate the skin and produce a "reservoir effect" in the skin or
mucous membranes. Such a reservoir effect can be produced by
complexing of suitable pharmaceutical agents with zinc ions, by an as yet
unknown mechanism. This "reservoir effect" is defined as an enhancement
of the skin or membrane's ability to both absorb and retain
pharmacological agents, that is:
* to increase skin or membrane residence time;
* to decrease drug transit time; and
* to reduce transdermal flux.
A number of compounds are known to enhance the ability of
pharmacologically active agents to penetrate the skin, but have the
disadvantage of allowing rapid systemic dispersion away from the site of
disease. Many topical agents, such as the retinoids used in the treatment
of acne, and methotrexate, used in the treatment of psoriasis, are
systemically toxic. There is, therefore, a need for a method of enhancing
the ability of such agents to penetrate the skin so that a lesser total dosage
may be used, while at the same time their ability to move from the skin
to the systemic circulation is minimized.
Carbohydrate Targeting Drug Delivery Technology
- -----------------------------------------------
Our carbohydrate polymer drug delivery technology exploits specific
changes in the vascular endothelium that occur during disease processes.
These carriers mimic disease-specific, carbohydrate recognition by
vascular endothelium cells and underlying tissue. It has been well
established that white blood cells can recognize, target and permeate
disease sites by means of surface carbohydrates which bind to cytokine-
induced endothelium plus underlying tissue and cells. A number of
receptors on the endothelium and on underlying tissue are known to bind
sulfated glycosaminoglycans, such as heparin and dermatan sulfate. We
have developed glycosaminoglycan carriers to selectively image and treat
diseases involving the neovascular endothelium. We believe that our
glycosaminoglycan technology has broad potential in a number of
therapeutic applications including cancer, inflammation and infection.
Viral Disease Technology
- ------------------------
We acquired our viral disease technology through our acquisition of
Virologix. This technology is targeted for the prevention and treatment of
viral diseases, including HIV. These compounds target a critical enzyme
involved in viral infection and replication, analogous to reverse
transcriptase and protease inhibitors that have shown effectiveness against
HIV. We also have technology for treating HTLV type I and II infection.
We acquired a part of this technology through a licensing agreement with
the National Institute of Health.
12
Research Projects, Products and Products in Development
- -------------------------------------------------------
ACCESS DRUG PORTFOLIO
Licensing Clinical
Compound Originator Partner Indication FDA Filing Stage(1)
- ----------------------------- ---------- ---------- ---------- ------------ --------
Cancer
- ------
Polymer Platinate (AP5280)(2) Access- - Ovarian Development(7) Phase I/II
U London
Polymer Platinate (AP5346)(2) Access- - Ovarian, Development(7) Phase I
U London Colorectal
cancer
Mucositis technology Access - Mucositis IND Phase III
Topical Delivery
- ----------------
Amlexanox(3) Takeda Strakan, Aphthous NDA Approved
Zambon, ulcers
Esteve,
Meda,
Mipharm,
Paladin
OraDisc(TM) Amlexanox(3) Access Strakan Aphthous IND Phase III
Biodegradable Polymer Disc Zambon, ulcers
Esteve,
Meda,
Mipharm,
Paladin
Residerm(R) A Access Strakan Acne PLA (8) Approved(9)
Zinc Clindamycin(4) Fujisawa
Vitamin Mediated Delivery
- -------------------------
Oral Delivery System Access - Various Research Pre-Clinical
Folate Targeted Therapeutics Access - Anti-tumor Research Pre-Clinical
Vitamin B12 Targeted Access - Anti-tumor Research Pre-Clinical
Therapeutics
Antiviral
- ---------
Anti viral compound (5) (6) NIH - HIV Development Pre-Clinical
Anti viral compound (6) Rockefeller - HTLV type I Development Pre-Clinical
and II
(1) For more information, see "Government Regulation" for description
of clinical stages.
(2) Licensed from the School of Pharmacy, The University of London.
Subject to royalty and milestone payments.
(3) Acquired from GlaxoSmithKline - Block Drug Company. Amlexanox
licensing agreements executed with the following parties for the prevention
and treatment of aphthous ulcers:
* Strakan Limited for UK and Ireland manufacturing and marketing rights.
* Zambon Group for France, Germany, Holland, Belgium, Luxembourg,
Switzerland, Brazil, Columbia and Italy manufacturing and marketing
rights.
13
* Laboratories Dr. Esteve SA for Spain, Portugal and Greece
manufacturing and marketing rights.
* Mipharm SpA for Italy manufacturing and marketing rights.
* Meda, AB for Scandinavia, the Baltic states and Iceland marketing rights.
* Paladin Labs Inc. for Canada manufacturing and marketing rights.
(4) Licensed worldwide manufacturing and marketing rights to Strakan
who sublicensed to:
* Fujisawa GmbH for continental Europe marketing rights.
* Taro Pharmaceuticals for Israel marketing rights.
* Various companies for other smaller countries for marketing rights.
(5) Licensed from NIH subject to royalty and milestone payments.
(6) Licensed from The Rockefeller University subject to royalty and
milestone payments.
(7) Clinical studies being conducted in Europe prior to a FDA filing.
(8) United Kingdom ("U.K.") equivalent of an NDA.
(9) Marketing approval received from the Medicines Control Agency in
the U.K. and product launched in March 2002. In addition there are seven
European Union product approvals including Germany and France.
We begin the product development effort by screening and formulating
potential product candidates, selecting an optimal active and formulation
approach and developing the processes and analytical methods. Pilot
stability, toxicity and efficacy testing are conducted prior to advancing the
product candidate into formal preclinical development. Specialized skills
are required to produce these product candidates utilizing our technology.
We have a core internal development capability with significant experience
in developing these formulations.
Once the product candidate has been successfully screened in pilot testing,
our scientists, together with external consultants, assist in designing and
performing the necessary preclinical efficacy, pharmacokinetic and
toxicology studies required for IND submission. External investigators and
scaleup manufacturing facilities are selected in conjunction with our
consultants. The initial Phase I and Phase II studies depending on the drug
indication are conducted by institutions and investigators supervised and
monitored by our employees and contract research organizations. We do
not plan to have an extensive clinical development organization as we plan
to have the advance phases of this process conducted by a development
partner. Should we conduct Phase III clinical studies a contract research
organization will be engaged to perform this work.
We contract with third party contract research organizations to complete
our large clinical trials and for data management of all of our clinical
trials. Generally, we manage the smaller Phase I and II trials ourselves.
Currently, we have two Phase I and one Phase III trial in process and a
Phase III trial planned for later this year.
With all of our product development candidates, we cannot assure you that
the results of the in vitro or animal studies are or will be indicative of the
results that will be obtained if and when these product candidates are
tested in humans. We cannot assure you that any of these projects will be
successfully completed or that regulatory approval of any product will be
obtained.
We expended approximately $7,024,000, $4,174,000 and $4,007,000 on
research and development during the years 2002, 2001 and 2000,
respectively.
Patents
- -------
We believe that the value of technology both to us and to our potential
corporate partners is established and enhanced by our broad intellectual
property positions. Consequently, we have already been issued and seek
to obtain additional U.S. and foreign patent protection for products under
development and for new discoveries. Patent applications are filed with
the U.S. Patent and Trademark Office and, when appropriate, with the
Paris Convention's Patent Cooperation Treaty (PCT) Countries (most
major countries in Western Europe and the Far East) for our inventions
and prospective products.
14
One U.S. patent has issued and one U.S. patent and two European patent
applications are pending for polymer platinum compounds. This patent and
applications are the result in part of our collaboration with The School of
Pharmacy, University of London, from which the technology has been
licensed and include a synthetic polymer, hydroxypropylmethacrylamide
incorporating platinates, that can be used to exploit enhanced permeability
and retention in tumors and control drug release. This patent and
applications include a pharmaceutical composition for use in tumor
treatment comprising a polymer-platinum compound through linkages
which are designed to be cleaved under selected conditions to yield a
platinum which is selectively released at a tumor site. This patent and
applications also include methods for improving the pharmaceutical
properties of platinum compounds.
One U.S. and two European patents have issued and one European patent
is pending for the use of zinc as a pharmaceutical vehicle for enhancing
the penetration and retention of drug in the skin. These patents cover the
method of inducing a reservoir effect in skin and mucous membranes to
enhance penetration and retention of topically applied therapeutic and
cosmetic pharmacologically active agents. These patents also relate to
topical treatment methods including such reservoir effect enhancers and
to pharmaceutical compositions containing them.
We have one U.S. patent and one European patent is pending for our
bioerodeable hydrogel technology. A number of possible drug delivery
systems can be developed using the Access bioerodible hydrogel
technology, ranging from nanoparticles for intravenous administration, to
larger devices which may be implanted, wound packaging materials,
medicated and non-medicated for decubitus and vascular ulcers, medicated
films and gels for topical applications, burn dressing and dressing for skin
donor sites.
We have filed one U.S. and one European patent application for our
OraDisc(TM) technology. This oral delivery vehicle potentially
overcomes the difficulties encountered in using conventional paste and gel
formulations for conditions in the mouth. Utilizing this technology, we
anticipate that higher drug concentrations will be achieved at the disease
site increasing the effectiveness of the product.
We have filed two U.S. patent applications for our mucoadhesive liquid
technology. Our applications cover a range of products utilizing our
mucoadhesive liquid technology for the management of the various phases
of mucositis. In addition to our product candidate, we are also considering
the development of products that incorporate an analgesic for pain
management or compounds for the treatment of bacterial or fungal
infections into our mucoadhesive liquid technology.
We have filed two patent applications for our nanoparticle delivery
technology. These applications are the result of our collaboration with the
University of North Texas, from which the technology has been licensed.
The applications include a new class of gels. Our technology may lead to
a variety of technological applications, including controlled delivery of
drugs or other actives, optical and colorimetric sensors, interferometer
systems, holographic or interference gratings, integrated circuit
lithography, optical displays, environmental cleanup agents and bio-
adhesives.
We have filed one patent application for our hydrogel particle aggregate
technology. Our application has a variety of potential applications, such
as in-dwelling medicated catheters, medicated stents, artificial discs, tissue
scaffold and controlled-release drug delivery systems.
Through our Access Pharmaceuticals Australia Pty. Limited subsidiary we
have three patented targeted therapeutic technologies:
* folate conjugates of polymer therapeutics, to enhance tumor delivery by
targeting folate receptors, which are upregulated in certain tumor types
with two U.S. and two European patent applications;
* the use of vitamin B12 to target the transcobalamin II receptor which
is upregulated in numerous diseases including cancer, rheumatoid arthritis,
certain neurological and autoimmune disorders with two U.S. patents and
three U.S. and four European patent applications; and
* oral delivery of a wide variety of molecules which cannot otherwise be
orally administered, utilizing the active transport mechanism which
transports vitamin B12 into the systemic circulation with six U.S. patents
and two European patents and one U.S. and one European patent
application.
Through our Virologix subsidiary, we have two patents licensed from the
National Institute of Health, or NIH, and four additional U.S. patent
applications licensed from the Rockefeller University for our viral disease
technology for the prevention and treatment of viral diseases including
HIV. The licensed patents' compounds target a critical
15
enzyme involved in viral infection and replication. The other patents include
vaccines in HTLV type I and II infection, and other applications of the
proprietary technology being used in the HIV therapeutic program.
We hold U.S. and European patents with broad composition of matter
claims encompassing glycosaminoglycan, acidic saccharide, carbohydrate
and other endothelial binding and targeting carriers in combination with
drugs and diagnostic agents formulated by both physical and chemical
covalent means. Eleven patents have issued commencing in 1990, ten U.S.
and one European, and an additional two European patent applications are
pending. These patents and applications relate to the in vivo medical uses
of drugs and diagnostic carrier formulations which bind and cross
endothelial and epithelial barriers at sites of disease, including but not
limited to treatment and medical imaging of tumor, infarct, infection and
inflammation. They further disclose the body's induction of endothelial,
epithelial, tissue and blood adhesins, selectins, integrins, chemotaxins and
cytotaxins at sites of disease as a mechanism for selective targeting, and
they claim recognized usable carrier substances which selectively bind to
these induced target determinants.
We also have a patent for amlexanox and the worldwide rights, excluding
Japan, for the use of amlexanox for oral and dermatological use.
We have a strategy of maintaining an ongoing line of patent continuation
applications for each major category of patentable carrier and delivery
technology. By this approach, we are extending the intellectual property
protection of our basic targeting technology and initial agents to cover
additional specific carriers and agents, some of which are anticipated to
carry the priority dates of the original applications.
Government Regulation
- ---------------------
We are subject to extensive regulation by the federal government,
principally by the FDA, and, to a lesser extent, by other federal and state
agencies as well as comparable agencies in foreign countries where
registration of products will be pursued. Although a number of our
formulations incorporate extensively tested drug substances, because the
resulting formulations make claims of enhanced efficacy and/or improved
side effect profiles, they are expected to be classified as new drugs by the
FDA.
The Federal Food, Drug and Cosmetic Act and other federal, state and
foreign statutes and regulations govern the testing, manufacturing, safety,
labeling, storage, shipping and record keeping of our products. The FDA
has the authority to approve or not approve new drug applications and
inspect research, clinical and manufacturing records and facilities.
Among the requirements for drug approval and testing is that the
prospective manufacturer's facilities and methods conform to the FDA's
Code of Good Manufacturing Practices regulations, which establish the
minimum requirements for methods to be used in, and the facilities or
controls to be used during, the production process. Such facilities are
subject to ongoing FDA inspection to insure compliance.
The steps required before a pharmaceutical product may be produced and
marketed in the U.S. include preclinical tests, the filing of an IND with
the FDA, which must become effective pursuant to FDA regulations
before human clinical trials may commence, numerous phases of clinical
testing and the FDA approval of a NDA prior to commercial sale.
Preclinical tests are conducted in the laboratory, usually involving
animals, to evaluate the safety and efficacy of the potential product. The
results of preclinical tests are submitted as part of the IND application and
are fully reviewed by the FDA prior to granting the sponsor permission
to commence clinical trials in humans. All trials are conducted under
International Conference on Harmonization, or ICH, good clinical practice
guidelines. All investigator sites and sponsor facilities are subject to FDA
inspection to insure compliance. Clinical trials typically involve a
three-phase process. Phase I, the initial clinical evaluations, consists of
administering the drug and testing for safety and tolerated dosages and in
some indications such as cancer and HIV, as preliminary evidence of
efficacy in humans. Phase II involves a study to evaluate the effectiveness
of the drug for a particular indication and to determine optimal dosage and
dose interval and to identify possible adverse side effects and risks in a
larger patient group. When a product is found safe, an initial efficacy is
established in Phase II, it is then evaluated in Phase III clinical trials.
Phase III trials consist of expanded multi-location testing for efficacy and
safety to evaluate the overall benefit to risk index of the investigational
drug in relationship to the disease treated. The results of
16
preclinical and human clinical testing are submitted to the FDA in the form
of an NDA for approval to commence commercial sales.
The process of doing the requisite testing, data collection, analysis and
compilation of an IND and an NDA is labor intensive and costly and may
take a protracted time period. In some cases, tests may have to be redone
or new tests instituted to comply with FDA requests. Review by the FDA
may also take a considerable time period and there is no guarantee that an
NDA will be approved. Therefore, we cannot estimate with any certainty
the length of the approval cycle.
We are also governed by other federal, state and local laws of general
applicability, such as laws regulating working conditions, employment
practices, as well as environmental protection.
Competition
- -----------
The pharmaceutical and biotechnology industry is characterized by intense
competition, rapid product development and technological change.
Competition is intense among manufacturers of prescription
pharmaceuticals and other product areas where we may develop and
market products in the future. Most of our potential competitors are large,
well established pharmaceutical, chemical or healthcare companies with
considerably greater financial, marketing, sales and technical resources
than are available to us. Additionally, many of our potential competitors
have research and development capabilities that may allow such
competitors to develop new or improved products that may compete with
our product lines. Our potential products could be rendered obsolete or
made uneconomical by the development of new products to treat the
conditions to be addressed by our developments, technological advances
affecting the cost of production, or marketing or pricing actions by one or
more of our potential competitors. Our business, financial condition and
results of operation could be materially adversely affected by any one or
more of such developments. We cannot assure you that we will be able to
compete successfully against current or future competitors or that
competition will not have a material adverse effect on our business,
financial condition and results of operations. Academic institutions,
governmental agencies and other public and private research organizations
are also conducting research activities and seeking patent protection and
may commercialize products on their own or with the assistance of major
health care companies in areas where we are developing product
candidates. We are aware of certain development projects for products to
treat or prevent certain diseases targeted by us, the existence of these
potential products or other products or treatments of which we are not
aware, or products or treatments that may be developed in the future, may
adversely affect the marketability of products developed by us.
The principal competitors in the polymer area are Cell Therapeutics,
Daiichi, Enzon and Inhale which are developing alternate drugs in
combination with polymers. We believe we are the only company
conducting clinical studies in the polymer drug delivery of platinum
compounds. We believe that the principal current competitors to our
polymer targeting technology fall into two categories: monoclonal
antibodies and liposomes. We believe that our technology potentially
represents a significant advance over these older technologies because our
technology provides a system with a favorable pharmacokinetic profile
which has been shown to effectively bind and cross neovascular barriers
and to penetrate the major classes of deep tissue and organ disease, which
remain partially inaccessible to other technologies.
A number of companies are developing or may in the future engage in the
development of products competitive with the Access polymer delivery
system. Several companies are working on targeted monoclonal antibody
therapy including Bristol-Myers Squibb, Centocor, GlaxoSmithKline,
Imclone and Xoma. Currently, liposomal formulations being developed by
Gilead Sciences, Elan Corporation and Alza Corporation, are the major
competing intravenous drug delivery formulations which deliver similar
drug substances.
A number of companies are developing products to treat mucositis. Some
of the products are in clinical trials that are further advanced than our
product. These companies are RxKinetics, Human Genome Sciences and
Amgen. There is no current treatment to modify the symptoms of
mucositis. There is potentially a significant market to treat this disease.
Products developed from our Residerm(R) technology will compete for a
share of the existing market with numerous products which have become
standard treatments recommended or prescribed by dermatologists.
Zindaclin(R), which is the first product developed utilizing our Residerm(R)
technology, will compete with products
17
including 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.
Aphthasol(R) is the only clinically proven product to accelerate the
healing of canker sores. There are numerous products, including
prescription steroids such as Kenalog in OraBase, and many over-the-
counter pain relief formulations which incorporate a local anesthetic used
for the treatment of this condition.
In the area of advanced drug delivery, which is the focus of our early
stage research and development activities, a number of companies are
developing or evaluating enhanced drug delivery systems. We expect that
technological developments will occur at a rapid rate and that competition
is likely to intensify as various alternative delivery system technologies
achieve similar if not identical advantages.
Even if our products are fully developed and receive required regulatory
approval, of which there can be no assurance, we believe that our
products can only compete successfully if marketed by a company having
expertise and a strong presence in the therapeutic area. Consequently, we
do not currently plan to establish an internal marketing organization. By
forming strategic alliances with major and regional pharmaceutical
companies, management believes that our development risks should be
minimized and that the technology potentially could be more rapidly
developed and successfully introduced into the marketplace.
Employees
- ---------
As of March 28, 2003, we had 33 full time employees, 18 of whom have
advanced scientific degrees. Of these employees, 29 are engaged in, or
directly supporting research and development activities and four are in
business administration positions. We have never experienced
employment-related work stoppages and consider that we maintain good
relations with our personnel. In addition, to complement our internal
expertise, we have contracts with scientific consultants, contract research
organizations and university research laboratories that specialize in various
aspects of drug development including clinical development, regulatory
affairs, toxicology, process scale-up and preclinical testing.
Web Availability
- ----------------
We make available free of charge through our web site,
www.accesspharma.com, our annual reports on Form 10-K and other
reports required under the Securities and Exchange Act of 1934.
Risk Factors
- ------------
This Annual Report on Form 10-K 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 10-K and documents incorporated by reference.
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 $47.3 million through
December 31, 2002. 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 significant 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.
18
We do not have significant operating revenue and we may never attain
profitability.
- --------------------------------------------------------------------
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 receive 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, and obtain
required regulatory approvals and market any additional products.
Moreover, even if we do identify, develop, commercialize, patent,
manufacture, obtain required regulatory approvals to market additional
products, we may not receive 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 royalties and 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.
- ----------------------------------------------------------
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 will 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.
- ---------------------------------------------------------------
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 June 2004, we may need to raise substantial
additional capital during that period because our actual cash requirements
may vary materially from those now planned and will depend upon
numerous factors, including :
* 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;
19
* 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.
- -------------------------------------------------------------------------
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
enter joint venture, sublicense or 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 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
- Strakan Ltd. - United Kingdom and Ireland manufacturing and marketing rights
- Zambon Group - France, Germany, Holland, Belgium, Luxembourg, Switzerland,
Brazil, Columbia and Italy manufacturing and marketing rights
- Laboratories Dr. Esteve SA - Spain, Portugal and Greece manufacturing
and marketing rights
- Meda, AB for Scandinavia, the Baltic states and Iceland marketing rights
- Mipharm SpA for Italy manufacturing and marketing rights
- Paladin Labs, Inc. for Canada manufacturing and marketing rights
* Zindaclin(R) and Residerm(R)
- Strakan Ltd. - worldwide manufacturing and marketing rights
- Fujisawa GmbH - sublicensed continental Europe marketing rights
- Taro - sublicensed Israel marketing rights
- Various companies for other smaller countries - sublicensed marketing rights
Our ability to commercialize, and market our products and product candidates
would be limited if any of these existing relationships were terminated.
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 no 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, so we
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,
20
contract manufacturers that we may use must adhere to current Good
Manufacturing Practices, as required by the FDA. In 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 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) by
Access. GSK has manufactured the 5% amlexanox paste since the product
was approved by the FDA in 1996 in a facility that is certified by the
FDA for Good Manufacturing Practices. We acquired the rights to
amlexanox 5% paste from GSK on July 22, 2002. We have evaluated
various manufacturers and selected a manufacturer of our product.
Production is planned to start in May 2003.
Access and Block Drug Company entered into a Supply Agreement whereas
Block was to produce Aphthasol(R) for Access for a defined period of time
at its Puerto Rico facility. Access has been advised by Block that it is
unable to comply with the terms of the Supply Agreement and will not be able
to produce Aphthasol(R) for Access. Access has notified Block Drug Company
that it is in breach of the Supply Agreement and is conducting discussions
with Block Drug Company to resolve this issue. Based on the current sales
volumes of Aphthasol(R), Access believes it has sufficient product to supply
wholesalers through June 2003. An alternative supplier has been identified
and Access is in the process of negotiating a contract for the supply of
Aphthasol(R). In the event that Block Drug Company remains in breach of the
Supply Agreement (which Access anticiapates) and does not supply Aphthasol(R)
to Access, there will be an interruption of supply to the wholesaler until
an alternate manufacturer of Aphthasol(R) is able to produce the product.
Wholesaler inventories may enable a continuing supply of the product to
the consumer, although there is no guarantee that such inventory will be
sufficient. Until the product supply issues are resolved our planned marketing
relaunch of Aphthasol(R) will be delayed.
Amlexanox 5% paste was approved in the UK and is currently in the
approval process in the remaining EU countries. We licensed
manufacturing to Strakan, Zambon, Esteve, Mipharm and Meda for
specific countries in Europe. Esteve is currently preparing to manufacture
the product and is obtaining the necessary European and FDA approvals.
Esteve has experience in the manufacture of other commercial
pharmaceutical products.
We licensed our patents for worldwide manufacturing and marketing for
Zindaclin(R) and the ResiDerm(R) technology to Strakan Ltd. for the
period of the patents. We receive a royalty on the sales of the product.
Strakan manufactures 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) is 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 are currently negotiating with a third party
for manufacturing if the product is approved.
AP5280 and AP5346 are manufactured by a third party for our Phase I
clinical trials. Manufacturing is ongoing for the current clinical trials.
Some manufacturing may be completed by the Company if significant cost
savings can be achieved.
Our mucoadhesive technology is manufactured by a third party for our
clinical trials.
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.
- ----------------------------------------------------------------------------
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 will require governmental
approvals for commercialization, none of which have been obtained.
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.
For example the status of our principal products are 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 waiting for finalized plans and approval to
start a Phase III trial in the US.
* OraDisc(TM) is currently in a Phase III clinical trial in the US.
* AP5280 is currently in a Phase I/II trial in Europe.
* AP5346 is currently in a Phase I trial in Europe.
* Mucoadhesive liquid technology is planned to start a Phase III trial in the
US in 2003.
* Vitamin mediated delivery technology is currently in the pre-clinical phase.
* We also have other products in the preclinical phase.
21
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 the 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, we, or 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 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.
- --------------------------------------------------------------------
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 or animals 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. For more information, see "Business-Government Regulation."
22
We may incur substantial product liability expenses due to the use or misuse of
our products for which we may be unable to obtain complete insurance coverage.
- -------------------------------------------------------------------------------
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,
however, if available at all, and as a result, we may be unable able 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.
- -------------------------------------------------------------------------
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 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. Cisplatin is marketed by Bristol-Myers-Squibb the originator
of the drug and by several generic manufacturers. Carboplatin is marketed
exclusively by Bristol-Myers-Squibb and Oxaliplatin by Sanofi-Synthelabo.
Our principal competitors in the polymer area are Cell Therapeutics,
Daiichi, Enzon, Inhale and Pharmacia, which are developing alternate
drugs in combination with polymers. Several companies are working on
therapies and formulations that may be competitive with our drug delivery
system, including Bristol-Myers-Squibb, Centocor (acquired by Johnson
& Johnson), GlaxoSmithKline, Imclone and Xoma, which are developing
targeted monoclonal antibody therapy, and Nexstar (acquired by Gilead
Sciences), The Liposome Company (acquired by Elan Corporation) and
Sequus Pharmaceuticals (acquired by Alza Corporation), which are
developing liposomal formulations. In addition, RxKinetics, Human
Genome Sciences and Amgen are developing competitive products to treat
mucositis. Furthermore, 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 are competitive with our
marketed Residerm(R) products and technology and prescription steroids
such as Kenalog in OraBase developed by Bristol-Myers Squibb are
competitive with our commercialized Aphthasol(R) product.
Many of these competitors have and employ greater financial and other
resources, including 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
23
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.
- --------------------------------------------------------------------------
The successful commercialization of, and the interest of potential
collaborative partners to invest in, the development of our drug candidates
will 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.
- -------------------------------------------------------------
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.
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.
- -----------------------------------------------------------------------
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 health care 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 23 U.S. patents and to 17
U.S. patent applications now pending, and 6 European 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
24
against competitive products or otherwise be commercially viable. Our patents
expire on average for the following technologies:
* 5% amlexanox paste approximately in 2011
* Zindaclin(R) and Residerm(R) approximately in 2008
* OraDisc(TM) approximately in 2017
* AP5280 approximately in 2018
* AP5346 approximately in 2021
* Mucoadhesive technology approximately in 2021
* Vitamin mediated technology approximately in 2013
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, our Senior
Vice President Research and Development, their employment may be
terminated by them or us at any time. In addition, 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 no investment 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 individual investors which could limit the ability of our other
stockholders to influence the direction of the company.
- -------------------------------------------------------------------------
Heartland Advisors, Inc. and Larry N. Feinberg (Oracle Partners LP,
Oracle Institutional Partners LP and Oracle Investment Management Inc.)
currently beneficially own approximately 13.0% and 9.3% respectively,
of our issued and outstanding common stock. 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.
- -------------------------------------------------------------------
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
25
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 13,159,119
shares of our common stock that are outstanding as of March 28, 2003 are
unrestricted and freely tradable or tradable pursuant to a resale registration
statement or under Rule 144 of the Securities Act.
AMEX listing requirements.
- ---------------------------
Our common stock is presently listed on the American Stock Exchange
under the symbol "AKC". All companies listed on AMEX are required to
comply with certain continued listing standards, including maintaining
stockholders' equity at required levels. We are not in compliance with
this stockholders' equity standard as of December 31, 2002. If we are
unable to remedy any listing standard noncompliance with AMEX under
its regulations, or otherwise regain compliance, we cannot assure you that
our common stock will continue to remain eligible for listing on AMEX.
In the event that our common stock is delisted from AMEX its market
value and liquidity would be materially adversely affected.
ITEM 2. PROPERTIES
We maintain one facility of approximately 17,000 square feet for
administrative offices and laboratories in Dallas, Texas. We have a lease
agreement for the facility, which terminates in March 2006. However, we
have an option for early termination. Adjacent space may be available for
expansion which we believe would accommodate growth for the
foreseeable future.
Our subsidiary, Access Pharmaceuticals Australia Pty. Limited, leases
approximately 6,000 square feet for offices and laboratories in New South
Wales, Australia.
ITEM 3. 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 are not clearly delineated,
he appears to bring claims for fraud, conspiracy, and theft against all
defendants, and a claim for breach of contract against
26
Access. Each of the allegations relates to an allegedly unfulfilled
contractual obligation to deliver to Hall 45,000 warrants to purchase our
stock. Hall alleges 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 seeks 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 interference
with the our right to enjoy certain contractual benefits. Discovery,
substantive fact investigation, and legal analysis have only recently begun.
Access intends to be vigorous in both its defense of Hall's claims and its
pursuit of our counterclaims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
27
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
Price Range of Common Stock and Dividend Policy
- -----------------------------------------------
Our common stock has traded on the American Stock Exchange, or
AMEX, since March 30, 2000 under the trading symbol AKC.
The following table sets forth, for the periods indicated, the high and low
closing prices for our common stock as reported by AMEX for fiscal
years 2002 and 2001.
Common Stock
-------------------
High Low
-------- --------
Fiscal Year Ended December 31, 2002
- -----------------------------------
First quarter $ 5.74 $ 3.40
Second quarter 3.80 1.40
Third quarter 2.85 1.50
Fourth quarter 2.18 1.05
Fiscal Year Ended December 31, 2001
- -----------------------------------
First quarter $ 5.95 $ 2.30
Second quarter 4.95 2.49
Third quarter 4.00 2.60
Fourth quarter 4.52 2.56
We have never declared or paid any cash dividends on our preferred stock
or common stock and we do not anticipate paying any cash dividends in
the foreseeable future. The payment of dividends, if any, in the future is
within the discretion of our board of directors and will depend on our
earnings, capital requirements and financial condition and other relevant
facts. We currently intend to retain all future earnings, if any, to finance
the development and growth of our business.
The number of record holders of Access common stock at March 28, 2003
was approximately 5,600. On March 28, 2003, the closing price for the
common stock as quoted on the AMEX was $2.00. There were
13,159,119 shares of common stock outstanding at March 28, 2003.
Recent Sales of Unregistered Securities
- ---------------------------------------
None.
28
ITEM 6. SELECTED FINANCIAL DATA (In Thousands, Except for Net Loss Per Share)
The following data has been derived from our audited consolidated
financial statements and notes thereto appearing elsewhere in this Form
10-K and prior audited consolidated financial statements of Access and
notes thereto. The data should be read in conjunction with the Financial
Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in
this Form 10-K.
For the Year Ended December 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Consolidated Statement of Operations Data:
Total revenues $ 1,147 $ 243 $ 107 $ 15 $ -
Operating loss (8,700) (6,308) (6,058) (3,364) (3,433)
Interest and
miscellaneous income 594 1,451 972 53 58
Interest expense 1,278 1,170 342 12 22
Net loss (9,384) (6,027) (5,428) (3,308) (3,397)
Common Stock Data:
Net loss per basic and diluted
common share $ (0.72) $ (0.47) $ (0.49) $ (0.72) $ (1.28)
Weighted average basic and
diluted common shares
outstanding 13,104 12,857 11,042 4,611 2,650
December 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Cash, cash equivalents and
short term investments $ 9,776 $ 20,126 $ 25,809 $ 869 $ 1,487
Total assets 19,487 25,487 30,526 4,600 2,351
Deferred revenue 1,199 508 551 155 -
Convertible notes 13,530 13,530 13,530 - -
Total liabilities 18,998 16,409 15,522 986 556
Total stockholders' equity $ 489 $ 9,078 $ 15,004 $ 3,614 $ 1,795
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and related notes included in this Form 10-K.
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,
* hydrogel particle aggregat technology,
* nanoparticles and nanoparticle networks,
* Residerm(R) topical delivery and
* carbohydrate targeting technology.
In addition, we are marketing in the United States - Aphthasol(R), the
first FDA approved product for the treatment of canker sores. We are
developing new formulations and delivery forms to evaluate amlexanox in
additional clinical indications, including mucoadhesive disc delivery and
mucoadhesive liquid delivery.
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 December 31, 2002, our accumulated deficit
was $47,292,000, of which $8,894,000 was the result of the write-off of
excess purchase price.
Results of Operations
- ---------------------
Comparison of Years Ended December 31, 2002 and 2001
- ----------------------------------------------------
Our licensing revenue in 2002 was $853,000, as compared to licensing
revenue of $243,000 in 2001, an increase of $610,000. We recognize
licensing revenue over the period of the performance obligation under our
licensing agreements. Licensing revenue recognized in both 2002 and
2001 was from several agreements, including agreements related to
various amlexanox projects and Residerm (R).
Product sales of Aphthasol(R) totaled $194,000 in 2002, our first sales
were recorded in December 2002.
We received research and development revenue of $89,000 and royalty
income in 2002, whereas we did not receive either of these types of
revenues in 2001. The research and development revenue was for a
project that is now completed and will not continue in the future. The
royalty income will continue since product sales started in 2002.
Our total research spending for the year ended December 31, 2002 was
$7,024,000, as compared to $4,174,000 in 2001, an increase of
$2,850,000. The increase in expenses was the result of:
* higher development and clinical development costs for our polymer
platinate project ($997,000);
* higher clinical development costs ($1,148,000) for amlexanox
development projects for OraDisc (TM);
* higher salary and salary related expenses due to additional staff ($579,000);
* higher expenses due to our Australian subsidiary ($341,000); and
* higher internal lab costs due to the additional staff and projects ($44,000).
These increases were offset by lower scientific consulting fees ($236,000)
and other net decreases ($23,000).
30
We expect our research spending to remain higher than it has been in
previous years as we intend to hire additional scientific staff, commence
additional clinical trials and accelerate preclinical development activities
as we continue to develop our product candidates.
Our cost of product sales was $107,000 for 2002 due to the
commencement of our Aphthasol(R) sales in the fourth quarter of 2002.
Our total general and administrative expenses were $2,277,000 for 2002
and $1,959,000 in 2001, an increase of $318,000 due to:
* higher salary and related expense ($92,000);
* higher foreign tax expense ($92,000);
* higher patent and license expenses ($85,000);
* higher rent expenses ($78,000);
* higher professional fees and expenses ($50,000); and
* other net increases ($60,000).
These increases were offset by lower shareholder expenses ($111,000) and
lower executive search fees ($28,000).
Depreciation and amortization was $439,000 in 2002 as compared to
$418,000 in 2001, an increase of $21,000.
Our loss from operations in 2002 was $8,700,000 as compared to a loss
of $6,308,000 in 2001.
Our interest and miscellaneous income was $594,000 for 2002 as
compared to $1,451,000 for 2001, a decrease of $857,000. The decrease
in interest income was due to lower net cash balances in 2002 and lower
interest rates.
Interest expense was $1,278,000 for 2002 as compared to $1,170,000 for
the same period in 2001, an increase of $108,000. The increase in interest
expense was due to higher interest accrued on the $13.5 million
convertible notes issued in September 2000 and amortization of debt
issuance costs.
Net loss for 2002 was $9,384,000, or a $0.72 basic and diluted loss per
common share compared with a loss of $6,027,000, or a $0.47 basic and
diluted loss per common share, for 2001.
Comparison of Years Ended December 31, 2001 and 2000
- ----------------------------------------------------
Our revenue in 2001 was $243,000, as compared to revenue of $107,000
in 2000, an increase of $136,000. We recognize licensing revenue over
the period of the performance obligation under our licensing agreements.
Licensing revenue recognized in 2001 was from several agreements,
including agreements related to various amlexanox projects and Residerm(R)
whereas the licensing revenue that we recognized in 2000 was only from
amlexanox projects.
Our total research spending for the year ended December 31, 2001 was
$4,174,000, as compared to $4,007,000 in 2000, an increase of $167,000.
The increase in expenses was the result of:
* higher salary and salary related expenses due to additional staff
($461,000);
* higher development and clinical development costs for our polymer
platinate project ($195,000);
* higher clinical development costs ($102,000) for amlexanox
development projects for the cream and gel formulations;
* higher internal lab costs due to the additional staff and projects
($52,000); and
* other net increases ($6,000).
These increases were offset by:
31
* lower clinical development costs for the following amlexanox projects:
OraDisc(TM) ($491,000) and MLT ($80,000); and
* lower moving and recruiting expenses for scientific personnel ($78,000).
We expect our research spending to increase and remain higher than it has
been in prior years as we intend to hire additional scientific and clinical
staff, commence additional clinical trials and accelerate preclinical
development activities as we continue to develop our product candidates.
Our total general and administrative expenses were $1,959,000 for 2001
and $1,736,000 in 2000. Our general and administrative expenses
increased $223,000 in 2001 due to:
* higher patent and license expenses ($118,000);
* higher shareholder expenses ($95,000);
* executive search fee ($30,000);
* higher rent expenses ($19,000); and
* other net increases ($4,000).
These increases were offset by lower foreign tax expense ($43,000).
Depreciation and amortization was $418,000 in 2001 as compared to
$422,000 in 2000, a decrease of $4,000.
Our loss from operations in 2001 was $6,308,000 as compared to a loss
of $6,058,000 in 2000.
Our interest and miscellaneous income was $1,451,000 for 2001 as
compared to $922,000 for 2000, an increase of $479,000. The increase in
interest income ($403,000) was due to higher net cash balances in 2001
resulting from our private placements of common stock and our
convertible note offering in the second half of 2000. The increase in
miscellaneous income ($76,000) was due entirely to a settlement in 2002
of a dispute with a vendor.
Interest expense was $1,170,000 for 2001 as compared to $342,000 for
the same period in 2000, an increase of $828,000. The increase in interest
expense was due to interest accrued on the $13.5 million convertible notes
issued in September 2000 and amortization of debt issuance costs.
Net loss for 2001 was $6,027,000, or a $0.47 basic and diluted loss per
common share compared with a loss of $5,428,000, or a $0.49 basic and
diluted loss per common share, for 2000.
Liquidity and Capital Resources
- -------------------------------
We have funded our operations primarily through private sales of common
stock, 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 December 31, 2002 our cash and
cash equivalents were $9,776,000 and our working capital was
$7,594,000. Our working capital at December 31, 2002 represented a
decrease of $10,925,000 as compared to our working capital as of
December 31, 2001 of $18,519,000. This decrease was due to our overall
operating expenses and the interest paid on the $13.5 million convertible
notes.
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 December 31, 2002 of
$47,242,000. We expect that our existing capital resources will be
adequate to fund our current level of operations through June 2004. We
cannot assure you that we will ever be able to generate 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 newly acquired
and developed
32
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;
* the successful integration of our newly created subsidiary, Access
Pharmaceuticals Australia Pty. Limited;
* 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;
* 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.
At December 31, 2002, we had invested the following amounts in these projects:
Project 2002 Inception to Date
- ----------------------------------------- ----------- -------------
Polymer Platinate (AP5280 and AP5346) $ 2,941,000 $ 10,222,000
OraDisc(TM) 2,296,000 4,836,000
Bioerodible Hydrogel Technology and
Nanoparticles and Nanoparticle Networks 811,000 1,370,000
Vitamin Mediated Targeted Delivery 341,000 341,000
Mucoadhesive Liquid Technology (MLT) 220,000 1,395,000
Others 415,000 4,243,000
----------- -------------
Total $ 7,024,000 $ 22,407,000
=========== =============
We discussed in Part I of this Form 10-K the status of each project, the
efforts and timing that are necessary for the next step of each project and
risks associated with our developments. We cannot at this time reasonably
estimate the cost to complete each project due to uncertainties in the
development process as discussed in Risk Factors in Part I of this Form
10-K.
We plan to continue our policy of investing available funds in certificates
of deposit, money market funds, government securities and investment-
grade interest-bearing securities, none of which matures in more than two
years. We do not invest in derivative financial instruments, as defined by
Statement of Financial Accounting Standards No. 133 and 138.
We have issued an aggregate of $13,500,000 of convertible notes, which
are due in two parts, $8,050,000 is due on September 13, 2005 and
$5,500,000 is due on September 13, 2006. The notes bear interest at a rate of
7.7% per annum with $1,041,000 of interest due annually on each
September 13 the notes 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 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.
33
Critical Accounting Policies
- ----------------------------
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United State of America requires us
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the reported period. In applying our accounting
principles, we must often make individual estimates and assumptions
regarding expected outcomes or uncertainties. As you might expect, the
actual results or outcomes are often different than the estimated or
assumed amounts. These differences are usually minor and are included
in our consolidated financial statements as soon as they are known. Our
estimates, judgments and assumptions are continually evaluated based on
available information and experience. Because of the use of estimates
inherent in the financial reporting process, actual results could differ from
those estimates.
Revenue
- -------
Revenue associated with up-front license, technology access and research
and development funding payments under collaborative agreements is
recognized ratably over the relevant periods specified in the agreement.
Asset Impairment
- ----------------
On January 1, 2002, we adopted SFAS 142, "Goodwill and Other
Intangible Assets." Upon adoption, we performed a transitional
impairment test on our recorded intangible assets that consisted primarily
of acquisition related goodwill and lease intangibles. We also performed
an annual impairment test in the fourth quarter of 2002. The analysis
resulted in no goodwill impairment charge in 2002. We will be required
to perform this test on at least an annual basis.
Our intangible assets at December 31, 2002 consist primarily of goodwill,
patents acquired in acquisitions and licenses, which were recorded at fair
value on the acquisition date.
Stock Compensation
- ------------------
We apply Accounting Principal Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB 25") and the related interpretations
in accounting for our stock options granted to employees. Under APB 25,
compensation cost related to stock options is computed based on the
intrinsic value of the stock option at the date of grant, reflected by the
difference between the exercise price and the fair market value of our
Common Stock. We generally grant options to employees with exercise
prices equal to fair market value on the date of grant and for such option
grants we do not record compensation expense. Under Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", compensation cost related to stock options
granted to employees and non-employees is computed based on the value
of the stock options at the date of grant using an option valuation
methodology, typically the Black-Scholes model. SFAS No. 123 can be
applied either by recording the Black-Scholes model value of the options
as compensation expense or by continuing to record the APB 25 value and
by disclosing SFAS No. 123 compensation costs on a pro-forma basis.
Had we adopted the Black-Scholes model value provisions of SFAS No.
123, our loss in 2002, 2001 and 2000 would have been increased by
approximately $1.662 million, $1.565 million, and $0.938 million,
respectively.
Based on an assessment of our accounting policies and underlying
judgments and uncertainties affecting the application of those policies, we
believe that our consolidated financial statements provide a meaningful
and fair perspective of us. We do not suggest that other general factors,
such as those discussed elsewhere in this report, could not adversely
impact our consolidated financial position, results of operations or cash
flows.
New Accounting Pronouncements
- -----------------------------
On December 31, 2002, FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure". SFAS No. 148
amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS
No. 148 requires accounting policy note disclosures to provide the method
of stock option accounting for each year presented in the financial
statements and for each year until all years presented in the financial
statements recognize the fair value of stock-based compensation. Also,
SFAS No. 148 provides two additional transition methods that eliminate
the ramp-up effect resulting from applying the expense recognition
provisions of SFAS No. 123. The transition
34
provisions and annual
statement disclosure requirements of SFAS No. 148 are effective for fiscal
years ending after December 15, 2002. The interim statement disclosure
requirements are effective for the first interim statement that includes
financial information after December 15, 2002. There will be no financial
statement effect from the adoption of this new standard unless we were to
make a change in our accounting policy and account for stock option
grants as compensation expense.
ITEM 7(a). 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
2003 and 2004 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 $42,000. The estimated effect assumes no changes in our
short-term investments at December 31, 2002. We do not believe that we
are exposed to any market risks, as defined. We are not exposed to risks
for changes in commodity prices, or any other market risks.
ITEM 8. FINANCIAL AND SUPPLEMENTARY DATA
Financial statements required by this Item are incorporated in this 10-K
on pages F-1 through F-23. Reference is made to Item 16 of this 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item with respect to directors and reports
of beneficial ownership will be contained in our definitive Proxy
Statement ("Proxy Statement") for our 2003 Annual Meeting of
Stockholders to be held on May 19, 2003 and is incorporated herein by
reference. We will file the Proxy Statement with the Securities and
Exchange Commission not later than April 30, 2002.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Report, we carried out an
evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective
in timely alerting them to material information relating to us (including
our subsidiaries) required to be included in our periodic filings with the
Securities and Exchange Commission. Our management, including our
Chief Executive Officer and Chief Financial Officer, reviewed our internal
controls. No significant changes were made in our internal controls or,
to our knowledge, in other factors that could significantly affect such
internal controls subsequent to the date of their evaluation.
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 Access 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,
controls may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by reference.
36
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
a. Financial Statements and Exhibits Page
----
1. Financial Statements. The following financial statements are
submitted as part of this report:
-------------------------------------------------------------
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets at December 31, 2002 and 2001 F-2
Consolidated Statements of Operations for 2002, 2001 and 2000 F-3
Consolidated Statements of Stockholders' Equity (Deficit) for
2002, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for 2002, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedules
-----------------------------
No financial statement schedules are included because they are not
required or the information is included in the financial statements or notes
thereto.
3. Exhibits
--------
Exhibit Number
- --------------
2.1 Amended and Restated Agreement of Merger and Plan of
Reorganization between Access Pharmaceuticals, Inc. and Chemex
Pharmaceuticals, Inc., dated as of October 31, 1995 (Incorporated by
reference to Exhibit A of the our Registration Statement on Form S-4
dated December 21, 1995, Commission File No. 33-64031)
3.0 Articles of incorporation and bylaws:
3.1 Certificate of Incorporation (Incorporated by Reference to Exhibit
3(a) of our Form 8-B dated July 12, 1989, Commission File Number 9-9134)
3.2 Certificate of Amendment of Certificate of Incorporation filed August
21, 1992
3.3 Certificate of Merger filed January 25, 1996. (Incorporated by
reference to Exhibit E of our Registration Statement on Form S-4 dated
December 21, 1995, Commission File No. 33-64031)
3.4 Certificate of Amendment of Certificate of Incorporation filed
January 25, 1996. (Incorporated by reference to Exhibit E of our
Registration Statement on Form S-4 dated December 21, 1995,
Commission File No. 33-64031)
3.5 Amended and Restated Bylaws (Incorporated by reference to Exhibit
3.1 of our Form 10-Q for the quarter ended June 30, 1996)
3.6 Certificate of Amendment of Certificate of Incorporation filed July
18, 1996. (Incorporated by reference to Exhibit 3.8 of our Form 10-K for
the year ended December 31, 1996)
3.7 Certificate of Amendment of Certificate of Incorporation filed June
18, 1998. (Incorporated by reference to Exhibit 3.8 of our Form 10-Q for
the quarter ended June 30, 1998)
3.8 Certificate of Amendment of Certificate of Incorporation filed July
31, 2000. (Incorporated by reference to Exhibit 3.8 of our Form 10-Q for
the quarter ended March 31, 2001)
3.9 Certificate of Designations of Series A Junior Participating Preferred
Stock filed November 7, 2001 (Incorporated by reference to Exhibit 4.1.h
of our Registration Statement on Form S-8, dated December 14, 2001,
Commission File No. 333-75136)
10.0 Material contracts:
10.1 Irrevocable Assignment of Proprietary Information with Dr. Charles
G. Smith (Incorporated by reference to Exhibit 10.6 of our Form 10-K for
the year ended December 31, 1991)
10.2 Asset Purchase and Royalty Agreement between Block Drug
Company, Inc. and us dated June 7, 1995 (Incorporated by reference to
Exhibit 10.28 of our Form 10-Q for the quarter ended June 30, 1995)
37
3.0 Exhibits (continued)
--------------------
Exhibit Number
--------------
*10.3 1995 Stock Option Plan (Incorporated by reference to Exhibit F of
our Registration Statement on Form S-4 dated December 21, 1995,
Commission File No. 33-64031)
10.4 Patent Purchase Agreement dated April 5, 1994 between David F.
Ranney and Access Pharmaceuticals, Inc. (Incorporated by reference to
Exhibit 10.16 of the our Form 10-K for the year ended December 31,
1995)
10.5 First Amendment to Patent Purchase Agreement dated January 23,
1996 between David F. Ranney and us (Incorporated by reference to
Exhibit 10.17 of our Form 10-K for the year ended December 31, 1995)
10.6 Lease Agreement between Pollock Realty Corporation and us dated
July 25, 1996 (Incorporated by reference to Exhibit 10.19 of our Form
10-Q for the quarter ended September 30, 1996)
10.7 Platinate HPMA Copolymer Royalty Agreement between The
School of Pharmacy, University of London and the Company dated
November 19, 1996 (Incorporated by reference to Exhibit 10.19 of our
Form 10-Q for the quarter ended September 30, 1996)
10.8 Agreement of Merger and Plan of Reorganization, dated May 23,
1997 among us, Access Holdings, Inc and Tacora Corporation
(Incorporated by reference to Exhibit 10.11 of the Company's Form 10-K
for the year ended December 31, 1997)
10.9 License Agreement between Strakan Limited and us dated February
26, 1998 (Certain portions are subject to a grant of confidential treatment)
(Incorporated by reference to Exhibit 10.12 of our Form 10-Q for the
quarter ended March 31, 1998)
10.10 Agreement between us and Block Drug Company, Inc. (Certain
portions are subject to a grant of confidential treatment) (Incorporated by
reference to Exhibit 10.13 of our Form 10-Q for the quarter ended June
30, 1998)
*10.11 Employment Agreement of Mr. Kerry P. Gray (Incorporated by
reference to our Registration Statement on Form SB-2 dated January 11,
1999, Commission File No. 333-62463)
10.12 Letter Agreement between us and David F. Ranney (Incorporated
by reference to our Registration Statement on Form SB-2 dated January
11, 1999, Commission File No. 333-62463)
10.13 License Agreement between Block Drug Company and us dated
December 21, 1998 (Certain portions are subject to a grant of confidential
treatment) (Incorporated by reference to Exhibit 10.11 of our Form 10-K
for the year ended December 31, 1998)
10.14 Agreement of Merger and Plan of Reorganization, dated as of
February 23, 1999 among us, Access Holdings, Inc. and Virologix
Corporation (Incorporated by reference to Exhibit 2.2 of the Company's
Form 8-K filed on August 3, 1999)
*10.15 Employment Agreement of David P. Nowotnik, PhD
(Incorporated by reference to Exhibit 10.19 of our Form 10-K for the year
ended December 31, 1999)
*10.16 401(k) Plan (Incorporated by reference to Exhibit 10.20 of our
Form 10K for the year ended December 31, 1999)
*10.17 2000 Special Stock Option Plan and Agreement (Incorporated by
reference to Exhibit 10.24 of our Form 10-Q for the quarter ended
September 30, 2000)
10.18 Form of Convertible Note (Incorporated by reference to Exhibit
10.24 of our Form 10-Q for the quarter ended September 30, 2000)
10.19 Supplemental Lease Agreement between Pollock Realty
Corporation and us dated February 9, 2002. (Incorporated by reference
to Exhibit 10.19 of our Form 10-Q for the quarter ended June 30, 2002)
10.20 Rights Agreement, dated as of October 31, 2001 between the
Registrant and American Stock Transfer & Trust Company, as Rights
Agent (incorporated by reference to Exhibit 99.1 of our Current Report
on Form 8-K dated October 19, 2001)
*10.21 2001 Restricted Stock Plan (incorporated by reference to
Appendix A of our Proxy Statement filed on April 16, 2001)
38
3.0 Exhibits (continued)
--------------------
Exhibit Number
--------------
10.22 Supplemental Lease Agreement between Pollock Realty
Corporation and us dated September 15, 2002. (Incorporated by reference
to Exhibit 10.24 of our Form 10-K for the year ended December 31,
2001)
10.23 Amendment to 1995 Stock Option Plan (Incorporated by reference
to Exhibit 10.25 of our Form 10-K for the year ended December 31,
2001)
10.24 Asset Sale Agreement among BIOA Pty. Limited, Access
Pharmaceuticals Australia Pty. Limited, Human Therapeutics Limited and
us dated February 26, 2002. (Certain portions are subject to a grant of
confidential treatment) (Incorporated by reference to Exhibit 10.26 of our
Form 10-Q for the quarter ended March 31, 2002)
10.25 Asset Sale Agreement between Block Drug Company, Inc. and us
dated July 22, 2002. (Certain portions are subject to a grant of
confidential treatment) (Incorporated by reference to Exhibit 10.27 of our
Form 10-Q for the quarter ended September 30, 2002)
21. Subsidiaries of the registrant
23.0 Consent of Experts and Counsel
23.1 Consent of Grant Thornton LLP
99.1 Certification of Financial Statements by Chief Executive Officer and
Chief Financial Officer of Access Pharmaceuticals, Inc. pursuant to 18
U.S.C. Section 1350
* Management contract or compensatory plan required to be filed as an
Exhibit to this Form pursuant to Item 14(c) of the report
(b) Reports on Form 8-K
None
39
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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 March 31, 2003 By: /s/ Kerry P. Gray
-------------- -------------------
Kerry P. Gray
President and Chief Executive
Officer
Date March 31, 2003 By:/s/ Stephen B. Thompson
-------------- ------------------------
Stephen B. Thompson
Vice President, Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Date March 31, 2003 By:/s/ Kerry P. Gray
-------------- -------------------
Kerry P. Gray
President and Chief Executive
Officer, Director
Date March 31, 2003 By:/s/ Stuart M. Duty
-------------- --------------------
Stuart M. Duty, Director
Date March 31, 2003 By:/s/ J. Michael Flinn
-------------- ----------------------
J. Michael Flinn, Director
Date March 31, 2003 By:/s/ Stephen B. Howell
-------------- ---------------------
Stephen B. Howell, Director
Date March 31, 2003 By:/s/ Max Link
-------------- --------------
Max Link, Director
Date March 31, 2003 By:/s/ Herbert H. McDade, Jr.
-------------- --------------------------
Herbert H. McDade, Jr., Director
Date March 31, 2003 By:/s/ John J. Meakem
-------------- --------------------
John J. Meakem, Jr., Director
40
CERTIFICATIONS
I, Kerry P. Gray, the President and Chief Executive Officer of Access
Pharmaceuticals, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Access
Pharmaceuticals, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Kerry P. Gray
- -----------------
Kerry P. Gray
President and Chief Executive Officer
CERTIFICATIONS
I, Stephen B. Thompson, the Chief Financial Officer of Access
Pharmaceuticals, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Access
Pharmaceuticals, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Stephen B. Thompson
- -----------------------
Stephen B. Thompson
Chief Financial Officer
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Access Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Access
Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Access
Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2002 and
2001, and the consolidated results of their operations and their
consolidated cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" on January 1, 2002.
/s/ Grant Thornton LLP
- ----------------------
GRANT THORNTON LLP
Dallas, Texas
March 7, 2003
F-1
Access Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 2002 2001
------------ ------------
Current assets
Cash and cash equivalents $ 1,444,000 $ 7,426,000
Short term investments, at cost 8,332,000 12,700,000
Accounts receivable 1,184,000 83,000
Accrued interest receivable 89,000 110,000
Inventory 461,000 -
Prepaid expenses and other current assets 852,000 611,000
------------ ------------
Total current assets 12,362,000 20,930,000
Property and equipment, net 742,000 477,000
Debt issuance costs, net 496,000 679,000
Patents, net 2,991,000 -
Licenses, net 449,000 774,000
Goodwill, net 1,868,000 1,868,000
Other assets 579,000 759,000
------------ ------------
Total assets $19,487,000 $25,487,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,469,000 $ 1,486,000
Accrued interest payable 311,000 310,000
Deferred revenues 1,199,000 508,000
Current portion of note payable
and future obligations 789,000 107,000
------------ ------------
Total current liabilities 4,768,000 2,411,000
Long-term obligations for
purchased patents 346,000 -
Note payable, net of current portion 354,000 468,000
Convertible notes 13,530,000 13,530,000
------------ ------------
Total liabilities 18,998,000 16,409,000
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, 13,159,119 at December 31, 2002
and 12,909,344 at December 31, 2001 132,000 132,000
Additional paid-in capital 48,989,000 48,057,000
Notes receivable from stockholders (1,045,000) (1,045,000)
Unamortized value of restricted
stock grants (277,000) (154,000)
Treasury stock, at cost - 819 shares (4,000) (4,000)
Accumulated other comprehensive loss (14,000) -
Accumulated deficit (47,292,000) (37,908,000)
------------ ------------
Total stockholders' equity 489,000 9,078,000
------------ ------------
Total liabilities and
stockholders' equity $19,487,000 $25,487,000
============ ============
The accompanying notes are an integral part of these statements.
F-2
Access Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
--------------------------------
2002 2001 2000
---------- ---------- ----------
Revenues
License revenues $ 853,000 $ - $ -
Product sales 194,000 - -
Research and development 89,000 - -
Royalty income 11,000 243,000 107,000
---------- ---------- ---------
Total revenues 1,147,000 243,000 107,000
Expenses
Research and development 7,024,000 4,174,000 4,007,000
Cost of product sales 107,000 - -
General and administrative 2,277,000 1,959,000 1,736,000
Depreciation and amortization 439,000 418,000 422,000
---------- ---------- ----------
Total expenses 9,847,000 6,551,000 6,165,000
---------- ---------- ----------
Loss from operations (8,700,000) (6,308,000) (6,058,000)
Other income (expense)
Interest and miscellaneous
income 594,000 1,451,000 972,000
Interest and debt expense (1,278,000) (1,170,000) (342,000)
---------- ---------- ----------
(684,000) 281,000 630,000
---------- ---------- ----------
Net loss $(9,384,000)$(6,027,000)$(5,428,000)
========== ========== ==========
Basic and diluted loss
per common share $(0.72) $(0.47) $(0.49)
========== ========== ==========
Weighted average basic and diluted
common shares outstanding 13,104,060 12,856,639 11,042,141
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-3
Access Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Notes Unamortized Accumulated
Common Stock Additional receivable value of other
------------------- paid-in from restricted Treasury comprehensive Accumulated
Shares Amount capital stockholders stock grants stock loss deficit
---------- -------- ----------- ------------ ------------ ---------- ----------- -------------
Balance, January 1, 2000 6,090,000 $ 61,000 $30,006,000 $ - $ - $ - $ - $(26,453,000)
Common stock issued for cash 6,255,000 62,000 15,772,000 - - - - -
Common stock issued for
cash exercise of warrants
and options 115,000 1,000 298,000 - - - - -
Common stock for cashless
exercise of warrants 152,000 2,000 (2,000) - - - - -
Common stock issued
to officers 190,000 2,000 1,043,000 (1,045,000) - - - -
Common stock issued for
nil proceeds 43,000 4,000 (4,000) - - - - -
Purchase common stock - - - - - (754,000) -
Sale of treasury stock - - 625,000 - - 750,000 - -
Warrants issued - - 64,000 - - - - -
Net loss - - - - - - - (5,428,000)
---------- -------- ----------- ------------ ----------- ---------- ------------ -------------
Balance, December 31, 2000 12,845,000 132,000 47,802,000 (1,045,000) - (4,000) - (31,881,000)
Common stock issued for cash
exercise of warrants 13,000 - 33,000 - - - - -
Common stock issued for
cashless exercise of
warrants and SARs 7,000 - 41,000 - - - - -
Issuance of restricted
stock grants 44,000 - 181,000 - (181,000) - - -
Amortization of restricted
stock grants - - - - 27,000 - - -
Net loss - - - - - - - (6,027,000)
---------- -------- ----------- ------------ ----------- --------- ----------- -------------
Balance, December 31, 2001 12,909,000 132,000 48,057,000 (1,045,000) (154,000) (4,000) - (37,908,000)
Common stock issued for cash
exercise of warrants
and options 13,000 - 31,000 - - - - -
Common stock issued for
cashless exercise
of warrants 14,000 - - - - - -
Common stock issued,
purchase of assets 173,000 - 632,000 - - - - -
Warrants issued - - 80,000 - - - - -
Issued of restricted
stock grants 50,000 - 189,000 - (190,000) - -
Other comprehensive loss - - - - - - (14,000) -
Amortization of restricted
stock grants - - - - 67,000 - - -
Net loss - - - - - - - (9,384,000)
---------- -------- ----------- ----------- ----------- --------- ------------ ------------
Balance, December 31, 2002 13,519,000 $132,000 $48,989,000 $(1,045,000) $ (277,000) $(4,000) $(14,000) $(47,292,000)
========== ======== =========== =========== =========== ========= ============ ============
The accompanying notes are an integral part of these statements.
F-4
Access Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
----------------------------------------
2002 2001 2000
------------ ------------ ------------
S>
Cash flows from operating activities:
Net loss $(9,384,000) $(6,027,000) $(5,428,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Warrants issued in payment of
consulting expenses 37,000 41,000 64,000
Amortization of restricted stock grants 64,000 27,000 -
Depreciation and amortization 439,000 418,000 422,000
Amortization of debt costs 183,000 182,000 54,000
Deferred revenue 691,000 (43,000) 396,000
Other long-term obligations 43,000 - -
Change in operating assets
and liabilities:
Accounts receivable (1,101,000) 168,000 (163,000)
Accrued interest receivable 21,000 86,000 (196,000)
Inventory (461,000) - -
Prepaid expenses and other
current assets (241,000) (478,000) (16,000)
Licenses - - (100,000)
Other assets 130,000 (1,000) -
Accounts payable and accrued expenses 983,000 328,000 353,000
Accrued interest payable 1,000 27,000 283,000
------------ ------------ ------------
Net cash used in operating activities (8,595,000) (5,272,000) (4,331,000)
Cash flows from investing activities:
Capital expenditures (403,000) (419,000) (72,000)
Redemptions (purchases) of
short-term investments and
certificates of deposit, net 4,368,000 4,094,000 (17,394,000)
Purchase of businesses,
net of cash acquired (1,313,000) - -
Other investing activities 36,000 - -
------------ ------------ -----------
Net cash provided by (used in)
investing activities 2,688,000 3,675,000 (17,466,000)
Cash flows from financing activities:
Proceeds from notes payable - 600,000 -
Payments of notes payable (107,000) (25,000) (26,000)
Purchase of treasury stock - - (754,000)
Notes receivable from shareholders - - (1,045,000)
Proceeds from convertible note, net - - 12,615,000
Proceeds from stock issuances, net 32,000 33,000 18,553,000
------------ ------------ -----------
Net cash provided by (used in)
financing activities (75,000) 608,000 29,343,000
------------ ------------ -----------
Net increase (decrease) in cash and
cash equivalents (5,982,000) (989,000) 7,546,000
Cash and cash equivalents at
beginning of period 7,426,000 8,415,000 869,000
------------ ------------ ------------
Cash and cash equivalents at
end of period $1,444,000 $7,426,000 $8,415,000
============ ============ ============
Cash paid for interest $1,083,000 $ 959,000 $ 50,000
Cash paid for income taxes - - -
Supplemental disclosure of
noncash transactions
Acquisition of Australia patents
Assets acquired 676,000 - -
Stock and warrants issued (676,000) - -
The accompanying notes are an integral part of these statements.
F-5
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three years ended December 31, 2002
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
- --------------------
Access Pharmaceuticals, Inc. is a diversified emerging pharmaceutical
company engaged in the development of novel therapeutics based
primarily on the adaptation of existing therapeutic agents using its
proprietary drug delivery platforms. We operate in a single industry
segment. Our efforts have been principally devoted to research and
development, resulting in significant losses since inception on February
24, 1988. Prior to 2002, we presented our financial statements as a
development stage enterprise. We no longer consider ourselves to be in
the development stage.
A summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements follows.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the financial statements of
Access Pharmaceuticals, Inc. and our wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated
in consolidation.
Cash and Cash Equivalents
- -------------------------
We consider all highly liquid instruments with an original maturity of
three months or less to be cash equivalents for purposes of the statements
of cash flows. We invest our excess cash in government and corporate
securities. Cash and cash equivalents consist primarily of cash in banks,
money market funds and short-term corporate securities. All other
investments are reported as short-term investments.
Short-term Investments
- ----------------------
All short term investments are classified as held to maturity. The cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income.
The cost of securities sold is based on the specific identification method.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Depreciation is provided
using the straight-line method over estimated useful lives ranging from
three to seven years.
Patents and Applications
- ------------------------
We expense internal patent and application costs as incurred because, even
though we believe the patents and underlying processes have continuing value,
the amount of future benefits to be derived therefrom are uncertain.
Licenses
- --------
We recognize the purchase cost of licenses and amortize them over their
estimated useful lives.
F-6
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Revenue Recognition
- -------------------
Licensing revenues are recognized over the period of our performance
obligation. Licensing agreements generally require payments of fees on
executing the agreement with milestone payments based on regulatory
approvals and cumulative sales. Some agreements allow for the return of
a portion of the initial execution fee if regulatory approvals are not
received. Many of our agreements are for ten years with automatic
extensions. Sponsored research and development revenues are recognized
as research and development activities are performed under the terms of
research contracts. Advance payments received are recorded as unearned
revenue until the related research activities are performed. Royalty income
is recognized as earned. Option revenues are recognized when the
earnings process is completed pursuant to the terms of the respective
contract.
Revenue from product sales is recognized when the customer's order is
shipped from our third party logistics company's warehouse.
Research and Development Expenses
- ---------------------------------
Pursuant to SFAS No. 2, "Accounting for Research and Development
Costs," our research and development costs are expensed as incurred.
Research and development expenses include, but are not limited to,
payroll and personnel expense, lab supplies, preclinical, development cost,
clinical trial expense, outside manufacturing and consulting.
Income Taxes
- ------------
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Loss Per Share
- --------------
We have presented basic loss per share, computed on the basis of
the weighted average number of common shares outstanding during the
year, and diluted loss per share, computed on the basis of the weighted
average number of common shares and all dilutive potential common
shares outstanding during the year. Dilutive potential common shares
result from stock options and warrants. However, for all years presented,
stock options and warrants are anti-dilutive.
F-7
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Acquisition-Related Intangible Assets and Change In Accounting Principles
- -------------------------------------------------------------------------
Effective January 1, 2002, we adopted SFAS 141, "Business
Combinations" and SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, and also specifies the
criteria for the recognition of intangible assets separately from goodwill.
Under the new rules, goodwill is no longer amortized but is subject to an
impairment test at least annually or more frequently if impairment
indicators arise. Separately identified and recognized intangible assets
resulting from business combinations completed before July 1, 2001 that
did not meet the new criteria for separate recognition of intangible assets
were subsumed in goodwill upon adoption. The intangible assets of the
company that did not meet the separate recognition criteria of SFAS 141
were licenses and acquired patents. We continue to amortize intangible
assets that meet the new criteria over their useful lives. In accordance with
SFAS 142, we performed a transitional impairment test of goodwill as of
January 1, 2002, and an annual test in the fourth quarter of 2002, which
did not result in an impairment of goodwill.
Intangible assets consist of the following (in thousands):
December 31, 2002 December 31, 2001
----------------------------------------
Gross Gross
carrying Accumulated carrying Accumulated
value amortization value amortization
------------ ------------ ------------ ------------
Amortizable intangible assets
Patents $2,966 $ 188 $ - $ -
Licenses 830 380 1,130 356
-------- -------- -------- --------
Total $3,796 $ 568 $1,130 $ 356
======== ======== ======== ========
Intangible assets not subject
to amortization
Goodwill $2,464 $ 596 $2,464 $ 596
======== ======== ======== ========
Amortization expense related to intangible assets totaled $301,000 and
$359,000 for the twelve months ended December 31, 2002 and 2001,
respectively. The aggregate estimated amortization expense for intangible
assets remaining as of December 31, 2002 is as follows (in thousands):
2003 $ 390
2004 390
2005 390
2006 390
2007 390
Thereafter 1,278
------
Total $3,228
======
F-8
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Net loss and loss per share for the twelve months ended December 31,
2002 and 2001, adjusted to exclude goodwill amortization expense, is as
follows:
Twelve months ended December 31,
--------------------------------
2002 2001
------------ ------------
Net loss
Reported net loss allocable
to common stockholders $(9,384) $(6,027)
Goodwill amortization - 246
------------ ------------
Adjusted net loss allocable
to common stockholders $(9,384) $(5,781)
============ ============
Basic and diluted loss per share
Reported basic and diluted
loss per share $(.72) $(.47)
Goodwill amortization - .02
------------ ------------
Adjusted basic and diluted
loss per share $(.72) $(.45)
============ ============
Stock-Based Compensation
- ------------------------
We account for our stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. We have
adopted the disclosure provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
which recognizes the fair value of all stock-based awards on the date of
grant.
We have adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and apply Accounting
Principles Board Opinion No. 25, or APB 25, and related interpretations
in accounting for our stock option plans. Accordingly, our employee
stock-based compensation expense is recognized based on the intrinsic
value of the option on the date of grant.
At December 31, 2002 we had two stock-based employee compensation
plans, which are described more fully in Note 11. No stock-based
employee compensation cost, other than compensation associated with
options assumed in acquisitions, is reflected in net loss, as all options
granted under those plans had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net loss and net loss per share if we had applied
the fair value recognition of SFAS 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
December 31,
---------------------------
2002 2001 2000
------------ ------------ ------------
Net loss
As reported $(9,384,000) $(6,027,000) $(5,428,000)
Pro forma (11,046,000) (7,592,000) (6,366,000)
Basic and diluted loss per share
As reported ($.72) ($.47) ($.49)
Pro forma ($.84) ($.59) ($.57)
F-9
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Stock compensation expense for options granted to nonemployees has been
determined in accordance with SFAS 123 and EITF 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services," as the fair
value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured.
Use of Estimates
- ----------------
In preparing consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
We tested goodwill for impairment based on estimates of fair value. It is
at least reasonably possible that the estimates used by us will be materially
different from actual amounts. These differences could result in the
impairment of all or a portion of our goodwill, which could have a
materially adverse effect on our results of operations.
Segment Information
- -------------------
We currently operate as a single segment under SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information."
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
- -----------------------------------------------------------------------
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards, or SFAS, 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The primary objectives of SFAS 144 are to develop one accounting
model based on the framework established in SFAS 121 for long-lived
assets to be disposed of by sale, and to address significant implementation
issues. Our adoption of SFAS 144 did not have an impact on our financial
position or results of operations.
Fair Value of Financial Instruments
- -----------------------------------
The carrying value of cash, cash equivalents, short-term investments and
certificates of deposit approximates fair value due to the short maturity of
these items. It is not practical to estimate the fair value of the Company's
long-term debt because quoted market prices do not exist and there were
no available securities as a basis to value our debt.
New Accounting Pronouncements
- ------------------------------
On December 31, 2002, FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure". SFAS No. 148
amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS
No. 148 requires accounting policy note disclosures to provide the method
of stock option accounting for each year presented in the financial
statements and for each year until all years presented in the financial
statements recognize the fair value of stock-based compensation. Also,
SFAS No. 148 provides two additional transition methods that eliminate
the ramp-up effect resulting from applying the expense recognition
provisions of SFAS No. 123. The transition provisions and annual
statement disclosure requirements of SFAS No. 148 are effective for fiscal
years ending after December 15, 2002. The interim statement disclosure
requirements are effective for the first interim statement that includes
financial information after December 15, 2002. There will be no financial
statement effect from the adoption of this new standard unless we were to
make a change in our accounting policy and account for stock option
grants as compensation expense.
F-10
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 2 - SHORT-TERM INVESTMENTS
Short-term investments consist of certificates of deposit maturing from
March 2003 through April 2004.
NOTE 3 - ACQUISITIONS
Our wholly-owned subsidiary, Access Pharmaceuticals Australia Pty.
Limited acquired the targeted therapeutic technology business of Biotech
Australia Pty. Ltd under an Asset Sale Agreement dated February 26,
2002. Under the terms of the Asset Sale Agreement, Access
Pharmaceuticals Australia Pty. Limited acquired the patents to three
targeted therapeutics technologies and retained the scientific group that has
developed this technology. The total consideration payable by us will be
paid in a combination of cash and stock over a three-year period and is
dependent on the achievement of certain technology milestones. We paid
$500,000 at closing and an additional total of up to $525,000 will be paid
over a three-year period. Additionally up to $350,000 may be payable if
events occur that result in certain new agreements. We also issued as
consideration 172,584 shares of our common stock (valued at $633,000)
and warrants to purchase 25,000 shares of our common stock at an
exercise price of $5.00 per share (valued at $43,000 using the Black-
Scholes option pricing model). The stock issued is subject to restriction
and could not be sold until February 27, 2003.
The three patented targeted therapeutic technologies acquired in this
transaction are:
* folate conjugates of polymer therapeutics to enhance tumor delivery by
targeting folate receptors which are upregulated in certain tumor types;
* the use of vitamin B12 to target the transcobalamin II receptor which
is upregulated in numerous diseases including cancer, rheumatoid arthritis
and certain neurological and autoimmune disorders; and
* oral delivery of a wide variety of molecules, which cannot otherwise
be orally administered, using the active transport mechanism which
transports vitamin B12 into the systemic circulation.
The cost of the acquisition has been assigned principally to patents and
will be amortized over the useful life of the patents.
On July 22, 2002, we acquired from GlaxoSmithKline the patents,
trademarks and technology covering the use of amlexanox for the
treatment of mucosal and skin disorders. The two major components of
the acquisition are the US marketing rights to amlexanox 5% paste which
is currently marketed for the treatment of canker sores under the
trademark Aphthasol (R), and the remaining worldwide marketing rights
for this indication which were the subject of a prior licensing agreement
between the companies. Under the terms of the agreement, we made an
initial upfront payment of $750,000 and an additional payment of
$250,000 on January 22, 2003. We will make an additional $250,000 on
July 22, 2003 and future possible milestone payments based on the
commercial success of amlexanox. The commercial terms of our prior
mucositis agreement between the companies, which granted us worldwide
rights for this indication, will remain in place.
NOTE 4 - RELATED PARTY TRANSACTIONS
Under a consulting agreement between Thoma Corporation ("Thoma") and
us, Thoma receives payments for consulting services and reimbursement
of direct expenses. Herbert H. McDade, Jr., our Chairman of the Board
of Directors, is an owner of Thoma Corp. Thoma received payments for
consulting services and was also reimbursed for expenses as follows:
Consulting Expense
Year Fees Reimbursement
- ---- ----------- -------------
2002 $18,000 $ -
2001 54,000 -
2000 72,000 1,000
F-11
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 4 - RELATED PARTY TRANSACTIONS - continued
Stephen B. Howell, M.D., a Director, receives payments for consulting
services and reimbursement of direct expenses and has also received
warrants for his consulting services. Dr. Howell's payments for consulting
services, expense reimbursements and warrants are as follows:
Consulting Expense Exercise
Year Fees Reimbursement Warrants Price
- ---- ----------- ------------- -------- --------
2002 $ 55,000 $ 3,000 10,000 $4.91
2001 101,000 16,000 15,000 $3.00
2000 66,000 9,000 30,000 $2.00
See Note 10 for a discussion of our Restricted Stock Purchase Program.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
--------------------------
2002 2001
------------ ------------
Laboratory equipment $1,524,000 $1,139,000
Laboratory and building improvements 157,000 151,000
Furniture and equipment 191,000 179,000
------------ ------------
1,872,000 1,469,000
Less accumulated depreciation
and amortization 1,130,000 992,000
------------ ------------
Net property and equipment $ 742,000 $ 477,000
============ ============
Depreciation and amortization on property and equipment was $138,000,
$57,000, and $64,000 for the years ended December 31, 2002, 2001 and
2000, respectively.
NOTE 6 - 401(k) PLAN
We have a tax-qualified employee savings and retirement plan (the
"401(k) Plan") covering all our employees. Pursuant
to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit ($11,000 in
2002, $10,500 in 2001 and 2000) and to have the amount of such
reduction contributed to the 401(k) Plan. We have
implemented a 401(k) matching program whereby we contribute for each
dollar a participant contributes a like amount, with a maximum
contribution of 2% of a participant's earnings. The 401(k) Plan is intended
to qualify under Section 401 of the Internal Revenue Code so that
contributions by employees or by us to the 401(k) Plan, and income
earned on 401(k) Plan contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that contributions by us, if any,
will be deductible by us when made. At the direction of each participant,
we invest the assets of the 401(k) Plan in any of 23 investment options.
Company contributions under the 401(k) Plan were approximately $37,000
in 2002, $32,000 in 2001, and $22,000 in 2000.
F-12
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 7 - NOTE PAYABLE AND OTHER OBLIGATIONS
On September 20, 2001, we completed a $600,000 installment loan with
a bank. The loan was used to purchase capital equipment and for leasehold
improvements to expand our laboratory and office space. The loan is due
in 60 equal installments, including interest at 6.5%. The loan is secured
by a $468,000 certificate of deposit classified as an other asset at
December 31, 2002.
On February 26, 2002, our wholly-owned subsidiary, Access
Pharmaceuticals Australia Pty. Limited acquired the targeted therapeutic
technology business of Biotech Australia Pty. Ltd under an Asset Sale
Agreement. We will pay $175,000 each February 26, starting in 2003, for
a total of up to $525,000, over a three-year period.
On July 22, 2002, we acquired from GlaxoSmithKline the patents,
trademarks and technology covering the use of amlexanox for the
treatment of mucosal and skin disorders. Under the terms of the
agreement, we made a payment of $250,000 on January 22, 2003. We
will make an additional $250,000 payment on July 22, 2003.
Future maturities of the note payable and other obligations are as follows:
2003 $ 787,000
2004 294,000
2005 305,000
2006 103,000
-----------
$1,489,000
===========
NOTE 8 - CONVERTIBLE NOTES
On September 20, 2000, we completed a $13.5 million convertible note
offering. The offering was placed with three investors. Our convertible
notes are due in two parts, $8,050,000 due on September 13, 2005 and
$5,500,000 due on September 13, 2006. The notes bear interest at 7.7%
per annum with $1,041,000 of interest due annually on September 13th.
The notes have a fixed conversion price of $5.50 per share of common
stock and may be converted by the note holder or us under certain
circumstances as defined in the note. If the notes are not converted we
will have to repay the notes on the due dates. Total expenses of issuance
were $915,000 and are amortized over the life of the notes.
NOTE 9 - COMMITMENTS
At December 31, 2002, we do have commitments under noncancelable operating
leases for facilities and equipment as follows:
Operating
leases
----------
2003 $ 204,000
2004 200,000
2005 192,000
2006 42,000
----------
Total future minimum
lease payments $ 638,000
==========
We lease certain office and research and development facilities under an
operating lease. Rent expense for the years ended December 31, 2002,
2001 and 2000 was $138,000, $114,000 and $85,000, respectively.
F-13
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 10 - STOCKHOLDERS' EQUITY
Common Stock
- ------------
In May 2000 we completed two self-managed private placement sales of
our common stock, at prices of $3.00 and $5.00 per share, respectively.
We received gross proceeds of $3.3 million from these sales.
On March 1, 2000, with the assistance of an investment bank, we
completed the closing of a private placement offering of 4.8 million shares
of common stock, at a per share price of $2.50, for which we received
gross proceeds of $12.0 million. The placement agent for the offering
received warrants to purchase 509,097 shares of common stock with an
exercise price of $2.50 per share, in accordance with the offering terms,
and elected to receive 382,315 shares of common stock in lieu of certain
sales commissions and expenses.
Restricted Stock Purchase Program
- ---------------------------------
On October 12, 2000, the Board of Directors authorized a Restricted
Stock Purchase Program. Under the Program, the Company's executive
officers and corporate secretary were given the opportunity to purchase
shares of common stock in an individually designated amount per
participant determined by the Compensation Committee of the Board of
Directors. A total of 190,000 shares were purchased under the Program
by four eligible participants at $5.50 per share, the fair market value of
the common stock on October 12, 2000, for an aggregate consideration of
$1,045,000. The purchase price was paid through the participant's
delivery of a 50%-recourse promissory note payable to the Company for
three executive officer participants and a full-recourse promissory note
payable to the Company for the corporate secretary. Each note bears
interest at 5.87% compounded semi-annually and has a maximum term of
ten years. The notes are secured by a pledge of the purchased shares to
the Company. The Company recorded the notes receivable from
participants in this Program of $1,045,000 as a reduction of equity in the
Consolidated Balance Sheet.
The stock granted under the Program other than to the corporate secretary
vests ratably over a four year period. The stock granted to the corporate
secretary vested on the date of grant.
Warrants
- --------
There were warrants to purchase a total of 990,343 shares of common
stock outstanding at December 31, 2002. All the warrants were
exercisable at December 31, 2002. The warrants had various prices and
terms as follows:
Warrants Exercise Expiration
Summary of Warrants Outstanding Price Date
- ---------------------------------------- ----------- ---------- -----------
2002 warrants offered in acquisition (a) 25,000 $ 5.00 2/26/05
2002 scientific consultant (b) 10,000 4.96 2/01/09
2001 scientific consultant (c) 15,000 3.00 1/1/08
2000 offering (d) 326,637 2.00 3/01/05
2000 scientific consultant (e) 30,000 2.00 1/01/07
2000 scientific consultant (f) 7,500 3.00 1/01/04
1999 offering (g) 105,548 2.00 10/18/04
1999 financial advisor (h) 100,000 2.93 3/26/04
1999 scientific consultant (i) 30,000 3.00 1/01/03
1998 offering (j) 242,287 3.00 4/01/03
1998 offering (j) 83,371 3.00 7/30/03
1998 financial advisor (k) 15,000 4.00 12/01/03
---------
Total 990,343
=========
F-14
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 10 - STOCKHOLDERS' EQUITY - Continued
a) During 2002, a company received warrants to purchase 25,000 shares
of common stock at an exercise price of $5.00 per share at any time from
February 26, 2002 until February 26, 2005. The warrants were issued in
connection with the acquisition of patents in Australia. The fair value of
the warrants was $1.72 per share on the date of the grant using the Black-
Scholes pricing model with the following assumptions: expected dividend
yield 0.0%, risk-free interest rate 3.67%, expected volatility 81% and an
expected life of 3 years. Total fair value of the warrants relating to the
purchase of patents ($43,000) has been capitalized as patent costs and an
increase to additional paid-in capital.
b) During 2002, a scientific advisor received warrants to purchase 10,000
shares of common stock at an exercise price of $4.91 per share at any
time from February 1, 2002 until February 1, 2009, for scientific
consulting services rendered in 2002. The fair value of the warrants was
$3.70 per share on the date of the grant using the Black-Scholes pricing
model with the following assumptions: expected dividend yield 0.0%,
risk-free interest rate 3.90%, expected volatility 81% and an expected life
of 7 years. Total fair value of the warrants relating to the consulting
services ($37,000) has been recorded as consulting expense and an
increase to additional paid-in capital.
c) During 2001, a scientific advisor received warrants to purchase 15,000
shares of common stock at an exercise price of $3.00 per share at any
time from January 1, 2001 until January 1, 2008, for scientific consulting
services rendered in 2001. The fair value of the warrants was $2.74 per
share on the date of the grant using the Black-Scholes pricing model with
the following assumptions: expected dividend yield 0.0%, risk-free
interest rate 5.03%, expected volatility 118% and an expected life of 7
years. Total fair value of the warrants relating to the consulting services
($41,000) has been recorded as consulting expense and an increase to
additional paid-in capital.
d) In connection with the aforementioned offerings of common stock in
2000, warrants to purchase a total of 509,097 shares of common stock
were issued. All of the warrants are exercisable immediately and expire
five years from date of issuance.
e) During 2000, a scientific advisor received warrants to purchase 30,000
shares of common stock at an exercise price of $2.00 per share at any
time from January 1, 2000 until January 1, 2007, for scientific consulting
services rendered in 2000. The fair value of the warrants was $1.68 per
share on the date of the grant using the Black-Scholes pricing model with
the following assumptions: expected dividend yield 0.0%, risk-free
interest rate 5.625%, expected volatility 118% and an expected life of 5
years. Total fair value of the warrants relating to the consulting services
($50,000) has been recorded as consulting expense and an increase to
additional paid-in capital.
f) During 2000, a scientific advisor received warrants to purchase 7,500
shares of common stock at any time from January 1, 1999 until January
1, 2004, for scientific consulting services rendered in 2000. The fair value
of the warrants was $1.87 per share on the date of the grant using the
Black-Scholes pricing model with the following assumptions: expected
dividend yield 0.0%, risk-free interest rate 5.38%, expected volatility
122% and an expected life of 4 years. Total fair value of the warrants
relating to the consulting services ($14,000) has been recorded as
consulting expense and an increase to additional paid-in capital.
g) In connection with offerings of common stock in 1999, warrants to
purchase a total of 165,721 shares of common stock were issued. All of
the warrants are exercisable immediately and expire five years from date
of issuance.
F-15
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 10 - STOCKHOLDERS' EQUITY - Continued
h) During 1999, a financial advisor received warrants to purchase
100,000 shares of common stock at any time from March 26, 1999 until
March 26, 2004, for financial consulting services rendered in 1999. The
fair value of the warrants was $2.48 per share on the date of the grant
using the Black-Scholes pricing model with the following assumptions:
expected dividend yield 0.0%, risk-free interest rate 5.42%, expected
volatility 122% and an expected life of 5 years. Total fair value of the
warrants relating to the consulting services ($249,000) has been recorded
as general and administrative expense and an increase to additional paid-in
capital
i) During 1999, a scientific advisor received warrants to purchase 30,000
shares of common stock at any time from January 1, 1999 until January
1, 2003, for scientific consulting services rendered in 1999. The fair value
of the warrants was $1.56 per share on the date of the grant using the
Black-Scholes pricing model with the following assumptions: expected
dividend yield 0.0%, risk-free interest rate 5.38%, expected volatility
122% and an expected life of 4 years. Total fair value of the warrants
relating to the consulting services ($47,000) has been recorded as
consulting expense and an increase to additional paid-in capital.
j) In connection with offerings of units and common stock in 1998,
warrants to purchase a total of 579,627 shares of common stock were
issued. All of the warrants are exercisable immediately at $3.00 per share
and expire five years from date of issuance.
k) During 1998, a financial advisor received warrants to purchase 15,000
shares of common stock at any time from December 1, 1998 until
December 1, 2003, for financial consulting services rendered in 1998. The
fair value of the warrants was $2.48 per share on the date of the grant
using the Black-Scholes pricing model with the following assumptions:
expected dividend yield 0.0%, risk-free interest rate 4.85%, expected
volatility 122% and an expected life of 5 years. Total fair value of the
warrants relating to the consulting services ($37,000) has been recorded
as general and administrative expense and an increase to additional paid-in
capital.
2001 Restricted Stock Plan
- --------------------------
We have a restricted stock plan, the 2001 Restricted Stock Plan, under
which 200,000 shares of our authorized but unissued common stock were
reserved for issuance to certain employees, directors, consultants and
advisors. The restricted stock granted under the plan generally vests over
five years, 25% two years after the grant date with additional 25% vesting
every anniversary date. All stock is vested after five years. At December
31, 2002 there were 94,857 shares granted and 105,143 shares available
for grant under the 2001 Restricted Stock Plan.
NOTE 11 - STOCK OPTION PLANS
We have a stock option plan, as amended, (the "1995 Stock Awards
Plan"), under which 2,000,000 shares of our authorized but unissued
common stock were reserved for issuance to optionees including officers,
employees, and other individuals performing services for us. The 1995
Stock Awards Plan replaced the previously approved stock option plan
(the "1987 Stock Awards Plan"). On February 11, 2000 we adopted the
2000 Special Stock Option Plan and Agreement (the "Plan"). The Plan
provides for the award of options to purchase 500,000 shares of the
authorized but unissued shares of common stock of the Company. Options
granted under all the plans generally vest ratably over a four to five year
period and are generally exercisable over a ten-year period from the date
of grant. Stock options are generally granted with an exercise price equal
to the market value at the date of grant.
At December 31, 2002, there were 238,500 additional shares available for
grant under the 1995 Stock Awards Plan.
F-16
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 11 - STOCK OPTION PLANS - Continued
The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 2002, 2001 and 2000, respectively:
dividend yield of 0% for all periods; volatility of 98%, 90% and 118%;
risk-free interest rates of 2.03%, 3.70% and 4.85% and expected lives of
four years for all periods. The weighted average fair values of options
granted were $2.46, $2.52 and $2.88 per share during 2002, 2001 and
2000, respectively.
Summarized information for the 1995 Stock Awards Plan is as follows:
Weighted-
average
exercise
Shares price
------------ --------
Outstanding options at January 1, 2000 633,000 $2.47
Granted, fair value of $2.46 per share 551,500 4.94
Exercised (47,916) 2.64
Forfeited (10,000) 1.73
---------
Outstanding options at December 31, 2000 1,126,584 3.68
Granted, fair value of $2.52 per share 154,000 3.65
---------
Outstanding options at December 31, 2001 1,280,584 3.68
Granted, fair value of $2.88 per share 493,000 3.53
Exercised (2,428) 2.08
Forfeited (60,000) 3.17
---------
Outstanding options at December 31, 2002 1,711,156 3.59
=========
Exercisable at December 31, 2000 414,239 2.59
Exercisable at December 31, 2001 733,851 3.20
Exercisable at December 31, 2002 997,570 3.35
Further information regarding options outstanding under the 1995 Stock
Awards Plan at December 31, 2002 is summarized below:
Weighted average Weighted-
Number of ----------------------- Number of average
shares Remaining Exercise shares exercise
Range of exercise prices outstanding life in years price exercisable price
- ------------------------ ----------- ------------- -------- ----------- --------
$1.49-2.18 328,972 7.2 $2.00 275,503 $2.00
$2.50-2.81 203,100 8.5 2.58 152,379 2.60
$2.94-3.99 749,084 8.4 3.43 311,855 3.05
$4.05-7.8125 430,000 8.1 5.87 257,833 5.64
--------- -------
1,711,156 997,570
========= =======
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 11 - STOCK OPTION PLANS - Continued
Summarized information for the 2000 Special Stock Option Plan is as
follows:
Weighted-
average
exercise
Shares price
---------- ----------
Outstanding options at January 1, 2000 -
Granted 500,000 $2.50
Outstanding options at December 31,
2000, 2001 and 2002 500,000 $2.50
343,749 of the options in the 2000 Special Stock Option Plan were
exercisable at December 31, 2002, 218,749 of the options were
exercisable at December 31, 2001 and none were exercisable at December
31, 2000. All of the options expire on March 1, 2010 and have an
exercise price of $2.50 per share.
All issued options under the 1987 Stock Awards Plan are vested and
exercisable. No further grants can be made. Summarized information for
the 1987 Stock Awards Plan is as follows:
Weighted-
average
Stock exercise
options price
----------- ---------
Outstanding awards at January 1, 2000 30,002 $34.66
Forfeited (1,250) 30.00
------
Outstanding awards at December 31, 2000 28,752 37.38
Forfeited (2,750) 23.52
------
Outstanding awards of December 31, 2001 26,002 46.18
Forfeited (8,824) 90.45
------
Outstanding awards of December 31, 2002 17,178 23.31
======
All options outstanding were exercisable at each year end.
Further information regarding options outstanding and exercisable under
the 1987 Stock Awards Plan at December 31, 2002 is summarized below:
Weighted average
-------------------------------
Number Remaining Exercise
Range of exercise prices of shares life price
- ------------------------- --------- ------------ -----------
$0-$17.50 11,428 2.0 $17.42
$35.00 5,750 1.0 35.00
------
17,178
======
F-18
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 12 - INCOME TAXES
Income tax expense differs from the statutory amounts as follows:
2002 2001 2000
------------ ------------ ------------
Income taxes at U.S. statutory rate $(3,191,000) $(2,049,000) $(1,846,000)
Change in valuation allowance 1,153,000 1,897,000 (24,000)
Expenses not deductible 15,000 8,000 46,000
Expiration of net operating loss
and general business credit
carryforwards, net of revisions 2,023,000 144,000 1,824,000
------------ ------------ ------------
Total tax expense $ - $ - $ -
============ ============ ============
Deferred taxes are provided for the temporary differences between the
financial reporting bases and the tax bases of our assets and liabilities.
The temporary differences that give rise to deferred tax assets were as
follows:
December 31,
2002 2001 2000
------------ ------------ ------------
Deferred tax assets (liabilities)
Net operating loss carryforwards $20,487,000 $19,259,000 $18,491,000
General business credit carryforwards 1,356,000 1,396,000 445,000
Property, equipment and goodwill 119,000 154,000 (24,000)
------------ ------------ ------------
Gross deferred tax assets 21,962,000 20,809,000 18,912,000
Valuation allowance (21,962,000) (20,809,000) (18,912,000)
------------ ------------ ------------
Net deferred taxes $ - $ - $ -
============ ============ ============
At December 31, 2002, we had approximately $60,255,000 of net
operating loss carryforwards and approximately $1,356,000 of general
business credit carryforwards. These carryforwards expire as follows:
Net operating General business
loss carryforwards credit carryforwards
------------------ --------------------
2003 $ 7,145,000 $ -
2004 5,713,000 -
2005 2,897,000 26,000
2006 198,000 38,000
2007 3,330,000 26,000
Thereafter 40,972,000 1,266,000
----------- -----------
$59,128,000 $ 1,752,000
=========== ===========
As a result of a merger on January 25, 1996, a change in control occurred
for federal income tax purposes which limits the utilization of pre-merger
net operating loss carryforwards of approximately $3,100,000 to
approximately $530,000 per year.
F-19
Access Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2002
NOTE 13 - CONTINGENCIES
Our products will require clinical trials, U.S. Food and Drug
Administration approval, or approval of similar authorities internationally
and acceptance in the marketplace after commercialization. Although we
believe our patents and patent applications are valid, the invalidation of
any of our major patents could have a material adverse effect upon our
business. We compete with specialized biotechnology companies and
major pharmaceutical companies, many of these competitors have
substantially greater resources than us.
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 are not clearly delineated,
he appears to bring claims for fraud, conspiracy, and theft against all
defendants, and a claim for breach of contract against Access. Each of
the allegations relates to an allegedly unfulfilled contractual obligation to
deliver to Hall 45,000 warrants to purchase our stock. Hall alleges in his
complaint and in a subsequent letter that the warrants, had they been
delivered, could have been worth up to $540,000. He seeks 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 interference
with the our right to enjoy certain contractual benefits. Discovery,
substantive fact investigation, and legal analysis have only recently begun.
Access intends to be vigorous in both its defense of Hall's claims and its
pursuit of our counterclaims.
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Our results of operations by quarter for the years ended December 31,
2002 and 2001 were as follows (in thousands, except per share amounts):
2002 Quarter Ended
----------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ---------- ----------
Revenue $ 116 $ 263 $ 91 $ 677
Operating loss (1,763) (2,118) (2,675) (2,144)
Net loss $(1,866) $(2,308) $(2,858) $(2,352)
========== ========== ========== ==========
Basic and diluted loss per
common share $(0.14) $(0.18) $(0.22) $(0.18)
========== ========== ========== ==========
2001 Quarter Ended
----------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ---------- ----------
Revenue $ 211 $ 10 $ 11 $ 11
Operating loss (1,330) (1,584) (1,844) (1,550)
Net loss $(1,171) $(1,517) $(1,744) $(1,595)
========== ========== ========== ==========
Basic and diluted loss per
common share $(0.09) $(0.12) $(0.13) $(0.12)
========== ========== ========== ==========