UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

 

 

Commission file number 1-33895

CPEX Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(603) 658-6100

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o     NO þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o     NO þ

 

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 þ      NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o     NO o

 

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 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.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o     NO þ

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

 

 

Part I

 

 

Overview

 

We are an emerging specialty pharmaceutical company in the business of research and development of pharmaceutical products utilizing our validated drug delivery platform technology.

 

We have U.S. and international patents and other proprietary rights to technology that facilitates the absorption of drugs. Our platform drug delivery technology is based upon CPE-215^®, which enhances permeation and absorption of pharmaceutical molecules across biological membranes such as the skin, nasal mucosa and eye. Our first product is Testim^®, a gel for testosterone replacement therapy, which is a formulation of our technology with testosterone. Testim is licensed to Auxilium Pharmaceuticals, Inc. (“Auxilium”) which is currently marketing it in the United States, Europe and other countries. Substantially all of our current revenue is derived from royalties on Testim sales.

 

In April 2010, we announced that Serenity Pharmaceuticals, LLC, our licensing and development partner, entered into a global agreement with Allergan, Inc. for the development and commercialization of Ser-120, a product candidate for the treatment of nocturia that utilizes our patented intranasal drug delivery technology. In connection with its agreement with Serenity, Allergan assumed our exclusive development and license agreement with Serenity under which we granted Serenity an exclusive and sub-licensable license to use our CPE-215^® permeation technology for the development of Ser-120. In return, we are entitled to sales milestones and low single digit royalties on worldwide net sales following commercialization of Ser-120. In 2010, Allergan reported that Serenity and Allergan are in the process of reviewing the complete trial data from two Phase 3 trials of Ser-120, which were not sufficient for successful registration, to determine what additional trials are indicated to support development of the program.

 

On January 4, 2011, we announced that we had entered into a definitive agreement with FCB I Holdings Inc., or FCB, a newly formed company which is controlled by Footstar Corporation, under which FCB, through a wholly-owned subsidiary, will acquire all of our outstanding common stock for $27.25 per share in cash, pursuant to an agreement and plan of merger approved by our Board of Directors. The proposed merger was subsequently approved by our stockholders on March 24, 2011. The closing of the transaction is subject to the satisfaction of certain customary closing conditions, provided, the closing of the transaction may not occur prior to April 4, 2011. We expect that the transaction will be completed shortly after April 4, 2011, but there can be no assurance that the closing will occur on this timeframe or at all. Upon closing of the transaction, we will become a wholly-owned subsidiary of FCB and our common stock will cease to trade on the NASDAQ Capital Market. The foregoing description of the transaction with FCB does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is filed as Exhibit 2.1 to this report.

 

We were incorporated in the State of Delaware in 2007, and our principal executive offices are located in Exeter, New Hampshire. Our business was initially the drug delivery business of Bentley Pharmaceuticals, Inc. We were spun off in June 2008 in connection with the sale of Bentley’s remaining business. Shares of our stock were distributed to Bentley stockholders after the close of business on June 30, 2008 by means of a stock dividend (the “Separation”). Each Bentley stockholder of record on June 20, 2008 received one share of our common stock for every ten shares of Bentley common stock. Bentley has no ownership interest in our company subsequent to the spin-off.

 

Industry Overview

 

Specialty pharmaceutical companies like ours develop products to address the limitations of current therapies in selected established markets (endocrinology, urology, dermatology, neurology, etc.). These specialty markets can usually be addressed by smaller sales forces, but have the same market potential. Our pipeline products are designed to enhance safety, efficacy, ease-of-use and patient compliance. Our pipeline

products also provide novel opportunities for pharmaceutical and biotechnology companies to partner with us to develop new and innovative products and extend their therapeutic franchises.

 

Developing safer and more efficacious methods of delivering existing drugs is generally subject to less risk than attempting to discover new drugs, because of lower development costs. On average, it takes 10 to 15 years for an experimental new drug to progress from the laboratory to commercialization in the U.S., with an average cost of approximately $800 million to $900 million. Typically, only one in 5,000 compounds entering preclinical testing advances into human testing and only one in five compounds tested in humans is approved for commercialization. By contrast, we typically consider drugs for our pipeline that already have been approved and are commercially available, have a track record of safety and efficacy and have established markets for which there is an unmet medical need. In addition, we may be able to pursue an accelerated 505(b)(2) path to the market for some of our pipeline products that may translate into less time spent in the clinic and less money spent on clinical development. The 505(b)(2) development path in turn translates into a faster time to market launch.

 

The vast majority of the drugs currently on the market are administered orally or by injection. Oral drug delivery methods, while simple to use, typically subject drugs to degradation initially by the stomach and secondarily to first-pass metabolism in the liver before reaching the bloodstream. In order to achieve efficacy, higher drug dosages are often used, which can increase the risk of side effects.

 

Injectable pharmaceuticals, while avoiding first-pass metabolism in the liver, possess several disadvantages, which can lead to decreased patient acceptance and compliance with prescribed therapy. Injectable drugs are more painful for the patient and often require medical personnel to administer. In addition, injectable drugs are typically also more expensive due to the added cost associated with their manufacturing under sterile conditions and added costs for their administration, including medical personnel, syringes, needles and other supplies. A decline in patient acceptance and compliance due to any of these reasons can delay the initiation of treatment and increase the risk of medical complications and could lead to higher healthcare costs.

 

Alternative Drug Delivery Technologies

 

Pharmaceutical and biotechnology companies recognize the benefits of alternative delivery technologies as a way of gaining a competitive advantage. It has been reported that while pharmaceutical sales in the U.S. have risen steadily over the last several years to more than $720 billion in 2008, sales growth is expected to slow over the next several years due to an extraordinary number of patent expirations and to the poor global economy. At the same time, it is estimated that the global drug delivery market has tripled in value since 2000 to approximately $78 billion (Espicom Healthcare Intelligence, 2009). The growth in the drug delivery market has been driven by the recognition of pharmaceutical and biotechnology companies that provide alternative delivery technologies that avoid first-pass liver metabolism, that are less invasive than injectable options and that enable product line and patent position extension provide an attractive combination of advantages to companies and patients. Further, these pharmaceutical and biotechnology companies often benefit from specialty pharmaceutical companies that apply their technologies to off-patent products, formulating their own proprietary products, which are then typically commercialized by larger pharmaceutical companies capable of promoting the products.

 

Our Permeation Enhancement Technology — The Path to Improved Drug Benefits

 

Permeation enhancement with CPE-215 is the drug delivery technology of CPEX. It has been proven to enhance the absorption of drugs through the nasal mucosa, skin and eye. It can be adapted to products formulated as creams, ointments, gels, solutions, sprays or patches. CPE-215 also has maintained a record of safety as a direct and indirect food additive and fragrance, and is listed on the U.S. Food and Drug Agency’s inactive ingredient list for approved use in drug applications.

We believe that potential key benefits of the patented drug delivery formulation technology of CPEX using CPE-215 may include the following therapeutic and commercial opportunities and advantages:

 

 

Licensed Products

 

We earn royalty revenues on sales of Testim, a testosterone gel that incorporates our CPE-215 drug delivery technology. The product is licensed to Auxilium and was launched in the U.S. in early 2003 as a testosterone replacement therapy. Testim has been approved for marketing in Canada and 15 countries in Europe. Royalties received from Testim sales were $23.3 million and $18.6 million for the years ended December 31, 2010 and 2009, respectively. Auxilium uses its sales force to market Testim in the U.S. and has partnered with Paladin Labs Inc. to market the drug in Canada and with Ferring International S.A. to market the drug in Europe.

 

The testosterone replacement market has expanded as more baby-boomers enter middle age and more attention is focused on male hormonal deficiency and the benefits of replacement therapy. Hypogonadism, a condition in men where insufficient amounts of testosterone are produced, is thought to affect one out of every five men in the U.S. and Europe aged over 50. Symptoms associated with low testosterone levels in men include depression, decreased libido, erectile dysfunction, muscular atrophy, loss of energy, mood alterations, increased body fat and reduced bone density. This condition is currently significantly under-treated. Growing patient awareness together with education continue to spur demand for testosterone replacement therapy.

 

Currently marketed testosterone replacement therapies deliver hormones through injections, transdermal patches or gels. Gels provide commercially attractive and efficacious alternatives to the other current methods of delivery by providing a more steady state of absorption rather than the bolus surge of injections or the irritation caused by patches resulting in a less desirable dosage regimen.

 

Product Pipeline

 

Our CPE-215 technology has been licensed to Serenity, which in turn has assigned it Allergen as part of a global agreement for development of Serenity’s potential nocturia product. Allergen reported in 2010 that it is in the process of reviewing the data from two Phase III trials of the product candidate to determine what additional trials are indicated to support development of the program. Nasulin^tm, our patented, intranasal insulin formulation, which incorporated CPE-215 as a permeation facilitator, is no longer in development. In 2010 we completed a Phase 2a study of Nasulin which did not meet its primary endpoint. Based on a full review of the results of this study, we determined not to proceed with any further Nasulin development activities.

 

Key Markets and Trends for Testim^®

 

The testosterone replacement market has expanded as more baby-boomers enter middle age and more attention is focused on male hormonal deficiency and the benefits of replacement therapy. Symptoms

associated with low testosterone levels in men include depression, decreased libido, erectile dysfunction, muscular atrophy, loss of energy, mood alterations, increased body fat and reduced bone density. This condition is currently significantly under-treated and growing patient awareness together with education continue to spur demand for testosterone replacement therapy.

 

Currently marketed testosterone replacement therapies deliver hormones through injections, transdermal patches or gels. Gels provide commercially attractive and efficacious alternatives to the other current methods of delivery by providing a more steady state of absorption rather than the bolus surge of injections or the irritation caused by patches, which often results in a less desirable dosage regimen.

 

The testosterone replacement therapy market is highly competitive. Potential competitors, some of which are described below, include large pharmaceutical companies, specialty pharmaceutical companies and biotechnology firms.

 

Other pharmaceutical companies may develop generic versions of Testim or any products that compete with Testim that do not infringe our patents or other proprietary rights, and, as a result, our business may be adversely affected. For example, because the ingredients of Testim are commercially available to third parties, it is possible that competitors may design formulations, propose dosages or develop methods of administration that would be outside the scope of the claims of one or more, or of all, of our patents. This would enable their products to effectively compete with Testim. Governmental and other pressures to reduce pharmaceutical costs may result in physicians writing prescriptions for these generic products. Increased competition from the sale of competing generic pharmaceutical products could cause a material decrease in revenue from Testim.

 

The primary competition for Testim is AndroGel^®, marketed by Abbott Laboratories. In February 2010, Abbott acquired Solvay Pharmaceuticals, Inc. which launched Androgel three years prior to Testim. Watson Pharmaceuticals, Inc. began co-promoting AndroGel with Solvay in late 2006, and Par Pharmaceutical Companies, Inc. began co-promoting AndroGel in early 2007, each pursuant to patent lawsuit settlement agreements with Solvay. In January 2009, the U.S. Federal Trade Commission, or FTC, and a number of private parties filed actions against Solvay, Watson and Par alleging that their respective 2006 patent lawsuit settlements related to AndroGel are unlawful. All actions were consolidated in the U.S. District Court for the Northern District of Georgia. In February 2010, the court dismissed the FTC’s claims and some of the private party claims. Certain private party claims remain pending. According to IMS, as of December 31, 2010, AndroGel accounted for 77.9% of the gel prescriptions.

 

Generic Competition

 

In October 2008, we and Auxilium received notice that Upsher-Smith Laboratories, Inc. (“Upsher-Smith”) filed an Abbreviated New Drug Application, or ANDA, containing a paragraph IV certification in which it certified that it believes that its proposed testosterone gel product does not infringe CPEX’s patent covering Testim^®, U.S. Patent No. 7,320,968 (the ”‘968 Patent”). The ‘968 Patent claims a method for maintaining effective blood serum testosterone levels for treating a hypogonadal male, and will expire in January 2025. The ’968 Patent is listed for Testim in Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book), published by the U.S. Food and Drug Administration(“FDA”). Upsher-Smith’s paragraph IV certification sets forth allegations that the ’968 Patent will not be infringed by the manufacture, use, or sale of the product for which the ANDA was submitted. On December 4, 2008, CPEX and Auxilium filed a Hatch-Waxman patent infringement lawsuit in the United States District Court for the District of Delaware (“the Court”) against Upsher-Smith, seeking injunctive and declaratory relief. The Court docketed this case as Civil Action No. 08-908-SLR. In June 2009, Upsher-Smith amended its answer to the complaint to include a defense and counterclaim of invalidity of the ’968 Patent, which CPEX and Auxilium have denied. CPEX and Auxilium filed a reply to the counterclaim in July 2009 denying the invalidity of the’ ‘968 Patent. A patent issued by the U.S. Patent and Trademark Office, such as the ’968 Patent, is presumed valid. As of March 2011, the lawsuit remains pending; however, the trial date has been removed from the Court’s calendar. As described more fully under Item 3 — “Legal Proceedings” in this report, any final FDA approval of Upsher-Smith’s proposed generic product will be stayed until the earlier of 30 months beginning

on the date of receipt of the paragraph IV certification (April 2011) or an adverse decision in our patent infringement lawsuit.

 

In February 2009, Auxilium filed a Citizen Petition with FDA concerning regulatory approval for testosterone gel products. In August 2009, FDA responded to Auxilium’s Citizen Petition. While FDA’s response did not address any particular proposed generic product, it stated that “any application for a testosterone gel product that has different penetration enhancers than the reference listed drug cannot be submitted as an abbreviated new drug application (ANDA) and, instead, will have to be submitted as an NDA (New Drug Application) under section 505(b) of the Federal Food, Drug, and Cosmetic Act.” Furthermore, in October, 2010, FDA issued a response to the Citizen Petition submitted on behalf of Abbott Laboratories regarding testosterone gel products. In its response, FDA reiterated that “the practical effect” of its statements is that an applicant must submit an NDA under section 505(b)(2) rather than an ANDA if its proposed product contains a different enhancer than the reference listed drug. FDA further stated that if an applicant first filed an ANDA, and later filed an NDA under Section 505(b)(2), the NDA would be treated as a separate application, suggesting that this would trigger a separate review by the agency. In July 2003, Watson and Par filed ANDAs with the FDA to be approved as generics for AndroGel. In response to these ANDAs, Solvay filed patent infringement lawsuits against these two companies to block the approval and marketing of the generic products. In 2006, all the subject companies reached an agreement pursuant to which Watson and Par agreed not to bring a generic of Androgel to the market until August 2015. During this time frame, Abbott, Watson and Par will co-promote AndroGel. In June 2009, Perrigo Israel Pharmaceuticals, Inc. (“Perrigo”) filed an ANDA with a paragraph IV certification seeking the approval of a generic version of Androgel in the United States. The paragraph IV certification procedure challenges a U.S. patent relating to Androgel which runs through the next decade. In its letter to the company, Perrigo asserted that it did not infringe the AndroGel patent because its proposed testosterone gel product contains a different formulation than the formulation protected by the AndroGel patent. In contrast, the proposed testosterone gel products that were the subject of earlier ANDAs filed by other companies, and which were the subject of prior patent litigation brought by the company, purported to be identical to the AndroGel formulation. To date, we believe that Abbott has not initiated patent infringement litigation against Perrigo. The introduction of a generic version of Androgel would have an adverse impact on the branded gel market, including taking a significant portion of branded Androgel business. Although Testim has a BX rating, meaning that pharmacists are prohibited from substituting Testim with Androgel, or a generic version of Androgel, a less expensive generic testosterone gel product could still have a material adverse affect on Testim market share and/or Testim’s formulary status, and therefore could have a material negative impact on our financial condition and results of operations.

 

Other competition

 

 

There are several other compounds in various stages of clinical development which may compete with Testim.

 

 

Testim also competes with other testosterone replacement therapies such as long-acting injectables, patches, orals, a buccal tablet and implantable pellets. Other new treatments are being sought for testosterone replacement therapy; these products are in development and their future impact on the treatment of testosterone deficiency is unknown.

 

Research and Development

 

Research and development expenses, which are attributed to our investments in our research and development programs, were $7.5 million and $12.3 million for the years ended December 31, 2010 and 2009, respectively. Research and development expenses for the year ended December 31, 2009 and through the first quarter of 2010 were, primarily for Nasulin, our intranasal insulin product candidate. As described above, we have determined not to proceed with any further Nasulin development activities. Expenses subsequent to the suspension of the Nasulin program include costs for preclinical studies and new product discovery projects.

 

Sources and Availability of Raw Materials

 

Our technology is dependent upon obtaining pharmaceutical grade CPE-215 from third-party suppliers. We do not manufacture our own CPE-215. Pharmaceutical grade CPE-215 is available from at least two major industrial manufacturers. Other molecules and compounds used in our development process are often proprietary to our development partners and supplied directly by those partners.

 

Partners/Customers

 

We enter into research and license agreements with other companies under which we perform research activities and license product candidates in exchange for milestone payments and royalties and/or a share of profits derived from product sales.

 

License Agreement with Auxilium

 

We and Auxilium are parties to a License Agreement dated May 31, 2000 pursuant to which Auxilium obtained a sole and exclusive, worldwide, royalty-bearing license (including sub-license rights) to make, have made on their behalf, use and sell anywhere in the world any and all pharmaceutical compositions which contain (A) testosterone as the single active ingredient; and (B) CPE-215 and which are covered by a valid CPEX patent, all related patents and technology. Initially this license was based solely upon the issued

U.S. Patent No. 5,023,252. Since this patent expired in June 2008, Auxilium’s license is now based upon issued U.S. Patents, No. 7,320,968 and the recently obtained six U.S. patents (see “Intellectual Property”). In addition, Auxilium was granted the exclusive right to enter into another license agreement to acquire rights in these patents and technology for the development of combination products, which right expires upon the termination of the original License Agreement. The License Agreement continues for an indefinite term but it is terminable by us if Auxilium fails to make timely payments and may also be terminated by either party if (i) the other party becomes insolvent, (ii) the other party fails to cure a breach within 30 days or (iii) CPEX is dissolved.

 

Pursuant to the terms of the Agreement, we receive royalties of 12%, of Auxilium’s annual net sales of Testim in the U.S. and Canada. In the event that we do not have, or do not maintain an enforceable patent in a country in which Auxilium products are sold, the royalty rate due to us from sales in that particular country reduces from the aforementioned rates to a rate in the low single-digits.

 

Development and License Agreement with Serenity

 

In February 2008, we entered into a Development and License Agreement with Serenity Pharmaceuticals Corporation, to develop Ser-120, a product candidate for the treatment of nocturia that utilizes CPEX’s patented intranasal drug delivery technology. Nocturia is a condition which causes an individual to wake one or more times at night to urinate. Serenity granted us a non-exclusive license to its technology and patents rights to conduct initial formulation activities under the Agreement. We granted Serenity an exclusive, sublicensable, worldwide license under United States Patent No. 7,244,703 and foreign equivalents and CPEX’s proprietary CPE-215 drug delivery technology to conduct research activities related to the development of Ser-120 and to make and sell the product. On April 1, 2010, we announced that Serenity entered into a global agreement with Allergan, Inc. (“Allergan”) under which Allergan assumed our development and license agreement with Serenity. In return, we are entitled to sales milestones and low single digit royalties on worldwide net sales following commercialization of Ser-120. Allergan has recently reported that Serenity and Allergan are in the process of reviewing the complete trial data from two phase 3 trials of Ser-120, which were not sufficient for successful registration, to determine what additional trials are indicated to support development of the program.

 

Business Strategy

 

Prior to entering into our Merger Agreement with FCB, our objective has been to become a leading specialty pharmaceutical company focused on advanced drug delivery and formulation technologies to improve the delivery of new as well as existing pharmaceuticals. Our business strategy to accomplish this objective includes:

 

 

Identifying new product candidates that leverage our CPE-215 technology and formulation expertise

 

We intend to apply our CPE-215 drug delivery technology in an effort to improve the performance of existing pharmaceutical products and advanced research candidates with respect to their method of delivery and effectiveness. Candidates will be prioritized for selection based on compatibility with CPE-215, clinical need, market size and potential for the associated intellectual property to be protected through patents.

 

We are targeting therapeutic areas with high clinical need with compounds that have established market demand or that face limited market acceptance as a result of less efficient drug delivery methods.

 

Once we bring our products to an advanced stage of development, we intend to develop collaboration relationships that leverage the clinical development, marketing and sales capabilities of strategic partners. We hope to collaborate with partners to commercialize our internal product candidates by utilizing their late stage clinical development, regulatory, marketing and sales capabilities. We believe that this will allow us to license

our products on terms that are more favorable than those that would be possible earlier in the development cycle. As we succeed with this strategy, we will identify product candidates that we can bring to late stage development on our own.

 

Developing strong alliances for clinical research, product manufacturing and marketing

 

In addition to pursuing our own proprietary compounds, we will continue to seek strategic collaborations with pharmaceutical and biotechnology companies to apply our CPE-215 technology to their branded or generic products. We will assist our collaboration partners in developing more effective drug delivery methods for their product candidates that have already completed early stage clinical trials, or are even currently marketed. We believe pharmaceutical and biotechnology companies will be motivated to co-develop products utilizing CPE-215 technology to achieve these benefits:

 

 

We generally structure our collaborative arrangements to receive research and development funding and milestone payments during the development phase and upon commercialization, and patent-based royalties on future sales of products.

 

Competition

 

Competition in the drug industry is intense. There are a number of competitors who possess capabilities relevant to the drug delivery field. In particular, we face substantial competition from companies pursuing the commercialization of products using nasal drug delivery technology. Established pharmaceutical companies, such as Archimedes Pharma Ltd, AstraZeneca PLC, Bayer Consumer Care, GlaxoSmithKline plc, and Pfizer, Inc. also have in-house nasal drug delivery research and development programs that have successfully developed products that are being marketed using nasal drug delivery technology. We also face indirect competition from other companies with expertise in alternate drug delivery technologies, such as oral, injectable, patch-based and pulmonary administration. Competitors in these fields include AstraZeneca PLC and GlaxoSmithKline plc, Alkermes Inc., Unigene Inc., Generex Biotechnology Corporation, Emisphere Technologies, Inc. and Coremed Corporation. Many of our competitors have substantially greater capital resources, research and development resources and experience, manufacturing capabilities, regulatory expertise, sales and marketing resources and established collaborative relationships with pharmaceutical companies. Our competitors, either alone or with their collaboration partners, may succeed in developing drug delivery technologies that are similar or preferable in effectiveness, safety, cost and ease of commercialization and our competitors may obtain intellectual property protection or commercialize competitive products sooner than we do.

 

Universities and public and private research institutions are also potential competitors. While these organizations primarily have educational objectives, they may develop proprietary technologies related to the drug delivery field or secure protection that we may need for development of our technologies and products.

We may attempt to license these proprietary technologies, but these licenses may not be available to us on acceptable terms, if at all.

 

Even if we are able to develop products and then obtain the necessary regulatory approvals, our success will depend to a significant degree on the commercial success of the products developed by us and sold or distributed by our collaboration partners.

 

We have described on page 5-6 the competition for Testim, the testosterone gel marketed and sold by Auxilium, including the ANDA filed by Upsher-Smith.

 

Intellectual Property

 

We actively seek to protect our pharmaceutical formulations and proprietary information by means of U.S. and foreign patents, trademarks, trade secrets as well as various other contractual arrangements. We depend on our ability to protect our intellectual property and proprietary rights, but we may not be able to maintain the confidentiality, or assure the protection, of these assets in the United States or elsewhere.

 

Our success depends, in large part, on our ability to protect our current and future technologies and products and to defend our intellectual property rights. If we fail to protect our intellectual property adequately, competitors may manufacture and market products similar to ours. Patents covering our technologies have been issued to us, and we have filed, and expect to continue to file, patent applications seeking to protect newly developed technologies and products in various countries, including the United States. However, patents may not be issued with respect to any of our patent applications and existing or future patents issued to or licensed by us may not provide competitive advantages for our products. Patents that are issued may be challenged, invalidated or circumvented by our competitors. Furthermore, our patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products. Where trade secrets are our sole protection, we may not be able to prevent third parties from marketing generic equivalents to our products, reducing prices in the marketplace and reducing our profitability.

 

We have the following issued patents:

 

 

 

 

The use of our technology with various products such as testosterone as well as other peptides, is covered by both U.S. and foreign patents in many major market countries. The initial patent for use of our technology has expired in the United States in June 2008, in Canada in 2010 and has expired in all other markets outside the United States. We have patent protection for the commercial formulations of testosterone (Testim) until 2025 and in 2010 we obtained six U.S. patents covering the testosterone formulation in the United States. These latter patents were added to the currently listed Orange Book: Approved Drugs with Therapeutic Equivalence (“Orange Book”) patent for Testim, which means that there are a total of seven listed patents covering the Testim product. We also have a patent for our nasal insulin formulation (Nasulin) until 2024. We have applied for and continue to file patent applications covering the use of our technology worldwide; however, we cannot provide any assurance that any patents will issue.

 

We also rely on trade secrets, non-patented proprietary expertise and continuing technological innovation that we seek to protect, in part, by entering into confidentiality agreements with licensees, suppliers, employees, consultants and others. To this end, we require our employees, consultants and advisors to enter

into agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of all ideas, developments, discoveries and inventions that arise from their activities for us. Additionally, these confidentiality agreements require that our employees, consultants and advisors do not bring to our attention, or use, without proper authorization, any third party’s proprietary technology. However, these agreements may be breached and there may not be adequate remedies in the event of a breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Moreover, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors.

 

Third parties may claim that we infringe on their proprietary rights. There has been substantial litigation in the pharmaceutical industry with respect to the manufacture, use and sale of new products. These lawsuits relate to the validity and infringement of patents or proprietary rights of third parties. We may be required to commence or defend against charges relating to the infringement of patent or proprietary rights. Any such litigation could: (i) require us to incur substantial expenses, even if we are insured or successful in the litigation; (ii) require us to divert significant time and effort of our technical and management personnel; (iii) result in the loss of our rights to develop or make certain products; (iv) require us to pay substantial monetary damages or royalties in order to license proprietary rights from third parties; and (v) prevent us from launching a developed, tested and approved product.

 

Assignment Agreement with Access Pharmaceuticals, Inc.

 

Under an Assignment Agreement with MacroChem Corporation (“MacroChem”), dated June 24, 2003, which was assumed by Access Pharmaceuticals, Inc. (“Access”) following their acquisition of MacroChem in February 2009, we own all of Access’s right, title and interest to U.S. Patent Number 6,495,124 B1 and any and all related patents and patent applications which are divisions, continuations, continuations-in-part, reissues, renewals, extensions and supplementary protection certificates (the “Access Patent Rights”). As a result of the assignment, Access retained no interest whatsoever in the Access Patent Rights. To date, we have not generated any revenue from the Access Patent Rights, which expire in 2020.

 

Government Regulation

 

Numerous governmental authorities in the U.S. and other countries extensively regulate the activities of pharmaceutical manufacturers. If we fail to comply with the applicable requirements of governmental authorities, we may be subject to administrative or judicial sanctions such as refusal of or delay in the approval of pending marketing applications or supplements to approved applications, warning letters, total or partial suspension of production, fines, injunctions, product seizures or recalls, as well as criminal prosecution.

 

Prior to marketing most pharmaceutical products in the U.S., the product must first be approved by the FDA. For new compounds, the regulatory approval process begins with developing preclinical laboratory supporting data and animal safety testing. The approval process generally consists of the following five principal stages:

 

 

In some cases, further clinical trials may also be required following approval.

 

The IND is submitted to the FDA when the appropriate preclinical studies are completed and must be submitted to the FDA 30 days before beginning clinical studies. The IND becomes effective if the FDA does not put the investigations described in the IND on clinical hold within 30 days of receiving the IND for filing.

Human clinical trials typically are conducted in three sequential phases. Some clinical trials may include aspects of more than one phase.

 

 

Throughout the drug development process, the IND must be updated continually with protocol amendments, information amendments, IND Safety Reports and Annual Reports. The FDA carefully reviews all data submitted and holds meetings with the sponsor at key stages to discuss the preclinical and clinical plans and results.

 

The Chemistry/Manufacturing/Controls data, clinical studies, statistical evaluation and all relevant supporting research data that has been collected over many years of development is submitted to the FDA in an NDA. Additionally, an NDA will contain complete information on the proposed manufacturing process including process, equipment and facilities validation demonstrating that the applicant is capable of consistently manufacturing a drug product of appropriate strength, quality and purity consistent with the product that was studied in the clinical trials. An NDA is an application requesting FDA approval to market a new drug for human use in interstate commerce.

 

NDAs are allocated varying review priorities based on a number of factors, including the severity of the disease, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. Additional animal studies or clinical trials may be requested during the FDA review process and may delay marketing approval. After FDA approval for the initial indications, further clinical trials are necessary to gain approval for the use of the product for any additional indications. The FDA may also require post-marketing testing to monitor for adverse effects, and in some cases to provide additional information on efficacy, which can involve significant expense. Our products under development and future products to be developed must go through the approval process delineated above prior to gaining approval by the FDA for commercialization.

 

FDA approval is also required for the marketing of generic equivalents of an existing drug. An Abbreviated New Drug Application, or ANDA, is required to be submitted to the FDA for approval. When processing an ANDA, the FDA, in lieu of the requirement for conducting complete clinical studies, requires bioavailability and/or bioequivalence studies. Bioavailability indicates the rate and extent of absorption and levels of concentration of a drug product in the body. Bioequivalence compares the bioavailability of one drug product (in this case, the product under review) with another (usually the innovator product). When bioequivalence is established, the rate of absorption and levels of concentration of the drug in the body will closely approximate those of the previously approved drug. An ANDA may only be submitted for a drug on the basis that it is the equivalent to a previously approved drug.

 

In addition to obtaining FDA approval for each product, each manufacturer of drugs must register its manufacturing facilities with the FDA, and must list the drug products it manufactures at each facility. Domestic manufacturing establishments are subject to biennial inspections by the FDA and must comply with current Good Manufacturing Practices or cGMPs for drugs. To supply products for use in the U.S., foreign manufacturing establishments must also comply with U.S. cGMPs and are subject to inspection by the FDA. Such inspections generally take place upon submission of an NDA or ANDA to the FDA or at any other time deemed necessary by the FDA and can impact both the approval of drugs, and a company’s ability to continue manufacturing following approval.

Employees

 

We employ 13 people, as of March 24, 2011, all of which are full-time employees and are based in the United States. Five of these employees are principally engaged in research, development, clinical and regulatory activities. In general, we consider our relations with our employees to be good.

 

 

You should carefully consider the following discussion of risks and uncertainties relating to our business and ownership of our securities. The risks described below are not the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described below actually occurs, our business, financial condition, or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline and you may lose all, or part of your investment.

 

Risks Related to the Transaction with FCB

 

Failure of the FCB Merger to close could damage our business.

 

There are a number of risks and uncertainties relating to our proposed transaction with FCB, pursuant to which FCB has agreed to acquire all of our outstanding shares of common stock (the “FCB Merger”). There is no assurance that the FCB Merger will close, or that it will close in a timely fashion. There is no assurance that the closing conditions will be satisfied or waived or that other events will not intervene to delay or result in the termination of the merger agreement with FCB. If the FCB Merger is not completed for any reason, we will be subject to several risks, including the following: (i) the current market price of our common stock may reflect a market assumption that the FCB Merger will occur, and a failure to complete the FCB Merger could result in a negative perception by the market of us generally and a decline in the market price of our common stock; (ii) many costs relating to the FCB Merger are payable by us whether or not the FCB Merger is completed; (iii) we would continue to face the risks that we currently face as a independent company, as further described herein. If the FCB Merger is not completed, the risks described above may materialize and materially adversely affect our business, financial results, financial condition and stock price.

 

Risks Related to our Business

 

Substantially all of our revenues to date have been generated from royalties on Auxilium’s sales of Testim, which may be subject to generic competition in the future. Should the sales of Testim decline, we may be required to limit, scale back or cease operations.

 

Substantially all of our revenues are derived through royalty income from the only commercialized product utilizing our CPE-215 technology, Testim^®, which is sold by Auxilium. Testim^® royalties totaled $23.3 million and $18.6 million in the years ended December 31, 2010 and 2009, respectively. The only expenses regarding Testim^® that we have incurred during this period are patent maintenance costs, which have not been material. Though we believe that Auxilium intends to continue commercialization of Testim, sales of this product are subject to the following risks, among others:

 

 

In October 2008, CPEX and Auxilium received notice that Upsher-Smith Laboratories, Inc. (“Upsher-Smith”) filed an Abbreviated New Drug Application, or ANDA, containing a paragraph IV certification in which it certified that it believes that its proposed testosterone gel product does not infringe CPEX’s patent covering Testim^®, U.S. Patent No. 7,320,968 (the “’968 Patent”). The ’968 Patent claims a method for maintaining effective blood serum testosterone levels for treating a hypogonadal male, and will expire in January 2025. The ’968 Patent is listed for Testim^® in Approved Drug Products with Therapeutic Equivalence

Evaluations (commonly known as the Orange Book), published by the U.S. Food and Drug Administration (“FDA”). Upsher-Smith’s paragraph IV certification sets forth allegations that the ’968 Patent will not be infringed by the manufacture, use, or sale of the product for which the ANDA was submitted. On December 4, 2008, CPEX and Auxilium filed a Hatch-Waxman patent infringement lawsuit in the United States District Court for the District of Delaware (“the Court”) against Upsher-Smith, seeking injunctive and declaratory relief. The Court docketed this case as Civil Action No. 08-908-SLR. In June 2009, Upsher-Smith amended its answer to the complaint to include a defense and counterclaim of invalidity of the ’968 Patent, which CPEX and Auxilium have denied. CPEX and Auxilium filed a reply to the counterclaim in July 2009 denying the invalidity of the ’968 Patent. A patent issued by the U.S. Patent and Trademark Office, such as the ’968 Patent, is presumed valid. As of March 2011, the lawsuit remains pending; however, the trial date has been removed from the Court’s calendar. As described more fully under Item 3 — “Legal Proceedings” in this report, any final FDA approval of Upsher-Smith’s proposed generic product will be stayed until the earlier of 30 months beginning on the date of receipt of the paragraph IV certification (April 2011) or an adverse decision in the patent infringement lawsuit. Should Testim^® sales be adversely impacted by any of the above risks, our revenues will be reduced, which may force us to delay our current plans to develop other product candidates.

 

In addition, our royalty income is dependent upon our ability to maintain our intellectual property claims for our CPE-215 technology that is used in the Testim product. Should we be unable to maintain our intellectual property position with regards to CPE-215, our royalty income would be impaired.

 

If we are unable to meet our responsibilities under any of our agreements, we may lose potential business and be subject to penalties and other damages.

 

We have a licensing agreement with Auxilium pursuant to which we license our CPE-215 with a testosterone formulation to Auxilium and receive royalties of 12% from Auxilium based upon Auxilium’s sales of Testim. This royalty stream is our major source of current revenue. If we do not maintain adequate patent protection for Testim, the royalty rate due to us would be reduced to 2%. To date we have not experienced a reduction in the royalty rate due to loss of patent protection and we recently obtained patents that cover the application of testosterone with CPE-215 in the U.S. and in foreign countries that continue through 2023.

 

Disputes may arise with respect to certain of our development agreements regarding the development and commercialization of products, which incorporate our intellectual property. These disputes could lead to delays in commercialization of products incorporating our technologies or termination of the agreements.

 

If our existing patents do not afford adequate protection to us, our competitors may be able to develop competing products.

 

The basic patent disclosing and claiming CPE-215 technology expired in the U.S. in June 2008 and most foreign markets in 2006. The patent also expired in Canada in 2010. The Company has filed applications in many countries that cover the application of testosterone with CPE-215. Patents for the application of testosterone with CPE-215 have been issued to us in various countries, including the U.S., Canada and Europe that continue through 2023. As such, we do not anticipate a significant impact from the expiration of the basic CPE-215 patent on the current Testim royalty rates due to the Company or on our plan of operation or future business plans. The Company also has pending applications for other applications involving CPE-215 technology. If our pending applications covering various applications involving CPE-215 technology are not issued as patents or if our patents do not afford adequate protection to us or our licensees, our competitors may be able to use information from our expired and soon to expire patents to develop, manufacture and market products that compete with our products, as well as other products using CPE-215 that we otherwise might have developed.

Our patent positions and intended proprietary or similar protections are uncertain.

 

We have filed a number of patent applications and have been granted licenses to, or have acquired, a number of patents. We cannot assure you, however, that any of our issued or licensed patents will afford adequate protection to us or our licensees. Furthermore, enforcing a claim that another person is infringing one or more of our patents is expensive and time consuming, and the outcome is unpredictable. We cannot determine the ultimate scope and validity of patents that are now owned by or may be granted to third parties, the extent to which we may wish, or be required, to acquire rights under such patents or the cost or availability of such rights. In the event that patent protection for technologies expire, or are not extended, revenues derived from such technologies may be reduced significantly.

 

Competitors may interfere with our patent process in a variety of ways. Competitors may claim that they invented the claimed invention prior to us. Competitors also may claim that we are infringing their patents, interfering with or preventing the use of our technologies. Competitors also may contest our patents by showing the patent examiner that the invention was not original, was not novel or was obvious. A competitor could claim that our issued patents are not valid for a variety of other reasons as well.

 

We also rely on trade secrets, unpatented proprietary technologies and continuing technological innovations in the development and commercialization of our products. We cannot assure you that others will not independently develop the same or similar technologies or obtain access to our proprietary technologies. It is unclear whether our trade secrets will be protected under law. While we use reasonable efforts to protect our trade secrets, our employees or consultants may unintentionally or willfully disclose our information to competitors. Our employees and consultants with access to our proprietary information have entered into or are subject to confidentiality arrangements with us and have agreed to disclose and assign to us any ideas, developments, discoveries and inventions that arise from their activities for us. We cannot assure you, however, that others may not acquire or independently develop similar technologies or, if effective patents in applicable countries are not issued with respect to our products or technologies, that we will be able to maintain information pertinent to such research as proprietary technologies or trade secrets. Enforcing a claim that another person has illegally obtained and is using our trade secrets, like patent litigation, is expensive and time consuming, and the outcome is unpredictable. In addition, we may be subject to the jurisdiction of courts outside the U.S., some of which may be less willing to protect trade secrets.

 

Our growth depends on identifying drugs suitable for our drug delivery technology.

 

We believe that our growth depends on the identification of pharmaceutical products that are suitable for delivery using our proprietary technologies. Our principal drug delivery technology is our CPE-215 technology. This technology, like certain other drug delivery technologies, operates to increase the amount and rate of absorption of certain drugs across biological membranes. This technology does not operate independently and must be coupled with suitable pharmaceutical products in order to provide value. Consequently, our growth will depend to a great extent on identifying and commercializing these suitable drugs with respect to which we intend to expend significant resources and efforts. Identifying suitable products is a lengthy and complex process that may not succeed. Even if identified, products may not be available to us or we may otherwise be unable to enter into licenses or other agreements for their use. In our efforts to identify suitable products, we compete with other drug delivery companies with greater research and development, financial, marketing and sales resources. If we do not effectively identify drugs to be used with our technologies, improve the delivery of drugs with our technologies and bring the improved drugs to commercial success, then we may not be able to continue our growth and we will be adversely affected.

 

Products using our technology that are in development may not achieve commercial success.

 

In conjunction with strategic partners, we are investigating the use of our technology with respect to pharmaceutical compounds and products that are in various stages of development. We are unable to predict whether any of these products will receive regulatory approvals or be successfully developed, manufactured or commercialized. Further, due to the extended testing and regulatory review process required before marketing

clearance can be obtained, the time periods before commercialization of any of these products are long and uncertain. Risks during development include the possibility that:

 

 

If medical doctors do not prescribe our products or the medical profession does not accept our products, our ability to grow our revenues will be limited.

 

Our business is dependent on market acceptance of our products by physicians, hospitals, pharmacists, patients and the medical community. Willingness to prescribe our products depends on many factors, including:

 

 

Even though regulatory approval has been received for Testim, and even if any other product candidates developed by us or incorporating our drug delivery technology receive regulatory approval, physicians may not prescribe these products if they are not promoted effectively. Factors that could affect success in marketing any such products include:

 

 

We will rely on strategic partners to conduct clinical trials and commercialize products that use our drug delivery technology.

 

In light of our limited development resources and the significant time, expense, expertise and infrastructure necessary to bring new drugs and formulations from inception to market, we are particularly dependent on resources from third parties to commercialize products incorporating our technologies. Our strategy involves forming alliances with others who will develop, manufacture, market and sell our products in the United States and other countries. We may not be successful in finding other strategic partners or in otherwise obtaining financing, in which case the development of our products would be delayed or curtailed.

 

We must enter into agreements with strategic partners to conduct clinical trials, manufacturing, marketing and sales necessary to commercialize product candidates. In addition, our ability to apply our drug delivery technologies to any proprietary drugs will depend on our ability to establish and maintain strategic partnerships or other collaborative arrangements with the holders of proprietary rights to such drugs. Arrangements with strategic partners may be established through a single comprehensive agreement or may

evolve over time through a series of discrete agreements, such as letters of intent, research agreements and license agreements. We cannot assure you that we will be able to establish such strategic partnerships or collaborative arrangements on favorable terms or at all or that any agreement entered into with a strategic partner will lead to further agreements or ultimately result in commercialization of a product.

 

In collaborative arrangements, we will depend on the efforts of our strategic partners and will have limited participation in the development, manufacture, marketing and commercialization of the products subject to the collaboration. We cannot assure you that these strategic partnerships or collaborative arrangements will be successful, nor can we assure you that strategic partners or collaborators will not pursue alternative technologies or develop alternative products on their own or with others, including our competitors. In addition, our collaborators or contract manufacturers will be subject to regulatory oversight which could delay or prohibit our development and commercialization efforts. Moreover, we could have disputes with our existing or future strategic partners or collaborators. Any such disagreements could lead to delays in the research, development or commercialization of potential products or could result in time-consuming and expensive litigation or arbitration.

 

An interruption in the sourcing and availability of the active ingredient used in our CPE-215 technology could cause our product development and commercialization to slow or stop.

 

We do not own or operate manufacturing facilities for clinical or commercial production of our product candidates. We lack the resources and the capability to manufacture any of our product candidates on a clinical or commercial scale. We also lack the resources to manufacture the excipient CPE-215, which is the major component of our CPE-215 technology. Our technology is dependent upon obtaining pharmaceutical grade CPE-215 which is available from at least two major industrial manufacturers. If a third party supplier is unable to provide us with required quantities of pharmaceutical grade CPE-215 on commercially favorable terms, we may be unable to continue our product development or commercialization activity.

 

If any of our product candidates for which we receive regulatory approval do not achieve broad market acceptance, the revenues that we generate from their sales will be limited.

 

The commercial success of our product candidates for which we obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of these products by the medical community and coverage and reimbursement of them by third-party payors, including government payors. The degree of market acceptance of any of our approved products will depend on a number of factors, including:

 

 

Our ability to effectively promote and sell our product candidates will also depend on pricing and cost effectiveness, including our ability to produce a product at a competitive price and our ability to obtain sufficient third-party coverage or reimbursement. We will also need to demonstrate acceptable evidence of safety and efficacy as well as relative convenience and ease of administration. Market acceptance could be further limited depending on the prevalence and severity of any expected or unexpected adverse side effects associated with our product candidates. If our product candidates are approved but do not achieve an adequate level of acceptance by physicians, health care payors and patients, we may not generate sufficient revenue from these products, and we may not become or remain profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.

Pharmaceutical pricing, changes in third-party reimbursement and governmental mandates are uncertain and may adversely affect us.

 

Successful commercialization of many of our products may depend on the availability of reimbursement for the cost of such products and related treatment from third-party healthcare payors, such as the government, private insurance plans and managed care organizations. Third-party payors are increasingly challenging the price of medical products and services. Such reimbursement may not be available for any of our products at all or for the duration of the recommended treatment with a drug, which could materially adversely affect our ability to commercialize that drug. The increasing emphasis on managed care in the U.S. continues to increase the pressure on pharmaceutical pricing. Some governmental agencies can compel companies to continue to produce products that are not profitable for the company due to insufficient supply. In the U.S., there have been a number of federal and state proposals to implement similar government controls. We anticipate that there will continue to be a number of proposals in the U.S., as has been the case in many foreign markets. The announcement or adoption of such proposals could adversely affect us. Further, our ability to commercialize our products may be adversely affected to the extent that such proposals materially adversely affect the business, financial condition and profitability of companies that are prospective strategic partners.

 

The cost of healthcare in the U.S. and elsewhere continues to be a subject of investigation and action by various governmental agencies. Certain resulting legislative proposals may adversely affect us. For example, governmental actions to further reduce or eliminate reimbursement for drugs may directly diminish our markets. In addition, legislative safety and efficacy measures may be invoked that lengthen and increase the costs of drug approval processes. Further, social, economic and other broad policy legislation may induce unpredictable changes in the healthcare environment. If any of these measures are enacted in some form, they may have a material adverse effect on our results of operations.

 

Any of our products candidates may fail or be delayed in clinical trials.

 

Any human pharmaceutical product developed by us or a collaboration partner of ours would require clearance by the FDA for sales in the United States and by comparable regulatory agencies for sales in other countries. The process of conducting clinical trials and obtaining FDA and other regulatory approvals is expensive, takes several years and cannot be assured of success. In order to obtain FDA approval of any new product candidates using our technologies, a New Drug Application (“NDA”) must be submitted to the FDA demonstrating that the product candidate, based on preclinical research, animal studies and human clinical trials, is safe for humans and effective for its intended use. Positive results from preclinical studies and early clinical trials do not ensure positive results in more advanced clinical trials designed to permit application for regulatory approval. Our product candidates may suffer significant setbacks in clinical trials, even in cases where earlier clinical trials show promising results. Any of our new product candidates may produce undesirable side effects in humans that could cause us or regulatory authorities to interrupt, delay or halt clinical trials of a product candidate. We or our collaboration partners, the FDA or other regulatory authorities, may suspend our clinical trials at any time if we or they believe the trial participants face unacceptable health risks or if they find deficiencies in any of the regulatory submissions for the product candidate. Other factors that can cause delay or terminate clinical trials include:

 

 

A delay or termination of any of our clinical trials may have a material adverse effect on our results of operations.

 

We rely on third parties to conduct any clinical trials for our product candidates and plan to rely on third parties to conduct any future clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize our current and future product candidates.

 

We do not have the ability to conduct clinical trials for any of our product candidates. We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct all of our clinical trials for our product candidates. Although we rely on these third parties to conduct our clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and other non-U.S. regulatory authorities require us to comply with regulations and standards, commonly referred to as Good Clinical Practices (“GCPs”), for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. Our reliance on third parties does not relieve us of these responsibilities and requirements. If the third parties do not perform their contractual duties or obligations, do not meet expected deadlines or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to GCPs or for any other reason, we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated. In addition, failure by such third parties to perform their obligations in compliance with GCPs may cause our clinical trials to fail to meet regulatory requirements, which may require us to repeat our clinical trials.

 

Regulatory approvals must be obtained and maintained for products incorporating our technology and, if approvals are delayed or withdrawn, commercialization of these products must be suspended or abandoned.

 

Government regulations in the United States and other countries have a significant impact on our business and affect the research, development and marketing of products incorporating our technology. In the United States and other countries, governmental agencies have the authority to regulate the distribution, manufacture and sale of drugs. Failure to obtain or experiencing a delay in obtaining regulatory approval for our products could result in reduction of our expected revenues. Failure to comply with applicable regulatory requirements can, among other things, result in fines, suspension or withdrawal of regulatory approvals, product recalls, operating restrictions and/or criminal prosecution. In addition, governmental regulations may be established that could prevent, delay, modify or rescind regulatory approval of our products.

 

If we cannot keep pace with rapid technological change and meet the intense competition in our industry, we may not succeed.

 

Our success depends, in part, on achieving and maintaining a competitive position in the development of products and technologies in a rapidly evolving industry. If we are unable to continue to develop and/or acquire competitive products and technologies, our current and potential strategic partners may choose to adopt the drug delivery technologies of our competitors. We also compete generally with other drug delivery, biotechnology and pharmaceutical companies engaged in the development of alternative drug delivery technologies or new drug research and testing. Many of these competitors have substantially greater financial, technological, manufacturing, marketing, managerial and research and development resources and experience than we do and represent significant competition for us. Our competitors may succeed in developing competing technologies or obtaining governmental approval for products before we achieve success, if at all. The products of our competitors may gain market acceptance more rapidly than our products. Developments by competitors may render our existing or proposed products noncompetitive or obsolete.

 

The competitive position of our drug delivery technologies is subject to the possible development by others of superior technologies. Other drug delivery technologies, including oral and injection methods, have

wide acceptance, notwithstanding certain drawbacks, and are the subject of improvement efforts by other entities having greater resources. In addition, our drug delivery technologies are limited by the number and commercial magnitude of drugs with which they can successfully be combined.

 

We may be unable to meet increasing expenses and demands on our resources from future growth, if any, or to effectively pursue additional business opportunities.

 

We have no current agreements or commitments with respect to any acquisitions or investments by us. Any future acquisitions or investments would further challenge our resources. If we do not properly meet the increasing expenses and demands on our resources from future growth, we will be adversely affected. To properly manage our growth, we must, among other things, improve and implement additional administrative, financial, marketing, operational and research and development systems, procedures and controls on a timely basis. While we currently do not have any plans to hire additional personnel, in the future, we may need to expand our staff in various areas of the business. We may not be able to complete the improvements to our systems, procedures and controls necessary to support our future operations in a timely manner. We may not be able to hire, train, integrate, retain, motivate and manage required personnel, successfully integrate acquisitions or investments, nor successfully identify, manage and pursue existing and potential market opportunities.

 

If we cannot attract and retain key personnel, we may not be able to execute our business plan as anticipated.

 

Our success is dependent on our ability to attract and retain qualified, experienced personnel. We face significant competition from other pharmaceutical companies in recruiting competent personnel. The loss of key personnel, or the inability to attract and retain additional, competent employees, could adversely affect our business and financial results.

 

We may incur substantial liabilities and may be required to limit commercialization of our products in response to product liability claims.

 

The testing and marketing of pharmaceutical products entails an inherent risk of product liability. We may be held liable to the extent that there are any adverse reactions from the use of our products. Our products involve new methods of delivery for drugs, some of which may require precautions to prevent unintended use, especially since they are designed for patients’ self-use rather than being administered by medical professionals. The FDA may require us to develop a comprehensive risk management program for our products. The failure of these measures could result in harmful side effects or death. As a result, consumers, regulatory agencies, pharmaceutical companies or others might make claims against us. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities, lose market share or be required to limit commercialization of our products.

 

Regardless of merit or eventual outcome, liability claims may result in:

 

 

Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could inhibit or prevent the commercialization of pharmaceutical products we develop alone or with corporate collaborators. We maintain $10.0 million in product liability and clinical trials insurance in the U.S. at an approximate cost of $70,000 per policy year. While management believes this

insurance is reasonable for conducting clinical trials, we cannot assure you that any of this coverage will be adequate to protect us in the event of a claim. We, or any corporate collaborators, may not be able to obtain or maintain insurance at a reasonable cost, if at all. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate if any claim arises.

 

The discovery of any new side effects or negative efficacy findings for our products could significantly harm our business.

 

While the safety of our products has been, is being, and will be extensively studied in clinical trials there can be no assurance that new or more serious side effects or negative efficacy findings may not be discovered based on long term safety and efficacy studies or required reporting of adverse events regarding any of our products after each such product has been marketed, any of which could severely harm our business and result in one or more of the following regulatory events:

 

 

In addition, one or more of the above factors would also have the potential to negatively impact regulatory registrations for the applicable product in other countries.

 

Our revenues, operating results and cash flows may fluctuate in future periods and we may fail to meet investor expectations, which may cause the price of our common stock to decline.

 

Variations in our quarterly and year-end operating results are difficult to predict and may fluctuate significantly from period to period. If our sales or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. In addition to the other factors discussed under this “Risk Factors” section, specific factors that may cause fluctuations in our operating results include:

 

 

Risks Relating to Our Common Stock

 

Your percentage ownership in CPEX common stock may be diluted in the future.

 

Your percentage ownership in CPEX may be diluted in the future because of equity awards that have or we expect will be granted to our directors, officers and employees and the accelerated vesting of equity

awards. Shareholders of CPEX have approved the Amended and Restated 2008 Equity Incentive Plan (the “2008 Equity Incentive Plan”), which provides for the grant of equity based awards, including restricted stock, restricted stock units, stock options, stock appreciation rights, unrestricted stock and stock equivalents and other equity-based awards to our directors, officers and other employees, advisors and consultants.

 

Provisions in our certificate of incorporation and by-laws and of Delaware law may prevent or delay an acquisition of our Company, which could decrease the trading price of our common stock.

 

Our certificate of incorporation, by-laws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the raider and to encourage prospective acquirors to negotiate with our Board of Directors rather than to attempt a hostile takeover. These provisions include, among others:

 

 

Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.

 

We also maintain a shareholder rights plan which may deter a potential acquiror from pursuing an offer for our company.

 

We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our Board and by providing our Board with more time to assess any acquisition proposal. These provisions are not intended to make our company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our Board determines is not in the best interests of our company and our stockholders.

 

We do not expect to pay any dividends in the short term.

 

We do not expect to declare dividends in the short term. Pending completion of the merger agreement with FCB, we currently intend to retain earnings to support our operations and to finance the growth and development of our business. There can be no assurance that we will have sufficient surplus under Delaware law to be able to pay any dividends. This may result from extraordinary cash expenses, actual expenses exceeding contemplated costs funding of capital expenditures, or increases in reserves. If we do not pay dividends, the price of our common stock must appreciate for you to receive a gain on your investment in CPEX. This appreciation may not occur.

 

 

Not applicable.

 

 

We own a 15,700 square foot commercial building situated on approximately 14 acres of land in Exeter, New Hampshire which has sufficient space and fixtures to serve as our corporate headquarters and research and development laboratory. It is located approximately 50 miles north of Boston, Massachusetts.

 

 

In October 2008, CPEX and Auxilium Pharmaceuticals, Inc. (“Auxilium”) received notice that Upsher-Smith Laboratories, Inc. (“Upsher-Smith”) had filed an Abbreviated New Drug Application, or ANDA containing a paragraph IV certification in which Upsher-Smith certified that it believes its proposed generic version of Testim does not infringe our patent, U.S. Patent No. 7,320,968 (“the ’968 Patent”). The ’968 Patent claims a method for maintaining effective blood serum testosterone levels for treating a hypogonadal male, and will expire in January 2025. The ’968 Patent is listed for Testim^® in Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book), published by the U.S. Food and Drug Administration (“FDA”) Upsher-Smith’s paragraph IV certification sets forth allegations that the ’968 Patent will not be infringed by the manufacture, use, or sale of its proposed generic product. On December 4, 2008, we and Auxilium filed a Hatch-Waxman infringement lawsuit in the United States District Court for the District of Delaware (“the Court”) against Upsher-Smith seeking injunctive and declaratory relief. The Court docketed this case as Civil Action No. 08-908-SLR. . In June 2009, Upsher-Smith amended its answer to the complaint to include a defense and counterclaim of invalidity of the ’968 Patent, which CPEX and Auxilium have denied. A patent issued by the U.S. Patent and Trademark Office (USPTO), such as the ’968 Patent, is presumed valid. As of March 2011, the lawsuit remains pending; however, the trial date has been removed from the Court’s calendar. Any final FDA approval of Upsher-Smith’s proposed generic product will be stayed until the earlier of thirty months from the date of our receipt of the paragraph IV certification (April 2011) or an adverse decision in our patent infringement lawsuit.

 

We have filed continuation and divisional applications with the USPTO relating to the ’968 Patent. Six patents, U.S. Patent Nos. 7,608,605; 7,608,606; 7,608,607; 7,608,608; 7,608,609; and 7,608,610, issued from these applications, and may provide us with further market protection. Each of these six patents has been listed in the Orange Book with respect to Testim^®.

 

We are committed to protecting our intellectual property rights and will vigorously pursue the Hatch-Waxman patent infringement lawsuit. However, if we are unsuccessful in obtaining an injunction to keep Upsher-Smith’s proposed version of Testim^® off the market until the patent protection expires, or in defending the ’968 Patent covering Testim^®, sales of Testim^® and our royalties relating to Testim^® sales will be materially reduced.

 

 

Part II

 

 

Our common stock has been trading on The NASDAQ Capital Market since July 1, 2008, under the trading symbol “CPEX”. The following table sets forth, for the periods indicated, the range of quarterly high and low sales prices for our common stock as reported on The NASDAQ Capital Market;

 

 

As of March 24, 2011 the closing price of our Common Stock was $27.19 and there were 576 holders of record of our common stock, which does not reflect stockholders whose shares are held in street name.

Dividends

 

We did not pay dividends on our common stock during the years ended December 31, 2010 and 2009 and we do not intend to pay dividends pending completion of the merger agreement with FCB. We intend to retain future earnings in order to finance the growth and development of our business.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table summarizes the number of securities issuable under our Amended and Restated 2008 Equity Incentive Plan as of December 31, 2010.

 

 

 

Not applicable.

 

 

The following discussion and analysis should be read in conjunction with the Financial Statements and related Notes to the Consolidated Financial Statements, or Notes, included in Item 15 of this Annual Report. Except for the historical information contained herein the foregoing discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected in the forward-looking statements discussed herein.

 

Words such as “expect”, “anticipate”, “intend”, “believe”, “may”, “could”, “project”, “estimate” and similar words are used to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, including, but not limited to, the statements in “Business”, “Legal Proceedings”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors” and other sections in this Annual Report, are not based on historical facts, but rather reflect our current expectations concerning future results and events. The forward-looking statements include statements about our strategy, the prospects of our technologies and research and development efforts, our plans to enter into more collaborative relationships, the prospects for clinical development of our product candidates, our prospects for revenue growth, anticipated financial results and the prospects for growth of our business. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements, including the risks outlined in the Risk Factors section and elsewhere in this report. You are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise, except as may be required by law.

Overview

 

We are an emerging specialty pharmaceutical company that employs 13 people as of March 24, 2011, at our principal executive offices in Exeter, New Hampshire. Our business is the research, development, licensing and commercialization of pharmaceutical products utilizing our validated drug delivery platform technology. We have U.S. and international patents and other proprietary rights to technology that facilitates the absorption of drugs. Our platform drug delivery technology enhances permeation and absorption of pharmaceutical molecules across the skin, nasal mucosa and eye through formulation development with proprietary molecules such as CPE-215. Our principal product is Testim^®, a gel for testosterone replacement therapy, which is a formulation of CPE-215 with testosterone. Testim is licensed to Auxilium Pharmaceuticals, Inc. which is currently marketing the product in the United States, Europe and other countries.

 

We believe, based upon our experience with Testim, that our CPE-215 technology is a broad platform technology that has the ability to significantly enhance the permeation of a wide range of therapeutic molecules. To expand the development and commercialization of products using our CPE-215 drug delivery technology, we are pursuing strategic alliances with partners including large pharmaceutical, specialty pharmaceutical and biotechnology companies. The alliance opportunities may include co-development of products, in-licensing of therapeutic molecules, out-licensing of delivery technology or partnering late-stage candidates for commercialization.

 

Transaction with FCB

 

On January 4, 2011, we announced that we had entered into a definitive agreement with FCB I Holdings Inc., a newly formed company which is controlled by Footstar Corporation, under which FCB, through a wholly-owned subsidiary, will acquire all of our outstanding common stock for $27.25 per share in cash, pursuant to an agreement and plan of merger. Approved by our Board of Directors the agreement was subsequently approved by our stockholders on March 24, 2011. The closing of the transaction is subject to the satisfaction of certain customary closing conditions, provided, the closing of the transaction may not occur prior to April 4, 2011. We expect that the transaction will be completed shortly following April 4, 2011, but there can be no assurance that the closing will occur in this timeframe or at all. Upon closing of the transaction, we will become a wholly-owned subsidiary of FCB and our common stock will cease to trade on the NASDAQ Capital Market. The foregoing description of the transaction with FCB does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is filed as Exhibit 2.1 hereto.

 

Consolidated Results of Operations

 

The following is a discussion of the results of our operations for the years ended December 31, 2010 and 2009. Inflation and changing prices have not had a material impact on our revenues or results from operations in the two years ended December 31, 2010.

Fiscal Year Ended December 31, 2010 Compared To Fiscal Year Ended December 31, 2009

 

 

Royalties and other revenue increased 25% to $23.3 million in 2010 from $18.7 million in 2009 due entirely to royalties earned on increased sales of Testim. For the year ended December 31, 2010, Testim prescriptions were reported to have grown approximately 11% compared to the same period in 2009. The long-term prospects for Testim sales are subject to resolution of our patent infringement suit against Upsher-Smith, which has made an ANDA filing for a generic version of Testim, as described above in “Legal Proceedings”.

 

General and administrative costs decreased 1% to $8.8 million in 2010 compared to $8.9 million in 2009, primarily due to a net decrease in advisory and consulting expenses. During 2010, there was a substantial decrease in legal fees associated with the legal proceedings described under — Commitments, contingencies and concentrations — Legal Proceedings in the accompanying Notes to the Consolidated Financial Statements which were offset by an increase in fees and expenses relating to the exploration of strategic alternatives.

 

Research and development expenses consist primarily of costs associated with the development of Nasulin, which was our product candidate in development until March 2010 when we determined to cease Nasulin development activities. These costs include costs of clinical trials, manufacturing supplies and other development materials, compensation and related benefits for research and development personnel, costs for consultants, and various overhead costs. Research and development costs are expensed as incurred. Research and development costs decreased to $7.5 million in 2010 compared to $12.3 million in 2009, primarily due to a $4.7 million decrease in spending on clinical trials following the discontinuation of the Nasulin clinical trial program and a $1.2 million decrease in employee related expenses. These decreases were partially offset by a $1.5 million increase in spending on preclinical activities during the year ended December 31, 2010.

 

Provision for income taxes for the year ended December 31, 2010 is a net credit of $230,000. During 2010, we determined that it was more likely than not that we will realize our net deferred tax assets for which there was a valuation allowance. Accordingly, we reversed our valuation allowance of $2.9 million which was partially offset by current and deferred income taxes of $2.7 million. No tax benefit was recorded during the year ended December 31, 2009 as future operating profits could not be reasonably assured at that time. See Note 8 — Provision for Income Taxes in the accompanying consolidated financial statements for additional information.

Liquidity and Capital Resources

 

Overview

 

We had approximately $22.2 million in cash and cash equivalents at December 31, 2010, which, along with Testim royalties, we believe will be sufficient to fund our operations and our cash requirements for at least the next twelve months. Our cash includes balances maintained in commercial bank accounts, amounts invested in overnight sweep investments and cash deposits in money market accounts. There can be no assurance that changes in our research and development plans or other events affecting our revenues or operating expenses will not result in the earlier depletion of our funds. In appropriate situations, which will be strategically determined, we may seek funding from other sources, including, but not limited to, contribution by others to joint ventures and other collaborative or licensing arrangements for the development, testing, manufacturing and marketing of products currently under development or sales of debt or equity securities.

 

Summary Balance Sheet and Cash Flow Information

(in thousands)

 

 

 

Sources and Uses of Cash

 

Operating Activities

 

Net cash provided by operating activities was $6.7 million for the year ended December 31, 2010, largely resulting from the net income of $6.6 million, an increase in income taxes payable of $1.5 million, non-cash share-based compensation expense of $1.1 million and depreciation and amortization of $702,000. These were partially offset by the recognition of deferred tax assets of $1.9 million, an increase in accounts receivable of $1.1 million and decreases in accounts payable and accrued expenses of $866,000. Net cash used in operating activities was $598,000 for the year ended December 31, 2009, largely resulting from the net loss of $3.0 million and an increase in accounts receivable of $844,000, which were partially offset by non-cash share-based compensation expense of $1.9 million, increases in accounts payable and accrued expenses of $670,000 and depreciation and amortization of $699,000.

 

Investing Activities

 

Included in investing activities for the year ended December 31, 2010 is $1.0 million resulting from the expiration of a letter of credit the Company was no longer required to maintain. Historically, our investing

activities have included capital expenditures necessary to expand our manufacturing capacity and laboratory facilities, purchase laboratory equipment and upgrade office equipment. In addition, investing activities included outlays related to patent registration costs and costs to acquire intellectual property rights. Cash used in investing activities in 2009 was $922,000 which included a $300,000 note receivable, which is described under Commitments, contingencies and concentrations — Agreement for a Potential Joint Venture in the accompanying Notes to the Consolidated Financial Statements. It also included $398,000 for the purchase of manufacturing and laboratory equipment, and $224,000 for costs related to obtaining new patents.

 

Financing Activities

 

Net cash provided by financing activities for the year ended December 31, 2010 includes proceeds from the exercise of stock options and excess tax benefits from share-based awards. Net cash provided by financing activities for the year ended December 31, 2009 includes proceeds from the exercise of stock options.

 

Off-Balance Sheet Arrangements

 

We do not have any material off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

Critical Accounting Policies and Estimates

 

Certain of our accounting policies are particularly important to the portrayal of our financial position, results of operations and cash flows and require the application of significant judgment by our management. As a result they are subject to an inherent degree of uncertainty. In applying those policies, our management uses judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Our critical accounting policies and estimates include:

 

Revenue recognition and accounts receivable

 

We earn royalty revenues on Auxilium’s sales of Testim, which incorporates our CPE-215 permeation enhancement technology. Since 2003, Auxilium has sold Testim to pharmaceutical wholesalers and chain drug stores. We recognize revenue upon receiving sales reports from Auxilium which includes estimates for revenue deductions, including discounts, rebates and product returns.

 

Accounts receivable are also recorded upon the receipt of sales reports from Auxilium at their net realizable value. Receivable balances are reported net of an estimated allowance for uncollectible accounts. Estimated uncollectible receivables are based on the amount and status of past due accounts, contractual terms with customers, the credit worthiness of customers and the history of our uncollectible accounts.

 

Intellectual property costs

 

Costs incurred in connection with acquiring licenses, patents and other proprietary rights are capitalized. Capitalized costs are amortized on a straight-line basis for periods not exceeding 15 years from the dates of acquisition. Such assets are reviewed whenever events or changes in circumstances indicate that the assets may be impaired, by comparing the carrying amounts to their estimated future undiscounted cash flows, and adjustments are made for any diminution in value below the carrying value.

 

Research and development costs

 

Research and development expenses consist primarily of costs associated with our clinical trials, manufacturing supplies and other development materials, compensation and related benefits for research and development personnel, costs for consultants, and various overhead costs. Research and development costs are expensed as incurred consistent with Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“FASB ASC”) 730-10-25-1 (Prior authoritative literature: SFAS No. 2, Accounting for

Research and Development Costs). Our clinical trial costs, which are reflected in research and development expenses, result from obligations under contracts with vendors, consultants, and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in cash flows which are not consistent with the periods in which materials or services are provided. These costs are capitalized upon payment and expensed according to the progress of each trial as measured by patient progression and the timing of various aspects of the trial. The progress of the trials is obtained through discussions with internal personnel as well as outside service providers. Determining the timing and level of services performed often requires judgment.

 

Share-based compensation

 

We record share-based compensation expense in accordance with the fair value recognition provisions of FASB ASC Topic 718 (Prior authoritative literature: SFAS No. 123(R), Share-Based Payment). Under the fair value recognition provisions of FASB ASC 718, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of equity awards at the grant date requires judgment. We estimate the grant date fair value of stock options using the Black-Scholes option valuation model. This option valuation model requires the input of subjective assumptions including: (1) Expected life — the expected life (estimated period of time outstanding) of options granted is estimated based on historical exercise behaviors, including the periods prior to the Separation when we were the drug delivery business of Bentley; (2) Volatility — the volatility applied to grants is the average stock volatility of CPEX and a peer group of comparable life science companies using daily price observations for each company over a period of time commensurate with the expected life of the respective award; (3) Risk-free rate — the risk-free interest rate is based on the yield curve of U.S. Treasury securities in effect at the date of the grant, having a duration commensurate with the estimated life of the award; and (4) Dividends — as we have not declared dividends, and we do not expect to declare dividends in the future, we include an annual dividend rate of 0% when calculating the grant date fair value of equity awards. Because share-based compensation expense is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. FASB ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.

 

Provision for income taxes

 

We have provided for current and deferred U.S. federal and state income taxes for the current and prior periods presented. Current and deferred income taxes have been provided with respect to jurisdictions where our subsidiary produces taxable income.

 

In 2010, we determined that it is more likely than not that we will realize our net deferred tax assets for which we have previously recorded a valuation allowance. Accordingly, we reversed the valuation allowance against our deferred taxes. Previous to 2010, as future operating profits could not be reasonably assured, no tax benefit was recorded for net deferred taxes. In addition, we operate within multiple taxing jurisdictions and are subject to audit in those jurisdictions. These audits can involve complex issues, which may require an extended period of time for resolution. Although we believe that adequate consideration has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our financial position, results of operations or cash flows.

 

We account for uncertain tax positions in accordance with FASB ASC Topic 740 (Prior authoritative literature: Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes). The application of income tax law is inherently complex. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations and guidance surrounding income tax laws and regulations change frequently. Changes in our subjective assumptions and judgments could have a material effect on our financial position, results of operations or cash flows.

Recently Issued Accounting Pronouncements

 

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06 for Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This Update requires new disclosures for transfers in and out of Level 1 and 2 and activity in Level 3. This Update also clarifies existing disclosures for level of disaggregation and about inputs and valuation techniques. The new disclosures are effective for interim and annual periods beginning after December 15, 2009, except for the Level 3 disclosures, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on our financial statements and is not expected to have a significant impact on the reporting of our financial condition or results of operations.

 

In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition — Milestone Method, which provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. Under the milestone method of revenue recognition, consideration that is contingent upon achievement of a milestone in its entirety can be recognized as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. This standard provides the criteria to be met for a milestone to be considered substantive which include that: a) performance consideration earned by achieving the milestone be commensurate with either performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from performance to achieve the milestone; and b) relate to past performance and be reasonable relative to all deliverables and payment terms in the arrangement. This standard is effective on a prospective basis for milestones in fiscal years beginning on or after June 15, 2010. The adoption of this new guidance did not have a material impact on our financial statements and is not expected to have a significant impact on the reporting of our financial condition or results of operations.

 

In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805) (“ASU 2010-29”). ASC Topic 350 (Prior authoritative literature : FASB Staff Position (“FSP”) 142-3, Determination of the Useful Life of Intangible Assets)has required pro forma revenue and earnings disclosure requirements for business combinations. ASU 2010-29 clarifies the requirements for disclosure of supplementary pro forma information for business combinations. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The modifications to ASC Topic 805 resulting from the issuance of ASU 2010-28 are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. Early adoption is permitted. The Company believes that the impact, if any, the application of the amendments in ASU 2010-29 may have on its financial statements will not be significant.

 

In June 2009, the FASB issued ASC Topic 810 (Prior authoritative literature: Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R),”), which improves financial reporting by enterprises involved with variable interest entities. ASC 810 addresses (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in SFAS 166 and (2) concerns about the application of certain key provisions of FIN 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. We adopted this topic as of January 1, 2010 and determined that the adoption did not have a material impact on our consolidated financial statements.

 

In June 2009, the FASB issued ASC Topic 860 (Prior authoritative literature: issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140”. ASC Topic 860 prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a

transferor’s continuing involvement in transferred financial assets. Specifically, among other aspects, ASC Topic 860 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS No. 140, by removing the concept of a qualifying special-purpose entity from SFAS No. 140 and removes the exception from applying FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised), or FIN 46(R), to variable interest entities that are qualifying special-purpose entities. It also modifies the financial-components approach used in SFAS No. 140. We adopted this topic as of January 1, 2010 and determined that the adoption did not have a material impact on our consolidated financial statements.

 

 

Not applicable.

 

 

The financial statements required by this item are located beginning on page F-1 of this report.

 

 

Not applicable.

 

 

Evaluation of Disclosure Controls and Procedures.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this annual report (the “Evaluation Date”). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.

 

Management’s Report on Internal Control Over Financial Reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the design and effectiveness of our internal control over financial reporting as of the Evaluation Date. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control — Integrated Framework. Based on this assessment, our management concluded that, as of the Evaluation Date, our internal control over financial reporting was effective based on the criteria set forth by COSO in Internal Control — Integrated Framework.

 

Changes in Internal Control over Financial Reporting.

 

There have been no changes in our internal control over financial reporting (as defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

Not applicable.

 

Part III

 

 

Directors and Executive Officers

 

Our Directors and Executive Officers are listed below:

 

 

James R. Murphy, Director and non-executive Chairman of the Board — 61, has served as our non-executive Chairman of the Board since the spin-off from Bentley Pharmaceuticals, Inc. in 2008. Mr. Murphy was President of Bentley from September 1994 until August 2005, was named Chief Executive Officer effective January 1995 and became Chairman of the Board in June 1995. Mr. Murphy served as Vice President of Business Development at MacroChem Corporation, a publicly owned pharmaceutical and drug delivery company, from March 1993 through September 1994. From September 1992 until March 1993, Mr. Murphy served as a consultant in the pharmaceutical industry with his primary efforts directed toward product licensing. Prior thereto, Mr. Murphy served as Director Worldwide Business Development and Strategic Planning of Bentley from December 1991 to September 1992. Mr. Murphy previously spent 14 years in pharmaceutical research and product development with SmithKline Corporation and in international business development with contract research and consulting laboratories. Mr. Murphy received a B.A. in Biology from Millersville University. The Board of Directors believes Mr. Murphy’s qualifications to sit on our Board of Directors include his extensive experience with pharmaceutical companies, particularly including his focus on business development and strategic collaborations, as well as his executive leadership and management expertise.

 

Robert Forrester, Director — 47, has served as one of our directors since 2010. Mr. Forrester is Chief Operating Officer of FORMA Therapeutics, Inc., a private pharmaceutical development company. Before joining FORMA, Mr. Forrester was the Interim President and Chief Executive Officer, and Chief Financial Officer of CombinatoRx (NASDAQ:CRXX), a pharmaceutical company, from 2004 until 2010. Prior to joining CombinatoRx, Mr. Forrester served as Senior Vice President, Finance and Corporate Development at Coley Pharmaceutical Group (acquired by Pfizer, Inc.), a pharmaceutical company, from 2000 to 2003. From 1994 to 2000, Mr. Forrester was a managing director of the Proprietary Investment Group at MeesPierson, part of the Fortis Group, a banking, insurance, and investment management company. Prior to MeesPierson, Mr. Forrester worked for BZW, UBS, & Clifford Chance. He is a member of the Board of Directors of Myriad Pharmaceuticals (NASDAQ:MYRX), Atlantic Healthcare, Rhapsody Biologics and MoMelan Technologies. He holds a LL.B. from Bristol University. The Board believes Mr. Forrester’s qualifications to sit on our Board of Directors include his leadership experience in the biotechnology industry, as well as his years of experience in the banking and legal fields, during which time he gained significant strategic, operational and corporate governance expertise.

 

Michael McGovern, Director — 67, has served as one of our directors since the spin-off from Bentley. Mr. McGovern served as a Bentley director from 1997 until the spin-off and was named Vice Chairman of Bentley in October 1999. Mr. McGovern serves as President of McGovern Enterprises, a provider of corporate and financial consulting services, which he founded in 1975. Mr. McGovern is Chairman of the Board of Training Solutions Interactive, Inc., Chairman of the Board of Teacher Research Network, LLC, Vice Chair of L2C Corporation, a Director on the corporate board of the Reynolds Development Company, a Director of

Eclipse Aerospace, Inc., and a Director of each of Community & Southern Holdings, Inc. and its banking subsidiary, Community & Southern Bank Inc. Mr. McGovern received a B.S. and M.S. in accounting and his Juris Doctor from the University of Illinois. Mr. McGovern is a Certified Public Accountant. The Board of Directors believes Mr. McGovern’s qualifications to sit on our Board of Directors include his financial expertise and his years of experience providing strategic and corporate consulting services to a broad range of businesses.

 

John W. Spiegel, Director — 70, has served as one of our directors the spin-off from Bentley. Mr. Spiegel served as a Bentley director from 2002 until the spin-off. Mr. Spiegel served as Vice Chairman and Chief Financial Officer of SunTrust Banks, Inc. from August 2000 until he retired as Chief Financial Officer in August 2004 and as Vice Chairman in 2005. Prior to August 2000, Mr. Spiegel was an Executive Vice President and Chief Financial Officer of SunTrust Banks since 1985. Mr. Spiegel also serves on the Board of Directors of Rock-Tenn Company, S1 Corporation, Colonial Properties Trust and formerly served on the Board of Directors of Homebanc Corp. Mr. Spiegel is a member of the Dean’s Advisory Council of the Goizueta Business School at Emory University. Mr. Spiegel is also a member of the board of directors of Community and Southern Holdings, Inc. and chairman of its banking subsidiary, Community and Southern Bank, Inc. Mr. Spiegel received an MBA from Emory University. The Board of Directors believes Mr. Spiegel’s qualifications to sit on our Board of Directors include his financial expertise, which qualify him as our “audit committee financial expert” and his extensive executive experience, including leadership roles in complex organizations.

 

John A. Sedor, CEO, President and Director — 66, has been our Chief Executive Officer and President since the spin-off from Bentley in 2008. Mr. Sedor was President of Bentley from 2005 until the spin-off. From 2001 to May 2005, he was President and CEO of Sandoz, Inc. (a division of Novartis AG). From 1998-2001 Mr. Sedor was President and Chief Executive Officer at Verion, Inc., a drug delivery company. Previously, Mr. Sedor served as President and Chief Executive Officer at Centeon, LLC, a joint venture between two major multinational corporations, Rhône-Poulenc Rorer and Hoechst AG. Previously, Mr. Sedor served as Executive Vice President at Rhône-Poulenc Rorer, Revlon Health Care and Parke-Davis. Mr. Sedor holds a Bachelor of Science degree in Pharmacy/Chemistry from Duquesne University, and has studied strategic marketing at both Northwestern University’s Kellogg Graduate School of Management and Harvard Business School. He has also attended Harvard’s Executive Forum. The Board of Directors believes Mr. Sedor’s qualifications to sit on our Board of Directors include his decades of experience in the pharmaceutical industry, including his service as our, and, prior to our spin-off, Bentley’s, President and/or Chief Executive Officer.

 

Nils Bergenhem, Ph.D., Chief Scientific Officer and Vice President — 52, joined us as Chief Scientific Officer in February 2010. From January 2008 until joining CPEX, Dr. Bergenhem served as Chief Scientific Officer at Escoublac, Inc., the first biotechnology company in the Biogen Idec Innovations Incubator. There, he was responsible for development and execution of the research plan for human osteocalcin in metabolic disease, Type 2 diabetes and obesity. From June 2005 until December 2007 he served as CSO at AdipoGenix where he oversaw internal drug discovery and development programs for obesity and related co-morbidities, as well as the AdipoGenix alliance with Johnson and Johnson. Previously, Dr. Bergenhem served as Vice President for Research at the Institute for Diabetes Discovery, as Director for Diabetes Research at OSI Pharmaceuticals Inc. and held positions of increasing importance at Novo Nordisk in Copenhagen. Dr. Bergenhem holds a BS degree in Chemistry from Linkoping University, Sweden, and a Ph.D. in Biochemistry from Umeå University, Sweden. He has completed postdoctoral work at University of Michigan in Molecular Biology and Human Genetics, where he also spent three years at the School of Medicine as Research Investigator at the Institute of Gerontology and at the Department of Biological Chemistry.

 

Lance Berman, M.D., Chief Medical Officer and Senior Vice President — 40, has been our Chief Medical Officer since February 2009. Previously, Dr. Berman served at Pfizer from 2003 until 2009. From December 2007 he served as Senior Medical Director and Global Medical Team Leader at Pfizer, responsible for the strategic medical development and evolution of products within the cardiovascular and diabetes portfolios. Previously, Dr. Berman held roles of increasing importance at Schering-Plough from 1999 to 2003 and Janssen Pharmaceuticals (Johnson & Johnson) from 1996 to 1999. Dr. Berman received his Bachelor of Medicine and

Bachelor of Surgery at University of Cape Town in Cape Town, South Africa, and holds a Masters Degree in Pharmaceutical Medicine.

 

Robert P. Hebert, Chief Financial Officer and Vice President — 38, has been in this role since the spin-off from Bentley in 2008. From June 2006 until the spin-off, Mr. Hebert was Controller and Principal Accounting Officer for Bentley. In this role, Mr. Hebert managed all of Bentley’s accounting and reporting functions. From May 2003 until June 2006, Mr. Hebert was Bentley’s Director of SEC Reporting & Compliance, Assistant Secretary and Assistant Treasurer. His responsibilities in this role included Bentley’s financial reporting and compliance with the requirements of the Sarbanes-Oxley Act of 2002. Prior to joining Bentley, Mr. Hebert worked as an auditor for Deloitte & Touche LLP from 1995 to 2003. Mr. Hebert received a B.S. in Business Administration with a concentration in accounting from Merrimack College in 1995.

 

Audit Committee

 

The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent auditors, who audit our consolidated financial statements. The Audit Committee is also responsible for discussing with our management and our independent auditors, our accounting policies and procedures and reporting systems, as well as the effectiveness of our internal financial controls. The Audit Committee monitors the independence of the auditors, and resolves any disagreements between our management and our independent auditors regarding financial reporting. The Audit Committee also oversees the financial reporting process, including review of the audited financial statements, and based on the reviews and discussions referred to above, it recommends to the Board whether the financial statements should be included in our Annual Report on Form 10-K. The Audit Committee currently consists of Messrs. John W. Spiegel (Chairman), Robert Forrester and Michael McGovern. Currently, all members of the Audit Committee are “independent” directors in accordance with the listing standards of the NASDAQ and SEC rules. Our Nominating and Governance Committee and our Board of Directors has determined that Mr. Spiegel qualifies as an “audit committee financial expert” as defined in applicable SEC rules.

 

Code of Business Conduct and Ethics

 

The Company has adopted a code of business conduct and ethics, or the code of conduct, that applies to its directors, officers, and employees. The code of conduct is publicly available on the Company’s website at www.cpexpharm.com under the caption “Investor Relations — Corporate Governance.” If the Company makes any substantive amendments to the code of business conduct or grants any waiver, including any implicit waiver from a provision of the code of conduct to our principal executive officer, principal financial officer or principal accounting officer, we will disclose the nature of such amendments or waiver on our website or in a Current Report on Form 8-K filed with the SEC. To date, we have not granted any waivers under the code of conduct.

 

Stockholder Recommendations for Director Nominations

 

Stockholders may recommend individuals for the Nominating and Governance Committee to consider as potential director candidates by submitting their names and background to “CPEX Pharmaceuticals, Inc. Nominating and Governance Committee” c/o the Secretary, CPEX Pharmaceuticals, Inc., 2 Holland Way, Exeter, New Hampshire, 03833. The Nominating and Governance Committee will consider a recommendation only if appropriate biographical information and background material is provided on a timely basis. Assuming that appropriate biographical and background material is provided for candidates recommended by stockholders, the Nominating and Governance Committee will evaluate those candidates by following substantially the same process, and applying substantially the same criteria, as for candidates submitted by Board members.

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers, and 10% stockholders to file reports of ownership and reports of change in ownership of the Company’s equity securities with the Securities and Exchange Commission. Directors, executive officers, and 10% stockholders are required to furnish the Company with copies of all Section 16(a) forms they file. Based on a review of the copies of such reports furnished, the Company believes that during the fiscal year ended December 31, 2010, the Company’s directors, executive officers, and 10% stockholders filed on a timely basis all reports required by Section 16(a) of the Exchange Act.

 

 

Summary Compensation Table for the 2010 and 2009 Fiscal Years

 

The following table summarizes the compensation of our principal executive officer and our two other most highly paid executive officers who were serving as executive officers as of December 31, 2010 (the “Named Executive Officers”).

 

 

 

 

Employment Agreements

 

We have entered into employment agreements with each of Messrs. Sedor, Berman and Bergenhem, which set forth the terms of their relationships with the Company. The agreements renew annually for one-year terms. Under the agreements, each individual is paid a base salary and provided with life insurance, as well as annual salary review, bonus potential and stock option grants. Mr. Sedor is eligible for a bonus each year of up to 50% of his base salary and Messrs. Berman and Bergenhem are each eligible for a bonus each

year of up to 40% of his respective base salary. The amount of any such bonuses, which are payable in cash, common stock and/or any other equity awards, and stock option grants are determined by the Compensation Committee after considering the Company’s and each individual’s performances during the year. Mr. Sedor’s agreement also provides for a minimum stock option grant of 5,000 options under the terms of the Amended and Restated 2008 Equity Incentive Plan, however, Mr. Sedor did not receive the minimum award in 2010. Each of these individuals is employed by us on a full time basis.

 

For details regarding our obligations in the event of various potential circumstances of termination of employment for any of our Named Executives, please see “Potential Payments Upon Termination or Change-In-Control” below.

 

Terms of Restricted Stock Units and Stock Option Grants

 

Each restricted stock unit granted to the Company’s executive officers represents the right to receive one share of common stock. The restricted stock units vest in three annual installments on the first three anniversaries of the grant date. The underlying shares will be issued on the respective vesting dates for the units. The restricted stock units are not subject to performance milestones or other vesting requirements beyond continued employment on the applicable vesting dates. The terms of the restricted stock units permit the Company to withhold vested shares in satisfaction of applicable tax withholding requirements.

 

The stock options granted during 2010 and 2009 vest in three equal installments on the first three anniversaries of the grant date and expire on the tenth anniversary of the grant. We believe that this vesting schedule, as well as the vesting schedule for the restricted stock units, aids in retaining executive officers and motivating longer-term performance. The exercise price of stock options is the closing price per share of our common stock on the NASDAQ Capital Market on the date of grant.

 

Outstanding Equity Awards at 2010 Fiscal Year End

 

The following table details unexercised options and restricted stock units that have not vested for each of our Named Executive Officers as of December 31, 2010.

 

 

 

 

 

Potential Payments Upon Termination or Change-in-Control

 

The employment agreements with our Named Executive Officers may be terminated at any time upon written notice. If we terminate a Named Executive Officer without cause, we would be obligated to pay the terminated executive severance equal to the sum of one year’s salary plus a bonus equal to the greater of the bonus target for the current year or bonus paid for the prior year; provided, however, that these obligations shall terminate if the terminated executive does not deliver a general release of claims to us within 60 days after such termination. Additionally, vesting of equity awards shall be accelerated on a pro rata basis determined by the number of completed months of service during the then current annual vesting period. Upon a termination for cause (as defined in such Named Executive Officer’s employment agreement), no severance is payable and the terminated executive’s equity awards shall not be accelerated. Upon the death or disability of an executive officer, all equity awards shall vest.

 

If any of the Named Executive Officers terminates his employment for good reason (as defined in such Named Executive Officer’s employment agreement), or we terminate his employment without cause, within 12 months after a change in control, (i) we would be obligated to pay the terminated executive two times either (A) the average of his aggregate annual compensation paid by his current employer during the two prior calendar years (including base salary and bonuses, if any) or (B) if he has not been so employed for two full prior calendar years, 12 times his monthly base salary immediately prior to the change in control plus the greater of his (X) most recent bonus, if any, paid by his current employer before the change in control and (Y) his target bonus most recently determined by his current employer prior to the change in control; provided, however, that the obligations in this clause (i) shall terminate if the release described above has not been delivered within 60 days after such termination; (ii) all of his then outstanding equity awards would vest and become fully exercisable immediately; and (iii) he would be entitled to health benefits for a period of up to two years and the right to continue life insurance coverage at our expense for up to two years. The severance payments described in (i) of the preceding sentence would be paid in a lump sum within 30 days after termination of employment, subject to a six month delay if so required to comply with Section 409A of the Internal Revenue Code.

 

2010 Director Compensation

 

The following table summarizes compensation paid to our non-employee directors during 2010.

 

 

 

 

 

We pay directors who are not employees, fees consisting of a $25,000 annual retainer, $1,500 for each meeting of the Board of Directors attended, $1,000 for each Audit Committee meeting attended, $1,000 for each Compensation Committee meeting attended, and $1,000 for each Nominating and Governance Committee meeting attended. We also reimburse expenses incurred in attending meetings. In addition, the chairman of the Board is paid an annual retainer of $50,000, the chairman of the Audit Committee is paid an additional annual retainer of $7,500, the chairman of the Compensation Committee is paid an additional annual retainer of $5,000, and the chairman of the Nominating and Governance Committee is paid an additional annual retainer of $5,000.

 

 

The following table sets forth information as of January 31, 2011 as to (i) each person (including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) who we know to be the beneficial owner of more than five percent of the outstanding shares of our common stock, (ii) each of the Named Executive Officers listed in the Summary Compensation Table above, (iii) each director, and (iv) all current executive officers and directors as a group.

 

Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and dispositive power with respect to their shares of our common stock, except to the extent authority is shared by spouses under applicable law. Pursuant to the rules of the Securities and Exchange Commission, or SEC, the number of shares of common stock deemed outstanding includes shares issuable pursuant to options held by the respective person or group that are currently exercisable or may be exercised within 60 days of January 31, 2011 unless a more recent SEC filing through February 24, 2011 is available for our 5% stockholders. Except

as otherwise indicated, the address of each beneficial holder is c/o CPEX Pharmaceuticals, Inc., 2 Holland Way, Exeter, New Hampshire 03833.

 

 

 

 

Change in Control

 

On January 4, 2011, we announced that we had entered into a definitive agreement with FCB I Holdings Inc. (“FCB”), a newly formed company which is controlled by Footstar Corporation, under which FCB, through a wholly-owned subsidiary, will acquire all of our outstanding common stock for $27.25 per share in

cash, pursuant to an agreement and plan of merger (the “Merger Agreement”). The transaction was approved by our Board of Directors and was approved by our stockholders on March 24, 2011. The closing of the transaction is subject to the satisfaction of certain customary closing conditions, provided, the closing of the transaction may not occur prior to April 4, 2011. We expect that the transaction will be completed shortly following April 4, 2011, but there can be no assurance that the closing will occur on this timeframe or at all. Upon closing of the transaction, we will become a wholly-owned subsidiary of FCB and our common stock will cease to trade on the NASDAQ Capital Market. The foregoing description of the transaction with FCB does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is filed as Exhibit 2.1 hereto.

 

 

Certain Relationships and Related Transactions

 

Our Board of Directors has adopted a written Policy on Related Person Transactions that sets forth our policies and procedures for the reporting, review, and approval or ratification of each related person transaction. The Nominating and Governance Committee is responsible for implementing the policy. The policy applies to transactions and other relationships that would need to be disclosed in this proxy statement as related person transactions pursuant to Item 404 of the SEC’s Regulation S-K, or Item 404. In general, these transactions and relationships are defined as those involving our executive officers, directors, nominees for director or 5% stockholders, or specified members of the family or household of any of these individuals, where CPEX or any of its affiliates have participated in the transaction as a direct party or by arranging the transaction and the transaction involves more than $120,000. In adopting this policy, our Board of Directors expressly excluded from its coverage any transactions, among others, involving compensation of our executive officers or directors that has been expressly approved by our Compensation Committee or our Board of Directors.

 

Since January 1, 2009, we have not been engaged in any related party transactions requiring disclosure pursuant to subsection (d) of Item 404, nor are we party to any proposed related party transactions.

 

Director Independence

 

We are subject to the NASDAQ listing standards, which require that a majority of our directors be independent. Under the NASDAQ listing standards, a director is independent if he or she is not an executive officer or employee of CPEX and does not have any relationship that, in the opinion of our Board, would interfere with his or her exercise of independent judgment in carrying out his or her responsibilities as a director. The NASDAQ listing standards also identify a variety of relationships that, if they exist, prevent a director from being considered independent.

 

Our Nominating and Governance Committee and our Board of Directors have determined that, at the current time, Messrs. Forrester, McGovern and Spiegel meet the NASDAQ listing standards for independence. Mr. Murphy does not meet these standards because of his prior employment with Bentley Pharmaceuticals, Inc., which under NASDAQ independence standards, will preclude independence until the third anniversary of CPEX’s independence from Bentley in mid-2008. Mr. Sedor, as the President and Chief of Executive Officer of CPEX, is precluded from being considered independent.

 

 

 

The Audit Committee pre-approves the engagement of BDO USA, LLP for all professional services. The pre-approval process generally involved the full Audit Committee evaluating and approving the particular

engagement prior to the commencement of services. There were no audit-related, tax or other fees billed by BDO USA or Deloitte & Touche for the years ended December 31, 2010 and 2009.

 

Part IV

 

 

 

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.

 

CPEX PHARMACEUTICALS, INC.

 

John A. Sedor

Chief Executive Officer and President

 

Date: March 31, 2011

 

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 Registrant and in the capacities and on the dates indicated.

 

Exhibit Index

 

to Form 10-K for the Year Ended December 31, 2010

 

 

 

Index to Consolidated Financial Statements of
CPEX Pharmaceuticals, Inc. and Subsidiary

 

 

 

To the Board of Directors and Stockholders of

CPEX Pharmaceuticals, Inc.

Exeter, New Hampshire

 

We have audited the accompanying consolidated balance sheets of CPEX Pharmaceuticals, Inc. and its subsidiary (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of CPEX Pharmaceuticals, Inc. and its subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

 

Boston, Massachusetts

March 31, 2011

CPEX Pharmaceuticals, Inc. and Subsidiary

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

CPEX Pharmaceuticals, Inc. and Subsidiary

Consolidated Statements of Operations

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

CPEX Pharmaceuticals, Inc. and Subsidiary

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

CPEX Pharmaceuticals, Inc. and Subsidiary