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ACURA PHARMACEUTICALS, INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This discussion and analysis should be read in conjunction with the Company's financial statements and accompanying notes included elsewhere in this Report. Historical operating results are not necessarily indicative of results in future periods. Forward-Looking Statements Certain statements in this Report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Forward-looking statements may include, but are not limited to: · the results of our dispute resolution request with the FDA, including any appeal therefrom, relating to our Aversion hydrocodone/acetaminophen product; · the results of our development of our Limitx™ technology; · our ability to fund, or obtain funding for, products developed utilizing our Limitx™ technology; 20 · our ability to enter into a license agreement for our FDA approved Aversion Oxycodone product; · our and our licensee's ability to successfully launch and commercialize our products and technologies including Aversion Oxycodone and Nexafed Tablets; · the results of our meetings or discussions with the FDA relating to our Aversion hydrocodone/acetaminophen product; · whether the results of studies AP-ADF-302, AP-ADF-303, and AP-ADF-304 relating to our Aversion hydrocodone/acetaminophen product will be acceptable to the FDA; · whether we will conduct an additional intranasal abuse liability study on our Aversion hydrocodone/acetaminophen product and, if conducted, whether the results of such study will support the filing of a New Drug Application and/or a claim of intranasal abuse deterrence; · our and our licensee's ability to obtain necessary regulatory approvals and commercialize products utilizing our technologies; · the market acceptance of and competitive environment for any of our products; · the willingness of wholesalers and pharmacies to stock Nexafed Tablets; · expectations regarding potential market share for our products and the timing of first sales; · our ability to enter into additional license agreements for our Aversion Technology product candidates; · our exposure to product liability and other lawsuits in connection with the commercialization of our products; · the increasing cost of insurance and the availability of product liability insurance coverage; · the ability to avoid infringement of patents, trademarks and other proprietary rights of third parties; · the ability of our patents to protect our products from generic competition and our ability to protect and enforce our patent rights in any paragraph IV patent infringement litigation; · the ability to fulfill the FDA requirements for approving our product candidates for commercial manufacturing and distribution in the United States, including, without limitation, the adequacy of the results of the laboratory and clinical studies completed to date, the results of laboratory and clinical studies we may complete in the future to support FDA approval of our product candidates and the sufficiency of our development process to meet OTC Monograph standards as applicable; · the adequacy of the development program for our product candidates, including whether additional clinical studies will be required to support FDA approval of our product candidates; · changes in regulatory requirements; · adverse safety findings relating to our product candidates; · whether the FDA will agree with our analysis of our clinical and laboratory studies; · whether further studies of our product candidates will be required to support FDA approval; · whether or when we are able to obtain FDA approval of labeling for our product candidates for the proposed indications and will be able to promote the features of our abuse discouraging technologies; and 21 · whether our Aversion and Limitx™ product candidates will ultimately deter abuse in commercial settings and whether our Impede technology will disrupt the processing of pseudoephedrine into methamphetamine. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "indicates," "estimates," "projects," "predicts," "potential" and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail in this Report and in our filings with the Securities and Exchange Commission. Unless required by law, we undertake no obligation to update or revise any forward-looking statements to reflect new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements. Company Overview We are a specialty pharmaceutical company engaged in the research, development and commercialization of technologies and products intended to address medication abuse and misuse. We have discovered and developed three proprietary platform technologies which can be used to develop multiple products. Our Aversion® Technology is a mixture of inactive ingredients incorporated into pharmaceutical tablets and capsules intended to address some common methods of product tampering associated with opioid abuse. Oxycodone HCl tablets, CII, or Aversion Oxycodone, is the first approved product utilizing Aversion in the United States and we have 7 additional opioid products utilizing Aversion in various stages of development. In April 2014, we reacquired Aversion Oxycodone from our prior licensee and intend to seek a commercialization partner for that product and our Aversion opioids in development. We have also developed Impede® Technology which is a combination of inactive ingredients that prevent the extraction of pseudoephedrine from tablets and disrupt the direct conversion of pseudoephedrine from tablets into methamphetamine. We launched our first Impede Technology product, Nexafed®, into the United States market in December 2012 and we have multiple pseudoephedrine products in development utilizing Impede. In August 2014, we received a grant from the National Institute on Drug Abuse to advance early stage development of our third abuse deterrent technology, Limitx™. Limitx is designed to retard the release of active drug ingredients when too many tablets are accidently or purposefully ingested. Opioid analgesics are one of the largest prescription drug markets in the United States with 253 million prescriptions dispensed in 2013. Prescription opioids are also the most widely abused drugs with 12 million people abusing or misusing these products annually. We expect our Aversion Technology opioid products to compete primarily in the immediate-release opioid product segment. Because immediate-release opioid products are used for both acute and chronic pain, a prescription, on average, contains 65 tablets or capsules. According to IMS Health, in 2013, sales in the immediate-release opioid product segment were approximately 238 million prescriptions and $2.6 billion, of which ~97% was attributable to generic products. Immediate-release oxycodone tablets represent 16.7 million of these prescriptions or almost 1.6 billion tablets. The FDA approved label for our Aversion Oxycodone product describes the unique, and we believe promotable, abuse deterrent features of our product which we believe makes prescribing our product attractive to some healthcare providers. Hydrocodone bitartrate with acetaminophen, or hydrocodone/acetaminophen, is the most widely prescribed and often abused opioid product in the United States. Our Aversion hydrocodone/acetaminophen product is the most advanced opioid product in development and the primary focus of our opioid development efforts. On December 5, 2013, we met with the FDA to discuss the results of Study AP-ADF-301, or Study 301, a key abuse liability study for our Aversion hydrocodone/acetaminophen product and whether the results from Study 301 are acceptable for submission in a New Drug Application, or NDA. On May 27, 2014, we announced that the FDA advised us that the data from our Study 301 was insufficient to support an intranasal abuse deterrence description in our product labeling. The FDA indicated that a product will have to have an impact on "drug liking" to support a description of abuse-deterrence through a relevant route of abuse. The FDA's advice also questioned whether the intranasal route is a relevant route of abuse for hydrocodone/ acetaminophen products. We met with the FDA on August 14, 2014 to discuss the development pathway for our Aversion hydrocodone/acetaminophen tablet development candidate, which is intended to provide abuse-deterrent features to address abuse by nasal snorting and injection. The FDA continues to question the relevance of abuse of hydrocodone with acetaminophen products by the intranasal route of administration. 22 On September 11, 2014, we submitted a formal dispute resolution request with the FDA. The dispute pertains to the FDA's determination that nasal snorting abuse of hydrocodone with acetaminophen products lacks relevance. We believe the available data, as contained in the multiple sources provided to the FDA, strongly supports the conclusion that hydrocodone containing products are known to be abused through snorting, a standard explicitly identified in FDA's January 2013 "Guidance for Industry Abuse-Deterrent Opioids - Evaluation and Labeling". On October 16, 2014, we announced that the FDA denied on procedural grounds our appeal of the position taken by the Division of Anesthesia, Analgesia and Addiction Products ("DAAAP") that abuse by snorting hydrocodone with acetaminophen products lacks relevance. In a letter decision from the Office of Drug Evaluation II, the FDA indicated that DAAAP's comments and correspondence with us to date, as well as the FDA's Draft Guidance on abuse deterrent opioids, should be viewed only as recommendations and opinions, and do not preclude us from completing clinical development of our hydrocodone with acetaminophen product and submitting an NDA for consideration by the FDA. The FDA noted that an Advisory Committee meeting may greatly inform their considerations. The FDA letter ruling also advised us that we may appeal the decision of the Office of Drug Evaluation II to the next level within the FDA. We are currently assessing our development strategy for our Aversion hydrocodone with acetaminophen product, including the merits of appealing the FDA's decision. Even if we were to file an appeal and succeed in such proceeding, in order to continue the development of our hydrocodone/acetaminophen product we will be required to conduct an additional abuse liability study that will need to demonstrate a statistically significant reduction in Drug Liking, of which no assurance can be provided. We are currently in the process of designing this next study and will make a decision on commencing this study in 2015. We expect that the development program for all our Aversion opioid products in development will be consistent with that of Aversion Oxycodone and our hydrocodone/acetaminophen product candidate. In 2009, the United States market for over-the-counter market, or OTC, cold and allergy products containing an oral nasal decongestant was approximately $1 billion. In 2012, the DEA reported 11,210 laboratory incidents involving the illegal use of OTC pseudoephedrine products to manufacture the highly addictive drug methamphetamine, or meth. Nexafed, our 30mg pseudoephedrine hydrochloride immediate-release tablet utilizing our Impede Technology, is stocked in approximately 15% of the estimated 65,000 U.S. pharmacies. Many of these pharmacies are either actively recommending Nexafed to their patients or carry Nexafed as their only 30mg pseudoephedrine product. The category for meth-resistant pseudoephedrine products has also been the focus of some, as yet unsuccessful, state legislation seeking to incentivize consumers and pharmacists to utilize these meth-resistant technologies. We are advancing commercial preparations to launch the first line extension of Nexafed into the U.S. market later in 2014 and have an active development program to develop a sustained-release version of our technology to capitalize on higher sales products in the category. We also are investigating new technologies that would improve on our meth-resistant capabilities. We also have discovered an early-stage technology, Limitx™, which, in proof of concept laboratory tests, demonstrates the ability to limit the release of the active ingredient from tablets when multiple tablets are consumed simultaneously. Aversion Technology Overview Aversion Technology is a unique composition of inactive pharmaceutical ingredients utilized with an opioid or other drug susceptible of abuse to provide abuse deterrent functionality. All of our Aversion Technology opioid products are covered by six issued U.S. patents, which expire between 2023 and 2025. Our Aversion Technology products are intended to provide the same therapeutic benefits of the active drug ingredient as currently marketed products containing the same active pharmaceutical ingredient, while simultaneously discouraging the following common methods of pharmaceutical product misuse and abuse: 23 · Drug abusers may dissolve pharmaceutical tablets or capsules in water, alcohol, or other common solvents, filter the dissolved solution into a syringe, and inject the resulting fluid intravenously to obtain euphoric effects. Aversion Technology tablets dissolved in generally available solvents, including water or alcohol, into a volume and form suitable for intravenous injection, converts the tablet into a viscous gel mixture. We believe this gel will limit or impede drug abusers from extracting and injecting the active ingredientsfrom our tablets. · Drug abusers may crush pharmaceutical tablets or capsules and intranasally snort the resulting powder to absorb active ingredient through the nasal passages to obtain euphoric effects. The combination of Aversion Technology inactive ingredients is intended to induce nasal passage discomfort if the tablets are snorted. We believe products which utilize Aversion Technology may be disliked and will discourage prospective nasal drug abusers from snorting crushed tablets or capsules. The extent and manner in which any of the features described above may be described in the FDA approved label for our pipeline products will be dependent on the results of and the acceptance by the FDA of our and our licensees' studies for each product. Aversion Oxycodone Aversion Oxycodone is a Schedule II narcotic indicated for the management of acute and chronic moderate to severe pain where the use of an opioid analgesic is appropriate. Aversion Oxycodone was FDA approved on June 17, 2011 and introduced, by our former licensee, Pfizer Inc., into the U.S. market in February 2012 under the trade name Oxecta®. Pfizer strategically deprioritized their efforts in immediate-release opioids commencing in summer of 2012 and we reacquired the rights to Aversion Oxycodone in April 2014, shortly after Pfizer initiated minimal, non-sales representative promotion in late 2013. We currently expect to partner with a strategically focused pharmaceutical company to manufacture and commercialize Aversion Oxycodone in the United States and possibly other territories by end of this year or early 2015. As such, we now expect the re-launch to occur in the first half of 2015. However, we caution that this expectation can change based on the status of the negotiations, and there can be no assurance that this will be the case. The 2013 market for immediate-release oxycodone products was 16.7 million dispensed prescription or 1.6 billion tablets. The current market is predominately serviced by generic formulations that contain no abuse deterrent features and sell for approximately $0.10 to $0.40 per tablet, depending on strength. Immediate-release opioids are prescribed by a broad cross-section of healthcare providers including primary care physicians, surgeons and pain specialists. We believe Aversion Oxycodone, given its differentiated label compared to generic products, can offer an alternative for opioid prescribing physicians concerned with the abuse or diversion for abuse of their prescriptions even at premium pricing to generics. Because the target audience for promoting our opioid products is so large, we will seek marketing partners to best capitalize on our opioid opportunities. The safety and efficacy of Aversion Oxycodone 5mg and 7.5mg tablets was established by demonstrating bioequivalence to commercially available oxycodone immediate-release tablets in the fasted state. Aversion Oxycodone differs from oxycodone tablets when taken with a high fat meal though these differences are not considered clinically relevant, and Aversion Oxycodone can be taken without regard to food. The FDA-approved label for Aversion Oxycodone describes elements unique to our Aversion Technology, which differs from current commercially available oxycodone immediate-release tablets. The label for Aversion Oxycodone includes the results from a clinical study that evaluated the effects of nasally snorting crushed Aversion Oxycodone and commercially available oxycodone tablets, and limitations on exposing Aversion Oxycodone tablets to water and other solvents and administration through feeding tubes. The clinical study evaluated 40 non-dependent recreational opioid users, who self-administered the equivalent of 15mg of oxycodone. After accounting for a first sequence effect, the study demonstrated: · 30% of subjects exposed to Aversion Oxycodone responded that they would not take the drug again compared to 5% of subjects exposed to immediate-release oxycodone; · subjects taking Aversion Oxycodone reported a higher incidence of nasopharyngeal and facial adverse events compared to immediate-release oxycodone; · a decreased ability to completely insufflate two crushed Aversion Oxycodone tablets within a fixed time period (21 of 40 subjects), while all subjects were able to completely insufflate the entire dose of immediate-release oxycodone; and 24 · small numeric differences in the median and mean drug liking scores, which were lower in response to Aversion Oxycodone than immediate-release oxycodone. Although we believe these abuse deterrent characteristics differentiate Aversion Oxycodone from immediate-release oxycodone products currently on the market, consistent with FDA guidance which requires epidemiology studies to support a claim of abuse deterrence, the clinical significance of the difference in drug liking and difference in response to taking the drug again in this study has not been established. There is no evidence that Aversion Oxycodone has a reduced abuse liability compared to immediate release oxycodone. We have a post-approval commitment with the FDA to perform an epidemiology study to assess the actual impact on abuse of Aversion Oxycodone tablets. Further, the Aversion Oxycodone product label guides patients not to crush and dissolve the tablets or pre-soak, lick or otherwise wet the tablets prior to administration. Similarly, caregivers are advised not to crush and dissolve the tablets or otherwise use Aversion Oxycodone for administration via nasogastric, gastric or other feeding tubes as it may cause an obstruction. Our laboratory studies demonstrated that the Aversion Oxycodone tablet may gel when Aversion Oxycodone is exposed to certain solvents, including water. Aversion Technology Opioid Products in Development We have the following opioid products utilizing our Aversion Technology in various stages of development: Aversion Technology Tablets Comparable Brand Status Name1 Hydrocodone Vicodin®, All clinical work is complete except a bitartrate/acetaminophen Lortab®, Norco® repeat nasal snorting abuse liability study will be required. We are assessing FDA's view that abuse by nasal snorting lacks relevance before continuing the development program. Hydromorphone HCl Dilaudid® Proof of Concept2 Methadone HCl Methadose Proof of Concept2 Morphine Sulfate MSIR® Proof of Concept2 Oxycodone HCl/acetaminophen Percocet® Proof of Concept2 Oxymorphone HCl Opana® Proof of Concept2 Tramadol HCl Ultram® Proof of Concept2 1 Comparable Brand Name refers to currently marketed prescription products in the United States containing the same active analgesic ingredient(s) as in the corresponding Aversion Technology product. 2 Proof of Concept is attained upon demonstration of product stability and bioavailability parameters. All proof of concept formulations contain niacin (derived from the initial Aversion formulation) and will require reformulation. We anticipate the development program for each of our Aversion opioid products will be consistent with that of Aversion Oxycodone. Because our products use known active ingredients in approved dosage strengths, the safety and efficacy of the Aversion opioid will be established by a series of pharmacokinetic studies demonstrating: (a) bioequivalence to an approved reference drug, (b) food effect of our formulations, and (c) dose proportionality of our formulation. The abuse deterrent studies of the Aversion products will be consistent with FDA's draft guidance for the development of abuse deterrent opioids with the objective to obtain a description of our studies and/or abuse deterrent features in the product's label. These studies may include in vitro laboratory studies to determine, among other things, syringeability of the formulation, extractability of the opioid, and particle size of the crushed product. We also may conduct human abuse liability studies comparing the abuse liability of Aversion products to currently marketed products. 25 We may have to perform additional safety and/or efficacy assessment as may be identified by the FDA for each specific formulation during the IND or NDA phase of development. In accordance with the FDA draft guidance, we will likely have a post-approval requirement for each of our products, if approved, to perform an epidemiology study to assess the in-market impact on abuse of our formulation. We believe that the time to develop each Aversion opioid product from IND to NDA submission can be as short as 18 months to 24 months, provided all studies meet their primary study objectives. Aversion Hydrocodone/Acetaminophen Development Our most advanced opioid development product is Aversion hydrocodone/acetaminophen. Our clinical development program for our hydrocodone/acetaminophen product is expected to consist of: · A nasal abuse liability liking study in about 40 recreational drug users against a reference drug, or Study AP-ADF-301 (complete); · A pharmacokinetic study (Study AP-ADF-302) in about 36 fasted subjects to establish bioequivalence to the FDA's reference listed drug and determine the food effect on our drug (complete); · A pharmacokinetic study (Study AP-ADF-303) in about 24 subjects demonstrating dose proportionality of our formulation (complete); · A pharmacokinetic study (Study AP-ADF-304) in about 24 subjects to establish safety compared to the reference listed drugs tramadol/acetaminophen (for acetaminophen) and hydrocodone bitartrate/ibuprofen (for hydrocodone) (complete); · Laboratory studies demonstrating extraction, syringing, swelling and particle size characteristics of our product (in progress); · An assessment of the routes of abuse of hydrocodone products (complete); and · An additional nasal abuse liability study in recreational drug users against a reference drug (under strategic review). On August 26, 2013, we announced top-line results from Study AP-ADF-301 (Study 301), a phase II clinical study in 40 recreational drug abusers assessing the abuse liability of snorting of our crushed hydrocodone/acetaminophen product. Study 301's primary endpoint indicated Aversion hydrocodone/acetaminophen had slightly lower numeric mean maximum drug liking (Emax: 72.1) compared to an equivalent dose of a generic hydrocodone/acetaminophen tablet (Emax: 75.6) currently on the market, however these results were not statistically significant (p=0.22). The secondary endpoints demonstrated the effects of the Aversion ingredients on drug snorting. Aversion hydrocodone/acetaminophen's mean minimum liking (Emin: 40.2) was less than the comparator (Emin: 50.4) (the difference being statistically significant at p=0.0003). The mean minimum drug liking for Aversion hydrocodone/acetaminophen and the placebo control were 40.2 and 48.8, respectively (the difference being statistically significant at p=0.0042). A score below 50 indicates a subject disliked the drug they were taking at some point during the treatment (a score of 50 means neither like or dislike), and a score greater than 50 indicates they liked the drug they were taking. The mean minimum liking results correlated closely the Overall Drug Liking score (ODL) and Take Drug Again assessment (TDA). ODL assessed the subject like or dislike for the drug experience 12 hours after taking the dose. The ODL for Aversion hydrocodone/acetaminophen (52.7) was lower than the generic comparator (71.0) (the difference being statistically significant at p=0.0001) with a score of 50 indicating a neither a like or dislike. TDA assessed a subject's willingness to take the drug again assessed 12 hours after taking the dose. The TDA for Aversion hydrocodone/acetaminophen (45.1) was lower than the generic comparator (71.0) (the difference being statistically significant at p=0.0001) with the Aversion hydrocodone/acetaminophen score below 50 indicating an unwillingness to take the drug again. There were no serious adverse events reported for Aversion hydrocodone/acetaminophen. There was no sequence effect identified in the study but a carryover effect between the 5 study crossover periods was identified for the Emax measure but not the Emin measure. Due to this observed carryover effect, the FDA may review the results of our study differently than we have and/or limit the amount of data we collected in the label for our product if approved by the FDA. As such, we are strategically considering the need to complete an additional nasal abuse liability study. 26 On December 5, 2013, we met with FDA to discuss if the FDA will consider whether the results of Study 301 are acceptable for submission in a NDA. On May 27, 2014, we announced that the FDA advised us that the data from our Study 301 was insufficient to support an intranasal abuse deterrence claim. The FDA indicated that a product will have to have an impact on "drug liking" to support a claim of abuse-deterrence through a relevant route of abuse. The FDA's advice also questioned whether the intranasal route is a relevant route of abuse for hydrocodone/ acetaminophen products and recommended that we identify variables that could have impacted the findings from Study 301 before considering or conducting an additional intranasal abuse liability study on our Aversion hydrocodone/ acetaminophen product. We have previously submitted a report to the FDA on the prevalence of abusing hydrocodone products by intranasal administration. We met with the FDA on August 14, 2014 to discuss the development pathway for our Aversion hydrocodone/acetaminophen tablet development candidate, which is intended to provide abuse-deterrent features to address abuse by nasal snorting and injection. The FDA continues to question the relevance of abuse of hydrocodone with acetaminophen products by the intranasal route of administration. The FDA indicated that we may conduct an additional nasal abuse liability study for its Aversion hydrocodone/acetaminophen product candidate. On September 11, 2014, we submitted a formal dispute resolution request with the FDA. The dispute pertains to the FDA's determination that nasal snorting abuse of hydrocodone with acetaminophen products lacks relevance. We believe the available data, as contained in the multiple sources provided to the FDA, strongly supports the conclusion that hydrocodone containing products are known to be abused through snorting, a standard explicitly identified in FDA's January 2013 "Guidance for Industry Abuse-Deterrent Opioids - Evaluation and Labeling". On October 16, 2014, we announced that the FDA denied on procedural grounds our appeal of the position taken by the Division of Anesthesia, Analgesia and Addiction Products ("DAAAP") that abuse by snorting hydrocodone with acetaminophen products lacks relevance. In a letter decision from the Office of Drug Evaluation II, the FDA indicated that DAAAP's comments and correspondence with us to date, as well as the FDA's Draft Guidance on abuse deterrent opioids, should be viewed only as recommendations and opinions, and do not preclude us from completing clinical development of our hydrocodone with acetaminophen product and submitting an NDA for consideration by the FDA. The FDA noted that an Advisory Committee meeting may greatly inform their considerations. The FDA letter ruling also advised us that we may appeal the decision of the Office of Drug Evaluation II to the next level within the FDA. We are currently assessing our development strategy for our Aversion hydrocodone with acetaminophen product, including the merits of appealing the FDA's decision. Even if we were to file an appeal and succeed in such proceeding, in order to continue the development of our hydrocodone/acetaminophen product we will be required to conduct an additional abuse liability study that will need to demonstrate a statistically significant reduction in Drug Liking, of which no assurance can be provided. We are currently in the process of designing this next study and will make a decision on commencing this study in 2015. We have completed scale-up activities for our Aversion hydrocodone/acetaminophen product at the proposed commercial manufacturer and have manufactured our registration batches for use in subsequent clinical trials. We have also completed the pharmacokinetic studies (302, 303 and 304) for Aversion hydrocodone/acetaminophen, the preliminary results of which have demonstrated conformance with the FDA's standard for bioequivalence when compared to the reference drug, and demonstrated dose proportionality, or relatively consistent blood exposure, across all three dosage strengths. Such studies also evaluated blood levels of each of hydrocodone and acetaminophen compared to their respective comparator drugs, and demonstrated that our Aversion hydrocodone/acetaminophen blood levels of hydrocodone were consistent with the comparator product, while acetaminophen peak blood levels were 23% higher than the comparator product based on the geometric mean. A large variability in acetaminophen results was observed in the study. We believe the results of Studies 302, 303 and 304 satisfy the requirement for a New Drug Application (NDA) to establish the safety and pain efficacy of our Aversion hydrocodone/acetaminophen product, however, the interpretation of these results will be subject to FDA's review and acceptance of our conclusions. Before submitting and NDA, we will need to complete an additional nasal abuse liability study which is currently undergoing an internal strategic review. U.S. Market Opportunity for Opioid Analgesic Products Utilizing Aversion Technology The misuse and abuse of controlled prescription drugs (CPDs) in general, and opioid analgesics in particular, continues to constitute a dynamic and challenging threat to the United States and is the nation's fastest growing drug problem. Results from the 2013 National Drug Threat Assessment conducted by the DEA report that CPD rates of abuse remain high, with individuals abusing CPDs at a higher prevalence rate than any illicit drug except marijuana. Opioid analgesics are the most common type of CPDs taken illicitly and are the CPDs most commonly involved in overdose incidents. According to the Drug Abuse Warning Network (DAWN), the estimated number of emergency department visits involving nonmedical use of prescription opiates/ opioids increased 112 percent-84,671 to 179,787-between 2006 and 2010. Immediate release, or IR, opioid products comprise the vast majority of this abuse compared with extended release, or ER, opioid products. 27 It is estimated that more than 75 million people in the United States suffer from pain and the FDA estimates more than 45 million people receive a prescription for the opioid hydrocodone annually. For many pain sufferers, opioid analgesics provide their only pain relief. As a result, opioid analgesics are among the largest prescription drug classes in the United States with over 253 million tablet and capsule prescriptions dispensed in 2013 of which approximately 238 million were for IR opioid products and 15 million were for ER opioid products. However, physicians and other health care providers at times are reluctant to prescribe opioid analgesics for fear of misuse, abuse, and diversion of legitimate prescriptions for illicit use. We expect our Aversion Technology opioid products, to compete primarily in the IR opioid product segment of the United States opioid analgesic market. Because IR opioid products are used for both acute and chronic pain, a prescription, on average, contains 65 tablets or capsules. According to IMS Health, in 2013, sales in the IR opioid product segment were approximately $2.6 billion, of which ~97% was attributable to generic products. Due to fewer identified competitors and the significantly larger market for dispensed prescriptions for IR opioid products compared to ER opioid products, we have initially focused on developing IR opioid products utilizing our Aversion Technology. Aversion oxycodone and our Aversion Technology products in development include the active opioid ingredients representing approximately 76% of the U.S. IR Opioid Product segment. A summary of the IR opioid product prescription data for 2013 is provided below: 2013 US Prescriptions % IR Opioid Products(1) (Millions)(2) of Total Hydrocodone 128 54 % Oxycodone 52 22 Tramadol 41 17 Codeine 11 5 3 Others 6 2 Total 238 100 % 1 Includes all salts and esters of the opioid and opioids in combination with other active ingredients such as acetaminophen. 2 IMS Health, 2013 Product Labeling for Aversion Technology Products In January 2013, the FDA published draft guidance for industry on the evaluation and labeling of abuse-deterrent opioids. While this guidance is non-binding on the FDA, it outlines FDA's current thinking on the labeling of abuse-deterrent products. FDA encourages sponsors to seek approval of proposed product labeling that sets forth the results of physiochemical, physiologic, pharmacodynamic, pharmacokinetic, and/or formal post-marketing studies that appropriately characterizes the abuse-deterrent properties of a product. To date, FDA has limited data correlating the potentially abuse-deterrent properties of certain opioid drug products with actual reduction in abuse or adverse events associated with abuse. When the data predict or show that a product's potentially abuse-deterrent properties can be expected to, or actually do, result in a significant reduction in that product's abuse potential, these data, together with an accurate characterization of what the data mean, should be includedin product labeling. We or our licensee may seek to include descriptions of studies that characterize the abuse-deterrent properties in the label for our Aversion Technology products in development. Although the FDA approved label for Aversion Oxycodone contains limitations on exposing Aversion Oxycodone tablets to water and other solvents and administration through feeding tubes, the FDA approved Aversion Oxycodone label does not contain a description of the I.V. injection studies we performed to characterize the abuse deterrent properties of Aversion Oxycodone. We have committed to the FDA to undertake epidemiological studies to assess the actual consequences of abuse of Aversion Oxycodone in the market. The extent to which a description of the abuse-deterrent properties or results of epidemiological or other studies will be added to or included in the FDA approved product label for our products in development will be the subject of our discussions with the FDA as part of the NDA review process, even after having obtained approval of Aversion Oxycodone. Further, because the FDA closely regulates promotional materials, even if FDA initially approves labeling that includes a description of the abuse deterrent properties of the product, the FDA's Office of Prescription Drug Promotion, or OPDP, will continue to review the acceptability of promotional labeling claims and product advertising campaigns for our marketed products. 28 Patents and Patent Applications In April 2007, the United States Patent and Trademark Office, or USPTO, issued to us U.S. Patent No. 7,201,920 titled "Methods and Compositions for Deterring Abuse of Opioid Containing Dosage Forms," or the 920 Patent. The 54 allowed claims in the 920 Patent encompass certain pharmaceutical compositions intended to deter the most common methods of prescription opioid analgesic product misuse and abuse. These patented pharmaceutical compositions include the mixture of functional inactive ingredients and specific opioid analgesics such as oxycodone HCl and hydrocodone bitartrate among others. The 920 Patent expires in March, 2025. In January 2009, the USPTO issued to us U.S. Patent No. 7,476,402, or the 402 Patent, with 18 allowed claims. The 402 Patent encompasses certain combinations of kappa and mu opioid receptor agonists and other ingredients intended to deter opioid analgesic product misuse and abuse. The 402 Patent expires in November, 2023. In March 2009, the USPTO issued to us U.S. Patent No. 7,510,726, or the 726 Patent, with 20 allowed claims. The '726 Patent encompasses a wider range of abuse deterrent compositions than our '920 Patent. The 726 Patent expires in November, 2023. In July 2011, the USPTO issued to us U.S. Patent No. 7,981,439, or the 439 Patent, with 7 allowed claims. The 439 Patent encompasses certain compositions including any water soluble drug of abuse intended to deter the most common methods of prescription opioid analgesic product misuse and abuse. The 439 Patent expires in August, 2024. In January 2012, the USPTO issued to us U.S. Patent No. 8,101,630, or the 630 Patent with a single claim that encompasses an extended release abuse deterrent dosage form of oxycodone or a pharmaceutically acceptable salt thereof. The 630 Patent expires in August, 2024. In July 2014, we ceded priority of the '630 patent to a patent application filed by Purdue Pharma and expect this patent to be rescinded. In April 2013, the USPTO issued to us U.S. Patent No. 8,409,616, or the 616 Patent, that encompasses certain immediate-release abuse deterrent dosage forms. The 616 Patent expires in November, 2023. In January 2014, the USPTO issued to us U.S. Patent No. 8,637,540, or the 540 Patent, that encompasses certain immediate-release abuse deterrent opioid products. The 540 Patent expires in November, 2023. In July 2014, the USPTO issued to us U.S. Patent No. 8,822,489, or the 489 Patent, that encompasses certain abuse deterrent products that contain polymers, surfactant and polysorb 80. The 489 Patent expires in November 2023. In addition to our issued U.S. patents, we have filed multiple U.S. patent applications and international patent applications relating to compositions containing abusable active pharmaceutical ingredients as well as applications covering our Impede Technology and filed U.S. patent applications for our Limitx Technology. We have retained all intellectual property rights to our Aversion Technology, Impede Technology, Limitx Technology, and related product candidates. In 2012 and 2013, we received Paragraph IV Certification Notices from five generic sponsors of an ANDA for a generic drug listing our Aversion® Oxycodone product as the reference listed drug. The Paragraph IV Notices referred to our 920, 726 and 439 Patents, which cover our Aversion® Technology and our Aversion® Oxycodone product. We filed suit against each of such generic sponsors, Watson Laboratories, Inc., Par Pharmaceutical, Inc., Impax Laboratories, Inc., Sandoz Inc. and Ranbaxy Inc., in the United States District Court for the District of Delaware alleging infringement of our 726 Patent listed in the FDA's Orange Book. Our litigation against Watson Laboratories was dismissed by us following Watson Laboratories' change of its Paragraph IV Certification to a Paragraph III Certification, indicating it would not launch its generic product until the expiry of our applicable Patents. Our litigation against the remaining generic sponsors was settled during the period October 2013 through May 2014 on an individual basis, upon mutual agreement between us and such generic sponsors. None of such settlements impacted the validity or enforceability of our Patents. See "Note 3. Paragraph IV ANDA Litigation" for a discussion of the settlements relating to such patent litigation. 29 Reference is made to the Risk Factors contained in item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion, among other things, of patent applications and patents owned by third parties, including claims that may encompass our Aversion Technology and Aversion oxycodone tablets. Impede Technology Overview Our Impede Technology, a proprietary mixture of inactive ingredients, prevents the extraction of pseudoephedrine, or PSE, from tablets using known extraction methods and disrupts the direct conversion of PSE from tablets into methamphetamine. The chemical structure of PSE is very similar to methamphetamine, facilitating a straight-forward chemical conversion to methamphetamine. OTC PSE products are sometimes purchased and used for this conversion. There are multiple known processes to convert PSE to methamphetamine, all of which are not complex and do not require specialized equipment; however, many do require readily available but uncommon ingredients. Two of the three most popular processes follow two general processing steps: (1) dissolving the PSE tablets in a solvent to isolate by filtration purified PSE and (2) a chemical reduction of the PSE into methamphetamine for drying into crystals. The third method, or the "one-pot" method, involves the direct chemical reduction of the PSE to methamphetamine in the presence of the tablet's inactive ingredients. All the solvents used are ultimately dried off or otherwise removed so a vast range of solvents are amenable to the process. Studies sponsored by us at an independent laboratory demonstrated our Impede Technology prevents the extraction of PSE from tablets for conversion into methamphetamine using what we believe are the two most common extraction methods, each requiring extraction of PSE as an initial step. Laboratory tests conducted on our behalf by an independent Clinical Research Organization, or CRO, using the "one-pot" method demonstrated that our Impede Technology disrupted the direct conversion of PSE from the tablets into methamphetamine. The study compared the amount of pure methamphetamine hydrochloride produced from Nexafed and Johnson & Johnson's Sudafed® tablets. Using one hundred 30 mg tablets of both products, multiple one-pot tests and a variety of commonly used solvents, the study demonstrated an average of 38% of the maximum 2.7 grams of pure methamphetamine hydrochloride was recovered from Nexafed. Comparatively, approximately twice as much pure methamphetamine hydrochloride was recovered from Sudafed tablets. Both products yielded a substantial amount of additional solids such that the purity of the total powder provided contained approximately 65% methamphetamine hydrochloride. We are developing a next generation of our Impede Technology in order to improve the meth-resistance of our technology. The U.S. Drug Enforcement Administration, or DEA, may grant exemptions from the purchase requirements and behind-the-counter status of PSE under the Combat Methamphetamine Epidemic Act of 2005, or CMEA. We believe a more robust formulation along with in-market data demonstrating a reduction in meth lab incidents may qualify for this exemption, although there can be no assurance this will be the case. Nexafed Our Nexafed product is an immediate-release 30mg pseudoephedrine HCl tablet which utilizes our patent pending Impede Technology. PSE is a widely-used nasal decongestant available in many non-prescription and prescription cold, sinus and allergy products. While the 30mg PSE tablet is not the largest selling PSE product on the market, we believe it is the most often used product to make meth due to: (a) its relatively low selling price and (b) its simpler formulation provides better meth. However, as meth-resistant products become pervasive, we believe meth cooks will migrate to other, larger selling, PSE containing products. We have demonstrated that our Nexafed 30mg tablets is bioequivalent to Johnson & Johnson's Sudafed 30mg Tablets when a single 2 tablets dose is administered. Commencing in 2006, the CMEA, required all non-prescription PSE products to be held securely behind the pharmacy counter, has set monthly consumer purchase volume limits, and has necessitated consumer interaction with pharmacy personnel to purchase PSE-containing products. We are capitalizing on this consumer-pharmacist interaction at the point of sale by soliciting distribution to pharmacies and educating and encouraging pharmacists to recommend Nexafed to their customers. We are using telemarketing, direct mail, and online and journal advertising to educate pharmacists about Nexafed and encourage pharmacists to recommend Nexafed to their customers. 30 We launched Nexafed commercially in mid-December 2012 into the United States OTC market for cold and allergy products. We have built a distribution system of several regional and national drug wholesalers for redistribution to pharmacies which includes the three largest U.S. drug wholesalers: McKesson, Cardinal Health and AmerisourceBergen. We also ship directly to the warehouses of certain pharmacy chains. Nexafed is currently stocked in approximately 9,900 U.S. pharmacies or about 15% of the estimated 65,000 U.S. pharmacy outlets. Initial adoption was primarily in independent pharmacies in predominately rural communities with high meth awareness. Chain pharmacies, with more centralized control of the pharmacy operations, began adopting in mid-2013, including Kroger, Publix, Fruth and Bartells. Some pharmacists are actively recommending Nexafed to their customers while some have replaced all 30mg PSE products, brand and generic, with Nexafed. Rite Aid, the nation's fourth largest pharmacy operator, began purchasing Nexafed in late 2013. Many chain pharmacies reset their cough/cold product offering in advance of the winter cold/flu season. We are in active discussion with some chains to have Nexafed as part of theirstore resets this winter. We estimate that approximately 52% of Nexafed stocking pharmacies are repeat customers, excluding Rite Aid which purchases directly from us and we therefore do not have individual store data. We have shipped approximately $68 thousand in Nexafed product during the quarter ended September 30, 2014 and $164 thousand during the nine months ended September 30, 2014. We are marketing our 30mg Nexafed product under FDA's regulations applicable to OTC Monograph products. Nexafed tablets are offered in 24-count blister packaged cartons and priced comparable to other branded PSE 30mg tablets. Impede Technology Product in Development Given the fragmented nature of the PSE market with products containing multiple active ingredients, we are developing additional products for our Nexafed franchise: Impede Technology Product Status Nexafed Sinus In commercial manufacturing scale-up Launch expected in early December 2014 Immediate-release pseudoephedrine HCl in combination with other cold and Formulations being considered allergy active ingredients Extended-release formulation Development initiated We also have been working on a next generation Impede Technology, an improvement for our Nexafed franchise which is an enhancement on the methamphetamine resistance of our current technology in the one-pot methamphetamine conversion method. As part of this effort, we now have a comprehensive database on meth recoveries from most major and meth-resistant PSE containing products marketed in the US. We consider this information a competitive advantage in developing follow-on meth-resistant products and technologies as all products tested yield substantial quantities of meth that can be improved upon. Our objective is to establish our own Nexafed franchise in the United States with multiple product offerings, including both immediate and extended release products utilizing both single and combinations of active ingredients. We aim to make meth-resistant PSE product the standard of care in all U.S. pharmacies. We will evaluate possible licensing of our Impede Technology with commercial partners outside the United States. Within the United States, we may consider licenses with appropriate partners that can: (a) help advance our distribution network with the goal of making meth-resistant products the standard of care in all U.S. pharmacies, and/or (b) extend our internal development resources to develop difficult to formulate products, such as extended-release. 31 U.S. Market Opportunity for Impede PSE Products Methamphetamine is a highly addictive illicit drug used non-medically by an estimated 13 million people at some point in their lifetime. In 2006, the Combat Methamphetamine Epidemic Act, or CMEA, was enacted in response to an alarming increase in and widespread conversion of PSE containing products into methamphetamine. Among other things, the CMEA requires retail stores to maintain their inventory of PSE containing products in a secured location and restricts the amount of PSE products a store can sell to an individual customer. Implementation of the CMEA initially reduced the number of illegal methamphetamine laboratory seizures reported by the Drug Enforcement Administration, or DEA, as the then most commonly used process for conversion of PSE to methamphetamine required substantial quantities of PSE. However, a newer process for converting PSE to methamphetamine requires less PSE. Possibly as a result of this new conversion process, the DEA reported 2010 clandestine methamphetamine laboratory seizures increased 84% over the low reported in 2007. Laboratory seizures were down 12% and 5.5% in 2011 and 2012, respectively, although certain states continue to see increases. In response to the ongoing methamphetamine problem, several local jurisdictions (state, counties and/or local municipalities) have enacted or propose to enact legislation to require a physician's prescription to obtain a PSE-containing product. For example, a bill passed the West Virginia Senate in 2014 requiring all PSE products to have a prescription with an exemption for meth-resistant products like Nexafed, however, this bill failed to pass in the state Assembly. In July, CVS pharmacies announced the removal of older single-ingredient PSE products from their West Virginia stores. We believe the vast majority of West Virginia pharmacies now stock either no single-ingredient PSE products or exclusively meth-resistant products. The West Virginia Gazette recently reported that PSE purchases in the state are down 30% and meth lab seizures in the state are trending down 20% compared to 2013. PSE is a widely-used nasal decongestant available in many non-prescription and prescription cold, sinus and allergy products. PSE is sold in products as the only active ingredient in both immediate and extended-release products. In addition, PSE is combined with other cold, sinus and allergy ingredients such as pain relievers, cough suppressants and antihistamines. PSE also competes against phenylephrine, an alternate nasal decongestant available in non-prescription products. In 2009, AC Nielsen reported approximately $1.0 billion in retail sales of non-prescription products containing either PSE or phenylephrine as a nasal decongestant, of which approximately 47% contained PSE. The top selling brands of OTC cold/allergy products in 2009 were: Active 2009 Retail Sales Brand1 Company Ingredient(s) ($ Millions) Claritin-D Merck PSE & Loraditine2 $ 113.0 Mucinex-D Rickett Benckiser PSE & Guaifenesin2 $ 72.2 Zyrtec-D Pfizer PSE & Ceterizine2 $ 52.2 Advil Sinus Pfizer PSE & Ibuprofen $ 30.9 Sudafed 12 Hour J&J PSE2 $ 24.9 Sudafed 30mg J&J PSE $ 20.8 1 Branded product only. Does not include store brand sales. 2 Extended release PSE formulations The 2009 market for 30mg PSE tablets, including store brands was approximately 372 million tablets or 15.5 million boxes of 24 tablets. Nexafed is currently priced at $3.99 for a box of 24 tablets. The market for cold, sinus and allergy products is highly competitive and many products have strong consumer brand recognition and, in some cases, prescription drug heritage. Category leading brands are often supported by national mass marketing and promotional efforts. Consumers often have a choice to purchase a less expensive store brand. Store brands contain the same active ingredients as the more popular national brands but are not supported by large marketing campaigns and are offered at a lower price. Non-prescription products are typically distributed through retail outlets including drug store chains, food store chains, independent pharmacies and mass merchandisers. The distribution outlets for PSE products are highly consolidated. According to Chain Drug Review, the top 50 drug, food and mass merchandising chains operate approximately 40,000 pharmacies in the U.S., of which 58% are operated by the four largest chains. Stocking decisions and pharmacists recommendations for these chain pharmacies are often centralized at the corporate headquarters. Our 2010 market research study showed that 93% of the 204 pharmacists surveyed believe that PSE has superior efficacy as a nasal decongestant compared to phenylephrine. In our 2012 survey of 215 chain and independent pharmacists, 164 indicated they had influence over the pharmacies' product offerings. Of such pharmacists, 70% indicated they were likely to stock or recommend stocking Nexafed in their pharmacies. The 215 surveyed pharmacists also indicated a willingness to recommend Nexafed to over 50% of their customers who seek a pharmacist's advice for a single ingredient nasal decongestant. 32 Product Labeling for Impede Technology Products We are marketing our Nexafed product pursuant to the FDA's OTC Monograph regulations, which require that our product have labeling as specified in the regulations. We are advertising the extraction characteristics and methamphetamine-resistant benefits of our Nexafed product which is supported by our published research studies. We expect that any of our other Impede Technology products that are marketed pursuant to an NDA or ANDA will be subject to a label approved by the FDA. We expect that such a label will require submission of our scientifically derived abuse liability data and we intend to seek descriptions of our abuse liability studies in the FDA approved product label, although there can be no assurance that this will be the case. Limitx™ Technology Limitx™ technology is a novel, early stage technology intended to address abuse by excess oral consumption of multiple tablets and provide a margin of safety during accidental over-ingestion of tablets. In proof of concept laboratory tests, Limitx™ demonstrated the ability to limit the release of the active ingredient from tablets when multiple tablets are simultaneously introduced into simulated gastric fluid. While the initial Limitx™ formulation utilizes hydromorphone as its sole active ingredient, if such development proves successful, of which no assurance can be given, it is expected that the technology could incorporate other opioids as well. The need for abuse deterrent formulations which address excess oral consumption was stressed in the January 2013 FDA draft guidance for abuse deterrent opioids. We have patents pending with the U.S. Patent and Trademark office covering our Limitx™ technology. Limitx™ is being developed pursuant to a $300,000 grant (the "Grant") by the National Institute On Drug Abuse ("NIDA") of the National Institutes of Health. Phase I of development is to create an optimized formulation suitable for human testing. Phase II will encompass human testing to characterize the abuse deterrent features of the formulation. Under the terms of the Grant, we must complete Phase I development by February 28, 2015. NIDA funding of Phase II development, for which an application has already been submitted, will be contingent upon (1) assessment by NIDA of the Phase I progress report and determination that the Phase I milestones were achieved, (2) review and approval of other documents necessary for continuation, and (3) availability of funds. No assurance can be given that Phase II development funding will be provided by NIDA. Phase I Research on the Company's hydromorphone tablet utilizing Limitx™ technology is supported by the National Institute On Drug Abuse of the National Institutes of Health under Award Number R44DA037921. The results and content of any such research is solely the responsibility of Acura and does not necessarily represent the official views of the National Institutes of Health. Company's Present Financial Condition At October 30, 2014 we had cash, cash equivalents and marketable securities of approximately $14.0 million. We estimate that our current cash reserves will be sufficient to fund operations through at least the next 12 months. During the nine months ended September 30, 2014 we had shipments of Nexafed totaling $164 thousand. We recognized revenue of $218 thousand from Nexafed product sales. Certain of our customers have accepted a pricing allowance in exchange for forfeiting the right to return Nexafed and therefore we are recognizing revenue upon product shipment to them. Additionally we are recognizing revenue from certain of our other customers based on a pharmacy's Nexafed reorder activity with their own drug wholesaler supplier. For all other customers, given the limited sales history of Nexafed, we currently cannot reliably estimate expected returns of the product from these customers at the time of shipment. Accordingly, we are deferring recognition of revenue on these product shipments of Nexafed until the right of return no longer exists or adequate history and information is available to estimate product returns. Pfizer no longer has a royalty obligation to us on Pfizer's sale of Aversion Oxycodone as our license agreement with Pfizer was terminated effective April 9, 2014. 33 To fund our continued operations, we expect to rely on our current cash resources (which includes the proceeds of our $10.0 million term loan from Oxford Finance having principal debt repayments beginning April 1, 2015), milestones and royalty payments that may be made under future license agreements with pharmaceutical company partners, of which there can be no assurance of obtaining, and revenues from our commercialization of our Nexafed Tablets. Our cash requirements for operating activities may increase in the future as we continue to conduct pre-clinical studies and clinical trials for our product candidates, maintain, defend, and expand the scope of our intellectual property, hire additional personnel, commercialize our Nexafed Tablets, or invest inother areas. Three months Ended September 30, 2014 Compared to Three months Ended September 30, 2013 Three Months Ended September 30, 2014 2013 Increase (decrease) $000's $000's Percent Revenues: Royalty revenue $ - $ 3 $ (3 ) nm% Product sales, net 145 80 65 81 Total revenues, net 145 83 62 75 Expenses: Cost of sales (excludes inventory write-down) 108 78 30 39 Inventory write-down - - - - Research and development 955 1,289 (334 ) (26 ) Selling, marketing, general and administrative 1,728 1,941 (213 ) (11 ) Total operating expenses 2,791 3,308 (517 ) (16 ) Operating loss (2,646 ) (3,225 ) (579 ) (18 ) Non-operating income (expense): Investment income 46 55 (9 ) nm Loss on sales of marketable securities - (20 ) (20 ) nm Interest expense (304 ) - 304 nm Total other income (expense) (258 ) 35 293 nm Loss before income taxes (2,904 ) (3,190 ) (286 ) (9 ) Provision for income taxes - - - - Net loss $ (2,904 ) $ (3,190 ) $ (286 ) (9 )% nm = not meaningful Revenues Product Sales We launched Nexafed commercially in mid-December 2012. Given the limited sales history of Nexafed, we could not reliably estimate expected returns of the product at the time of shipment. Accordingly, we have deferred recognition of revenue and the related cost of sales on selected product shipments of Nexafed until the right of return no longer exists or adequate history and information is available to estimate product returns. At September 30, 2014 we have deferred $228 thousand of revenue. During each of the three month periods ended September 30, 2014 and 2013, we recognized revenue of $145 thousand and $80 thousand, respectively, for shipments to customers where the right of return no longer existed either because a pricing allowance was accepted in exchange for forfeiting the right of return or because information became available on pharmacy's reorder activity with their drug wholesaler. We will continue to analyze information to assess the recognition of our revenue but also expect to continue the deferral of some revenue in the foreseeable future. 34 Royalty Revenue In connection with the Pfizer Agreement, we began to earn royalties equal to 5% of Aversion Oxycodone net sales starting in February 2013. The Pfizer Agreement was terminated effective April 9, 2014 and Pfizer's royalty payment obligations ceased as of such date. We earned royalties of approximately $3 thousand for the three month period ending September 30, 2013. Cost of Sales Cost of sales includes third party acquisition costs, third party warehousing and product distribution charges and inventory reserve charges for the Nexafed product line. Operating Expenses Research and development ("R&D") expense during the three months ended September 30, 2014 and 2013 were primarily for our Aversion or our Impede Technologies development, including costs of preclinical, clinical trials, clinical supplies and related formulation and design costs, salaries and other personnel related expenses, and facility costs. Included in each of the 2014 and 2013 results are non-cash share-based compensation expenses of $0.1 million. Excluding the share-based compensation expense, our R&D expenses decreased approximately $0.3 million between reporting periods. The decrease is primarily due to the nasal abuse liability liking study AP-ADF-301 expenses on our Aversion hydrocodone/acetaminophen product candidate which was ongoing during the three month period ended September 30, 2013 and completed later in the fourth quarter of 2013. Selling and marketing expenses during the three months ended September 30, 2014 and 2013 primarily consisted of advertising and marketing activities on Nexafed. We are continuing our Nexafed advertising and marketing activities. Our general and administrative expenses primarily consisted of legal, audit and other professional services, corporate insurance, and payroll. Included in each of the 2014 and 2013 results are non-cash share-based compensation expenses of $0.2 million. Excluding the share-based compensation expense our selling, marketing, general and administrative expenses decreased approximately $0.2 million between reporting periods. The decrease is primarily due to legal services relating to our paragraph IV ANDA litigation activities concluding in May 2014. Non-operating Income (Expense) During the three months ended September 30, 2014 and 2013, other non-operating income consisted principally of investment income derived from our cash reserves being invested in marketable securities in accordance with a Board of Director approved investment policy. Our marketable securities are classified as available-for-sale and are recorded at fair value based on quoted market prices. Our marketable securities may be sold within one year in response to changes in market prices or interest rates, to realign our investment concentrations or to meet our working capital needs and we may realize a gain or loss upon sale. During the three months ended September 30, 2014, other non-operating expense consisted of $0.3 million interest cost associated with our debt funded inDecember 2013. Income Taxes The net loss for the three months ended September 30, 2014 and 2013 includes no federal or state income tax benefit provisions due to uncertainty of their future utilization. 35 Nine months Ended September 30, 2014 Compared to Nine months Ended September 30, 2013 Nine Months Ended September 30, 2014 2013 Increase (decrease) $000's $000's Percent Revenues: Royalty revenue $ 4 $ 8 $ (4 ) nm% Product sales, net 218 80 138 172 Total revenues, net 222 88 134 152 Expenses: Cost of sales (excludes inventory write-down) 188 78 110 141 Inventory write-down 201 361 (160 ) (44 ) Research and development 3,674 4,120 (447 ) (11 ) Selling, marketing, general and administrative 5,903 6,138 (235 ) (4 ) Total operating expenses 9,966 10,697 (731 ) (7 ) Operating loss (9,744 ) (10,609 ) (865 ) (8 ) Non-operating income (expense): Investment income 143 136 7 nm (Loss) gain on sales of marketable securities (5 ) (11 ) (6 ) nm Interest expense (907 ) - 907 nm Total other income (expense) (769 ) 125 894 nm Loss before income taxes (10,513 ) (10,484 ) 29 (4 ) Provision for income taxes - - - - Net loss $ (10,513 ) $ (10,484 ) $ 29 nm% nm = not meaningful Revenues Product Sales We launched Nexafed commercially in mid-December 2012. Given the limited sales history of Nexafed, we could not reliably estimate expected returns of the product at the time of shipment. Accordingly, we have deferred recognition of revenue and the related cost of sales on selected product shipments of Nexafed since its launch until the right of return no longer exists or adequate history and information is available to estimate product returns. At September 30, 2014 we have deferred $228 thousand of revenue. During the nine months ended September 30, 2014 and 2013 we recognized revenue of $218 thousand and $80 thousand, respectively, for shipments to customers where the right of return no longer existed either because a pricing allowance was accepted in exchange for forfeiting the right of return or because information became available on pharmacy's reorder activity with their drug wholesaler. We will continue to analyze information to assess the recognition of our revenue but also expect to continue the deferral of some revenue in the foreseeable future. Royalty Revenue In connection with the Pfizer Agreement, we began to earn royalties equal to 5% of Aversion Oxycodone net sales starting in February 2013. The Pfizer Agreement was terminated effective April 9, 2014 and Pfizer's royalty payment obligations ceased as of such date. We earned royalties of approximately $4 thousand and $8 thousand for the nine months ended September 30, 2014 and 2013, respectively. Cost of Sales Cost of sales includes third party acquisition costs, third party warehousing and product distribution charges and inventory reserve charges for the Nexafed product line. During the nine months ended September 30, 2014 and 2013, we recorded $0.2 million and $0.4 million, respectfully, of inventory reserveexpenses. 36 Operating Expenses Research and development ("R&D") expense during the nine months ended September 30, 2014 and 2013 were primarily for our Aversion or our Impede Technologies development, including costs of preclinical, clinical trials, clinical supplies and related formulation and design costs, salaries and other personnel related expenses, and facility costs. Included in each of the 2014 and 2013 results are non-cash share-based compensation expenses of $0.2 million. Excluding the share-based compensation expense, our R&D expenses decreased approximately $0.4 million between reporting periods. The decrease is primarily due to the nasal abuse liability liking study AP-ADF-301 expenses on our Aversion hydrocodone/acetaminophen product candidate which was ongoing during the nine month period ended September 30, 2013 and completed later in the fourth quarter of 2013. Selling and marketing expenses during the nine months ended September 30, 2014 and 2013 primarily consisted of advertising and marketing activities on Nexafed. We are continuing our Nexafed advertising and marketing activities. Our general and administrative expenses primarily consisted of legal, audit and other professional services, corporate insurance, and payroll. Included in each of the 2014 and 2013 results are non-cash share-based compensation expenses of $0.5 million and $0.7 million, respectively. Excluding the share-based compensation expense our selling, marketing, general and administrative expenses remained relatively unchanged between reporting periods. The legal services relating to our paragraph IV ANDA litigation activities concluded in May 2014. Non-operating Income (Expense) During the nine months ended September 30, 2014 and 2013, other non-operating income consisted principally of investment income derived from our cash reserves being invested in marketable securities in accordance with a Board of Director approved investment policy. Our marketable securities are classified as available-for-sale and are recorded at fair value based on quoted market prices. Our marketable securities may be sold within one year in response to changes in market prices or interest rates, to realign our investment concentrations or to meet our working capital needs and we may realize a gain or loss upon sale. During the nine months ended September 30, 2014, other non-operating expense consisted of $0.9 million interest cost associated with our debt funded inDecember 2013. Income Taxes The net loss for the nine months ended September 30, 2014 and 2013 includes no federal or state income tax benefit provisions due to uncertainty of their future utilization. Liquidity and Capital Resources At September 30, 2014, the Company had cash, cash equivalents and marketable securities of $14.6 million compared to $26.1 million at December 31, 2013. The Company had working capital of $13.1 million at September 30, 2014 compared to $26.3 million at December 31, 2013. The decrease in our cash position is primarily due to our period's net operating loss which is adjusted for non-cash share-based compensation expenses. Our net loss includes our advertising and marketing activities on Nexafed of $1.9 million, our legal expenses incurred from our paragraph IV ANDA litigation of $0.3 million and for maintaining our patent and trademarks of $0.6 million. The decrease in our cash position includes our payment of employees' withholding taxes of $0.5 million associated with their option exercises and RSU exchanges during such period. Pending the receipt of milestone and royalty payments under license agreements similar to the Pfizer Agreement anticipated to be negotiated and executed with other pharmaceutical company partners, of which no assurance can be given, we must rely on revenues from our Nexafed sales and our current cash reserves, including interest income from the investment of our cash reserves, to fund the development of our Aversion Technology, Impede Technology, Limitx Technology and related administrative and operating expenses. Our future sources of revenue, if any, will be derived from milestone payments and royalties under license agreements similar to the Pfizer Agreement with other pharmaceutical company partners, for which there can be no assurance, and from the commercialization of our Nexafed tablets and other Impede Technology products that we expect to develop. At October 30, 2014, the Company had cash, cash equivalents and marketable securities of approximately $14.0 million. We estimate that our current cash reserves will be sufficient to fund operations through at least the next 12 months. 37 The amount and timing of our future cash requirements will depend on regulatory and market acceptance of our product candidates and the resources we devote to the development and commercialization of our product candidates NASDAQ Notification On September 18, 2014, we received a letter from the Listing Qualifications Staff of the NASDAQ Stock Market notifying us that because the closing bid price of our common stock has been below $1.00 for 30 consecutive business days, it no longer complies with the requirements for continued listing on the NASDAQ Capital Market. The NASDAQ notice does not impact our current listing on the NASDAQ Capital Market at this time and our common stock will continue to trade under the symbol "ACUR". In accordance with NASDAQ rules, we have been provided a period of 180 calendar days, or until March 17, 2015, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our common stock must be at least $1.00 per share for a minimum of 10 consecutive business days during this 180 day period. If we do not satisfy this requirement by March 17, 2015, NASDAQ will determine whether the Company meets the applicable market value of publicly held shares requirement for continued listing and all other applicable standards for initial listing on the NASDAQ Capital Market (except the bid price requirement). If Acura meets such criteria, it may be eligible for an additional 180 day compliance period. If we do not regain compliance, our common stock will be subject to delisting. We intend to monitor the bid price of our common stock between now and March 17, 2015, and will consider available options to regain compliance with the listing requirements. There can be no assurance that we will be able to regain compliance with the minimum bid price requirement or maintain compliance with other listing requirements. Critical Accounting Policies Note A of the Notes to Consolidated Financial Statements, in the Company's 2013 Annual Report on Form 10-K, includes a summary of the Company's significant accounting policies and methods used in the preparation of the financial statements. The application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The Company's critical accounting policies described in the 2013 Annual Report are also applicable to 2014. |