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A.P. Pharma Reports Fourth Quarter and Year-End 2002 Results

REDWOOD CITY, Calif., Feb 27, 2003 (BUSINESS WIRE) -- A.P. Pharma, Inc. (Nasdaq:APPA), a specialty pharmaceutical company focusing on the development of prescription pharmaceutical products using its proprietary Biochronomer(TM) drug delivery system, today reported financial results for the three and twelve months ended December 31, 2002.

Recent Highlights: -- A plan has been implemented to enable APF112 to enter Phase II clinical testing for the treatment of pain in abdominal surgery in mid 2003. -- Preclinical studies with a modified APF112 formulation have been initiated. -- Eight reimbursed feasibility studies involving the Biochronomer system are proceeding with various corporate partners of which five have now entered in vivo testing. -- 2002 royalty revenue exceeded $4 million, which is an increase of 25% over 2001. -- Retin-A Micro(R) royalties grew 23% in 2002 as the product's share of the topical retinoid market increased to its highest level ever as a result of the launch of a low-dose formulation and a direct-to-consumer advertising campaign. -- Carac(TM) royalties grew by 29% in 2002 as the product continued to maintain share in the growing topical actinic keratoses market, despite strong competition. -- The Analytical Standards division, a non-core business, was sold in February 2003 for $2.1 million in cash and the right to receive royalties on net sales for a five-year period. -- The Company has approximately $16 million in cash, cash equivalents and short-term investments at February 27, 2003, with a current annual cash burn rate of approximately $4 to $6 million.

"We remain enthusiastic about the prospects for APF112 for the treatment of post-surgical pain. The challenges that we faced in 2002 with this program have now been resolved with the agreement of a plan with the FDA. With positive outcomes of the preclinical testing now underway, this should allow the product to reenter the clinic in mid 2003," commented Michael O'Connell, A.P. Pharma's President and Chief Executive Officer.

The initial Phase II studies will address the treatment of pain in patients following surgery for inguinal hernias. With the demonstration of efficacy of APF112 in post-surgical pain, the Company believes that there will be substantial potential for this product as there are approximately 20 million surgical procedures performed annually in the U.S. where the product could be utilized.

Using the Company's Biochronomer bioerodible drug delivery system, APF112 is designed to provide 24-36 hours of post-surgical pain relief and to minimize the use of morphine-like drugs (opioids), which are used extensively in post-surgical pain management. Opioids are associated with a wide range of side effects, such as nausea, sedation, dizziness, constipation, vomiting, urinary retention, and in some situations, life-threatening respiratory depression. APF112 incorporates mepivacaine, a local anesthetic with analgesic properties that has been used extensively in clinical practice for several years for short-term pain relief. In animal studies, APF112 incorporating the Biochronomer bioerodible drug delivery system has demonstrated prolonged analgesic effect.

A.P. Pharma has also initiated a significant number of feasibility studies for other Biochronomer product applications in a wide array of clinical areas as diverse as ophthalmology, cardiovascular stents and DNA delivery. The Company's collaborators range from biotechnology companies to Fortune 500 companies. A.P. Pharma believes that the successful completion of in vivo studies is the final stage before entering into licensing arrangements.

Financial Results

The Company reported total revenues for 2002 of $5,815,000, an increase of $1,428,000 or 33% compared with the prior year. The increase in revenues was primarily attributable to contract revenues earned in collaborations with prospective corporate partners, a 25% increase in royalties and the recognition of deferred revenues resulting from the forfeiture by a partner of certain rights to a proprietary Microsponge(R) formulation. The Company reported total revenues for the fourth quarter of 2002 of $1,986,000, compared with $1,448,000 for the fourth quarter of 2001.

For the year ended December 31, 2002, royalties increased by $799,000 or 25% to $4,026,000. Royalties from Retin-A Micro(R) (licensed to Ortho Neutrogena, a Johnson and Johnson Company) grew by 23% and royalties from Carac (licensed to Dermik Laboratories, an Aventis Company) grew by 29% compared with the prior year. For the fourth quarter ended December 31, 2002, royalties grew by $97,000 or 8% to $1,258,000.

Research and development expense for the 12 months ended December 31, 2002 decreased by $649,000 or 9% to $6,699,000 reflecting the delayed entry of APF112 into Phase II clinical trials compared with the expenses incurred in the prior year as the Company prepared for the filing of an IND, together with the costs associated with the scale-up of GMP materials. Research and development expense for the fourth quarter of 2002 decreased by $983,000 or 40% to $1,456,000 due to the higher costs incurred in the prior year's fourth quarter related to preclinical trials pursuant to the filing of the IND for the post-surgical pain product.

The loss from continuing operations for the 12 months ended December 31, 2002 was $4,165,000, compared with a loss from continuing operations for the prior year of $5,929,000. The loss from continuing operations in the fourth quarter of 2002 was $404,000, compared with a loss from continuing operations in the fourth quarter of the prior year of $1,669,000.

Conference Call Information

Management will be hosting an investment community conference call beginning at 11:00 a.m. Eastern Time (8:00 a.m. Pacific Time) on Thursday, February 27, 2003 to discuss the results and to answer questions.

To participate in the live call by telephone, please dial 888/803-8275 from the U.S., and for international callers, please dial 706/634-1287. A telephone replay will be available for 48 hours by dialing 800/642-1687 from the U.S., or 706/645-9291 for international callers, and entering reservation number 8689235.

Individuals interested in listening to the conference call via the Internet may do so by visiting www.appharma.com. A replay will be available on the Company's Web site for 14 days.

About A.P. Pharma

A.P. Pharma is a specialty pharmaceutical company focused on the development of ethical (prescription) pharmaceuticals utilizing its proprietary polymer-based drug delivery systems. The Company's primary focus is the development and commercialization of its bioerodible injectable and implantable systems under the trade name Biochronomer. Initial targeted areas of application for the Company's drug delivery technology include pain management, inflammation, oncology and ophthalmology applications. The Company's product development programs are funded by royalties from topical products currently marketed by pharmaceutical partners and by proceeds from the divestiture of its cosmeceutical product lines as well as fees it receives from collaborative partners. For further information visit the Company's Web site at www.appharma.com.

Forward-looking Statements

Except for historical information, this news release contains certain forward-looking statements that involve risks and uncertainties, including among others, uncertainty associated with timely development, approval, launch and acceptance of new products, establishment of new corporate alliances and progress in research and development programs. Other risks and uncertainties associated with the Company's business and prospects are identified in the Company's filings with the Securities and Exchange Commission. The Company does not undertake to revise these forward-looking statements to reflect events or circumstances occurring in the future.

                           A.P. PHARMA, INC.
                      Income Statement Highlights
                 (in thousands, except per share data)
                                     Three Months       Twelve Months
                                    Ended Dec. 31,      Ended Dec. 31,
                                    2002       2001     2002      2001
                                (Unaudited)(Unaudited)(Unaudited)  (1)
Royalties                           $1,258   $1,161   $4,026   $3,227
Contract Revenues                      452        4      644       38
Product Revenues                       276      283    1,145    1,122
    Total Revenues                   1,986    1,448    5,815    4,387
Cost of Sales                          114      146      445      440
Operating Expenses:
 Research & Development              1,456    2,439    6,699    7,348
 Selling, General
  & Administrative                     917      797    3,494    3,720
    Total Operating Expenses         2,373    3,236   10,193   11,068
Operating Loss                        (501)  (1,934)  (4,823)  (7,121)
Interest and Other, Net                 97      265      658    1,192
Loss from Continuing Operations       (404)  (1,669)  (4,165)  (5,929)
Income (Loss) from Discontinued
 Operations                            177      (17)     387    3,415
Net Loss                             ($227) ($1,686) ($3,778) ($2,514)
Basic and Diluted Loss Per Share:
 Loss from Continuing Operations     (0.02)   (0.08)   (0.20)   (0.29)
 Net Loss                            (0.01)   (0.08)   (0.19)   (0.12)
Shares Used in Calculating
Loss Per Share:
 Basic and Diluted                  20,456   20,327   20,409   20,276
(1) Information derived from audited financial statements included
    in the Company's 2001 Form 10-K.
                           A.P. PHARMA, INC.
                       Balance Sheet Highlights
                            (in thousands)
                                        December 31, December 31,
                                           2002         2001
                                        (Unaudited)      (1)
Assets
Cash, Cash Equivalents
 and Marketable Securities                $14,121      $19,494
Accounts Receivable, Net                    1,504        1,468
Other Current Assets                          349          662
Total Current Assets                       15,974       21,624
Property, Plant & Equipment, Net            1,636        1,668
Other Non-Current Assets                      189          215
Total Assets                              $17,799      $23,507
Liabilities and Shareholders' Equity
Current Liabilities                        $1,995       $3,550
Long-Term Deferred Revenues                   345          785
Shareholders' Equity                       15,459       19,172
Total Liabilities and
 Shareholders' Equity                     $17,799      $23,507
(1) Information derived from audited financial statements included
    in the Company's 2001 Form 10-K.

CONTACT:
A.P. Pharma, Inc.
Gordon Sangster, Chief Financial Officer
650/366-2626
or
Investor Relations
Lippert/Heilshorn & Associates
Bruce Voss, 310/691-7100
bvoss@lhai.com

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