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Filed pursuant to Rule 424(b)(4)
Registration No. 333-115163
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 24, 2004)
A.P. PHARMA, INC.
4,183,335 Shares
Common Stock
We are offering up to 4,183,335 shares of our common stock
through this prospectus supplement and the base prospectus (which
was filed with our Registration Statement on Form S-3 on May 25,
2004, Registration No. 333-115163) at a fixed price of $3.00 per
share to certain institutional investors. You should read both
this prospectus supplement and the base prospectus carefully
before you invest in our common stock.
Our common stock trades on the Nasdaq National Market under the
symbol "APPA". On June 23, 2004, the last reported sale price of
the common stock on the Nasdaq National Market was $3.13 per
share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE S-8.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement is
truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus supplement is June 24, 2004
TABLE OF CONTENTS
-----------------
PROSPECTUS SUPPLEMENT
Page
----
Prospectus Supplement Summary S-1
The Offering S-5
Summary Financial Data S-6
Risk Factors S-8
Forward-Looking Information S-10
Use of Proceeds S-11
Capitalization S-12
Dilution S-13
Management S-14
Plan of Distribution S-16
Legal Matters S-16
Where You Can Find More Information S-16
PROSPECTUS
Page
----
About this Prospectus 1
About the Company 2
Forward-Looking Information 3
Risk Factors 4
Use of Proceeds 8
Description of Capital Stock 8
Plan of Distribution 9
Legal Matters 10
Experts 10
Where You Can Find More Information 11
Documents Incorporated by Reference 11
---------
Unless otherwise mentioned or unless the context requires
otherwise, all references in this prospectus supplement and the
accompanying prospectus to "the company", "A.P. Pharma", "we",
"us", "our", or similar references mean A.P. Pharma, Inc.
This document is in two parts. The first part is this
prospectus supplement, which describes the terms of this offering
of our common stock and also adds to and updates information
contained in the accompanying prospectus and the documents
incorporated by reference into the accompanying prospectus. The
second part is the accompanying prospectus, which gives more
general information about us and the shares of common stock we
may offer from time to time under our shelf registration
statement. To the extent there is a conflict between the
information contained in this prospectus supplement, on the one
hand, and the information contained in the accompanying
prospectus or any document incorporated by reference therein, on
the other hand, the information in this prospectus supplement
shall control.
We have not authorized any dealer, salesman or other person
to give any information or to make any representation other than
those contained or incorporated by reference in this prospectus
supplement and the accompanying prospectus. You must not rely
upon any information or representation not contained or
incorporated by reference in this prospectus supplement or the
accompanying prospectus. This prospectus supplement and the
accompanying prospectus do not constitute an offer to sell or the
solicitation of an offer to buy common stock, nor do this
prospectus supplement and the accompanying prospectus constitute
an offer to sell or the solicitation of an offer to buy common
stock in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction. You should
not assume that the information contained in this prospectus
supplement and the accompanying prospectus is accurate on any
date subsequent to the date set forth on the front of the
document or that any information we have incorporated by
reference is correct on any date subsequent to the date of the
document incorporated by reference, even though this prospectus
supplement and any accompanying prospectus is delivered or common
stock is sold on a later date.
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights selected information about us and
this offering. This summary is not complete and does not contain
all the information you should consider before investing in our
common stock. You should carefully read this entire prospectus
supplement and the accompanying prospectus, including the "Risk
Factors", the financial statements and the other documents we
refer to and incorporate by reference in this prospectus
supplement and the accompanying prospectus, before making an
investment decision. We incorporate by reference important
business and financial information into the accompanying
prospectus. See "Documents Incorporated by Reference" on page
11.
OVERVIEW
We are a specialty pharmaceutical company focused on the
development of pharmaceutical products utilizing our proprietary
polymer-based drug delivery systems. We have made important
progress since A.P. Pharma's transformation into a specialty
pharmaceuticals company just three years ago. Our focus is the
development and commercialization of bioerodible injectable and
implantable systems under the trade name Biochronomer(TM).
Product candidates based on our Biochronomer Systems enable us to
address a broader spectrum of medical needs and potentially
capture opportunities in large markets.
Our business focus is on developing our own product portfolio for
surgical/orthopedic applications and maintaining control and
management of Biochronomer-based product candidates through the
early phases of clinical development. As clinical studies
progress, we expect to establish corporate partnerships to
complete the development process and commercialize successful
drugs. Our ultimate goal is to retain rights in the U.S., while
partners handle sales and distribution in international markets.
Our business strategy is twofold:
- to develop selected proprietary products, funding them
through the preliminary phases of regulatory review before
entering partnerships to share costs and future profits;
and
- to license our proprietary technologies to corporate
partners after the successful completion of reimbursed
feasibility studies to earn research and development fees,
licensing fees, milestone payments and royalties.
Initial targeted applications for our drug delivery technologies
for our own product portfolio include pain management, as well as
anti-nausea, anti-inflammatory and anti-infective applications.
Potential licensing opportunities conducted through reimbursed
feasibility studies include vaccines, ophthalmology applications,
device coatings and DNA delivery. Product development programs
are primarily funded by royalties from topical prescription
products currently marketed by our pharmaceutical partners,
Johnson & Johnson and Aventis, proceeds from the divestiture of
our cosmeceutical and toiletry product lines in July 2000, fees
we receive from collaborative partners, and proceeds from the
sale of our Analytical Standards business in February 2003.
Bioerodible polymers are of increasing interest within the
pharmaceutical and biotechnology community for use in both drug
delivery applications and as devices. We have made substantial
progress in developing our proprietary Biochronomer system that
potentially represent a significant improvement over existing
drug delivery systems. Over one hundred in vivo and in vitro
studies have been completed to advance understanding of this
innovative drug delivery technology. Importantly, the initial
toxicology data indicate that the technology is safe for use in
the body. Studies demonstrate complete and controlled bioerosion
of the polymers. The major benefit is that our polymers have
been specifically designed as drug delivery systems and are
versatile. Erosion times can be varied from hours to days, weeks
or months and mechanical properties can be adjusted to produce
materials as diverse as injectable gels, coatings, strands,
wafers, films or microspheres. In addition, the manufacturing is
reproducible, has been scaled up under GMP conditions and the
polymers are stable, provided they are stored under appropriate
conditions. In studies, the polymers were observed to erode to
completion and, once the drug was released, no polymer remained.
In addition, the polymers bioerode with low acidity, thus
potentially allowing the delivery of sensitive proteins and DNA.
Patents and Trade Secrets
- -------------------------
As part of our strategy to protect our current products and to
provide a foundation for future products, we have filed a number
of United States patent applications on inventions relating to
specific products, product groups, and processing technology. We
have also filed foreign patent applications on our polymer
technology with the European Union, Japan, Australia, South
Africa, Canada, Korea and Taiwan. We have a total of 15 issued
United States patents and an additional 88 issued foreign
patents. Currently, we have over 29 pending patent applications
worldwide. The patents on the Microsponge(R) system expire
between October 2005 and September 2021. The patents on the
bioerodible systems expire between January 2016 and November
2021.
Products Under Development
- --------------------------
Our primary efforts in pharmaceutical markets involve
applications using our Biochronomer technology that are under
development, as summarized below.
Post-Surgical Pain
- ------------------
Our first product candidate (APF112) incorporates mepivacaine in
the Biochronomer(TM) delivery system and targets the management
of pain in patients following surgery. Mepivacaine is a well-
known drug for localized pain relief, and it has an extensive
safety protocol. Over time, we expect to evaluate a number of
pain management applications for APF112. This product is
designed to address major unmet needs in a $2 billion market for
post-surgical pain. The fastest growing segment is pain relief
for outpatients and those who undergo same-day in/out surgery.
Among them, pain management following abdominal surgery and
musculoskeletal surgery is our initial focus, with U.S. patient
populations estimated at 7.6 million and 7.2 million,
respectively, in 2003 alone. Initial clinical studies are being
conducted in surgeries for inguinal hernia repair.
The treatment goal is to provide 24 to 36 hours of localized
post-surgical pain relief by delivering mepivacaine directly to
the surgical site. APF112 is designed to prolong the anesthetic
effect of mepivacaine and thus to minimize or eliminate the use
of opioids (morphine-like drugs) which are currently used in the
majority of surgical procedures as a means of managing post-
operative pain despite unpleasant side effects - nausea,
disorientation, sedation, constipation, vomiting, urinary
retention and, in some situations, life-threatening respiratory
depression.
Part 2 of the Phase 2 human clinical study using APF112 for the
treatment of post-surgical pain is ongoing. APF112 has been
shown in Part 1 of the Phase 2 clinical study to sustain blood
drug levels for up to 72 hours. Wound healing in all patients
was observed to be normal and no adverse events were reported.
The second part of the Phase 2 trial is a 90-patient blinded
study comparing two doses of APF112 with current standard
treatments for post-surgical pain. The end points for the trial
include a visual analog score of pain intensity, the standard
means of measuring pain, and reduction in the use of opioid-type
medication by patients.
Chemotherapy-Induced Nausea and Vomiting
- ----------------------------------------
Our second product candidate (APF530) is designed to provide
three to five days of continuous relief for the prevention of
chemotherapy-induced nausea and vomiting following a single
subcutaneous injection.
APF530 combines A.P. Pharma's Biochronomer drug delivery system
with granisetron, one of a class of 5-HT3 antagonists which have
revolutionized the treatment of nausea and vomiting during and
after chemotherapy. The drug is currently administered by
intravenous (IV) injection, followed by oral administration for a
number of days. Biochronomer delivery of granisetron is a
potential alternative to the IV and subsequent oral
administration in the $2 billion annual market for anti-emetics.
In animal studies, APF530 incorporating the Biochronomer
bioerodible drug delivery system demonstrated sustained release
at constant and therapeutically equivalent blood drug levels.
The Company initiated a Phase 1 human clinical trial in April
2004 which will include 18 healthy volunteers at a single
clinical site in the United Kingdom. A.P. Pharma is also
finalizing pre-clinical work prior to filing an Investigational
New Drug (IND) application in the U.S. that could allow the
Company to go directly into U.S. Phase 2 studies in cancer
patients with APF530.
Anti-Inflammatories
- -------------------
Two product candidates at an early stage of development
incorporate meloxicam in the Biochronomer system. They are
designed to participate in the anti-inflammatory market. APF328
targets the post-surgical and orthopedic anti-inflammatory market
and APF505 targets the osteoarthritis market.
Licensing Opportunities
- -----------------------
While our primary emphasis is on our own portfolio, we are also
conducting feasibility studies of new product concepts based on
our Biochronomer technology for other pharmaceutical and
biotechnology companies. Those that prove promising could be
out-licensed or partnered through product development and
commercialization agreements.
We have entered into fee-paying feasibility studies with several
companies to develop a variety of products using our
Biochronomer(TM) delivery systems. These products are being
developed in the areas of vaccines, ophthalmology, device
coatings and DNA delivery. In general, these research and
development arrangements provide for us to receive research and
development fees from our collaborators. Three of these
development programs have moved into in vivo testing and, if they
are concluded successfully, could lead to licensing agreements
under which a partner would pay for development costs and we
would receive a license fee, research and development fees,
milestone payments and a royalty upon a product's marketing
clearance and commercialization.
Approved Products
- -----------------
Commercialization agreements have provided us with long-term
royalty streams. The following ethical dermatological products
incorporating our Microsponge technology have already been
developed and commercialized:
Retin-A Micro: In February 1997, we received FDA marketing
clearance for Microsponge-entrapped tretinoin for improved acne
treatment. Tretinoin has been marketed in the United States by
Ortho Neutrogena (formerly Ortho Dermatological), a Johnson &
Johnson ("J&J") subsidiary, under the brand name RETIN-A(R) since
1971. It has proven to be a highly effective topical acne
medication. However, skin irritation among sensitive individuals
can limit patient compliance with the prescribed therapy. We
developed a new formulation of Retin-A containing Microsponge-
entrapped tretinoin for acne treatment which we licensed to J&J.
Our patent-protected approach to drug delivery reduces the
potentially irritating side effects of tretinoin. This product
has been marketed under the brand name Retin-A Micro(R) since
March 1997.
Ortho launched this product in Canada during 2001 and has
completed Phase 3 clinical trials in Europe. Additionally, Ortho
received FDA marketing clearance in the United States for a
second Retin-A Micro formulation, a low-dose version, and
launched the product in July 2002. We receive royalty income
based on the sales of this product until the expiration of the
applicable patents in 2016.
Carac: In the fourth quarter of 2000, Dermik Laboratories, an
Aventis company, received U.S. marketing clearance for our
proprietary formulation containing Microsponge-entrapped 5-
fluorouracil (5-FU) for the treatment of actinic keratoses. This
product was launched under the trade name Carac(TM) in the first
quarter of 2001. We receive royalties based on the sales of this
product over the life of the applicable patents. In September
2003, a new formulation patent was issued by the U.S. Patent and
Trademark office (USPTO) extending patent coverage for this use
of our Microsponge formulation until 2021.
Government Regulation
- ---------------------
In order to clinically test, produce and sell products for human
therapeutic use, mandatory procedures and safety evaluations
established by the FDA and comparable agencies in foreign
countries must be followed. The procedure for seeking and
obtaining the required governmental clearances for a new
therapeutic product includes preclinical animal testing to
determine safety and efficacy, followed by human clinical
testing. This can take many years and require substantial
expenditures. In the case of third party agreements, we expect
that our corporate partners will partially fund the testing and
the approval process with guidance from us. We intend to seek
the necessary regulatory approvals for our proprietary products
as they are being developed.
Legal Proceedings
- -----------------
On October 22, 2003, Tristrata Technology, Inc. (Tristrata) filed
an amended complaint joining A.P. Pharma, Inc. and other
companies as defendants in Tristrata's action first filed July
12, 2002 against Cardinal Health, Inc. and others in the Federal
District Court of Delaware. Tristrata's complaint alleges
infringment of patents pertaining to alpha-hydroxyacids used in
cosmetics. A.P. Pharma answered Tristrata's amended complaint on
December 22, 2003. A.P. Pharma is vigorously defending this
action. At this early stage of the proceedings we cannot state
the amount, if any, which might be recovered by Tristrata from
A.P. Pharma, Inc. In our opinion, this litigation should not
have a material effect on our results of operations or financial
condition.
THE OFFERING
Common stock offered by us 4,183,335 shares
Common stock to be outstanding
after this offering 24,952,666 shares
Use of proceeds We intend to use the
proceeds of this
offering for clinical
trials, research and
development expenses
and general and
administrative
expenses See "Use of
Proceeds" on page S-8.
Nasdaq National Market symbol APPA
The information above is based on 20,769,331 shares of common
stock outstanding as of May 31, 2004. It does not include the
following shares of common stock as of May 31, 2004:
o 2,163,810 shares of common stock issuable upon the exercise of
stock options outstanding at a weighted average exercise price
of $3.81 per share;
o 388,356 shares of common stock reserved for future issuance
under our 2002 Equity Incentive Plan;
o 87,500 shares of common stock available for future issuance
under our Non-Qualified Stock Option Plan; and
o 141,843 shares of common stock available for future issuance
under our Employee Stock Purchase Plan.
Our address is 123 Saginaw Drive, Redwood City, California
94063, and our telephone number is (650) 366-2626.
SUMMARY FINANCIAL DATA
We derived the following information from our audited
financial statements for the years ended December 31, 2001
through 2003, and from our unaudited interim financial statements
as of March 31, 2004 and for the three months ended March 31,
2003 and 2004. In the opinion of our management, our unaudited
interim financial statements include all adjustments, consisting
only of normal and recurring adjustments, considered necessary
for a fair presentation of the financial information.
Operating results for the three months ended March 31, 2004
are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004 or any future
periods. The following information is only a summary and should
be read in conjunction with our financial statements and related
notes incorporated by reference in the accompanying prospectus,
and our historical financial statements and related notes
contained in our annual reports, quarterly reports and other
information on file with the Securities and Exchange Commission,
or the SEC. For more details on how you can obtain our SEC
reports and other information, you should read the section of
this prospectus supplement entitled "Where You Can Find More
Information".
The Pro Forma, As Adjusted balance sheet data below gives
effect to the sale of our common stock in this offering, at an
assumed offering price of $3.00 per share.
Three
Months Ended
Year Ended December 31, March 31,
----------------------- -------------
2001 2002 2003 2003 2004
---- ---- ---- ---- ----
Statement of
Operations Data:
Total Revenues $ 3,265 $ 4,670 $ 4,848 $ 1,106 $ 1,180
Total Operating
Expenses 10,595 9,723 11,460 2,980 3,759
Interest and other,
net 1,192 658 404 76 29
------ ------ ------ ------ ------
Loss from Continuing
Operations (6,138) (4,395) (6,208) (1,798) (2,550)
Gain (Loss) from
Disposition of
Discontinued
Operations 3,624 617 1,845 1,832 (49)
------ ------ ------ ------ ------
Net Income (Loss) (2,514) (3,778) (4,363) 34 (2,599)
====== ===== ====== ====== ======
Basic and Diluted
Earnings (Loss)
Per Common Share:
Net Income (Loss) $ (0.12) $ (0.19) $ (0.21) $ 0.00 $ (0.13)
====== ====== ====== ===== ======
Shares used in
Calculating Net
Income (Loss) Per
Share:
Basic 20,276 20,409 20,553 20,475 20,653
Diluted 20,276 20,409 20,553 20,516 20,653
As of March 31, 2004
--------------------
Pro Forma,
Actual As Adjusted
------ -----------
Balance Sheet Data:
Cash, Cash Equivalents and
Marketable Securities $ 7,744 $19,617
Total Assets 11,267 23,140
Long-term debt, non-current portion 0 0
Stockholders' Equity $ 8,748 $20,621
- ----------------
RISK FACTORS
Investment in our common stock involves a high degree of
risk. In addition to the risks described below, you should
carefully consider the specific factors set forth under the
caption "Risk Factors" in the accompanying prospectus beginning
on page 4, together with all of the information appearing in this
prospectus supplement and incorporated by reference into this
prospectus supplement and the accompanying prospectus, before
making a decision to purchase our common stock. Each of these
risk factors could adversely affect our business, operating
results and financial condition, as well as adversely affect the
value of an investment in our securities.
Risks Related to this Offering
You will experience immediate dilution in the book value per
share of the common stock you purchase.
Because the price per share of our common stock being
offered is substantially higher than the book value per share of
our common stock, you will suffer substantial dilution in the net
tangible book value of the common stock you purchase in this
offering. Based on an assumed offering price of $3.00 per share,
if you purchase shares of common stock in this offering, you will
suffer immediate and substantial dilution of $2.17 per share in
the net tangible book value of the common stock. See "Dilution"
below for a more detailed discussion of the dilution you will
incur if you purchase common stock in this offering.
Our stock price is highly volatile and you may not be able to
resell your shares at or above the price you pay for them.
The market price of our common stock has been, and is likely
to continue to be, highly volatile. The following factors, among
others, could have a significant impact on the market price of
our common stock:
o The factors listed in the accompanying prospectus under
"Risk Factors";
o announcements by us of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
o public concern as to the safety of new technologies;
o unfavorable announcements by us or favorable announcements
by our competitors;
o comments made by analysts, including changes in, or failure
to achieve, financial estimates made by securities analysts;
o future sales of equity or debt securities by us; and
o sales of our common stock by our directors, officers or
significant shareholders.
In addition, the stock market in general, the Nasdaq National
Market and the market for biotechnology and pharmaceutical stocks
in particular, have experienced significant price and volume
fluctuations. Volatility in the market price for particular
companies has often been unrelated or disproportionate to the
operating performance of those companies. These broad market and
industry factors might seriously harm the market price of our
common stock, regardless of our operating performance. In
addition, securities class action litigation has often been
initiated following periods of volatility in the market price of
a company's securities. A securities class action suit against
us could result in substantial costs, potential liabilities and
the diversion of management's attention and resources.
Provisions in our charter documents and under Delaware law could
prevent or delay a change of control, which could reduce the
market price of our common stock.
The terms of our certificate of incorporation and share
right agreement permit our Board of Directors to issue shares of
preferred stock and determine the price, rights, preferences,
privileges, and restrictions, including voting rights, of those
shares without any further vote or action by our stockholders.
The Board may authorize the issuance of preferred stock with
voting or conversion rights that could materially weaken the
voting power or other rights of the holders of our common stock.
The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other
corporate purposes, could make it more difficult for a third
party to acquire a majority of our outstanding voting stock.
Certain other provisions of our certificate of
incorporation, our bylaws, and the Delaware law may be deemed to
have an anti-takeover effect and could discourage a third party
from acquiring, or make it more difficult for a third party to
acquire, control of us without approval of our board of
directors. These provisions and provisions of the Delaware law
may discourage, delay or prevent a third party from acquiring us.
These provisions could also limit the price that certain
investors might be willing to pay in the future for shares of our
common stock.
Management will have broad discretion as to the use of the
proceeds from this offering, and we may not use the proceeds
effectively.
We have not designated the amount of net proceeds we will
use for any particular purpose. Accordingly, our management will
have broad discretion as to the application of the net proceeds
and could use them for purposes other than those contemplated at
the time of this offering. Our shareholders may not agree with
the manner in which our management chooses to allocate and spend
the net proceeds. Moreover, our management may use the net
proceeds for corporate purposes that may not increase our market
value or make us profitable.
A large number of shares may be sold in the market following this
offering, which may depress the market price of our stock.
Sales of a substantial number of shares of our common stock
in the public market following this offering could cause the
market price of our common stock to decline. If there are more
shares of common stock offered for sale than buyers are willing
to purchase, then the market price of our common stock may
decline to a market price at which buyers are willing to purchase
the offered shares of common stock and sellers remain willing to
sell the shares. All of the shares sold in the offering will be
freely tradeable without restriction or further registration
under the Securities Act, except for any shares purchased by our
"affiliates" as defined in Rule 144 of the Securities Act.
FORWARD-LOOKING INFORMATION
This prospectus supplement, the accompanying prospectus and
the documents incorporated by reference in the accompanying
prospectus include forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended.
We have based these forward-looking statements on our current
expectations and projections about future events. Our actual
results could differ materially from those discussed in, or
implied by, these forward-looking statements. Forward-looking
statements are identified by words such as "believe",
"anticipate", "expect", "intend", "plan", "will", "may" and other
similar expressions. In addition, any statements that refer to
expectations, projections or other characterizations of future
events or circumstances are forward-looking statements. Forward-
looking statements include, but are not necessarily limited to,
those relating to:
o results and timing of our clinical trials and publication of
those results;
o our expectations regarding obtaining FDA approval to market
our products;
o our intent to continue investing in our technologies and our
facilities;
o our ability to obtain a marketing partner for our products;
o our expectations regarding the level of our future research
and development expenses;
o our plans to retain marketing or co-marketing rights to
certain of our product candidates;
o our plans or ability to develop other product candidates;
and
o our expectations to receive research and development
funding, payments, fees and royalties through our
collaborations.
Factors that could cause actual results or conditions to
differ from those anticipated by these and other forward-looking
statements include those more fully described in the "Risk
Factors" section of the accompanying prospectus and elsewhere in
this prospectus. We are not obligated to update or revise these
forward-looking statements to reflect new events or
circumstances.
USE OF PROCEEDS
Assuming a public offering price of $3.00, we estimate that
the net proceeds we will receive from this offering will be
approximately $11.8 million, after deducting the placement agent
fees and estimated offering expenses. We will retain broad
discretion over the use of the net proceeds from the sale of our
common stock offered hereby. We currently anticipate using the
net proceeds from the sale of our common stock hereby primarily
for:
o clinical trials;
o research and development expenses;
o general and administrative expenses.
The amounts and timing of the expenditures may vary
significantly depending on numerous factors, such as the progress
of our research and development efforts, technological advances
and the competitive environment for our products.
Pending the use of the net proceeds, we intend to invest the
net proceeds in short-term, interest-bearing, investment-grade
securities.
CAPITALIZATION
The following table sets forth our capitalization as of March
31, 2004:
o on an actual basis; and
o on a pro forma, as adjusted basis, to give effect to the
sale of 4,183,335 shares of common stock offered by us in
this offering, assuming a public offering price of $3.00 per
share in this offering and after deducting the placement
agent's discounts and commissions and estimated offering
expenses payable by us.
As of March 31, 2004
--------------------
Pro Forma,
Actual As Adjusted
------ -----------
Capitalization:
Cash, Cash Equivalents and
Marketable Securities $ 7,744 $19,617
Long-term debt, non-current portion 0
Stockholders' Equity
Preferred Stock, 2,500,000 shares
authorized; issued or outstanding:
none-Actual; none-Pro Forma 0 0
Common stock, $.01 par value,
50,000,000 authorized; issued and
outstanding: 20,675,843 - Actual;
24,859,178 - Pro Forma, as
adjusted 207 249
Additional paid in capital 86,729 98,560
Accumulated deficit (78,197) (78,197)
Accumulated other comprehensive income 9 9
------ ------
Total stockholders' equity $ 8,748 $20,621
------ ------
Total capitalization $16,492 $40,238
====== ======
Information in the table above excludes the following shares of
common stock as of March 31, 2004:
o 2,197,312 shares of common stock issuable upon the exercise
of options outstanding with a weighted average exercise
price of $3.88 per share;
o 48,356 shares available for future issuance under our 2002
Equity Incentive Plan;
o 97,500 shares available for future issuance under our Non-
Qualified Stock Option Plan;
o 92,593 shares available for future issuance under our
Employee Stock Purchase Plan.
DILUTION
Our net tangible book value as of March 31, 2004 was
approximately $8.7 million, or $0.42 per share of common stock.
Net tangible book value per share is calculated by subtracting
our total liabilities from our total tangible assets, which is
total assets less intangible assets, and dividing this amount by
the number of shares of common stock outstanding. After giving
effect to the sale by us of the 4,183,335 shares of common stock
offered in this offering, assuming a public offering price of
$3.00 per share and after deducting the placement agent fees and
estimated offering expenses payable by us, our pro forma net
tangible book value as of March 31, 2004 would have been $20.6
million, or $0.83 per share of common stock. This represents an
immediate increase in the net tangible book value of $0.41 per
share to our existing shareholders and an immediate and
substantial dilution in net tangible book value of $2.17 per
share to new investors. The following table illustrates this per
share dilution:
Assumed public offering price per share $3.00
Net tangible book value per share
as of March 31, 2004 $0.42
Increase per share attributable to new
investors $0.41
Pro forma net tangible book value
per share after this offering as of
March 31, 2004 $0.83
----
Dilution per share to new investors $2.17
====
Information in the table above excludes the following dilutive
securities outstanding as of March 31, 2004;
o 2,197,312 shares of common stock issuable upon the exercise
of options outstanding with a weighted average exercise
price of $3.88 per share;
o 48,356 shares available for future issuance under our 2002
Equity Incentive Plan;
o 97,500 shares available for future issuance under our Non-
Qualified Stock Option Plan;
o 92,593 shares available for future issuance under our
Employee Stock Purchase Plan.
MANAGEMENT
The following is biographical information for our officers
and each member of our board of directors:
Name Age Position with Company
- ---- --- ---------------------
Michael O'Connell 54 President and Chief Executive Officer
Gordon Sangster 51 Chief Financial Officer, Vice
President of Finance
John Barr, Ph.D. 44 Vice President of Research and
Development
Paul Goddard, Ph.D. 54 Chairman
Stephen A. Drury 66 Director
Peter Riepenhausen 67 Director
Toby Rosenblatt 65 Director
Gregory Turnbull 65 Director
Dennis Winger 56 Directors
Robert Zerbe, M.D. 53 Director
Michael O'Connell -- director since May 2001 and Chief Executive
Officer and President of A.P. Pharma since August 2000; he
originally joined A.P. Pharma in July 1992 as Vice President and
Chief Financial Officer. From 1980 to 1992, Mr. O'Connell served
with The Cooper Companies, Inc. (formerly CooperVision, Inc.) in
a number of financial positions including Vice President and
corporate controller. Mr. O'Connell is a Fellow of the Institute
of Chartered Accountants of England and Wales.
Gordon Sangster -- Chief Financial Officer, joined A.P. Pharma in
1993 as corporate controller. He became Vice President of
Finance in 1994 and Chief Financial Officer in August 2000.
Prior to joining A.P. Pharma, Mr. Sangster spent five years in a
variety of corporate and international financial roles at
Raychem, Inc. Previously, Mr. Sangster held financial positions
at the Cooper Companies and at CooperVision, where he was
international controller. Mr. Sangster is a member of the
Institute of Chartered Accountants of England and Wales.
John Barr, Ph.D. -- Vice President, Research and Development,
joined A.P. Pharma in 1997 as director of Pharmaceutical
Sciences. He was promoted to his current position in August
2000. Prior to joining A.P. Pharma, he worked as the director of
Biopharmaceutics for Cortech, Inc. a Denver-based biotech firm
focused on the development of novel anti-inflammatory agents. In
that capacity, he was involved with both the research and
development aspects of the company's intravenous and oral
programs. Dr. Barr received his Ph.D. in pharmacology from the
University of Glasgow in Scotland, after which he pursued
postdoctoral studies at the University of Arizona.
Paul Goddard, Ph.D. -- chairman of A.P. Pharma board of directors
since November 2000. From 1998 to 2000, Dr. Goddard was
President and Chief Executive Officer of Elan's pharmaceutical
division. From 1991 to 1998 Dr. Goddard served as Chairman and
Chief Executive Officer of Neurex Corporation. In 1998, Neurex
was acquired by Elan. Prior to Neurex, Dr. Goddard held various
senior management positions at SmithKline Beecham. Dr. Goddard
also serves as Chairman of the Board for ARYx Therapeutics, Inc.
and Xenoport, Inc., and as a director for Adolor, Inc., Molecular
Devices, Inc. and Onyx Pharmaceuticals, Inc.
Stephen A. Drury -- director of A.P. Pharma since May 1999. Mr.
Drury is currently a healthcare financial advisor and a private
investor. Prior to his retirement in 1997, he was Executive Vice
President and a director of Owen Healthcare from 1992 and Senior
Vice President and Chief Financial Officer of Integrated Health
Services, Inc. from 1989 until 1992. Prior to that, Mr. Drury
served as Senior Vice President of Thomson McKinnon Securities
and managing director of its Healthcare Capital Markets Group
from 1985 to 1989.
Peter Riepenhausen -- director of A.P. Pharma since April 1991.
Mr. Riepenhausen is a business consultant. He was chairman,
Europe for Align Technology, Inc. from 2000 until 2002 and
President and Chief Executive Officer of ReSound Corporation from
1994 to 1998. He served as a director of Caradon (Europe) plc
from April 1994 until September 1998. He serves as a director of
Audimed Gmbh and The Resource Group (TRG).
Toby Rosenblatt -- director of A.P. Pharma since September 1983.
Mr. Rosenblatt is President of Founders Investments, Ltd. which
is involved in private investment activities. Mr. Rosenblatt
also serves as a director of State Street Research Mutual Funds
and Met Life Series Mutual Funds and is a trustee of numerous
civic and educational institutions.
Gregory Turnbull -- director of A.P. Pharma since February 1986.
Mr. Turnbull is currently a business consultant. Previously, he
was a general partner of Cable & Howse Ventures, a venture
capital firm, and also served as an investment banker with Morgan
Stanley & Co. and White, Weld & Co. Mr. Turnbull serves as a
director of Planar Systems, Inc.
Dennis Winger -- director of A.P. Pharma since February 1993.
Mr. Winger is Senior Vice President and Chief Financial Officer
of Applera Corporation. From 1989 to 1997, Mr. Winger was Senior
Vice President, Finance and Administration and Chief Financial
Officer of Chiron Corporation. He currently serves as a director
of Cell Genesys and Cephalon, Inc.
Robert Zerbe, M.D. -- director of A.P. Pharma since December
2002. Dr. Zerbe is the Chief Executive Officer and founder of
QuatRx Pharmaceuticals Company, a private biopharmaceutical
company. Until 2000, Dr. Zerbe was employed by Pfizer as the
Senior Vice President of Global Research and Development and
Director of Development Operations. From 1993 to 2000, Dr. Zerbe
served at the Parke-Davis Pharmaceutical Research Division of
Warner-Lambert as Senior Vice President worldwide, clinical
research and development. Dr. Zerbe serves as a director of
Maxim Pharmaceuticals, Inc.
PLAN OF DISTRIBUTION
We are directly selling to certain institutional investors
up to 4,183,335 shares of our common stock under this prospectus
supplement at a fixed price of $3.00 per share. We have
negotiated with these purchasers regarding the sale of the
shares.
Pursuant to an engagement letter dated June 7, 2004, we
engaged Olympus Securities, LLC, to act as our non-exclusive
placement agent in connection with offerings of securities under
our shelf registration statement, of which this prospectus
supplement is a part. Under the terms of the engagement letter,
Olympus Securities, LLC has agreed to provide assistance in
connection with the issuance and sale by us of the shares in this
offering and in possible future takedowns of securities from the
registration statement. The terms of any future offerings will be
subject to market conditions and negotiations among us, Olympus
Securities, LLC and prospective purchasers. The engagement letter
does not give rise to any commitment by Olympus Securities, LLC
to purchase any securities, and Olympus Securities, LLC will have
no authority to bind us by virtue of the engagement letter.
With respect to this offering, we have agreed to pay Olympus
Securities, LLC compensation as follows:
o a placement fee equal to 5% of gross proceeds of the sale of
shares of common stock in the offering; and
o reimbursement of certain out-of-pocket expenses.
With respect to this offering, we have agreed to reimburse an
aggregate of $15,000 in purchaser legal fees and expenses.
We will not pay any other compensation in connection with the
sale of the shares pursuant to this prospectus supplement.
We have agreed to indemnify Olympus Securities, LLC against
certain liabilities arising in connection with the engagement,
including liabilities under federal securities laws.
We have agreed to indemnify each of the investors, and each of
the investors' affiliates, employees, officers, directors,
agents, and partners, against certain liabilities arising in
connection with the engagement, including liabilities under
federal securities laws.
LEGAL MATTERS
The validity of the shares offered hereby will be passed
upon for us by Heller Ehrman White & McAuliffe, LLP, Palo Alto,
California, counsel to the company. Julian N. Stern, the
Secretary of the company, is the owner of 170,335 shares of
common stock and is the sole stockholder and employee of a
professional corporation that was a partner of a predecessor of
Heller Ehrman White & McAuliffe LLP.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance
therewith file reports, proxy statements and other information
with the Securities and Exchange Commission. Our filings are
available to the public over the Internet at the Securities and
Exchange Commission's website at http://www.sec.gov. You may
also read and copy, at prescribed rates, any document we file
with the Securities and Exchange Commission at the Public
Reference Room of the Securities and Exchange Commission located
at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Securities and Exchange Commission at (800) SEC-0330 for
further information on the Securities and Exchange Commission's
Public Reference Room.
PROSPECTUS
A.P. PHARMA, INC.
$15,000,000
Common Stock
------
The shares of common stock of A.P. Pharma, Inc. covered by
this prospectus may be offered and sold to the public from time
to time in one or more issuances.
Our common stock trades on the Nasdaq National Market under
the symbol "APPA". On May 3, 2004, the last reported sale price
of the common stock on the Nasdaq National Market was $3.28 per
share.
This prospectus is part of a registration statement that we
filed with the Securities and Exchange Commission utilizing a
"shelf" registration process. This prospectus provides you with
a general description of the shares that we may offer in one of
more offerings. Each time we offer shares, we will provide a
supplement to this prospectus that will contain more specific
information about the terms of that offering. We may also add,
update or change in the prospectus supplement any of the
information contained in this prospectus. This prospectus may
not be used to sell any of our common stock unless accompanied by
a prospectus supplement. You should read both this prospectus
and any prospectus supplement together with additional
information described under the heading "Where You Can Find More
Information" before you make your investment decision.
The aggregate offering price of all common stock sold under
this prospectus will not exceed $15,000,000.
Beginning on page 4, we have listed several "RISK FACTORS"
which you should consider. You should read the entire prospectus
carefully before you make your investment decision.
We may sell shares to or through underwriters or dealers,
through agents, or directly to investors.
------
The Securities and Exchange Commission and state regulatory
authorities have not approved or disapproved these securities, or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
------
The Date of this Prospectus is June 24, 2004
ABOUT THIS PROSPECTUS
We have not authorized any dealer, salesman or other person
to give any information or to make any representation other than
those contained or incorporated by reference in this prospectus
and the accompanying supplement to this prospectus. You must not
rely upon any information or representation not contained or
incorporated by reference in this prospectus or the accompanying
prospectus supplement. This prospectus and the accompanying
supplement to this prospectus do not constitute an offer to sell
or the solicitation of an offer to buy common stock, nor do this
prospectus and the accompanying supplement to this prospectus
constitute an offer to sell or the solicitation of an offer to
buy common stock in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
You should not assume that the information contained in this
prospectus and the accompanying prospectus supplement is accurate
on any date subsequent to the date set forth on the front of the
document or that any information we have incorporated by
reference is correct on any date subsequent to the date of the
document incorporated by reference, even though this prospectus
and any accompanying prospectus supplement is delivered or common
stock is sold on a later date.
This prospectus is part of a registration statement that we
filed with the Securities and Exchange Commission, or SEC, using
a "shelf" registration process. Under this shelf registration
process, we may, from time to time, issue and sell to the public
any part of the shares described in this prospectus in one or
more offerings up to a total dollar amount of $15,000,000.
This prospectus provides you with a general description of
the common stock we may offer. Each time we sell the common
stock, we will provide a prospectus supplement containing
specific information about the terms of that offering. The
prospectus supplement may also add, update or change information
in this prospectus or in documents incorporated by reference in
this prospectus. To the extent that any statement that we make
in a prospectus supplement is inconsistent with statements made
in this prospectus or in documents incorporated by reference in
this prospectus, the statements made or incorporated by reference
in this prospectus will be deemed modified or superseded by those
made in the prospectus supplement. You should carefully read
both this prospectus and any prospectus supplement together with
the additional information described under the heading "Where You
Can Find More Information" before buying any common stock in this
offering.
The registration statement containing this prospectus,
including exhibits to the registration statement, provides
additional information about us and the common stock offered
under this prospectus. The registration statement can be read at
the SEC web site or at the SEC offices mentioned under the
heading "Where You Can Find More Information".
In this prospectus, the "company", the "Registrant", "A.P.
Pharma", "APP", "we", "us" and "our" refer to A.P. Pharma, Inc.
ABOUT THE COMPANY
We are a specialty pharmaceutical company focused on the
development of pharmaceutical products utilizing our proprietary
polymer-based drug delivery systems. Our focus is the
development and commercialization of our patented bioerodible
injectable and implantable systems under the trade name
Biochronomer(TM).
Our business strategy is twofold:
o to develop selected proprietary products, funding them
through the preliminary phases of regulatory review
before entering into partnerships to share costs and to
earn a share of future profits; and
o to license our proprietary technologies to corporate
partners after the successful completion of reimbursed
feasibility studies to earn research and development
fees, licensing fees, milestone payments and royalties.
Initial targeted areas of application for our drug delivery
technologies include pain management; anti-nausea, anti-
inflammatory, anti-infective, oncology and ophthalmology
applications; device coatings and DNA delivery. Product
development programs have been funded primarily by royalties from
topical prescription products currently marketed by our
pharmaceutical partners, Johnson & Johnson and Aventis, proceeds
from the divestiture of our cosmeceutical and toiletry product
lines in July 2000, fees we receive from collaborative partners,
and proceeds from the sale of our Analytical Standards business
in February 2003.
Bioerodible polymers are of increasing interest within the
pharmaceutical and biotechnology community for use in both drug
delivery applications and as devices. We have made substantial
progress in developing the Biochronomer bioerodible polymers that
potentially represent a significant improvement over existing
drug delivery systems. A major point of difference with other
delivery systems is that our polymers have been specifically
designed as drug delivery systems and are versatile. Over one
hundred in vivo and in vitro studies have been completed to
advance understanding of this innovative drug delivery
technology. Importantly, the initial toxicology data indicate
that the technology is safe for use in humans. Studies
demonstrate complete and controlled bioerosion of the polymers.
Erosion times can be varied from hours to days, weeks or months
and mechanical properties can be adjusted to produce materials as
diverse as injectable gels, coatings, strands, wafers, films or
microspheres. In addition, the manufacturing is reproducible,
has been scaled up under GMP conditions and the polymers are
stable, provided they are stored under appropriate conditions.
In studies, the polymers were observed to erode to completion
and, once the drug was released, no polymer remained. In
addition, the polymers bioerode with low acidity, thus
potentially allowing the delivery of sensitive proteins and DNA.
Our first Biochronomer product candidate is APF112 for the
treatment of post-surgical pain. APF112 incorporates the well-
known analgesic mepivacaine in our Biochronomer system. It is
designed to provide 24 to 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.
We completed Phase 1 human clinical trials for APF112 in 2002.
In 2003, we initiated Phase 2 clinical trials. Our initial
target is pain management following inguinal hernia repair. The
first part of the trial was an open-label study which was
successfully completed. Results of the Part 1 study indicate
that the pharmacokinetic measurements demonstrated meaningful
levels of mepivacaine over a three day period consistent with
observations made in preclinical studies with APF112. No severe
or serious adverse events were reported and wound healing in all
patients was observed to be normal over a 30-day follow-up
period. The second part of the Phase 2 trial which is currently
ongoing is a blinded study involving 90 patients and compares two
doses of APF112 with the current standard treatment for post-
surgical pain. The endpoints for the trial will include a visual
analog score of pain intensity, the standard means of measuring
pain, and reduction in use of opioid-type pain medication by
patients. We believe that more than 20 million surgical
procedures are performed annually in the U.S. which could benefit
from this product.
Our second product candidate is APF530 for the prevention of
nausea and vomiting following chemotherapy or surgery. We
commenced human clinical trials in the second quarter of 2004.
Using the Company's proprietary Biochronomer(TM) bioerodible drug
delivery system, APF530 is designed to provide three to five days
of continuous relief from chemotherapy-induced nausea and
vomiting following a single subcutaneous injection. APF530
combines A.P. Pharma's Biochronomer drug delivery system with
granisetron, one of a class of 5-HT3 antagonists which have
revolutionized the treatment of nausea and vomiting during and
after chemotherapy. The drug is currently administered by
intravenous (IV) injection, followed by oral administration for a
number of days. Biochronomer delivery of granisetron is a
potential alternative to the IV and subsequent oral
administration in the $2 billion annual market for anti-emetics.
In animal studies, APF530 utilizing the Biochronomer bioerodible
drug delivery system demonstrated sustained release at constant
and therapeutically equivalent blood drug levels. The initial
clinical study is designed to determine the safety and
tolerability of APF530, and will include approximately 18 healthy
volunteers at a single clinical site in the United Kingdom. A.P.
Pharma is also finalizing pre-clinical work prior to filing an
Investigational New Drug (IND) application in the U.S. that could
allow the Company to go directly into U.S. Phase 2 studies in
cancer patients with APF530.
We have also entered into fee-paying feasibility studies
with several companies to develop a variety of products using our
Biochronomer(TM) delivery systems. These products are being
developed in the areas of vaccines, ophthalmology, device
coatings and DNA delivery. In general, these research and
development arrangements provide for us to receive research and
development fees from our collaborators. Three of these
development programs have moved into in vivo testing and, if they
are concluded successfully, could lead to licensing agreements
under which a partner would pay for development costs and we
would receive a license fee, research and development fees,
milestone payments and a royalty upon a product's marketing
clearance and commercialization.
In February 1997, we received FDA marketing clearance for
our first pharmaceutical product based on our original patented
Microsponge(R) technology, Retin-A Micro(R), which was licensed
to Ortho Neutrogena, a member of the Johnson & Johnson family of
companies. This product was launched in the United States in
March 1997. Retin-A Micro was also launched in Canada in the
third quarter of 2001 and Phase 3 clinical trials were completed
in Europe in 2002. In May 2002, the FDA granted marketing
clearance for a new low-dose formulation of Retin-A Micro, which
was launched in the U.S. in July 2002. The Company is eligible
to receive royalty income based on sales of these products over
the life of the applicable patents, until 2016.
We licensed to Dermik Laboratories, an Aventis company, a
Microsponge-based formulation incorporating 5-fluorouracil (5-FU)
for the treatment of actinic keratoses, a precancerous skin
condition. The product was launched in the first quarter of 2001
under the brand name Carac(TM). This product has a number of
advantages over other topical therapies, including less
irritation with shorter duration of therapy and reduced dosage
frequency. The Company is eligible to receive royalty income
based on the sales of this product over the life of the
applicable patents, until 2021.
In February 2003, we sold the assets of our wholly-owned
subsidiary, APS Analytical Standards, Inc., to GFS Chemicals of
Columbus, Ohio, for $2.1 million in cash and the right to receive
royalties for the next five years. The Company, founded in
February 1983 as a California corporation under the name AMCO
Polymerics, Inc., changed its name to Advanced Polymer Systems,
Inc. in 1984 and was reincorporated in Delaware in 1987. The
name was changed to A.P. Pharma, Inc. in May 2001 to reflect the
new pharmaceutical focus of the Company.
FORWARD-LOOKING INFORMATION
Statements made in this prospectus or in the documents
incorporated by reference herein that are not statements of
historical fact are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). A number of risks and
uncertainties, including those discussed under the caption "Risk
Factors" below and the documents incorporated by reference herein
could affect such forward-looking statements and could cause
actual results to differ materially from the statements made.
RISK FACTORS
You should consider carefully the following risk factors,
along with other information contained or incorporated by
reference in this prospectus, in deciding whether to invest in
our securities. These factors, among others, may cause actual
results, events or performances to differ materially from those
expressed in any forward-looking statements we made in this
prospectus.
Our bioerodible drug delivery system business is at an early
stage of development.
Our bioerodible drug delivery system business is at an early
stage of development. Our ability to produce bioerodible drug
delivery systems that progress to and through clinical trials is
subject to, among other things:
- success with our research and development efforts;
- selection of appropriate therapeutic compounds for
delivery;
- the required regulatory approval.
Successful development of delivery systems will require
significant preclinical and clinical testing prior to regulatory
approval in the United States and elsewhere. In addition, we
will need to determine whether any potential products can be
manufactured in commercial quantities at an acceptable cost. Our
efforts may not result in a product that can be marketed.
Because of the significant scientific, regulatory and commercial
milestones that must be reached for any of our research programs
to be successful, any program may be abandoned, even after
significant resources have been expended.
We will need additional capital to conduct our operations
and to develop our products and our ability to obtain the
necessary funding on favorable terms in the future is uncertain.
We will require additional capital resources in order to
conduct our operations and develop our products. While we
estimate that our existing capital resources, royalty income and
interest income will be sufficient to fund our current level of
operations for at least the next year based on current business
plans, we cannot guarantee that this will be the case. The
timing and degree of any future capital requirements will depend
on many factors, including:
- continued scientific progress in our research and
development programs;
- the magnitude and scope of our research and development
programs;
- our ability to establish and maintain strategic
collaborations or partnerships for research, development,
clinical testing, manufacturing and marketing;
- our progress with preclinical and clinical trials;
- the time and costs involved in obtaining regulatory
approvals;
- the costs involved in preparing, filing, prosecuting,
maintaining, defending and enforcing patent claims.
We intend to acquire additional funding through strategic
collaborations, in the form of license fees, research and
development fees and milestone payments. In the event that
additional funds are obtained through arrangements with
collaborative partners, these arrangements may require us to
relinquish rights to some of our technologies, product candidates
or products that we would otherwise seek to develop and
commercialize ourselves. If sufficient funding is not available,
we may be required to delay, reduce the scope of or eliminate one
or more of our research or development programs, each of which
could have a material adverse effect on our business.
If we are unable to recruit and retain skilled employees, we may
not be able to achieve our objectives.
Retaining our current employees and recruiting qualified
scientific personnel to perform future research and development
work will be critical to our success. Competition is intense for
experienced scientists, and we may not be able to retain or
recruit sufficient skilled personnel to allow us to pursue
collaborations and develop our products and core technologies to
the extent otherwise possible.
We are reliant on single source third party contractors for the
manufacture and production of raw materials and product
candidates.
We currently, and for the foreseeable future will, rely upon
outside contractors to manufacture, supply and package for us key
intermediates, active pharmaceutical ingredients and formulated
drug product for our product candidates. Our current dependence
upon others for the manufacture of our raw materials and product
candidates and our anticipated dependence upon others for the
manufacture of any products that we may develop, may adversely
affect our ability to develop our product candidates in a timely
manner and may adversely affect future profit margins and our
ability to commercialize any products that we may develop on a
timely and competitive basis.
Entry into clinical trials with one or more products may not
result in any commercially viable products.
We do not expect to generate any significant revenues from
product sales for a period of several years. We may never
generate revenues from product sales or become profitable because
of a variety of risks inherent in our business, including risks
that:
- clinical trials may not demonstrate the safety and
efficacy of our products;
- we need to perform extensive final formulation and
stability work on our polymer and product candidates and if this
is unsuccessful, our product candidates may not be commercially
viable;
- completion of clinical trials may be delayed, or costs of
clinical trials may exceed anticipated amounts;
- we may not be able to obtain regulatory approval of our
products, or may experience delays in obtaining such approvals;
- we and our licensees may not be able to successfully
market our products.
Because we or our collaborators must obtain regulatory approval
to market our products in the United States and foreign
jurisdictions, we cannot predict whether or when we will be
permitted to commercialize our products.
Federal, state and local governments in the United States
and governments in other countries have significant regulations
in place that govern many of our activities. The preclinical
testing and clinical trials of the products that we develop
ourselves or that our collaborators develop are subject to
government regulation and may prevent us from creating
commercially viable products from our discoveries. In addition,
the sale by us or our collaborators of any commercially viable
product will be subject to government regulation from several
standpoints, including the processes of:
- manufacturing;
- advertising and promoting;
- selling and marketing;
- labeling; and
- distributing.
We may not obtain regulatory approval for the products we develop
and our collaborators may not obtain regulatory approval for the
products they develop. Regulatory approval may also entail
limitations on the indicated uses of a proposed product.
The regulatory process, particularly for biopharmaceutical
products like ours, is uncertain, can take many years and
requires the expenditure of substantial resources. Any product
that we or our collaborative partners develop must receive all
relevant regulatory agency approvals or clearances, if any,
before it may be marketed in the United States or other
countries. In particular, human pharmaceutical therapeutic
products are subject to rigorous preclinical and clinical testing
and other requirements by the Food and Drug Administration in the
United States and similar health authorities in foreign
countries. The regulatory process, which includes extensive
preclinical testing and clinical trials of each product in order
to establish its safety and efficacy, is uncertain, can take many
years and requires the expenditure of substantial resources.
Data obtained from preclinical and clinical activities is
susceptible to varying interpretations that could delay, limit or
prevent regulatory agency approvals or clearances. In addition,
delays or rejections may be encountered as a result of changes in
regulatory agency policy during the period of product development
and/or the period of review of any application for regulatory
agency approval or clearance for a product. Delays in obtaining
regulatory agency approvals or clearances could:
- significantly harm the marketing of any products that we
or our collaborators develop;
- impose costly procedures upon our activities or the
activities of our collaborators;
- diminish any competitive advantages that we or our
collaborative partners may attain; or
- adversely affect our ability to receive royalties and
generate revenues and profits.
In addition, the marketing and manufacturing of drugs and
biological products are subject to continuing FDA review, and
later discovery of previously unknown problems with a product,
its manufacture or its marketing may result in the FDA requiring
further clinical research or restrictions on the product or the
manufacturer, including withdrawal of the product from the
market.
We depend on our collaborators to help us complete the process of
developing and testing our products and our ability to develop
and commercialize products may be impaired or delayed if our
collaborative partnerships are unsuccessful.
Our strategy for the development, clinical testing and
commercialization of our products requires entering into
collaborations with corporate partners, licensors, licensees and
others. We are dependent upon the subsequent success of these
other parties in performing their respective responsibilities and
the cooperation of our partners. Our collaborators may not
cooperate with us or perform their obligations under our
agreements with them. We cannot control the amount and timing of
our collaborators' resources that will be devoted to our research
activities related to our collaborative agreements with them.
Our collaborators may choose to pursue existing or alternative
technologies in preference to those being developed in
collaboration with us.
Under agreements with collaborators, we may rely
significantly on them, among other activities, to:
- fund research and development activities with us;
- pay us fees upon the achievement of milestones; and
- market with us any commercial products that result from
our collaborations.
Our reliance on the research activities of our non-employee
scientific advisors and other research institutions, whose
activities are not wholly within our control, may lead to delays
in technological developments.
We have relationships with scientific advisors at academic
and other institutions, some of whom conduct research at our
request. These scientific advisors are not our employees and may
have commitments to, or consulting or advisory contracts with,
other entities that may limit their availability to us. We have
limited control over the activities of these advisors and, except
as otherwise required by our collaboration and consulting
agreements, can expect only limited amounts of their time to be
dedicated to our activities. If our scientific advisors are
unable or refuse to contribute to the development of any of our
potential discoveries, our ability to generate significant
advances in our technologies will be significantly harmed.
The loss of key personnel could slow our ability to conduct
research and develop products.
Our future success depends to a significant extent on the
skills, experience and efforts of our executive officers and key
members of our scientific staff. We may be unable to retain our
current personnel or attract or assimilate other highly qualified
management and scientific personnel in the future. The loss of
any or all of these individuals could harm our business and might
significantly delay or prevent the achievement of research,
development or business objectives.
We face intense competition from other companies.
Most or all of the products we could develop or
commercialize will face competition from different therapeutic
agents intended for treatment of the same indications or from
other products incorporating drug delivery technologies. The
competition potentially includes all of the pharmaceutical
companies in the world. Many of these pharmaceutical companies
have more financial resources, technical staff and manufacturing
and marketing capabilities than we do. To the extent that we
develop or market products incorporating drugs that are off-
patent, or are being developed by multiple companies, we will
face competition from other companies developing and marketing
similar products.
Pharmaceutical companies are increasingly using advertising,
including direct-to-consumer advertising, in marketing their
products. The costs of such advertising are very high and are
increasing. It may be difficult for our company to compete with
larger companies investing greater resources in these marketing
activities.
Other pharmaceutical companies are aggressively seeking to
obtain new products by licensing products or technology from
other companies. We will be competing to license or acquire
products or technology with companies with far greater financial
and other resources.
Inability to obtain special materials could slow down our
research and development process.
Some of the critical materials and components used in our
developed products are sourced from a single supplier. An
interruption in supply of a key material could significantly
delay our research and development process.
Special materials must often be manufactured for the first
time for use in drug delivery systems, or materials may be used
in the systems in a manner different from their customary
commercial uses. The quality of materials can be critical to the
performance of a drug delivery system, so a reliable source of a
consistent supply of materials is important. Materials or
components needed for our drug delivery systems may be difficult
to obtain on commercially reasonable terms, particularly when
relatively small quantities are required, or if the materials
traditionally have not been used in pharmaceutical products.
Patents and other intellectual property protection may be
difficult to obtain or ineffective.
Patent protection generally has been important in the
pharmaceutical industry. Our existing patents may not cover
future products, additional patents may not be issued, and
current patents or patents issued in the future may not provide
meaningful protection or prove to be of commercial benefit.
In the United States, patents are granted for specified
periods of time. Some of our earlier patents have expired, or
will expire, over the next several years.
Other companies may successfully challenge our patents in
the future. Others may also challenge the validity or
enforceability of our patents in litigation. If any challenge is
successful, other companies may then be able to use the invention
covered by the patent without payment. In addition, if other
companies are able to obtain patents that cover any of our
technologies or products, we may be subject to liability for
damages and our activities could be blocked by legal action
unless we can obtain licenses to those patents.
In addition, we utilize significant unpatented proprietary
technology and rely on unpatented trade secrets and proprietary
know-how to protect certain aspects of our products and
technologies and the methods used to manufacture them. Other
companies have or may develop similar technology which will
compete with our technology.
Our royalty revenues could decline.
Our royalty revenues in future periods could vary
significantly. Major factors which could have an effect on our
royalty revenues include, but are not limited to:
- our partners' decisions about amounts and timing of
advertising support for Retin-A Micro and Carac.
- our partners' decisions about other promotion and
marketing support for Retin-A Micro and Carac.
- the timing of approvals for new product applications both
in the United States and abroad.
- the expiration or invalidation of patents.
- decreases in licensees' sales of product due to
competition, manufacturing difficulties or other factors that
affect sales of product, including regulatory restrictions on the
advertising of pharmaceutical products.
USE OF PROCEEDS
We will retain broad discretion over the use of the net
proceeds from the sale of our common stock offered hereby.
Except as described in any prospectus supplement, we currently
anticipate using the net proceeds from the sale of our common
stock hereby primarily for clinical trials, research and
development expenses and general and administrative expenses.
The amounts and timing of the expenditures may vary significantly
depending on numerous factors, such as the progress of our
research and development efforts, participation from potential
partnerships, technological advances and the competitive
environment for our products. We may also use a portion of the
net proceeds to acquire or invest in complementary businesses,
products and technologies. Although we have no specific
arrangements with respect to acquisitions, we evaluate
acquisition opportunities and engage in related discussions with
other companies from time to time.
Pending the use of the net proceeds, we intend to invest the
net proceeds in short-term, interest-bearing, investment-grade
securities.
DESCRIPTION OF CAPITAL STOCK
As of the date of this registration statement, we have
authorized 50,000,000 shares of $0.01 par value common stock and
2,500,000 shares of $0.01 par value preferred stock.
Common Stock
As of May 3, 2004, there were 20,744,735 shares of common
stock outstanding held of record by 453 stockholders. The
holders of common stock have one vote for each share on all
matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding preferred
stock, holders of common stock will receive ratably any dividends
declared by the board of directors out of funds legally available
for payment of dividends. In the event of a liquidation,
dissolution or winding up of the company, holders of common stock
will share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any outstanding
preferred stock. Holders of common stock have no preemptive
rights, no right to convert their common stock into any other
securities, and no right to vote cumulatively for the election of
directors. The outstanding shares of common stock are fully paid
and nonassessable.
On August 19, 1996, the board of directors adopted a
stockholders rights plan, which allows stockholders to purchase
common stock at discount in the event of a tender offer or when
any person acquires 20% or more of our outstanding common stock,
subject to some exceptions.
We have not paid cash dividends on our common stock and do
not plan to pay any such dividends in the foreseeable future.
Under lending agreements we are party to, we are restricted from
declaring or paying dividends on our common stock.
Preferred Stock
The board of directors may provide for the issuance of up to
2,500,000 shares of preferred stock in one or more series and fix
the rights, preferences, privileges and restrictions thereof,
including:
- dividend rights;
- conversion rights;
- voting rights;
- terms of redemption;
- liquidation preferences; and
- the number of shares constituting any series, or the
designation of such series, without any further vote or action by
the stockholders.
The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of the
company without action by the shareholders and could adversely
affect the rights and powers, including voting rights, of the
holders of common stock. In certain circumstances, the issuance
of preferred stock could depress the market price of common
stock. As of May 3, 2004, there were no shares of preferred
stock outstanding.
PLAN OF DISTRIBUTION
We may sell the common stock:
o to or through one or more underwriters or dealers;
o directly to purchasers, through agents; or
o through a combination of any of these methods of sale.
We may distribute the common stock:
o from time to time in one or more transactions at a fixed
price or prices, which may be changed from time to time;
o at market prices prevailing at the times of sale;
o at prices related to such prevailing market prices; or at
negotiated prices.
We will describe the method of distribution of the common
stock in the applicable prospectus supplement.
We may determine the price or other terms of the common
stock offered under this prospectus by use of an electronic
auction. We will describe how any auction will determine the
price or any other terms, how potential investors may participate
in the auction and the nature of the obligations of the
underwriter, dealer or agent in the applicable prospectus
supplement.
Underwriters, dealers or agents may receive compensation in
the form of discounts, concessions or commissions from us or our
purchasers (as their agents in connection with the sale of the
common stock). In addition, underwriters may sell common stock
to or through dealers, and those dealers may receive compensation
in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they
act as agent. These underwriters, dealers or agents may be
considered to be underwriters under the Securities Act of 1933,
as amended. As a result, discounts, commissions, or profits on
resale received by the underwriters, dealers or agents may be
treated as underwriting discounts and commissions. Each
applicable prospectus supplement will identify any such
underwriter, dealer or agent, and describe any compensation
received by them from us. Any initial public offering price and
any discounts or concessions allowed or reallowed or paid to
dealers may be changed from time to time. The aggregate
compensation received by all NASD members will not exceed 9.9% of
the aggregate proceeds of this offering.
We may enter into agreements that provide for
indemnification against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended, or for
contribution with respect to payments made by the underwriters,
dealers or agents and to reimburse these persons for certain
expenses.
We may grant underwriters who participate in the
distribution of the common stock an option to purchase additional
shares of common stock to cover over-allotments, if any, in
connection with the distribution. Underwriters or agents and
their associates may be customers of, engage in transactions
with, or perform services for us in the ordinary course of
business.
In connection with the offering of the common stock, certain
underwriters and selling group members and their respective
affiliates, may engage in transactions that stabilize, maintain
or otherwise affect the market price of the common stock. These
transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M promulgated by the SEC
pursuant to which these persons may bid for or purchase common
stock for the purpose of stabilizing its market price.
The underwriters in an offering of the common stock may also
create a "short position" for their account by selling more
common stock in connection with the offering than they are
committed to purchase from us. In that case, the underwriters
could cover all or a portion of the short position by either
purchasing common stock in the open market or by exercising any
over-allotment option granted to them by us. In addition, any
managing underwriter may impose "penalty bids" under contractual
arrangements with other underwriters, which means that they can
reclaim from an underwriter (or any selling group member
participating in the offering) for the account of the other
underwriters, the selling concession for the common stock that is
distributed in the offering but subsequently purchased for the
account of the underwriters in the open market. Any of the
transactions described in this paragraph or comparable
transactions that are described in any accompanying prospectus
supplement may result in the maintenance of the price of the
common stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this
paragraph or in an accompanying prospectus supplement are
required to be taken by any underwriters and, if they are
undertaken, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares offered hereby will be passed
upon for us by Heller Ehrman White & McAuliffe, LLP, Palo Alto,
California, counsel to the company. Julian N. Stern, the
Secretary of the company, is the owner of 170,335 shares of
common stock and is the sole stockholder and employee of a
professional corporation that is a partner of Heller Ehrman White
& McAuliffe LLP.
EXPERTS
The consolidated financial statements of A.P. Pharma, Inc.
appearing in A.P. Pharma's Annual Report (Form 10-K) for the year
ended December 31, 2003, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by
reference in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy
statements, and other documents with the Securities and Exchange
Commission (the "SEC"). You may read and copy any document we
file at the SEC's public reference room at Judiciary Plaza
Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. You should call 1-800-SEC-0330 for more information on
the public reference room. The SEC maintains an internet site at
http://www.sec.gov where certain information regarding issuers
(including A.P. Pharma) may be found.
This prospectus is part of a registration statement that we
filed with the SEC (Registration No. 333-115163). The
registration statement contains more information than this
prospectus regarding A.P. Pharma and its common stock, including
certain exhibits and schedules. You can get a copy of the
registration statement from the SEC at the address listed above
or from its internet site.
DOCUMENTS INCORPORATED BY REFERENCE
The SEC allows us to "incorporate" into this prospectus
information we file with the SEC in other documents. This means
that we can disclose important information to you by referring to
other documents that contain that information. The information
may include documents filed after the date of this prospectus
which update and supersede the information you read in this
prospectus. We incorporate by reference the documents listed
below, except to the extent information in those documents is
different from the information contained in this prospectus, and
all future documents filed with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until
we terminate the offering of these shares.
SEC Filing
(File No.) Period/Filing Date
---------- ------------------
Annual Report on Form 10-K Year ended December 31, 2003
Quarterly Report on Form
10-Q Quarter ended March 31, 2004
Registration Statement on
Form 8-A describing the
common stock Filed on August 7, 1987
You may request a copy of these documents, at no cost, by writing
to:
A.P. Pharma, Inc.
123 Saginaw Drive
Redwood City, California 94063
Attention: Investor Relations
Telephone: (650) 366-2626
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 24, 2004)
A.P. PHARMA, INC.
4,183,335 Shares
Common Stock
(Footnote continued)