U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2006
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
-------- --------
Commission file Number 0-16109
A.P. PHARMA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-2875566
- ------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
123 Saginaw Drive, Redwood City, CA 94063
------------------------------------------
(Address of principal executive offices)
(650) 366-2626
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See
definition of "accelerated filer and large accelerated filer" in
Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
---- ----
Non-accelerated filer [X ]
----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.)
Yes [ ] No [X ]
---- ----
At October 31, 2006, the number of outstanding shares of the Company's
common stock, par value $.01, was 25,423,663.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Balance Sheets as of September 30, 2006
and December 31, 2005
Condensed Statements of Operations for the three
and nine months ended September 30, 2006 and 2005
Condensed Statements of Cash Flows for the nine
months ended September 30, 2006 and 2005
Notes to Condensed Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
ITEM 4. Controls and Procedures
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
ITEM 6. Exhibits
Signatures
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. Financial Statements:
---------------------
A.P. PHARMA, INC.
- -----------------
CONDENSED BALANCE SHEETS
(in thousands)
- ------------------------
September 30, December 31,
2006 2005
------------- ------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 3,769 $ 790
Marketable securities 14,304 5,019
Accounts receivable, net 75 1,519
Prepaid expenses and other 743 320
------ ------
Total current assets 18,891 7,648
Property and equipment, net 953 1,164
Other long-term assets 105 157
------ ------
Total assets $ 19,949 $ 8,969
====== ======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 357 $ 614
Accrued clinical trial expenses 988 892
Accrued disposition costs 276 248
Other accrued expenses 799 1,012
------ ------
Total current liabilities 2,420 2,766
------ ------
Stockholders' equity:
Common stock 99,651 99,248
Accumulated deficit (82,097) (93,029)
Accumulated other comprehensive
loss (25) (16)
------ ------
Total stockholders' equity 17,529 6,203
------ ------
Total liabilities and stockholders'
equity $ 19,949 $ 8,969
====== ======
See accompanying notes to condensed financial statements.
A.P. PHARMA, INC.
- -----------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------
(in thousands, except per share amounts)
- ---------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
2006 2005 2006 2005
---- ---- ---- ----
Royalties $ -- $ 1,334 $ -- $ 3,803
Contract revenue -- 3 -- 144
------ ------ ------ ------
Total revenue -- 1,337 -- 3,947
Operating expenses:
Research & development 3,118 2,306 10,443 7,205
General & administrative 830 868 2,695 2,540
------ ------ ------ ------
Total operating expenses 3,948 3,174 13,138 9,745
------ ------ ------ ------
Operating loss (3,948) (1,837) (13,138) (5,798)
Interest income, net 244 74 786 221
Gain on sale of interest in royalties -- -- 23,429 --
Other expense, net (49) (1) (53) --
------ ------ ------ ------
Income (loss) from continuing
operations (3,753) (1,764) 11,024 (5,577)
Income (loss) from discontinued
operations (64) 20 (92) (30)
------ ------ ------ ------
Net income (loss) $(3,817) $(1,744) $10,932 $(5,607)
====== ====== ====== ======
Basic earnings (loss) per share:
Income (Loss) from continuing
operations $ (0.15) $ (0.07) $ 0.44 $ (0.22)
====== ====== ====== ======
Net income (loss) $ (0.15) $ (0.07) $ 0.43 $ (0.22)
====== ====== ====== ======
Diluted earnings (loss) per share:
Income (Loss) from continuing
operations $ (0.15) $ (0.07) $ 0.43 $ (0.22)
====== ====== ====== ======
Net income (loss) $ (0.15) $ (0.07) $ 0.43 $ (0.22)
====== ====== ====== ======
Weighted average common shares
outstanding-basic 25,278 25,145 25,246 25,095
====== ====== ====== ======
Weighted average common shares
outstanding-diluted 25,278 25,145 25,435 25,095
====== ====== ====== ======
See accompanying notes to condensed financial statements.
A.P. PHARMA, INC.
- -----------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------
(in thousands)
- --------------
For the Nine months ended
September 30,
-------------------------
2006 2005
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 10,932 $(5,607)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Loss from discontinued
operations 92 30
Loss on sale of marketable
securities 1 4
Depreciation and amortization 299 190
SFAS123R stock compensation expense 240 --
Stock and stock option compensation
awards to non-employees 79 89
Restricted stock awards 38 16
Amortization of premium/discount
and accretion of marketable
securities (22) 43
Changes in operating assets and
liabilities:
Accounts receivable 1,388 43
Prepaid expenses and other
current assets (423) 58
Other long-term assets 56 112
Accounts payable (257) 246
Accrued clinical trial expenses 96 (873)
Other accrued expenses (213) 203
------ ------
Net cash provided by (used in)
continuing operating activities 12,306 (5,446)
Net cash provided by (used in)
discontinued operations (11) 88
Cash flows from investing activities:
Purchases of property and equipment (88) (173)
Purchases of marketable securities (14,701) (8,113)
Maturities of marketable debt
securities 1,800 8,300
Sales of marketable securities 3,628 4,439
------ ------
Net cash provided by (used in)
investing activities (9,361) 4,453
Cash flows from financing activities:
Proceeds from the exercise of stock
options 11 22
Proceeds from issuance of shares under
Employee Stock Purchase Plan 34 53
Proceeds from issuance of restricted
stock -- 1
------ ------
Net cash provided by financing
activities 45 76
Net increase (decrease) in cash and
cash equivalents 2,979 (829)
Cash and cash equivalents, beginning
of the period 790 3,110
------ ------
Cash and cash equivalents, end
of the period $ 3,769 $ 2,281
====== ======
See accompanying notes to condensed financial statements.
A.P. PHARMA, INC.
- -----------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
- -----------------------------------
SEPTEMBER 30, 2006 and 2005 (UNAUDITED)
- ---------------------------------------
(1) Basis of Presentation
---------------------
A.P. Pharma, Inc. (the "Company", "we", "our", or "us") 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 commercializtion of its
bioerodible injectable and implantable systems under the trade
name Biochronomer(TM). Initial target areas of application for
the Company's drug delivery technology include anti-nausea,
pain mangagement, anti-inflammation and DNA/RNAI applications.
The accompanying unaudited condensed financial statements have
been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP") for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP
for complete financial statements. All adjustments (all of
which are of a normal recurring nature) considered necessary
for a fair presentation have been included. Operating results
for the three and nine months ended September 30, 2006 are not
indicative of the results that may be expected for the year
ending December 31, 2006 or for any other period. The
condensed balance sheet as of December 31, 2005 has been
derived from the audited financial statements as of that date
but it does not include all of the information and notes
required by GAAP. These condensed financial statements and the
notes thereto should be read in conjunction with the audited
financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2005 filed
with the Securities and Exchange Commission (the "SEC") on
March 31, 2006 (our "2005 10-K").
Summary of Critical Accounting Policies
- ---------------------------------------
Except for the adoption of FAS 123(R) (see Stock-Based
Compensation) there have been no significant changes in our
critical accounting policies during the nine months ended
September 30, 2006 compared to those previously disclosed in
our 2005 10-K.
Use of Estimates
- ----------------
The preparation of our financial statements in conformity with
GAAP requires management to make estimates and assumptions that
affect the amounts reported in our financial statements and
accompanying notes. Estimates were made relating to useful
lives of fixed assets, valuation allowances, impairment of
assets, accrued clinical and preclinical expenses, valuation of
stock-based compensation and contingencies. Actual results
could differ materially from those estimates.
Revenue Recognition
- -------------------
Our revenue arrangements with multiple deliverables are divided
into separate units of accounting if certain criteria are met,
including whether the delivered element has stand-alone value
to the customer and whether there is objective and reliable
evidence of the fair value of the undelivered elements. The
consideration we receive is allocated among the separate units
based on their respective fair values, and the applicable
revenue recognition criteria are considered separately for each
of the separate units. Advance payments received in excess of
amounts earned are classified as deferred revenue until earned.
* Royalties
Royalties from licensees are based on third-party sales of
licensed products or technologies and recorded as earned in
accordance with contract terms when third-party results can
be reliably determined and collectibility is reasonably
assured.
Generally, contractually required minimum royalties are
recorded ratably throughout the contractual period.
Royalties in excess of minimum royalties are recognized as
earned when the related product is shipped to the end
customer by our licensees based on information provided to
us by our licensees.
* License Fees
Licensing agreements generally provide for periodic minimum
payments, royalties, and/or non-refundable license fees.
These licensing agreements typically require a non-
refundable license fee and allow partners to sell our
proprietary products in a defined field or territory for a
defined period. License agreements provide for the Company
to earn future revenue through royalty payments. These non-
refundable license fees are initially reported as deferred
revenues and recognized as revenues over the estimated life
of the product to which they relate as we have continuing
involvement with licensees until the related product is
discontinued or the related patents expire, whichever is
earlier. License fees received in connection with
arrangements where we have no continuing involvement are
recognized as revenue when the amounts are received or when
collectibility is assured, whichever is earlier. No such
fees were recorded during the nine months ended September
30, 2006.
A milestone payment is a payment made by a third party or
corporate partner to us upon the achievement of a
predetermined milestone as defined in a legally binding
contract. Milestone payments are recognized as license fees
revenue when the milestone event has occurred and we have
completed all milestone related services such that the
milestone payment is currently due and is non-refundable.
No such fees were recorded during the nine months ended
September 30, 2006.
* Contract Revenues
Contract revenues relate to research and development
arrangements that generally provide for the Company to
invoice research and development fees based on full-time
equivalent hours for each project. Revenues from these
arrangements are recognized as the related development costs
are incurred. These revenues approximate the costs
incurred. No such revenues were recorded during the nine
months ended September 30, 2006.
Sale of Royalty Revenue
-----------------------
In January 2006, we completed the sale of our rights to
royalties on sales of Retin-A Micro(R) and Carac(R) for up to
$30 million. We received proceeds of $25 million upon the
closing of the transaction and may receive up to an additional
$5 million based on the satisfaction of certain predetermined
milestones. The royalty interest agreement was entered into by
the parties in January 2006, but the effective date of the sale
of the royalty interest was October 1, 2005. The royalties
recognized by the Company from October 1, 2005 through December
31, 2005 were accounted for as an offset against the $25
million gain.
Cash Equivalents and Short-term Investments
- -------------------------------------------
We consider all short-term investments in debt securities which
have original maturities of less than three months at date of
purchase to be cash equivalents. Investments which have
original maturities of three months or longer are classified as
marketable securities in the accompanying condensed balance
sheets. Marketable securities are classified as available for
sale at the time of purchase and carried at fair value.
Unrealized gains or losses, if any, are recorded as other
comprehensive income or loss in stockholders' equity.
Unrealized losses recorded as of September 30, 2006 were
$25,000.
Accrued Disposition Costs
- -------------------------
Costs relating to disposal of discontinued operations are
reported as accrued disposition costs in the accompanying
condensed balance sheets. Accrued disposition costs include
severance costs and gross profit guarantees.
Concentrations of Credit Risk
- -----------------------------
Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of cash
equivalents and marketable securities. We invest excess cash
in a variety of high grade short-term, interest-bearing
securities. This diversification of risk is consistent with
our policy to preserve principal and to maintain liquidity. In
consequence, we do not believe concentrations of credit risk
are an issue.
Segment and Geographic Information
- ----------------------------------
Our operations are confined to a single business segment, the
design and commercialization of polymer technologies for
pharmaceutical and other applications. Substantially all of
our revenues have been derived from domestic customers.
Stock-Based Compensation
- ------------------------
Refer to Note 2 "Stock-Based Compensation" and Note 8
Stockholders' Equity in our 2005 10-K for further information
regarding our adoption of SFAS 123(R) and our stock-based
compensation arrangements, including related disclosures
required upon the adoption of SFAS 123(R). On January 1, 2006,
we adopted the provisions of Financial Accounting Standards
Board Statement No. 123R, "Share-Based Payment" (SFAS 123R).
SFAS 123R revised SFAS 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS 123R requires companies
to measure and recognize compensation expense for all employee
share-based payments at fair value over the service period
underlying the arrangement. Accordingly, we are required to
record the grant-date or purchase-date fair value of stock
options issued to employees and employee stock purchases. We
have recorded the compensation expense for stock options issued
to non-employees and restricted stock awards to employees and
directors. Compensation related to options granted to non-
employees is periodically remeasured as earned. We adopted SFAS
123R using the "modified prospective" method, whereby fair
value of all previously-granted employee share-based
arrangements remaining unvested at January 1, 2006, based on
the grant-date value estimated in accordance with the pro forma
provisions of SFAS 123, and all grants made on or after January
1, 2006, based on fair value estimated in accordance with SFAS
123(R), have been included in our determination of share-based
compensation expense for the three and nine months ended
September 30, 2006. We have not restated our operating results
for the three and nine months ended September 30, 2005 to
reflect charges for the fair value of share-based arrangements.
The fair value of each employee and director grant of options
to purchase common stock is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants for the quarter
ended September 30, 2006: 1) risk-free interest rate of 5.01%
for stock options and 4.95% for employee stock purchase plan;
2) expected dividend yield of 0% for both stock options and
employee stock purchase plan; 3) expected holding period of
6.25 years based on the simplified method provided in Staff
Accounting Bulletin No. 107 for "plain vanilla options" and
expected term of 1.25 years for employee stock purchase plan
based on weighted-average purchase period of the plan; 4)
expected volatility of 240% for stock options and 71% for
employee stock purchase plan based on the Company's historical
stock prices; and 5) an estimated forfeiture rate of 4.2% of
the options granted based on historical data.
The SFAS 123R share-based compensation expenses recorded for
awards granted under the stock option plans and employee stock
purchase plan were approximately $74,000 and $240,000, net of
estimated forfeitures, for the three and nine months ended
September 30, 2006. The share-based compensation expense of
$99,000 and $141,000 was recorded in research and development
expense and general and administrative expense for the nine
months ended September 30, 2006, respectively. No tax benefit
was recognized related to share-based compensation expense
since we have incurred operating losses and we have established
a full valuation allowance to offset all the potential tax
benefits associated with our deferred tax assets.
During the quarter ended September 30, 2006 we did not grant
any restricted stock awards. As of September 30, 2006, we had
a total of 235,000 shares of restricted stock awards granted to
employees and directors, of which 135,000 shares have been
vested. The compensation costs charged as operating expenses
for restricted stock awards were $19,000 and $38,000 for the
three and nine months ended September 30, 2006, respectively,
and $8,000 and $16,000 for the three and nine months ended
September 30, 2005.
During the quarter ended September 30, 2006 we granted 25,000
options to directors to purchase common stock. The following
table summarizes option activity for the nine months ended
September 30, 2006:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
------ -------- ----------- ---------
Outstanding at January 1, 2006 2,165,966 $3.40
Granted 214,940 $1.62
Exercised (1,797) $1.55
Expired and forfeited (11,335) $1.66
---------
Outstanding at March 31, 2006 2,367,774 $3.25 5.5 $429,453
Granted 50,000 $1.74
Exercised (1,090) $1.05
Expired and forfeited (69,421) $9.10
---------
Outstanding at June 30, 2006 2,347,263 $3.04 5.5 $239,426
Granted 25,000 $0.89
Exercised (6,719) $1.07
Expired (161,542) $5.15
Forfeited (5,448) $1.53
---------
Outstanding at September 30, 2006 2,198,554 $2.87 5.48 $ 7,285
=========
Options exercisable at
September 30, 2006 1,776,054 $3.17 4.7 $ 2,251
As of September 30, 2006 there was approximately $497,741 of
total unrecognized compensation expense related to nonvested
stock options. This expense is expected to be recognized over
a weighted-average period of 1.28 years.
Prior to January 1, 2006, we accounted for employee stock-based
grants in accordance with SFAS No. 123, "Accounting for Stock-
Based Compensation," as amended by SFAS No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure". We
have provided below the pro forma disclosures of the effect on
net loss and net loss per share as if SFAS No. 123 had been
applied in measuring compensation expense for the three and
nine months ended September 30, 2005. Dollars in thousands
except per share amounts.
Three Months Nine Months
Ended Ended
September 30, September 30,
2005 2005
------------- -------------
Net loss, as reported $(1,744) $(5,607)
Deduct:
Stock-based employee
compensation expense
determined under FAS No. 123 (92) (251)
------ ------
Pro forma net loss $(1,836) $(5,858)
====== ======
Basic and diluted loss per
share, as reported $ (0.07) $ (0.22)
====== ======
Basic and diluted pro forma
loss per share $ (0.07) $ (0.23)
====== ======
Fair values of awards granted under the stock option plans and
employee stock purchase plan were estimated at grant date using
the Black-Scholes option pricing model. For pro forma
disclosure, the estimated fair value of the options is
amortized to expense over the vesting period of the options
using the straight line method. Forfeitures have been
accounted for in the period in which they occurred. The
multiple option approach is used to value the purchase rights
granted under the employee stock purchase plan. We used the
following assumptions for the three and nine months ended
September 30, 2005:
Three Months Nine Months
Ended Ended
September 30, September 30,
2005 2005
------------- -------------
Expected life in years (from
grant date):
Stock options 5 5
Employee stock purchase plan 1.5 - 2 1.5 - 2
Interest rate:
Stock options 4.2% 4%
Employee stock purchase plan 2.55%-3.63% 1.47%-3.63%
Volatility:
Stock options 78% 78%
Employee stock purchase plan 84%-94% 59%-94%
Expected dividend yield: 0% 0%
Reclassifications
- -----------------
Certain amounts in the prior year's condensed financial
statements have been reclassified to conform with the current
presentation of the financial statements. Amortization of
premium/discount and accretion of marketable securities in the
prior year's quarter have been reclassified from investing
activities to operating activities on the condensed statements
of cash flows.
(2) Earnings (Loss) Per Share Information
-----------------------------------
Basic earnings (loss) per share is computed by dividing net
income (loss) by the weighted-average number of common shares
outstanding. Because the Company is in a net loss position for
the three months ended September 30, 2006 and 2005 and nine
months ended September 30, 2005, diluted earnings per share is
also calculated using the weighted average number of common
shares outstanding excluding the effect of options which are
antidilutive. For the nine months ended September 30, 2006,
diluted earnings per share is calculated using the weighted
average number of common shares outstanding and other dilutive
securities.
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share
computations (in thousands):
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2006 2005 2006 2005
---- ---- ---- ----
Numerator:
Net income (loss) $(3,817) $(1,744) $10,932 $(5,607)
====== ====== ====== ======
Denominator:
Weighted-average shares
outstanding used to compute
basic earnings per share 25,278 25,145 25,246 25,095
Effect of dilutive stock options,
employee stock purchase
and restricted stock awards -- -- 189 --
------ ------ ------ ------
Weighted-average shares
outstanding and dilutive
securities used to compute
diluted earnings per share 25,278 25,145 25,435 25,095
====== ====== ====== ======
(3) Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) for the three and nine months ended
September 30, 2006 and 2005 consists of the following (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
---- ---- ---- ----
Net income (loss) $(3,817) $(1,744) $10,932 $(5,607)
Unrealized gains (losses) on
available-for-sale marketable
securities 33 (6) (9) (3)
------ ------ ------ ------
Comprehensive income (loss) $(3,784) $(1,750) $10,923 $(5,610)
====== ====== ====== ======
(4) Stockholders' Equity
--------------------
During the nine months ended September 30, 2006, 108,887 shares
of common stock were issued primarily through the exercise of
stock options, employee stock purchases, issuance of restricted
stock awards and for the payment of directors' fees.
(5) Discontinued Operations
-----------------------
We completed the sale of certain assets of our Analytical
Standards division as well as certain technology rights for our
topical pharmaceutical and cosmeceutical product lines and
other assets ("cosmeceutical and toiletry business") in
February 2003 and July 2000, respectively.
The Analytical Standards division and cosmeceutical and
toiletry business are reported as discontinued operations for
all periods presented in the accompanying condensed statements
of operations.
Income (loss) from discontinued operations represents the
income (loss) attributable to our Analytical Standards division
that was sold to GFS Chemicals on February 13, 2003, and
changes in estimates for our cosmeceutical and toiletry
business that was sold to RP Scherer on July 25, 2000, as
follows (in thousands):
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------- -------------
2006 2005 2006 2005
---- ---- ---- ----
Analytical Standards Division
- -----------------------------
Royalties earned in excess of
minimum amount recorded $ 16 $ 29 $ 38 $ 42
Cosmeceutical and Toiletry Business
- -----------------------------------
Change in estimates for gross
profit guarantees (80) (9) (130) (72)
---- ---- ---- ----
Total loss from discontinued
operations $ (64) $ (20) $ (92) $ (30)
==== ==== ==== ====
Basic and diluted earnings (loss) per common share from
discontinued operations were less than $0.01 per share for the
nine months ended September 30, 2006 and 2005, respectively.
Liabilities related to the discontinued operations at September
30, 2006 in the amount of $276,000 include severance costs and
accruals for gross profit guarantees. These liabilities are
reported as accrued disposition costs in the accompanying
condensed balance sheets.
Under the terms of the agreement with RP Scherer, we guaranteed
a minimum gross profit percentage on RP Scherer's combined
sales of products to Ortho Neutrogena and Dermik ("Gross Profit
Guaranty"). The guaranty period commenced on July 1, 2000 and
ends on the earlier of July 1, 2010 or the end of two
consecutive guaranty periods where the combined gross profit on
sales to Ortho and Dermik equals or exceeds the guaranteed
gross profit. We expect the annual Gross Profit Guaranty
payments to range from approximately $100,000 to $150,000 for
the remainder of the guaranty period. As the minimum amount of
Gross Profit Guaranty due is based on sales by RP Scherer and
can not be estimated, no accrual has been recorded relating to
sales in future periods.
Cash provided by (used in) discontinued operations primarily
relates to royalty payments received from GFS Chemicals for the
sale of certain products offset by a payment of $100,000
relating to the gross profit guaranty.
A summary of activity for liabilities related to discontinued
operations for the nine months ended September 30, 2006
follows: (in thousands)
Accrual at December 31, 2005 $248
Additional accrual for gross profit
guaranty 130
Payment for gross profit guaranty (100)
Payment under severance agreement (2)
---
Accrual at September 30, 2006 $276
===
(6) Subsequent Event
----------------
On October 2, 2006, we announced that we had granted an
exclusive license to RHEI Pharmaceuticals to develop and sell
APF530 in Greater China which includes China, Taiwan, Hong Kong
and Macau. While specific license terms were not disclosed,
the agreement includes an upfront payment and provisions for
milestone payments and double digit percentage royalties on
future net sales. APF530 is in Phase 3 clinical trial for the
prevention of acute and delayed chemotherapy-induced nausea and
vomiting.
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (dollars in thousands unless
------------------------------------------------------
otherwise indicated)
--------------------
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements" as defined by
the Private Securities Reform Act of 1995. These forward-looking
statements involve risks and uncertainties including uncertainties
associated with timely development, approval, launch and acceptance
of new products, satisfactory completion of clinical studies,
establishment of new corporate alliances, progress in research and
development programs and other risks and uncertainties identified in
the Company's filings with the Securities and Exchange Commission.
We caution investors that forward-looking statements reflect our
analysis only on their stated date. We do not intend to update them
except as required by law.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
See Note 1 of Notes to Condensed Financial Statements. Except for
the adoption of FAS 123(R), we believe that our current critical
policies and estimates have not changed from those discussed in our
2005 10-K.
Results of Operations for the Three and Nine Months Ended September
- -------------------------------------------------------------------
30, 2006 and 2005
- -----------------
Our revenue has been derived principally from royalties and contract
revenues. Under strategic alliance arrangements entered into with
certain companies, we received non-refundable upfront fees,
milestone payments and royalties based on third party product sales.
In January 2006, we completed the sale of our rights to royalties on
sales of Retin-A Micro(R) and Carac(R) for up to $30 million. We
received proceeds of $25 million upon the closing of the transaction
and may receive up to an additional $5 million based on the
satisfaction of certain predetermined milestones. The royalty
interest agreement was entered into by the parties in January 2006,
but the effective date of the sale of the royalty interest was
October 1, 2005. The royalties recognized by the Company from
October 1, 2005 through December 31, 2005 were accounted for as an
offset against the $25 million gain. As a result of this
transaction, royalties for the third quarter of 2006 decreased to $0
from $1.3 million in the corresponding quarter of the prior year and
decreased in the first nine months of 2006 to $0 from $3.8 million
in the first nine months of 2005. We will not record additional
royalty revenue on sales of Retin-A Micro and Carac in future
periods.
Contract revenue, which is derived from work performed under
collaborative research and development arrangements, decreased from
$3 to $0 in the third quarter of 2006 and decreased from $144 to $0
in the first nine months of 2006. The amount of contract revenue
varies from period to period depending on the level of activity
requested of us by our collaborators. Therefore we cannot predict
the amount of contract revenue in future periods.
Research and development expense for the third quarter of 2006
increased by $812 from $2.3 million to $3.1 million due mainly to
expenditures in the third quarter on our Phase 3 trial program for
APF530, our product candidate for the prevention of chemotherapy-
induced nausea and vomiting. Research and development expense for
the first nine months of 2006 increased by $3.2 million from $7.2
million to $10.4 million due mainly to the preparations and
initiation of our Phase 3 trial program for APF530. We expect
research and development expense to increase in the last quarter of
2006 as we continue to conduct, at an accelerated pace, our Phase 3
trial program for APF530.
General and administrative expense decreased for the third quarter
of 2006 by $38 from $868 to $830 and increased for the first nine
months of 2006 by $155 from $2.5 million to $2.7 million due
primarily to outside consultant fees. We expect general and
administrative expense for the fourth quarter of 2006 to remain
relatively constant with the first three quarters of the year.
We expect our non-cash operating expenses for employee share-based
compensation for the fourth quarter of 2006 to remain relatively
constant with the first three quarters of the year.
Interest income, net, increased for the third quarter of 2006 by
$170 to $244 from $74 and for the first nine months of 2006 by $565
from $221 to $786 due to higher interest rates earned on higher
average cash, cash equivalents and marketable securities balances.
Loss from discontinued operations represents the net loss
attributable to the Analytical Standards division which was sold to
GFS Chemicals, Inc. in February 2003 and the cosmeceutical and
toiletries business which was sold to RP Scherer Corporation in July
2000. Net loss from discontinued operations totaled $64 for the
three months ended September 30, 2006, compared with a net loss of
$20 in the three months ended September 30, 2005. For the nine
months ended September 30, 2006, net loss from discontinued
operations increased by $61 to $91 from $30 in the year-ago period.
Capital Resources and Liquidity
- -------------------------------
Cash, cash equivalents and marketable securities increased by $12.3
million to $18.1 million at September 30, 2006 from $5.8 million at
December 31, 2005 due to the cash received from the sale of our
interest in royalties on sales of Retin-A Micro and Carac in January
2006, partially offset by cash used in operating activities.
Net cash provided by continuing operating activities for the nine
months ended September 30, 2006 was $12.3 million, compared to net
cash of $5.4 million used in continuing operating activities for the
nine months ended September 30, 2005. The increase in net cash
provided by operating activities from 2005 to 2006 was mainly due to
proceeds from the sale of our interest in royalties in January 2006.
Net cash used in investing activities for the nine months ended
September 30, 2006 was $9.4 million compared to net cash of $4.5
million provided by investing activities for the nine months ended
September 30, 2005. The increase in the cash used in investing
activities was primarily due to the purchases of $14.7 million of
marketable securities.
Our future capital requirements will depend on numerous factors
including, among others, our ability to enter into collaborative
research and development and licensing agreements; progress of
product candidates in preclinical and clinical trials; investment in
new research and development programs; time required to gain
regulatory approvals; resources that we devote to self-funded
products; potential acquisitions of technology, product candidates
or businesses; and the costs of defending or prosecuting any patent
opposition or litigation necessary to protect our proprietary
technology.
To date, we have financed our operations including technology and
product research and development, primarily through income from
collaborative research and development fees, the proceeds received
from the sale of our Analytical Standards division, the sale of our
cosmeceutical and toiletry business and the sale of our interest in
royalties on sales of Retin-A Micro(R) and Carac(R), the sale of
common stock in June 2004, and interest earned on short-term
investments. In October 2006, we granted an exclusive license to
RHEI Pharmaceuticals to develop and sell APF530 in Greater China
which includes China, Taiwan, Hong Kong and Macau. While specific
license terms were not disclosed, the agreement includes an upfront
payment and provisions for milestone payments and double digit
percentage royalties on future net sales.
We expect that existing cash, cash equivalents and marketable
securities, together with interest income, receipts from the sale of
our interest in royalties and other revenue-producing activities
including license fees will be sufficient to meet our cash needs
through the first quarter of 2007. We are actively seeking partners
in the U.S. and abroad to take over the funding of the Phase 3
clinical trial of APF530, and to commercialize the product upon
approval by the FDA. Also, we are currently investigating various
financing options to fund our continued development of APF530 and
potentially additional compounds. We may be unable to raise
sufficient additional capital when we need it or to raise capital on
favorable terms. The sale of equity or convertible debt securities
in the future may be dilutive to our stockholders, and debt
financing arrangements may require us to pledge certain assets and
enter into covenants that could restrict certain business activities
or our ability to incur further indebtedness and may contain other
terms that are not favorable to us or our stockholders. If we are
unable to obtain adequate funds on reasonable terms, we may be
required to curtail operations significantly or to obtain funds by
entering into financing, supply or collaboration agreements on
unattractive terms.
Below is a summary of fixed payments related to certain contractual
obligations (in thousands). This table excludes amounts already
recorded on our condensed balance sheet as current liabilities at
September 30, 2006.
Less More
than 2 to 3 4 to 5 than
Total 1 year years years 5 years
----- ------ ------ ------ -------
Operating Leases $2,367 $508 $1,053 $806 $ --
===== === ===== === ===
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
----------------------------------------------------------
Since December 31, 2005, there have been no material changes in the
Company's market risk exposure.
ITEM 4. Controls and Procedures
-----------------------
Evaluation of disclosure controls and procedures: We carried out an
evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operations
of our disclosure controls and procedures pursuant to Rule 13a-15(b)
of the Exchange Act. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that as of
September 30, 2006, the end of period covered by this report, our
disclosure controls and procedures were effective at the reasonable
assurance level to alert them in a timely manner to material
information relating to the Company required to be included in our
Exchange Act filings.
Changes in internal controls: During the three months ended
September 30, 2006, there have been no significant changes in our
internal control over financial reporting that materially affected,
or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
-----------------
ITEM 1A. Risk Factors
There have been no material changes to the risk factors set forth
in the "RISK FACTORS" section of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.
ITEM 6. Exhibits
Exhibit 10.AA License Agreement, dated as of October 1, 2006,
between A.P. Pharma, Inc. and RHEI PHARMACEUTICALS, INC. Confidential
treatment has been requested with respect to the omitted portions of
this exhibit.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Rules 13A-14(a) Promulgated under the Securities Exchange Act of 1934
as amended.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Rules 13A-14(a) Promulgated under the Securities Exchange Act of 1934
as amended.
Exhibit 32 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
A.P. PHARMA, INC.
Date: November 7, 2006 By: /S/ Gregory H. Turnbull
------------------ -------------------------
Gregory H. Turnbull
President and Chief
Executive Officer
Date: November 7, 2006 By: /S/ Stephen C. Whiteford
------------------ --------------------------
Stephen C. Whiteford
Vice President, Finance and
Chief Financial Officer
Exhibit 10.AA
CONFIDENTIAL TREATMENT REQUESTED
LICENSE AGREEMENT
-----------------
A.P. PHARMA, INC. ("APP")
a corporation organized under the laws of Delaware
with corporate headquarters at
123 Saginaw Drive
Redwood City, California 94063
AND:
RHEI PHARMACEUTICALS, INC. ("RHEI")
a corporation organized under the laws of Delaware
with corporate headquarters at
300 George Street
New Haven, Connecticut 06511
LICENSE AGREEMENT
-----------------
THIS AGREEMENT is made as of the 1st day of October, 2006
("Effective Date"), by and between A.P. PHARMA, INC. ("APP") and
RHEI PHARMACEUTICALS, INC. ("RHEI").
RECITALS
A. APP is the owner of original processes, Patent Rights
and Know How (each as defined herein) covering the Licensed
Product (as defined herein);
B. RHEI is a specialty pharmaceutical company that, among
other things, licenses, registers and commercializes
pharmaceutical products in the Territory;
C. APP has developed the Licensed Product and has
initiated clinical trials in the United States for the purpose
of obtaining approval to market the Licensed Product for the
treatment of patients undergoing moderately or highly emetogenic
chemotherapy;
D. RHEI desires to obtain an exclusive license under
APP's proprietary rights, including the Patent Rights and Know
How, to develop, obtain Regulatory Approval and commercialize
the Licensed Product in the Territory; and
E. APP is willing to grant such license to RHEI and also
to permit RHEI to use the Data set forth on Schedule 4.2 for the
purpose of obtaining Regulatory Approval of the Product.
It is therefore agreed as follows:
1. DEFINITIONS.
1.1 The terms defined in this Article 1 shall, for all
purposes of this Agreement, have the following meanings:
1.2 "Active Ingredient" shall mean the chemical compound
known as granisetron.
1.3 "Affiliate" shall mean any corporation or other entity
that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with the
designated party but only for so long as such relationship
exists. For the purposes of this section, "Control" shall mean
ownership of at least fifty percent (or such lesser percent as
may be the maximum that may be owned by foreign interests
pursuant to the applicable laws of the country of incorporation)
of the shares of stock entitled to vote for directors in the
case of a corporation and at least fifty percent (or such lesser
percent as may be the maximum that may be owned pursuant to the
applicable laws of the country of domicile) of the equity or
interests in profits in the case of a business entity other than
a corporation.
1.4 "Applicable Permits" shall mean all permits or
approvals necessary to market the Licensed Product in any
country, including without limitation, permits or approvals
granted by the FDA and any pricing approvals.
1.5 "Application for Regulatory Approval" means an
application made to a Regulatory Authority in any country for
permission to Market Licensed Product in that country, and
includes without limitation a New Drug Application (an "NDA")
and an Abbreviated New Drug Application (an "ANDA") submitted to
the FDA or an equivalent application submitted to an equivalent
Regulatory Authority in the Territory.
1.6 "Biochronomer formulation" shall mean APP's delivery
system described and claimed in the Patent Rights listed on
Schedule 1.24 and any and all improvements thereto that APP is
legally entitled to license and related Know How and Data.
1.7 "Clinical Information" means clinical, pharmacology,
toxicology, safety, efficacy, and Phase I, II and III Data set
forth on Schedule 4.2 or similar information of a Party,
relating to the Licensed Product.
1.8 "Commercially Reasonable Efforts" means efforts of a
degree and kind, including the level of attention and care and
providing of funding and manpower, consistent with the exercise
of good business judgment for a company similarly situated as
APP or RHEI, as the case may be, and in the case of RHEI, such
efforts will in no event be less than the efforts that RHEI
applies with respect to its own products (including, without
limitation, in-licensed products) of similar commercial
potential and stage of product life cycle.
1.9 "Competition" shall mean that one or more third
parties is marketing in the Territory, for use in humans, a
long-acting poly(ortho ester) formulation of the Active
Ingredient for subcutaneous administration, and cannot be
legally restrained from such marketing.
1.10 "Confidential Information" shall mean all proprietary
materials or other information (whether or not patentable)
regarding a Party's technology, products, business information
or objectives, including without limitation, Data, Know-How,
Clinical Information, CMC, Manufacturing and Marketing
information, which is designated as confidential in writing by
the disclosing Party, whether by letter or by the use of an
appropriate stamp or legend, prior to or at the time any such
material, know-how or other information is disclosed by the
disclosing Party to the other Party. Notwithstanding the
foregoing to the contrary, materials, know-how or other
information which is orally, electronically, visually, or
otherwise disclosed by a Party, or is disclosed in writing
without an appropriate letter, stamp or legend, shall constitute
Confidential Information of a Party if the disclosing Party,
within 30 days after such disclosure, delivers to the other
Party a written document or documents describing the materials
or other information and referencing the place and date of such
oral, visual, electronic, written or other disclosure and the
names of the persons to whom such disclosure was made.
1.11 "Data" shall mean and include the data set forth on
Schedule 4.2 and any other Clinical Information concerning the
Licensed Product necessary or useful for seeking and obtaining
Regulatory Approval and Applicable Permits in the Field in the
United States.
1.12 "Effective Date" shall mean the date first written on
page 1 of this Agreement.
1.13 "FDA" shall mean the United States Food and Drug
Administration or any successor United States governmental
agency performing similar functions with respect to
pharmaceutical products.
1.14 "Field" shall mean any and all human applications.
1.15 "Invention" means any improvement to the Licensed
Product, any new performance characteristic of the Licensed
Product, any new process used to Manufacture the Licensed
Product, or any step or steps in any such process.
1.16 "Know How" shall mean all APP inventions, discoveries,
trade secrets, improvements and information not in the public
domain, whether or not patented or patentable (but excluding
Patent Rights), together with all experience, data, formulas,
procedures and results, and improvements thereon, now existing
or hereafter developed or acquired (by APP) during the term of
and in connection with this Agreement and proprietary or
licensed with right to sublicense to APP, which relate to or are
useful for the development, Marketing or use of Licensed
Product.
1.17 "Knowledge" or "knowledge" shall mean, with respect to
either Party, the actual knowledge of its executive officers
and/or managers after having taken reasonable steps to be
informed of or ascertain the existence or lack thereof of any
matter.
1.18 "Licensed Product" shall mean a formulation of the
Active Ingredient with the Biochronomer formulation, including
the formulation designated by APP as APF530.
1.19 "Manufacture" means to process, prepare, make and
analyze and Manufacturing and Manufactured have a corresponding
meaning.
1.20 "Market" means to promote, distribute, package, label,
market, advertise, sell or offer to sell, and Marketing has a
corresponding meaning.
1.21 "NDA" shall mean a New Drug Application or equivalent
application for approval to market submitted to the FDA or an
equivalent regulatory agency in the Territory.
1.22 "Net Sales" shall mean the total of all amounts
invoiced by RHEI and its Affiliates for Licensed Product sold to
independent, unrelated third parties in the Territory in bona
fide arms length transactions, less the following deductions
actually allowed and taken by such third parties and not
otherwise recovered by or reimbursed to RHEI or its Affiliates:
(i) trade, cash and quantity discounts in such amounts as are
customary in the trade; (ii) rebates (including any retroactive
rebates), credits or other reimbursements actually paid; (iii)
taxes on sales (such as sales or use taxes) to the extent added
to the sales price and set forth separately as such in the total
amount invoiced; (iv) value added taxes when included as part of
the sales price and not refunded to the payor; (v) freight,
insurance, and other transportation charges to the extent added
to the sales price and set forth separately as such in the total
amount invoiced; (vi) amounts repaid or credited by reason of
rejections, defects or returns or because of retroactive price
reductions; and (vii) other allowances, adjustments,
reimbursements, discounts, chargebacks and rebates related to
the sale of such Licensed Product that are granted to third
parties, including governmental entities and managed care
organizations. Net Sales shall not include sales of Licensed
Product between or among RHEI and its Affiliates.
1.23 "Party" shall mean APP or RHEI, and Parties shall mean
APP and RHEI.
1.24 "Patent Rights" shall mean any patent application or
issued patent covering Licensed Product or any improvement to
Licensed Product that are owned or otherwise controlled with
right to license by APP during the term of this Agreement, in
the Territory, including any addition, continuation,
continuation in part, or division thereof or any substitute
application thereof, any reexamination, any reissue or extension
of any such patent, and any confirmation patent, registration
patent revalidation patent, or patent of addition based on any
such patent, any patents owned or controlled with right to
license by APP that dominate any of the foregoing, and includes
without limitation the patent applications set forth on Schedule
1.24.
1.25 "Regulatory Approval" shall mean the permission or
consent granted by any relevant Regulatory Authority for the
Marketing of Licensed Product in the Territory.
1.26 "Regulatory Authority" shall mean, in respect of any
country, any government or other agency responsible for the
issuance of approval to Market pharmaceutical products in or
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
sold from that country, including without limitation the FDA and
the corresponding authorities in the Territory.
1.27 "Territory" shall mean the People's Republic of China
(including without limitation Hong Kong and Macau) and Taiwan.
1.28 "US GAAP" shall mean accounting principles generally
accepted in the United States of America.
1.29 "Valid Claim" shall mean a claim of an unexpired
issued patent falling within Patent Rights, which claim shall
not have been withdrawn, cancelled, disclaimed or held invalid
by a court, tribunal, arbitrator or governmental agency of
competent jurisdiction in a final or unappealed or unappealable
decision.
2. PRODUCT DEVELOPMENT
2.1 APP represents and warrants to RHEI that APP has
commenced the development of the Licensed Product prior to the
Effective Date and that as of the Effective Date Licensed
Product is undergoing Phase III clinical trials in the United
States. After the Effective Date, RHEI shall use Commercially
Reasonable Efforts to develop on its own or on its behalf
Licensed Product in the Territory.
3. PRODUCT DEVELOPMENT COSTS
3.1 In consideration of the entering into of this
Agreement by RHEI, and the agreement by RHEI to make the license
and milestone payments required by Article 8 of this Agreement,
and to pay the royalties required by Article 11 of this
Agreement, APP agrees to carry out its obligations under this
Agreement.
3.2 Any cost required to obtain Regulatory approval and
Applicable Permits of the Licensed Product in the Territory
other than [***] under this Agreement shall be paid [***].
4. DISCLOSURE OF INFORMATION AND REPORTING
4.1 Within 30 days after the Effective Date, APP shall
disclose and deliver to RHEI APP's existing Clinical
Information. Thereafter, during the term of this Agreement,
each Party shall disclose and deliver to the other Party
Clinical Information within 30 days after the same shall become
available, including information relating to the safety of
Licensed Product as set forth in Sections 4.7-4.9 below and any
regulatory problems relating thereto, all to the extent
necessary or useful to enable the receiving Party to develop or
Market or have Marketed the Licensed Product in accordance with
its obligations under this Agreement. Clinical Information
disclosed under this Section 4.1 shall be treated by the
receiving Party as Confidential Information of the disclosing
Party in accordance with Article 7 below.
4.2 APP shall deliver to RHEI Data, in an agreed upon
form, as follows: APP shall deliver to RHEI within 30 days
after the Effective Date the final report of any studies set
forth in Schedule 4.2 and completed by APP on the Licensed
Product and thereafter within 30 days after completion of each
additional final report relating to Clinical Information. RHEI
shall be responsible at its cost for all translations of any
such Data.
4.3 Within 30 days after the Effective Date, the Parties
shall mutually determine what other Data are judged by the
Parties as necessary or useful for RHEI to commercialize the
Licensed Product in the Territory. Within 30 days of such
determination, APP shall disclose and deliver to RHEI such Data
that are existing as of the Effective Date. Thereafter, during
the term of this Agreement, APP shall disclose and deliver such
Data within 30 days after it becomes available.
Records, Reports and Inspections.
4.4 APP shall maintain records in sufficient detail and in
compliance with cGMP, GCP and GLP standards for such period
after their completion as may be required by applicable
regulations of the FDA, which records shall fully and properly
reflect all work done and all results achieved by APP in the
performance of its obligations under this Agreement. RHEI shall
have the right to notify APP if a Regulatory Authority in the
Territory requests maintenance of records that are not required
by such applicable regulations of the FDA. The Parties agree to
discuss and attempt to resolve any such request, provided,
however, that if the Parties mutually agree to undertake
additional studies or data collection or the like in order to
resolve such request, the cost will be borne by RHEI.
Once in each calendar quarter each Party shall have the right to
arrange for its employees and/or consultants involved in the
activities contemplated hereunder to confer by telephone or to
visit the other Party at its offices and laboratories during
normal business hours and upon two weeks notice, and to discuss
the progress of the development work, its results, and the
information generated, with the technical personnel of the other
Party. Until approval of the NDA or Regulatory Approval each
Party shall provide to the other Party within 30 days after the
end of the relevant period, semi-annual written reports of the
progress and results of its development work and the information
generated during the relevant reporting period.
If a Regulatory Authority in the Territory desires to conduct an
inspection or audit of APP's facility with regard to a Licensed
Product or this Agreement, APP shall permit such inspection and
agrees to cooperate with the Regulatory Authority and RHEI
during such inspection or audit. Following receipt of the
inspection or audit observations of the Regulatory Authority (a
copy of which the receiving Party will immediately provide to
the other Party if given by the Regulatory Authority), the
Parties will cooperate to prepare a response to any observation
that concerns this Agreement. The Parties agree to fully
cooperate in the preparation of such a response, including by
providing such information and documentation in a Party's
possession as may be necessary. Each Party agrees to conform its
respective activities under this Agreement to any commitments
made in such a response, except to the extent a Party believes
in good faith that such commitments violate applicable laws.
Safety Information
4.7 During the Term of this Agreement, each Party shall
promptly notify the other Party of all information required to
be reported to the FDA or the Regulatory Authority in the
Territory coming into its possession concerning side effects,
injury, toxicity or sensitivity reaction including unexpected
increased incidence and severity thereof associated with
commercial or clinical uses, studies, investigations or tests
(animal or human) with the Licensed Product ("Adverse Reaction
Reports"). Each Party shall transmit such Adverse Reaction
Reports so that they are received by the other Party within 30
days after receipt by the transmitting Party, or such other
reporting period as may be required by law. All such
communications and other safety communications shall be held in
confidence by each Party subject to the terms of Article 7
hereof.
4.8 RHEI agrees to share safety information, including
without limitation, Adverse Reaction Reports, with APP's other
licensees (if any) who agree to share such information with RHEI
and to require the same obligations of its co-promotion partners
(if any).
4.9 APP agrees to use reasonable efforts to secure the
same provision in other Licensed Product licenses granted by APP
so that safety information generated by other licensees of the
Licensed Product will be shared with RHEI.
5.1 ADDITIONAL INFORMATION FOR REGULATORY APPROVAL
5.1 APP shall provide to RHEI additional information
relating to the Licensed Product in its possession or control
that is required to support Application for Regulatory Approval
of Licensed Product in the United States that may be reasonably
necessary to enable RHEI to apply for and obtain Regulatory
Approval in the Territory for the Licensed Product and to Market
Licensed Product in the Territory. APP shall provide such
existing additional information within 30 days after the
Effective Date and thereafter promptly after such information is
available.
6. APPLICATION FOR REGULATORY APPROVAL
6.1 Provided that APP has complied in all material
respects with its obligations under this Agreement, RHEI shall
use Commercially Reasonable Efforts to file in accordance with
the timelines set forth in Schedule 6.1 (as such timelines may
be adjusted by mutual action of the Parties) at the cost of
RHEI, and in the name of RHEI, or any Affiliate of RHEI, any
Applications for Regulatory Approval required for the Licensed
Product in the Territory. APP shall reasonably cooperate with
RHEI in the filing of an Application for Regulatory Approval in
the Territory. Notwithstanding the foregoing, APP shall have
the sole right to determine when clinical trials shall be
initiated in the Territory, provided that once an Application
for Regulatory Approval has been accepted by the FDA, APP shall
be deemed to have granted to RHEI or its Affiliates the right to
initiate clinical trials in the Territory. For avoidance of
doubt, upon the Effective Date, RHEI shall have the right, but
not the obligation, to file an application to conduct a
confirmatory clinical trial for Licensed Product with any
Regulatory Authority in the Territory.
6.2 Subject only to Section 19.5, RHEI or its Affiliate
shall retain ownership of each Application for Regulatory
Approval in the Territory. Any Regulatory Approval, import
licenses, formulary listings or other licenses or approvals for
the Licensed Product in the Territory, or any agency or
instrumentality thereof authorizing import and/or sale of the
Licensed Product shall be issued in the name of RHEI or any
Affiliate of RHEI.
7. CONFIDENTIALITY.
7.1 Each of RHEI and APP shall maintain all Confidential
Information of the other Party, in confidence, and shall not at
any time disclose any such information to persons other than
their Affiliates, officers, employees, agents, consultants and
advisers with a need to know, except where permitted by this
Agreement, and only to the extent necessary for the purposes of
this Agreement. RHEI and APP shall use Confidential Information
of the other Party only to the extent necessary or permitted by
this Agreement, or required by law, including, without
limitation, as necessary in the course of seeking, enforcing or
defending patent rights, obtaining approval to Market Licensed
Products, in the course of any actual or potential financing or
in connection with any sublicensing, alliance or other
arrangement permitted under this Agreement. RHEI and APP shall
take all reasonable steps to ensure that their respective
Affiliates, agents, officers, employees, representatives,
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
consultants, advisors, permitted licensees, potential licensees
and permitted sublicensees or others entitled to receive the
disclosing Party's Confidential Information under this Agreement
maintain the obligations of confidence imposed on RHEI and APP
by this Agreement.
7.2 Section 7.1 shall not apply to any Confidential
Information that:
(a) the receiving Party can establish by written
documentation was known to it at the time of its disclosure by
the other Party;
(b) has been published or is otherwise within the
public knowledge or is generally known to the public;
(c) has come into the public domain without any
breach of this Agreement;
(d) became known or available to it from a source
having the right to make such disclosure to it and without
restriction on such disclosure to it;
(e) is disclosed to the public and is generally
available to the public as a result of compliance with any
applicable law or regulation;
(f) is disclosed as the result of publication of an
application for patent relating to the Licensed Product anywhere
in the world; or
(g) is independently developed as established by the
receiving Party without use of the disclosing Party's
Confidential Information.
7.3 Each Party acknowledges that improper use or
disclosure of information of the other Party that must be kept
in confidence under Section 7.1 above would cause substantial
harm to the other Party (in particular in potentially barring
patent protection for that Party's technology), and that such
harm could not be remedied by the payment of damages alone.
Accordingly, each Party will be entitled to preliminary and
permanent injunctive relief and other equitable relief for any
breach of this Article 7 by the other Party, without prejudice
to all other remedies available at law or in equity.
8. LICENSE AND MILESTONE PAYMENT BY RHEI.
8.1 RHEI shall make the milestone payment due on the
Effective Date by wire transfer to APP within 10 business days
after execution of this Agreement and, thereafter, by wire
transfer within 10 days after each subsequent occurrence
requiring a milestone payment, in U.S. dollars as follows:
[***]
9. LICENSE TO APP.
9.1 APP shall be entitled to use the Data generated by or
on behalf of RHEI or its Affiliates for Licensed Product at any
time after the Effective Date for the purpose of obtaining
Regulatory Approval of the Licensed Product in jurisdictions
outside of the Territory.
10. LICENSE OF PRODUCT.
10.1 APP hereby grants to RHEI an exclusive license in the
Territory under the Patent Rights and Know How to develop, have
developed, apply for and obtain Regulatory Approval, use, Market
and import Licensed Product, with the right to grant sublicenses
to Affiliates of the same scope as the license granted by this
Agreement, (except that any Affiliate shall have no right to
grant further sublicenses), to develop, have developed, apply
for and obtain Regulatory Approval, use, Market and import
Licensed Product in the Territory. RHEI and its Affiliates
shall also have the right to grant co-promotion rights to third
parties in the Territory.
10.2 APP hereby grants to RHEI the right to use the
Clinical Information and Data generated by or on behalf of APP
and its Affiliates (as provided in Section 4.2) for the purpose
of obtaining Regulatory Approval of the Licensed Product in the
Territory.
10.3 RHEI shall have the right to Market and sell Licensed
Product under any trademark or trademarks that RHEI chooses and
has the legal right to use, whether now or hereafter acquired or
developed. At RHEI's sole discretion, RHEI shall have the right
to use trademark(s) for Licensed Product which is/are filed for
and owned by APP, if any, and APP hereby grants to RHEI all
rights and licenses to use such APP product trademark(s) in
connection with Licensed Product in the Territory. Upon the
written request of APP, RHEI will, in addition to a product
trademark, in any event use a line trademark proprietary to APP
that is registered and owned by APP in the People's Republic of
China (which may, but need not be, "Biochronomer"), which
trademark shall be displayed in a prominent position (but in a
size and prominence less than the primary trademark selected by
RHEI) on all promotional and Marketing materials for the
Licensed Product. Except as expressly set forth herein, nothing
herein shall be deemed to give either party any rights to the
trademarks of the other party.
10.4 RHEI shall make, or shall cause an Affiliate to make,
the first commercial sale of the Licensed Product in each
country in the Territory within 90 days following the grant of
Regulatory Approval and any other necessary Applicable Permits,
including, without limitation, pricing approval if required in
that country.
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
10.5 RHEI shall use Commercially Reasonable Efforts in the
Marketing of the Licensed Product.
11. ROYALTIES.
11.1 In consideration for the rights and licenses granted
herein, and subject to the other provisions of this Article 11
of this Agreement, RHEI shall pay to APP an earned royalty on
Net Sales without reduction for any withholding tax or similar
payments required to be made to a country in the Territory
(which withholding tax or similar payments shall be made by RHEI
and evidence of payment, including a certificate of payments,
timely provided to APP) of:
(a) [***] percent of the first US [***] of Net Sales
of Licensed Product in the Territory in each calendar year; and
(b) [***] percent of all Net Sales of Licensed
Product in the Territory in excess of [***] in each calendar
year.
(c) Beginning with the [***] calendar year following
first commercial sale of the Licensed Product in the Territory,
if in any calendar year earned royalties under Sections 11.1(a)
and (b) above do not equal or exceed [***], RHEI agrees to pay to
APP the difference between earned royalties paid and [***] or
[***] percent of the earned royalties for the prior calendar
year, whichever is greater.
11.2 RHEI shall pay the earned royalties required by
sections 11.1 in respect of the Net Sales of the Licensed
Product in each country in the Territory until the later of:
(a) the expiry of [***] years from the first
commercial sale in that country of Licensed Products; or
(b) provided that Licensed Product is covered by a
Valid Claim of an issued patent included in Patent Rights in
that country within [***] years of the first commercial sale of
Licensed Product in such country, until the Licensed Product is
no longer covered by such Valid Claim in such country of sale.
11.3 If Net Sales in any year are reduced by [***] or more
from the prior year's Net Sales due to Competition, as
established by appropriate documentation submitted to APP, all
royalties on Licensed Product shall be [***] (e.g., a [***] rate
shall be reduced to [***] and an [***] rate shall be reduced to
[***]) beginning in the year subsequent to documentation of such
reduction in Net Sales and continuing until the earlier of (i)
the calendar quarter after Competition ceases to exist, or (ii)
the expiration of the obligations of RHEI to make royalty
payments under Section 11.2.
11.4 Upon the expiration of the obligations of RHEI to make
the royalty payments required by Section 11.1 in any country in
the Territory, RHEI shall have a fully paid-up, royalty free
license to develop, have developed, use, Market and import
Licensed Product in that country.
Royalty Reports and Payments
11.5 Earned royalty payments hereunder shall be made within
45 days following the end of each calendar quarter, and each
payment shall include royalties which shall have accrued during
said calendar quarter. Such quarterly payments shall be
accompanied by a report setting forth separately the Net Sales
of Licensed Product sold during said calendar quarter in each
country in the Territory and the calculation of earned royalties
payable for such calendar quarter.
11.6 No multiple royalties shall be payable because
Licensed Product, its manufacture, use or sale is or shall be
covered by more than one Patent Right.
11.7 The remittance of royalties payable on Net Sales
outside the United States shall be made to APP in United States
dollars at the free market rate of exchange of the currency, as
published in the most recent issue of the Wall Street Journal
(New York edition), of the country in which the Net Sales are
made on the particular date the particular United States dollars
are transmitted for payment as royalties.
Records and Audits
11.8 RHEI and its Affiliates shall keep and maintain, and
shall cause their co-promotion partners to keep and maintain,
records of Net Sales. Such records shall be open to inspection
by APP or, in the case of their co-promotion partners, by RHEI
on behalf of APP or by APP, upon reasonable advance notice at
any mutually agreeable time during normal business hours within
three years after the royalty period to which such records
relate by an independent certified public accountant (or the
equivalent in countries other than the United States) reasonably
acceptable to RHEI but selected by APP. Said accountant shall
have the right to examine the records kept pursuant to this
Agreement and report findings of said examination of records to
APP only insofar as it is necessary to evidence any error on the
part of RHEI. This right of inspection shall be exercised only
once with respect to each country in the Territory for any
calendar year. The cost of such inspection shall be borne by
APP unless the result of such examination is the determination
that Net Sales in a particular country have been understated by
at least 5 percent for any calendar year in which event RHEI
shall bear the reasonable cost of such inspection for such
country.
12. TECHNOLOGY CONSULTATION.
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
12.1 APP shall provide technical consultation reasonably
requested by RHEI on an as needed basis at times and places
convenient to APP. APP also shall be available, at the
reasonable request of RHEI, for consultation during any
regulatory inspection or to assist in responding to regulatory
questions that may occur during the prosecution of any
Application for Regulatory Approval of, or Applicable Permit
for, the Licensed Product. If APP and RHEI agree that APP
should travel to the Territory for such consultation and
assistance, RHEI shall pay the reasonable out-of-pocket expenses
of APP for such travel.
12.2 RHEI shall use the Data, Know-How and Clinical
Information transferred pursuant to this Agreement only in
accordance with this Agreement and shall not use it for any
other purpose.
13. SUPPLY.
13.1 APP or its designated supplier shall provide to RHEI
or its Affiliates supply of the Licensed Product for clinical
trials and for commercialization. The transfer price for
clinical supplies and samples for regulatory purposes shall be
the fully-burdened actual cost of the Licensed Product to APP
computed in accordance with US GAAP but shall not exceed US
[***] per individual patient dosage. The transfer price for
commercial supplies of the Licensed Product shall be the lower
of APP's fully burdened actual cost (computed in accordance with
U.S. GAAP) of the Licensed Product plus [***] or US [***] per
individual patient dosage increased by an appropriate U.S. Cost
of Living Adjustment. APP shall endeavor to reduce the unit
dosage price to below [***].
13.2 The Parties will negotiate in good faith the remaining
provisions of the supply agreement within nine months after the
Effective Date, which shall include, without limitation, that
RHEI is responsible for import permits, providing product labels
for primary and secondary packaging, freight and insurance for
shipping Licensed Product from the site of manufacture and any
import duties. The definitive supply agreement shall also
include product warranties and indemnification by the Parties
and provisions for a second or alternative source of supply.
Notwithstanding any other provision of this Agreement, APP
agrees to discuss with RHEI the grant to RHEI or its Affiliates
the right to Manufacture bulk or final Licensed Product without
either Party being bound to enter into such an agreement. If
such agreement should be made, the transfer price of materials,
if any, that may be supplied by APP shall be APP's fully-
burdened actual cost (in accordance with U.S. GAAP) plus ten
percent.
14. PATENTS, INFRINGEMENT.
14.1 If either party determines that any of the Patent
Rights and/or Know How have been infringed by the Manufacture or
Marketing in the Territory of a product containing the Active
Ingredient, such Party shall give to the other Party notice of
such alleged infringement, in which event RHEI may at its
discretion take such steps as it may consider necessary to
prosecute such infringement. RHEI may not settle any such
litigation in a manner that adversely affects the rights of APP
hereunder without the consent of APP. APP shall have the right,
at its own expense, to be represented by counsel in any such
litigation. If RHEI, after such notice, elects not to bring
suit, it shall notify APP of such election within 60 days after
receipt of such notice and APP shall then have the right to
bring suit at its own expense. APP shall also have the right to
bring suit if RHEI fails to institute suit within 180 days from
the date of the original notice of infringement.
14.2 In any litigation brought by RHEI under section 14.1,
RHEI shall notify APP of the commencement of that litigation and
shall have the right to use and sue in APP's name, and APP shall
have the right, at its own expense, to be represented by
counsel, but RHEI shall have sole control of such suit. In any
such litigation, APP may elect by notice to RHEI to share
equally with RHEI the costs of such litigation in exchange for
the right to share equally with RHEI in any recovery of damages
resulting from such litigation. Such election by APP shall be
made not later than 45 days from the date such litigation is
commenced. If APP does not elect to share costs of such
litigation with RHEI, RHEI shall be entitled to the full
recovery of any damages but the amount of the actual damages
(excluding enhanced and/or punitive damages) less the costs to
RHEI of the litigation shall be considered Net Sales in the year
received and subject to the payment of royalties as provided in
Section 11.1. RHEI may not settle any such litigation in a
manner that adversely affects the rights of APP hereunder
without APP's consent.
14.3 In any litigation brought by APP following an election
by RHEI pursuant to section 14.1 not to bring suit, APP shall
notify RHEI of the commencement of that litigation and shall
have the right to use and sue in RHEI's name (if RHEI is deemed
a necessary party), and RHEI shall have the right, at its own
expense, to be represented by counsel, but APP shall have sole
control of such suit. In any such litigation, RHEI may elect by
notice to APP to share equally with APP the costs of such
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
litigation in exchange for the right to share equally with RHEI
in any recovery of damages resulting from such litigation. Such
election by RHEI shall be made not later than 45 days from the
date of the commencement of any such action. If RHEI does not
elect to share costs of such litigation with APP, APP shall be
entitled to the full recovery of any damages. APP may not
settle any such litigation in a manner that adversely affects
the rights granted to RHEI under this Agreement without RHEI's
consent.
14.4 In any litigation brought by one Party and naming the
other Party as a party plaintiff, pursuant to Section 14.2 or
14.3 above, the litigating Party shall hold harmless and
indemnify the other Party from and against any order for costs
arising without fault or negligence of the non-litigating Party
that may be made against such non-litigating party by reason of
being named a Party plaintiff in such lawsuit.
Infringement of Third Party Patents
14.5 In the event of a final judgment in any patent
infringement suit requiring RHEI to pay lump sum damages or a
royalty to a non-Affiliated third party or in the event of a
settlement of such suit or threatened suit consented to in
writing by APP, (a) upon receipt by APP of proof of payment by
RHEI of lump sum damages, the future milestone payments due to
APP pursuant to Article 8 shall be reduced by one-half until the
final milestone payment due to APP has been paid and after such
time, if RHEI has not recovered the full amount of such lump sum
payment, then the remainder shall be credited as royalty payment
reductions in accordance with (b) below until the full amount of
any lump sum damage payment has been recovered by RHEI; and (b)
if the judgment or settlement requires royalty payments to be
made, the future royalty payments due to APP pursuant to Article
11 shall be reduced by [***] of the royalty payment due to the
third party, but in no case shall the royalty payment due APP be
reduced by more than [***], provided that, any third party
royalty payments not credited in any given year may be carried
forward for credit in any future year.
15. OWNERSHIP OF INVENTIONS AND KNOW HOW.
Ownership of Intellectual Property Rights
15.1 APP shall retain its rights in and/or title to all
Patent Rights which it owned or controlled prior to the
Effective Date hereof.
15.2 All Inventions made by APP or by RHEI in the
performance of its obligations under this Agreement shall be
owned as follows:
(a) Any such Inventions relating to the Biochronomer
formulation and/or relating to the composition or manufacturing
of the Licensed Product shall belong to APP and shall be
included in the rights and licenses under this Agreement to RHEI
in the Territory; and
(b) Any other Inventions relating to the Licensed
Product in the Territory shall belong to the Party making the
Invention and be licensed to RHEI in the Territory and to APP
outside the Territory; provided that if any of the other
Inventions are jointly made under this Agreement by APP and
RHEI, the Parties shall jointly own any such Inventions and the
Parties agree that each Party shall have the right to practice
and exploit such joint inventions in accordance with the United
States Patent Laws, except that APP's rights in any such
Invention shall be included in the license under this Agreement
to RHEI in the Territory and RHEI's rights in any such Invention
shall be licensed by RHEI to APP outside the Territory.
15.3 The determination of inventorship for Inventions shall
be made in accordance with applicable laws relating to
inventorship set forth in the patent laws of the United States
(Title 35, United States Code).
15.4 Each Party shall cause any inventor of any Invention
employed by it to assign any and all rights that any such
inventor may have in any such Invention to RHEI or to APP, as
contemplated by this Agreement. Each Party shall cooperate with
the other party to effectuate the provisions of this Article 15
and shall execute any documents that may reasonably be required
to apply for and to obtain any patents. Each Party agrees to be
named as a party, if necessary, to bring and/or maintain a
lawsuit involving a patent on a jointly owned Invention.
Disclosure of Inventions
15.5 Each Party shall notify, in writing, the other Party
of any Inventions made after the Effective Date and of any
patent applications that it intends to file claiming Inventions
made after the Effective Date that may be subject to the
provisions of this Article 15, as promptly as possible, to
arrange, if appropriate, for simultaneous filing of
applications.
Filing and Prosecution of Patent Applications by RHEI
15.6 RHEI shall have right and the responsibility at its
expense for filing, prosecuting and maintaining patents and
patent applications in the Territory for all Inventions owned by
RHEI. RHEI shall disclose to APP the complete texts of all such
patents and patent applications filed by RHEI or its Affiliates
that relate to the Licensed Product, as well as all information
received concerning the institution or possible institution of
any interference, opposition, re-examination, reissue,
revocation, nullification, or any official proceeding involving
such patent application. APP shall have the right to review all
such pending applications and other proceedings in the Territory
and make recommendations to RHEI concerning such applications.
RHEI shall keep APP fully informed of the course of patent
prosecution or other proceedings relating to any such Invention
and/or Patent Rights and shall provide to APP copies of any
substantive communications submitted to or received from patent
offices in the Territory in sufficient time for APP to provide
comments, if desired. RHEI shall give due consideration to any
comments timely provided by APP.
Filing and Prosecution of Patent Applications by APP
15.7 APP shall have right and the responsibility at its
expense for filing, prosecuting and maintaining patents and
patent applications for all Inventions and Patent Rights
controlled by APP in each country in the Territory. APP shall
disclose to RHEI the complete texts of all such patents and
patent applications filed by APP that relate to the Licensed
Product, as well as all information received concerning the
institution or possible institution of any interference,
opposition, re-examination, reissue, revocation, nullification
or any official proceeding involving such patent application.
RHEI shall have the right to review all such pending
applications and other proceedings in the Territory and make
recommendations to APP concerning such applications. APP shall
keep RHEI fully informed of the course of patent prosecution or
other proceedings relating to any such Invention and/or Patent
Rights and shall provide to RHEI copies of any substantive
communications submitted to or received from patent offices in
the Territory in sufficient time for RHEI to provide comments,
if desired. APP shall give due consideration to any comments
timely provided by RHEI.
15.8 RHEI shall have the right to assume responsibility for
any patent or patent application in the Territory relating to
the Licensed Product that APP intends to abandon or otherwise
cause or allow to be forfeited. APP shall give RHEI reasonable
written notice prior to abandonment or other forfeiture of any
such patent or patent application so as to permit RHEI to
exercise its rights under this section at its own cost.
Enforcement of Intellectual Property Rights
15.9 Each Party shall report to the other any infringement
or any unauthorized use or misuse of APP Patent Rights or Know
How in the Territory that may come to its attention.
Filing and Prosecution of Patent Applications Jointly Owned
15.10 The Parties shall determine and agree which of
them shall be responsible for filing, prosecuting and
maintaining patent applications and patents on jointly owned
Inventions.
16. REPRESENTATIONS, WARRANTIES AND COVENANTS.
Representations, Warranties and Covenants of APP.
16.1 APP expressly warrants and represents to RHEI that:
(a) APP owns all right, title, and interest in and
to, or the exclusive right to practice in the Territory, all
presently existing Patent Rights (including those listed in
Schedule 1.24) and Know How relating to Licensed Product, Data
and Clinical Information; APP is legally able to grant to RHEI
an exclusive license to practice existing Patent Rights, Know-
How, Data and Clinical Information with respect to the Licensed
Product in the Territory.
(b) APP is empowered and has the right to enter into
this Agreement, perform its obligations hereunder and to grant
the rights and licenses provided for herein without the need for
any consents or permission and without burdens, encumbrances,
restraints, or limitations of any kind which could adversely
affect the rights of RHEI under this Agreement;
(c) APP has not entered, and has no obligation to
enter, into any arrangement or agreement that conflicts or would
conflict with or adversely affects or could adversely affect, as
applicable, the rights of RHEI under this Agreement;
(d) APP has no Knowledge of any patents or patent
applications owned by a third party and not licensed to APP that
would be infringed by the practice of the presently existing
Patent Rights or Know-How, by the Manufacture or Marketing of
the Licensed Product or by the use of the Data or Clinical
Information in the Territory. APP has not received any claims,
notices, or threats of infringement by third parties with
respect to such matters;
(e) APP has no Knowledge of any claim that any third
party asserts ownership rights in the Territory in any of the
Patent Rights, Know How, Licensed Product, Data or Clinical
Information;
(f) APP has no Knowledge that the use of any of the
Patent Rights, Know-How, Data, Clinical Information, or the
making, using, importing, offering for sale or selling Licensed
Product, in the Territory infringes any right of any third
party;
(g) APP shall file and diligently prosecute in
accordance with all applicable laws national stage applications
of the Patent Rights in the Territory, and maintain any patents
issuing thereon;
(h) As of the Effective Date, there are no inquiries,
actions or other proceedings pending before or threatened by any
Regulatory Authority or other government agency with respect to
any APP manufacturing facility and APP has not received any
notice threatening any such inquiry, action or other proceeding.
As of the Effective Date, there are no investigations pending
before or threatened by any Regulatory Authority or other
government agency with respect to any APP facility where
Licensed Product will be manufactured and APP has not received
notice threatening any such investigation During the term of
this Agreement, APP shall notify RHEI promptly in writing upon
learning of any such actual or threatened inquiry, action,
proceeding, or investigation.
Mutual Representations and Warranties.
16.2 Each Party hereby represents and warrants to the other
Party as follows:
(a) It is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction
of its incorporation. It has all requisite power and authority
to carry on its business and to own and operate its properties
and assets. The execution, delivery and performance of this
Agreement have been duly authorized by its Board of Directors;
(b) There is no pending or, to its knowledge,
threatened litigation involving it which would have any material
adverse effect on this Agreement or on its ability to perform
its obligations hereunder;
(c) There is no indenture, contract, or agreement to
which it is a party or by which it is bound which prohibits or
would prohibit the execution and delivery by it of this
Agreement or the performance or observance by it of any material
term or condition of this Agreement;
(d) It will use Commercially Reasonable Efforts to
carry out or have carried out the development of the Licensed
Product in the United States in the case of APP and in the
Territory in the case of RHEI in accordance with its obligations
set forth in this Agreement; or
(e) It has not been debarred or the subject of a
debarment proceeding by any Regulatory Authority. It shall not
use in connection with this Agreement any employee, consultant
or investigator that has been debarred or the subject of
debarment proceedings by any Regulatory Authority.
17. INDEMNIFICATION
Indemnification of APP.
17.1 RHEI shall indemnify and hold harmless APP and its
officers, directors, employees and agents against and from any
losses, damages, injuries, liabilities, claims, demands,
settlement, judgments, awards, fines, penalties, taxes, fees,
charges or expenses (including reasonable attorneys' fees) of
APP or any of its officers, directors, employees or agents
arising from or relating to:
(a) The breach or inaccuracy in any material respect
of any RHEI representation or warranty contained in Article 16
of this Agreement;
(b) Any injury or alleged injury to any person
(including death) or to the property of any person not a party
hereto arising out of the gross negligence or intentional act or
omission of RHEI or its employees or agents relating to the
development by or on behalf of RHEI of the Licensed Product,
labeling (except for APP's trademarks), storage, handling,
shipping or Marketing of Licensed Product; or
(c) The enforcement of APP's indemnification rights
hereunder.
Indemnification of RHEI.
17.2 APP shall indemnify and hold harmless RHEI and its
officers, directors, employees and agents ("RHEI Indemnitee")
against and from any losses, damages, injuries, liabilities,
claims, demands, settlement, judgments, awards, fines,
penalties, taxes, fees, charges or expenses (including
reasonable attorneys' fees) of a RHEI Indemnitee or a third
party arising from or relating to:
(a) The breach or inaccuracy in any material respect
of any APP representation, warranty or covenant contained in
Article 16 of this Agreement;
(b) Any injury or alleged injury to any person
(including death) or to the property of any person not a party
hereto arising out of the gross negligence or intentional act or
omission of APP or its employees or agents relating to Licensed
Product; or
(c) Any injury or alleged injury to any person
(including death) or to the property of any person arising out
of the Manufacture by or on behalf of APP of the Licensed
Product; or
(d) Any claim that Licensed Product or any trademark
of APP used in connection with Licensed Product in the Territory
infringes any third party rights; or
(e) The enforcement of RHEI's indemnification rights
hereunder.
17.3 If any indemnified Party intends to claim
indemnification under this Article 16 it shall promptly notify
the other Party in writing of such alleged claim. The
indemnifying Party shall have the sole right to control the
defense and settlement thereof except that, any such settlement
shall be upon the written consent of the indemnified Party. The
indemnified Party shall cooperate with the indemnifying Party
and its legal representatives in the investigation of any
action, claim or liability covered by this Article 17. The
indemnified Party shall not, except at its own cost, voluntarily
make any payment or incur any expense with respect to any claim
or suit without the prior written consent of the indemnifying
Party. In addition, the indemnifying Party shall be subrogated
to the rights of the indemnified Party against any third party,
and such indemnified Party hereby assigns to the indemnifying
Party all claims, causes of action and other rights that the
indemnified Party may then have against any third party,
including Affiliates and co-promotion sublicensees, with respect
to the claim, suit or proceeding. Conversely, and without in
any way limiting the obligation of either Party to indemnify the
other Party as herein provided, to the extent that any Party
shall fail to perform its indemnification obligations under
Section 17.1 or Section 17.2, such Party owing a duty of
indemnification hereby assigns to the indemnified Party to whom
indemnification is owed all claims, cause of action and other
rights that the Party owing such duty may then have against any
third party, including Affiliates and sublicensees with respect
to the claim, suit or proceeding.
18. TERM.
18.1 Unless sooner terminated as herein provided, this
Agreement shall become effective on the Effective Date and shall
continue in effect thereafter until it is terminated in
accordance with the terms hereof.
19. EXPIRY AND TERMINATION.
19.1 Unless earlier terminated pursuant to Section 19.2
below, this Agreement shall not expire. Upon the expiration of
the payment term for the license grant in all countries as set
forth in Article 11, RHEI shall have a fully paid up, perpetual
and non terminable exclusive license in the Territory for the
Licensed Product.
19.2 At any time during the Term of this Agreement, either
Party may terminate this Agreement forthwith for cause, as
"Cause" is described below, by giving written notice to the
other party. "Cause" for termination by one party of this
Agreement shall be deemed to exist (i) if the other Party is in
material breach or default in the performance or observance of
any of the provisions of this Agreement applicable to it, and
such breach or default is not cured within 60 days (or 30 days
in the case of failure to make royalty or other payments due
hereunder) after the giving of written notice by the Party
specifying such breach or default, or (ii) if, with respect to
the other Party:
(a) (i) a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in
effect shall be instituted by such Party, or such Party shall
consent to the entry of any order for relief in an involuntary
case under any such law; (ii) a general assignment for the
benefit of creditors shall be made by such Party; (iii) such
Party shall consent to the appointment of or possession by a
receiver, liquidation, trustee, custodian, sequestrator or
similar official of the property of such Party or of any
substantial part of its property; or (iv) such Party shall adopt
a directors resolution in furtherance of any of the foregoing
actions specified in this subsection (a); or
(b) a decree or order for relief by a court of
competent jurisdiction shall be entered in respect of such Party
in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or
appointing a receiver, liquidator, trustee, sequestrator or
other similar official of such Party to wind up or liquidate its
affairs, and any such decree or order shall remain unstayed or
undischarged and in effect for a period of 60 days.
19.3 RHEI may terminate this Agreement at will, in whole or
in part, upon 60 day written notice to APP in which event RHEI
shall remain liable for all of its obligations hereunder that
have accrued by the end of such 60-day period.
19.4 All rights and licenses granted under or pursuant to
this Agreement are, and shall otherwise be deemed to be, for the
purposes of Section 365(n) of Title 11, U.S. Code ("Bankruptcy
Code") license rights to "intellectual property" as defined
under Section 101(60) of the Bankruptcy Code. The parties agree
that RHEI, as a licensee of such rights under this Agreement,
shall retain and may fully exercise all of its rights and
elections under the Bankruptcy Code in the event of the
bankruptcy of APP.
19.5 Upon termination by APP for Cause or by RHEI pursuant
to Section 19.3, RHEI shall, at the request of APP, assign to
APP RHEI's Regulatory Approval or Application for Regulatory
Approval for the Licensed Product in each country in the
Territory; and shall assign to APP RHEI's interest in any
Inventions (including Joint Inventions) relating to the Licensed
Product.
19.6 Upon termination of this Agreement by APP pursuant to
Section 19.2, the licenses granted to RHEI under this Agreement
shall terminate. Notwithstanding such termination, and subject
to the terms and conditions of this Agreement, RHEI may dispose
of, by sale or otherwise in the Territory, any remaining
inventory of Licensed Product that RHEI may have in its
possession or control on the date of termination.
19.7 Upon termination of this Agreement by RHEI pursuant to
Section 19.2 above, the rights and licenses granted hereunder to
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
RHEI in the Territory shall continue in fall force and effect
and (i) any future milestone payments to APP pursuant to Section
8 shall be cancelled and (ii) royalty obligations on future Net
Sales pursuant to Section 11 shall be reduced by [***] as of the
termination date and such obligations shall expire [***] after
the date of first commercial sale. Upon such termination, APP
shall consent to having its contract manufacturer supply
Licensed Product directly to RHEI, and RHEI shall have the
obligation to continue to pay for such supply and to make full
payment of all its obligations hereunder that shall have accrued
as of such termination date.
19.8 Termination shall not release RHEI or APP from any
obligations or liabilities that matured prior to termination,
including without limitation the obligations of RHEI to make any
payments owing at the time of termination through the date of
termination. If the terms of this Agreement expressly state
that a right or obligation shall survive expiration or
termination of this Agreement, such right or obligation shall
survive expiration or termination to the degree necessary to
allow complete fulfillment or discharge of the right or
obligation. Unless otherwise provided to the contrary, the
provisions of Articles 1, 7, 15, 17 and 20 and Sections 19.4,
19.5, 19.6 and 19.7 of this Agreement shall survive the
expiration or termination of this Agreement.
19.9 Except as otherwise provided in this Agreement, in the
event of termination or expiration, each of APP and RHEI shall
retain ownership of the ideas, Inventions, discoveries,
developments, designs, trademarks, trade secrets, improvements,
know how, process, procedures, techniques, formulae, computer
programs, drawings, technology(ies) and intellectual and
industrial property accorded to each under the terms of this
Agreement.
20. PUBLICITY.
20.1 Neither Party will originate any publicity, news
release, public comment or other public announcement, written or
oral, or relating to this Agreement, without the written consent
of the other Party, except for an initial agreed upon and
jointly issued press release on execution of this Agreement and
such further announcements which, in accordance with the advice
of legal counsel to the party making such announcement, is
required by law. The Party making any announcement which is
required by law will, unless prohibited by law, give the other
party an opportunity to review the form and content of such
announcement and comment before it is made. Either Party shall
have the right to make such filings with governmental agencies
as to the contents and existence of this Agreement as it shall
reasonably deem necessary or appropriate.
21. ASSIGNABILITY.
21.1 This Agreement may be assigned by either Party to an
Affiliate or as part of the sale by either Party of all of its
business to which this Agreement may be a part without the
consent of the other Party; provided, however, that neither
Party shall assign this Agreement to an Affiliate or any third
party that is not reasonably capable of performing all of its
obligations under this Agreement and that has not agreed in
writing to be bound by all of the terms and conditions of this
Agreement. This Agreement may not otherwise be assigned by
either Party without the prior written consent of the other
Party, which consent shall not be unreasonably withheld.
21.2 No assignment permitted by this Article 21 shall serve
to release either Party from liability for the performance of
its obligations hereunder.
22. NOTICES.
22.1 All notifications, demands, approvals and
communications required to be made under this Agreement shall be
given in writing and shall be effective on the date of delivery
if personally delivered, sent by facsimile, if followed by
prepaid air express or delivered by courier service addressed as
set forth below. The Parties hereto shall have the right to
notify each other of changes of address during the Term of this
Agreement.
A.P. Pharma, Inc.
123 Saginaw Drive
Redwood City, California 94063
Attention: President
Facsimile: (650) 365-9452
With a copy to:
Heller Ehrman LLP
275 Middlefield Road
Menlo Park, California 94025
Attention: Julian N. Stern
Facsimile: (650) 324-0638
RHEI Pharmaceuticals, Inc.
300 George Street
Suite 530
New Haven, Connecticut 06511
Attention: CEO
Facsimile: (203) 624-7433
With a copy to:
Jones Day
222 East 41st Street
New York, New York 10017
Attention: Ann L. Gisolfi
Facsimile: (212) 755-7306
23. FORCE MAJEURE.
23.1 In the event of any failure or delay in the
performance by a Party of any provision of this Agreement due to
acts beyond the reasonable control of such Party (such as, for
example, fire, explosion, strike or other difficulty with
workmen, shortage of transportation equipment, accident, act of
God, or compliance with or other action taken to carry out the
intent or purpose of any law or regulation, or an order or
judgment of any court of competent jurisdiction, whether
interim, temporary, interlocutory or permanent), then such Party
shall have such additional time to perform as shall be
reasonably necessary under the circumstances. In the event of
such failure or delay, the affected Party will use its diligent
efforts, consonant with sound business judgment and to the
extent permitted by law, to correct such failure or delay as
expeditiously as possible.
24. MISCELLANEOUS.
24.1 The parties acknowledge and agree that: (a) each Party
and its representatives have reviewed and negotiated the terms
and provisions of this Agreement and have contributed to its
revision; and (b) the terms and provisions of this Agreement
will be construed fairly as to each Party hereto and not in
favor of or against either Party regardless of which Party was
generally responsible for the preparation or drafting of this
Agreement. Unless the context of this Agreement otherwise
requires: (i) words of any gender include each other gender;
(ii) words using the singular or plural number also include the
plural or singular number, respectively; (iii) the terms
"hereof", "herein", "hereby", and derivative or similar words
refer to this entire Agreement; (iv) the terms "Article",
"Section", "Exhibit", "Schedule", or "clause" refer to the
specified Article, Section, Exhibit, Schedule, or clause of this
Agreement; (v) "or" is disjunctive but not necessarily
exclusive; and (vi) the term "including" or "includes" means
"including without limitation" or "includes without limitation".
Whenever this Agreement refers to a number of days, such number
shall refer to calendar days unless business days are specified.
Business Days, whether or not capitalized, means any day except
Saturday and Sunday on which commercial banking institutions in
New York are open for business.
24.2 This Agreement and the confidential disclosure
agreement entered into by the Parties on May 7, 2006 define the
full extent of the legally enforceable undertakings of the
parties hereto. No promise or representation, written or oral,
which is not set forth explicitly in this Agreement or the said
confidential disclosure agreement is intended by either Party to
be legally binding. Both Parties acknowledge that in deciding
to enter into this Agreement and to consummate the transaction
contemplated hereby neither has relied upon any statements or
representations, written or oral, other than those explicitly
set forth in this Agreement.
24.3 It is the desire and intent of the Parties that the
provisions of this Agreement shall be enforced to the extent
permissible under the laws and public policies applied in each
jurisdiction in which enforcement is sought. Accordingly, if
any particular provision of this Agreement which substantially
affects the commercial basis of this Agreement shall be
determined to be invalid or unenforceable, such provision shall
be amended as hereinafter provided to delete therefrom or revise
the portion thus determined to be invalid or unenforceable.
Such amendment shall apply only with respect to the operation of
such provision of this Agreement in the particular jurisdiction
for which such determination is made, provided no unfairness
results. In such event, the Parties agree to use reasonable
efforts to agree on substitute provisions, which, while valid,
will achieve as closely as possible the same economic effects or
commercial basis as the invalid provisions, and this Agreement
otherwise shall continue in full force and effect. If the
Parties cannot agree to such revision within 60 days after such
invalidity or unenforceability is established, the matter may be
submitted by either party to arbitration as provided in this
Agreement to finalize such revision.
24.4 The waiver by a Party of any single default or breach
or succession of defaults or breaches by the other shall not
deprive either party of any right under this Agreement arising
out of any subsequent default or breach.
24.5 All matters affecting the interpretation, validity,
and performance of this Agreement shall be governed by the laws
of the State of California without regard to that state's
conflict of laws rules or principles.
24.6 Nothing in this Agreement authorizes either Party to
act as agent for the other Party as to any matter. The
relationship between APP and RHEI is that of independent
contractors.
24.7 Except if a Party reasonably determines that it must
seek a preliminary injunction, temporary restraining order or
other provisional relief, any and all disputes between the
Parties relating in any way to the entering into of this
Agreement and/or the validity, construction, meaning,
enforceability, or performance of this Agreement or any of its
provisions, or the intent of the parties in entering into this
Agreement, or any of its provisions arising under this
Agreement, except for any disputes relating to the provisions of
Articles 14, 17 and 19, shall be settled by binding arbitration.
Such arbitration shall be conducted at San Francisco,
California, if RHEI is the instigating Party and at New Haven,
Connecticut, if APP is the instigating Party, in accordance with
the rules then pertaining of the American Arbitration
Association with a panel of three arbitrators. (Each Party
shall select one arbitrator and the two selected arbitrators
shall select the third arbitrator. If the two selected
arbitrators cannot agree on a third arbitrator then the American
Arbitration Association shall select said arbitrator from the
National Panel of Arbitrators.) Reasonable discovery as
determined by the Arbitrators shall apply to the arbitration
proceeding. The law of the State of California shall apply to
the arbitration proceedings. Judgment upon the award rendered
by the arbitrators may be entered in any court having
jurisdiction thereof. The successful Party in such arbitration,
in addition to all other relief provided, shall be entitled to
an award of all its reasonable costs and expenses including
attorney costs. Both Parties agree to waive, and the
Arbitrators shall have no right to award, punitive damages in
connection with an arbitration proceeding hereunder.
24.8 All rights and obligations of the Parties are subject
to compliance with United States and foreign export regulations
and such other United States and foreign laws and regulations as
may be applicable, and to obtaining all necessary approvals
required by applicable agencies of the governments of the United
States and foreign jurisdictions.
24.9 This Agreement may be executed in counterparts, each
of which shall be deemed an original, but both of which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have caused this
Agreement to be duly executed by their duly authorized officers
on the date first above written.
A.P. PHARMA, INC.
By: /S/ Michael O'Connell
----------------------
Title: President
RHEI PHARMACEUTICALS, INC.
By: /S/ Scott B. Kozak
-------------------
Title: V.P. Commercial Operations
Schedule 1.24
Patent Rights
-------------
APP Case No. COUNTRY FILED Patents or
Application
Serial Numbers
- ------------ -------------- --------------
10008-7184 CIP PCT * Taiwan PCT/US2005/035117
94133844
10008-7208 United States 11/433,834
(Filed May 12, 2006)
10008-7209 United States 60/786,548
(Filed March 27, 2006)
* PCT Application designated 170 countries, including China.
Schedule 4.2
Data
----
Nonclinical Data - final study reports for:
* Single dose toxicology studies in dog and rat (Note 1)
* 28-day repeat dose toxicology studies in dog and rat (Note 1)
* Genotoxicity studies (Ames, mouse lymphoma and mouse
micronucleus) (Note 1)
* 90-day repeat dose toxicology studies in dog and rat
* Segment II reproductive toxicology studies in rat and rabbit
(Note 1)
* ADME study of radiolabeled polymer in rat
* Other studies carried out by APP that are determined to be
necessary for or carried out in support of Licensed Product
approval in the Field in the United States.
Clinical Data - final study reports for:
* Phase I study in normal volunteers (Note 1)
* Phase II study in patients undergoing chemotherapy (Note 1)
* Phase III pivotal study: three-arm blinded, placebo-
controlled study of APF530 250 mg, APF530 500 mg and Aloxi in
patients undergoing moderately or highly emetogenic
chemotherapy
* Other studies carried out by APP that are determined to be
necessary for or carried out in support of Licensed Product
approval in the Field in the U.S.
CMC Data
* Results of release and stability tests for Licensed Product
lots supplied to RHEI.
* Other CMC data that the Parties agree are necessary or useful
for RHEI to commercialize APF530 in the Territory
Regulatory Data
* Cross-reference rights to APP's US IND and APP's US NDA as
required for regulatory approval in the Territory
Marketing Data
* Final reports of market research conducted by APP (Note 1)
Note 1: These reports are complete as of the Effective Date
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
Schedule 6.1
Timing and Sequence of Events for
---------------------------------
Development and Commercialization of APF530 in China
----------------------------------------------------
[***]
All increments of time on the timeline are in months
Actual Dates after Application to Conduct Confirmatory Trials
Dependent upon US NDA Filing
(Footnote continued)
Exhibit 31.1
SECTION 302 CERTIFICATIONS
--------------------------
Certifications:
I, Gregory H. Turnbull, certify that:
1. I have reviewed this quarterly report on Form 10-Q of A.P.
Pharma, Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant is
made known to us by others, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the
end of the period covered by this report based on
such evaluation; and
c) Disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the
registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of registrant's board of
directors:
a) All significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which could be reasonably likely
to adversely affect the registrant's ability to
record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
Date: November 7, 2006
/s/ Gregory H. Turnbull
- -----------------------
Gregory H. Turnbull
President and Chief Executive Officer
Exhibit 31.2
SECTION 302 CERTIFICATIONS
--------------------------
Certifications:
I, Stephen C. Whiteford, certify that:
1. I have reviewed this quarterly report on Form 10-Q of A.P.
Pharma, Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant is
made known to us by others, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the
end of the period covered by this report based on
such evaluation; and
c) Disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the
registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of registrant's board of
directors:
a) All significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which could be reasonably likely
to adversely affect the registrant's ability to
record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
Date: November 7, 2006
/s/ Stephen C. Whiteford
- ------------------------
Stephen C. Whiteford
Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
- ------------------------------------------------------------
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
- ---------------------------------------------------------
In connection with the Quarterly Report of A.P. Pharma, Inc. (the "Company")
on Form 10-Q for the period ending September 30, 2006 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Gregory H. Turnbull, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ Gregory H. Turnbull
- -----------------------
Gregory H. Turnbull,
Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
- ------------------------------------------------------------
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
- ---------------------------------------------------------
In connection with the Quarterly Report of A.P. Pharma, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2006 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Stephen C. Whiteford, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ Stephen C. Whiteford
- ------------------------
Stephen C. Whiteford,
Chief Financial Officer
