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Executives

Edward M. Cox - Vice President of Corporate Development & Investor Relations

Steve Martin - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Richard W. Pascoe - Chief Executive Officer and Director

Analysts

Jason N. Butler - JMP Securities LLC, Research Division

Robert M. Wasserman - Dawson James Securities, Inc., Research Division

George Santana - Ascendiant Capital Markets LLC, Research Division

Apricus Biosciences (APRI) 2012 Earnings Call March 18, 2013 1:00 PM ET

Operator

Greetings, and welcome to the Apricus Biosciences 2012 Financial Results and Highlights Teleconference and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Edward Cox, VP of Corporate Development and IR for Apricus. Please begin, sir.

Edward M. Cox

Good morning, and thank you for joining us today. I'm Ed Cox, Vice President of Corporate Development and Investor Relations here at Apricus Bio. With me from Apricus is our newly appointed Chief Executive Officer, Rich Pascoe; along with Steve Martin, our Chief Financial Officer and recently interim Chief Executive Officer; as well as Randy Berholtz, our Executive Vice President and General Counsel.

During the call today, we will review the recent corporate events, discuss 2012 financial results and recap the company's upcoming milestones. After which, we will open the call up for questions. Let me remind everyone that during today's conference call, the management team will make forward-looking statements regarding future events or future financial performance of the company. Please keep in mind that such statements are predictions based on current expectations, and actual results could differ materially. You should refer to our most recent filings with the Securities and Exchange Commission for additional discussions on factors affecting our business.

With that, I will turn the call over to Steve Martin. Steve?

Steve Martin

Thank you, Ed. Good morning, and thank you, all, for joining us today. Before we begin, I'd like to take a moment to welcome Rich Pascoe, our newly appointed Chief Executive Officer, and give him the opportunity to introduce himself. Rich brings over 20 years of experience in the life sciences. This includes roles in corporate strategy, global strategic partnerships, product developments, regulatory approvals and marketing and sales. Rich's expertise will be invaluable to Apricus Bio during this pivotal time in our development as a company, particularly as we look to commercialize our lead assets, Vitaros and Femprox, in markets around the world. We welcome Rich to the company and look forward to his leadership and contributions as we continue to execute on our corporate strategy. Rich has also joined Apricus' Board of Directors.

With that, I'll turn the call over to Rich.

Richard W. Pascoe

Thank you, Steve. I'd like to quickly thank the Board of Directors and management at Apricus Bio for both a warm welcome and for the opportunity to help shape the direction of what, to me, is a very exciting story. I look forward to working closely with the team to execute on the company's near-term corporate goals, focusing on creating value through the development and commercialization of these 2 novel and very timely products, which Steve just mentioned, Vitaros and Femprox. I also look forward to updating shareholders on our progress in the coming months as I get more involved in these programs and with the teams here at Apricus.

I'd like to now spend a few moments reaffirming our corporate strategy here at Apricus and then turn it back over to Steve to describe some of the more recent activities. I believe that the core tenet of our streamlined corporate strategy is the company announced at the beginning of this year, will allow Apricus to generate the greatest potential for shareholder value creation. Our focus will be on the further development and commercialization through strategic partnerships of the company's primary commercial and pipeline assets in male and female sexual health. Both Vitaros and Femprox utilize Apricus Bio's proprietary NexACT transdermal delivery platform, a technology with extensive clinical validation and in Canada, regulatory validation. The company's resources therefore will be directed towards these key assets as we concentrate our strategic focus that will better allow us to deliver value through 2013 and beyond.

A key component in executing on this strategy is the divestiture of noncore assets. The company announced in January of this year its intention to seek strategic alternatives towards oncology supportive care business and is actively working with potential buyers for certain assets in its Apricus Pharmaceuticals USA subsidiary. In addition, the company announced last week its intention to cease financing of our French subsidiaries. This decision follows an in-depth cost benefit analysis and evaluation of strategic options, both of which point to this action being in the best interest of the company and its shareholders.

Since Apricus Bio's acquisition of these subsidiaries, change in the French drug reimbursement environment, which strongly favored generic pharmaceuticals, has led to an unforeseen loss of contract revenue and a substantial reduction in the unit's value potential. These decisions will allow the company to dedicate resources to our pipeline assets, for which we have secured numerous partnerships for Vitaros, are engaged in discussions with multiple additional license partners for both Vitaros and Femprox in which -- and which offer the greatest near-term potential for value creation.

I'd like to discuss Vitaros first, our lead product candidate for the treatment of erectile dysfunction. The first important milestone ahead of us with this product is its inaugural commercial launch in Canada. Our partners at Abbott remain fully committed to Vitaros and its launch in Canada. We are actively supporting their prelaunch efforts and continue to expect a full launch in the first half of this year. With this, Vitaros will become the first new and novel erectile dysfunction product launched in nearly a decade. And similar to Viagra, Cialis and Levitra, we believe it is well positioned for commercial success.

The next major milestone for Vitaros is the decision on European approval. This decision will come via the European Decentralized Procedure with Netherlands as the Reference Member State and is expected to occur in the first half of 2013. Following a DCP approval, we can then begin securing national approvals in each of the major markets of Europe. As we have guided recently, we also look forward to an approval decision on Vitaros in Switzerland, a separate regulatory system from the European DCP, in the second half of this year. As these approvals come in, marketing will be initiated in each of the respective countries through our various partnerships. Currently, Vitaros partnerships are in place in key European markets, including the United Kingdom, Germany and Italy, with additional partnership discussions ongoing. Overall, Europe is a $1.2 billion market for existing erectile dysfunction products with what we believe is a very significant untreated and undertreated population. Interest in Vitaros remains strong in many of these territories. And we expect to see additional partnering activity as our regulatory milestones unfold. As many of you know, Vitaros is a topically applied formulation of alprostadil, a vasodilator, which directly increases blood flow to the penis, causing an erection. The current leading medications for erectile dysfunction are all orally administered PDE5 inhibitors such as Viagra, Cialis and Levitra, the fact that leaves a large number of patients who cannot or do not respond well to these medications untreated or undertreated, in addition to the population which is intolerant to these systemic effects of PDE5 inhibitors. Third-party research has detailed that as many as 18% of patients are contraindicated due to medications or current disease, over 20% of patients are nonresponders to the available PDE5, and more than 31% of patients on those drugs drop out after the initial prescription and nearly 50% drop out within 3 years of starting on the medication. These figures give us and our major pharmaceutical partners confidence that there is a substantial market for a product like Vitaros once approved and launched in those markets.

Vitaros takes effect, on average, in 5 to 15 minutes versus 30 to 90 minutes with the oral medications. And unlike the oral medications, they can be safely used by ED patients with hypertension, diabetes, cardiovascular issues or patients on alpha blockers or beta blockers. Alprostadil, the active ingredient in Vitaros, is a widely accepted alternative to the PDE5 inhibitors for these difficult-to-treat patients where previously marketed products were administered by unacceptable means for most patients. We believe that topically applied Vitaros is safe and effective with significantly more market opportunity because of its patient-friendly formulation. Worldwide, this is a market affecting 140 million men and represented $2.6 billion in revenue. Excluding the U.S., Vitaros has represented tremendous value opportunity for us, particularly as a distinct product addressing underserved populations. Our near-term focus for Vitaros is to ensure a successful commercial launch in Canada, to secure additional partnerships with quality development and marketing partners, to continue to pursue regulatory filings in key global territories and to prepare for commercial launches as these opportunities present themselves.

Now I'd like to turn our attention to Femprox, our topical alprostadil cream for the treatment of female sexual arousal disorder, or FSAD. We believe that Femprox has the potential to be the first on-demand treatment for FSAD. The product is currently approved to treat FSAD, and estimates of its market size are on par with erectile dysfunction in males, and perhaps possibly larger. We believe that Femprox is further along in development than any other compound in the space. It's unique among its competitors in that it has a direct and localized mechanism of action. And it's the only product to have successfully completed a nearly 400-patient Phase III clinical trial in China in this indication, one which achieved statistical significance in both its primary and secondary influence.

We have been working closely with Health Canada and the U.S. Food and Drug Administration on determining our next step in the clinic with Femprox and expect to provide an update regarding this development program in the near term. For indications for which endpoints are primarily based on patient reported outcomes measures, such as FSAD, it is essential that methodologies used to measure the endpoints are developed and validated and, of course, agreed to by the regulatory authorities. Setbacks for other companies' products in the overall FSAD state has been largely due to concerns tied to the active products in these drugs almost always either hormone-based or SSRI inhibitors or to very high placebo rates. We believe that Femprox has distinct characteristics, including topical delivery and mechanism of action, separated from other development candidates on several levels. Key elements of our discussions with regulators include trial design. It remains our goal to work with the FDA and other regulatory bodies to build the best methodologies for measuring these desired outcomes.

I would now like to turn the call over to Steve to review the year-end financials and our expected 2013 milestones. Steve?

Steve Martin

Thank you, Rich. I'd like to first turn to the financials. In 2012, we have total revenues of $8.4 million, an increase of $4.3 million over 2011. The increase is primarily due to higher license fee revenue for Abbott and Takeda, as well as second half 2012 revenue from contract sales services related to the French subsidiaries.

Research and development costs increased by $0.4 million to $5.4 million for 2012. This decrease reflects the decrease in contract services related to manufacturing commercial validation batches of Vitaros, which was related to transition of moving Vitaros manufacturing from development to commercial stages.

Selling, general and administrative expenses increased by $3.9 million to $15.4 million during 2012 compared to $11.5 million during 2011. The increases were primarily associated with expenses related to the acquisition and operation of our French subsidiaries. As previously mentioned, we recently ceased funding our French subsidiaries and we anticipate that general and administrative expenses will further decrease as a result of eliminating costs associated with these. The company expects that the most significant expenditures in 2013 will be related to the execution of market approval and commercialization plans for Vitaros, the development and implementation of a regulatory and clinical trial program for Femprox and further development of our pipeline products.

We continued to reduce and closely monitor our operating costs as we move towards commercialization of Vitaros in Canada and Europe. Our net cash used in operating activities was $12.3 million in 2012, and that included approximately $3.1 million related to the French operations.

As of December 31, 2012, we had cash and cash equivalents totaling $15.1 million compared to $7.4 million at December 31, 2011.

In March of 2013, we completed the sale of our New Jersey real estate facility, which provided net cash proceeds of $3.6 million to us. We believe we have sufficient capital and access to capital to achieve our current initiatives and growth plans. We've made tremendous efforts in 2012 towards achieving our goals, which we hope to accelerate dramatically in 2013 and beyond.

To recap, our upcoming milestones include: first, the Canadian launch of Vitaros in the first half of 2013 by our partner, Abbott Laboratories, as a first-line treatment for erectile dysfunction, one of the first ED products to be launched in nearly a decade and a unique product addressing a large underserved population; second, an approval decision for Vitaros in Europe, a $1.2 billion market phase in the first half of 2013; third, feedback from the regulatory agencies, including the FDA, on the next step for Femprox and its clinical development; and then finally, continued partnership discussions for Vitaros, as well as our other pipeline products in major global markets with the goal of signing and announcing additional partnerships.

I'd like to thank the entire team for their ongoing efforts in streamlining our strategic focus. The team is excited and highly committed to seeing Apricus become a market leader. I'd also like to thank our shareholders for their support during my time as interim CEO. We're very excited that Rich has joined us at Apricus. And again, I'd like to welcome him to the team, and I look forward to supporting him in my role as CFO.

Richard W. Pascoe

Thank you, Steve, for that summary. In closing, I want to recognize Steve and the entire team here in Apricus for their outstanding leadership throughout this transition period. And I look forward to working with him and the senior team as we move Apricus Bio forward. With that, we will now open the call up to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jason Butler of JMP Securities.

Jason N. Butler - JMP Securities LLC, Research Division

First of all, let me say congratulations to everybody involved for the new appointment of the CEO. Great to see some clarity here. So first question, in Canada, I think it's fair to say that people have been waiting for some time now to see the launch. Can you just give us an idea of what's the -- what has been occurring and what the steps are to Abbott launching the product?

Richard W. Pascoe

Jason, this is Rich. I'm excited to be onboard. What I'd like to say, and I'm going to hand it over to Steve to provide a little more color here, is that we are working very closely with Abbott to support their launch. I applaud Abbott's approach here in terms of being well prepared to launch this product in Canada. We clearly are looking forward to that launch. It's important, given that this is not only our first launch of the product in terms of post-approval perspective, but also we want to make sure that we are being good partners to Abbott, and I think we will continue to do so. As we've said here in our prepared remarks, consistent with past remarks, we anticipate a launch to occur in the first half of this year. And with that, I'll turn it over to Steve to provide a little more color on some of the more recent activities.

Steve Martin

Yes, Jason, it's a good question. We've continued to indicate we have a lot of confidence in the product. We feel good about the opportunity. We are very close with Abbott. As you know, September of last year was when we announced that we achieved the sign off in the commercial batches, and we received $2.5 million. Since then, we worked through the process steps that are typical with any launch, there are stability batches that we've put out for test. We also have marketing steps. We also have sales planning and training. So all those are foreseen, but again, our process has been not to give too much of the detail of a launch led by our partners. So it really is a partner-led product -- project. And we continue to be feel good about the situation. But again, we won't be able to give specific dates or actions that are being planned and incurring by Abbott, other than we will continue to progress and support them all the way to the launch date.

Jason N. Butler - JMP Securities LLC, Research Division

That's great. And could just remind us what the patent protection is in Canada and how long do you anticipate marketing exclusivity or Abbott to have marketing exclusivity?

Steve Martin

Ed, do you want to cover that?

Edward M. Cox

Sure. So it's over 3 different generations. The first co-chain product with patent protection is out 2021, the room temperature formulation is 2026 and the room temperature device and mixing patents, which are pending, is 2031.

Jason N. Butler - JMP Securities LLC, Research Division

Okay, great. And then just in terms of the European approval decision, can you give us an idea of what the recent dialogue with the regulatory authorities has been and what the key points of discussion right now relate to?

Edward M. Cox

Sure. The background is we first filed in 2011. And we indicated recently, we went back on the clock, it's roughly a 210-day process. And we've indicated we'll have our final decision within this first half of the year, considering that there is no other administrative delays. But we have passed the 120-day mark, which means there has been continual questions back and forth. We've continued to be positive about the opportunity to respond successfully because we've been through this cycle in Canada and we were successful there as well. So again, we work closely with our partners. We work closely internally with our regulatory team. But we feel good about the next steps, which include responses due in the near term and then a couple more steps and a decision within this first half of the year.

Jason N. Butler - JMP Securities LLC, Research Division

Okay, great. And then just last question on Femprox. Understand you're still in a dialogue with regulatory authority there, but can you give us any visibility into what you are focused on right now in terms of the trial design, what endpoints you're looking to assess and what the value of the Phase III data in China still represents to you?

Richard W. Pascoe

Jason, this is Rich. I think the focus right now on Femprox is preparing the product for what we hope to be a successful clinical development program. That includes quite a bit of work that's been accomplished internally and in consultation with the regulatory authorities. I don't think we're prepared to go into a great deal of detail right now about that plan. Suffice it to say that it's our intention to provide more clarity on the Femprox development plan. And moreover, the more comprehensive approach that I'd like to take with a product like this at this stage of development is to really look at all the different facets to include market elements, payor elements and the like. And so I'm very confident that the team has been doing the work that needs to be done to prepare that plan. And as we've stated here today, we anticipate providing more clarity as we move forward here in the first half of this year.

Operator

Our next question is from Bob Wasserman of Dawson James Securities.

Robert M. Wasserman - Dawson James Securities, Inc., Research Division

Just a question on trends. I know at one time you were going to market that with your subsidiary, Vitaros, I mean, was just approved. Did that change any? Are you going to look for partners now that you're kind of winding that group down?

Steve Martin

As you understand, Bob, it's a step process. So Apricus has made a decision to cease funding. The next steps are really more legal and in France, and so there is a number of decisions that have to be made about the employee base there and the next steps with opportunities for the business. So we haven't probably decided how we'll next move to the French market for the Vitaros product. But it's expected that we probably would not be able to continue with the sales force that's in place. So we'll have to come back to you on how soon we're going to have decision on our plan for Vitaros in the EU. The first objective, of course, to get the products approved through the DCP. And we see that coming well and then we move on to the partner launches throughout Europe.

Robert M. Wasserman - Dawson James Securities, Inc., Research Division

Okay. And one more question, what's your R&D budget for 2013? Is that somewhat flexible depending on some of your other pipeline products or are you pretty much fixed in stone?

Steve Martin

Good question. We've been about mid $5-million-ish number the last couple of years. And there's been a couple different derivations to that. We've spent some time on commercial lots and validation lots for Vitaros with that increase and things slowed down as we move towards commercialization in Canada. What we'll see is that the latter part of 2013 and into '14, we'll start to see clinical trial activity for Femprox, and that will raise the R&D. So I think you would see that the normal run rate is a little bit below $5 million. And then it will certainly ramp up as we decide on the size of the trial, the number of the patients and the speed at which we start to recruit those patients.

Operator

Our next question comes from George Santana of Ascendiant.

George Santana - Ascendiant Capital Markets LLC, Research Division

There's been some question, perhaps some buzz, on manufacturing and any issues there. Can you maybe address that for a minute?

Steve Martin

Again, George, that's still part of manufacturing Vitaros. And so we make our products at a facility called Therapex, which is our captive contract manufacturer in Canada. They shipped the product from the former NexMed facility in New Jersey a number of years ago. So they have done all of our engineering batches, our validation batches and our stability batches. So we achieved, in effect, materials December last year. That was a key landmark for the company that triggered our payment with Abbott. And now, of course, we continue to make the batches towards sampling for Abbott and other companies and then ultimately, the commercial launch. So what I would say is I think we are working through the normal processes of evaluation and analysis of any manufacturing process to make sure you have the batch just right. But I wouldn't say there's any unusual manufacturing concerns that we have at this point in time, other than these are what we think our normal processes to make sure you have a commercial batch that's repeatable and accretable over time and in higher volumes, because certainly this is going to be a high-volume product. So we continue to work through that as well.

George Santana - Ascendiant Capital Markets LLC, Research Division

Great. And also just to rationally -- very generally, you've addressed a part of this. But what can we expect for OpEx for the year, because you've got so many moving pieces, of things being deconsolidated and sold off? Just directionally perhaps you can give us some guidance there?

Steve Martin

Yes, I'll cover that. So we had cash use from operations in 2012 of roughly $12.3 million, and that included a little bit of money we used for the French business, which we ceased funding. So we started the year with cash of about $15 million. We added $3.6 million in connection with the sale of our New Jersey building. So that gives us available a little bit more than $18 million. We indicated publicly we have sufficient cash to continue more than 12 months. And so if you look at our $12 million run rate in 2012, I would think before we get to the Femprox trial, we're going to be in that neighborhood. And then it will start to increase in late 2013 and '14 for Femprox.

Operator

[Operator Instructions] It appears we have no further questions at this time. I would now like to pass the floor back to management for closing comments.

Steve Martin

Thank you for joining us on the call today. And as always, if you have any questions, please do not hesitate to contact the company directly. Again, thanks everyone, for your time.

Operator

This concludes today's teleconference. You may now disconnect your lines at this time. And thank you for your participation.

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