AP Pharma's APF530 Poised To Return To FDA Review

| About: Heron Therapeutics, (HRTX)

AP Pharma (APPA.OB) intends to resubmit the New Drug Application (NDA) for APF530 in 1H12 after working quietly and diligently on addressing all the issues raised in a March 2010 complete response letter (CRL), which the FDA issued in response to the original NDA filing (May 2009). Investors seemed to have lost focus on AP Pharma since the setback at FDA, but our expectation is that recent developments in the chemotherapy-induced nausea and vomiting (CINV) marketplace and the expected re-filing and approval should renew investor enthusiasm in 2012.

APF530 is a long-acting subcutaneous formulation of granisetron that has the potential to follow Aloxi (palonostron), an intravenous product, as the second injectable drug to treat patients for the prevention of both acute and delayed onset CINV. Should APF530 get approved, it would be the only other 5HT-3 antagonist with this broad indication (acute and delayed onset).

In 2010, the market leader Aloxi, with ~50% share, generated $423MM in net sales for Eisai (TSE-45230). By next year, the total U.S. market potential for CINV therapies is estimated at ~$850MM, yet this is an area of chemotherapy supportive care that investors have stopped focusing on since the December 2007 acquisition of MGI Pharma by Eisai for $3.9 billion and the loss of a way to play CINV. Now, with the expected resubmission of the APF530 NDA and recent developments in the CINV marketplace [Aloxi patents now out to 2024 and Safety Announcement for Zofran (ondansetron)], investors now have a compelling story in AP Pharma that is gaining momentum into 2012.

In the APF530 CRL, FDA raised issues in three main areas, which include the dosing system, chemistry, manufacturing and controls (CMC), and various clinical/statistical aspects. Importantly, FDA requested no additional clinical efficacy studies. AP Pharma ran the largest Phase III studies of its kind for chemotherapy-induced nausea and vomiting and the study demonstrated statistical non-inferiority to market leader Aloxi, and numeric superiority on several important measures.

Prior to the two end-of-review meetings with FDA in February and March of 2011, AP Pharma took the necessary steps to address the issues raised by FDA. Overall, the dosing system was made simpler and more convenient. The double-syringe system was changed to a single-syringe system, a smaller needle was substituted, and the dosing instructions were enhanced. In response to the CMC issues, drug irradiation was switched from bulk to terminal and additional specifications and an assay for raw materials, polymer and drug product were made. Lastly, a metabolism study was initiated, the Phase III presentation format was updated, and a thorough QT study was initiated in August 2011.

Since 2010, the CINV market has become much more attractive for potential new entrants, like APF530. Until this summer, Aloxi was expected to go generic in 2015. To our surprise, three patents directed to various formulations of Aloxi that provide increased stability and shelf life were approved by the U.S. Patent Office and extend the patent life into 2024. These patents, which are now Orange Book listed, give Aloxi another decade of protection. This bodes well for the health of the CINV marketplace and the commercial prospects of APF530. Should APF530 gain approval, it is now expected to compete in a branded price marketplace until 2024. Investors had been worried that an introduction of generic Aloxi in 2015 would erode the marketplace; this overhang has been lifted.

Another recent development in the CINV marketplace that may have a profound impact on the commercial opportunity for APF530 relates to the safety of two competitor 5-HT3 drugs and the potential for them to cause cardiac issues. Previously, Anzemet (dolasetron), which is marketed by Sanofi (NYSE:SNY) was shown to cause QT prolongation and its use for CINV is now limited. In mid-September of this year, FDA issued a Safety Announcement related to Zofran (ondansetron), which is the most widely prescribed generic 5HT-3, with approximately a 30% market share. The Safety Announcement stated that Zofran might increase the risk of developing abnormal changes in the electrical activity of the heart, which can result in a potentially fatal abnormal heart rhythm. As a result, Zofran manufacturer GlaxoSmithKline (NYSE:GSK) must now conduct a thorough QT study. FDA has already requested label changes. It is plausible that these safety concerns could cause a significant shift in Zofran (ondansetron) prescribing habits. These changes could open up an additional $400MM market opportunity for APF530.

Importantly for APF530, there have been no clinically relevant QT prolongation effects observed with ProStrakan’s (OTC:PKNGF) Sancuso or Roche’s (OTCQX:RHHBY) Kytril, two marketed drugs containing granisetron, the same active ingredient as APF530. This bodes well for AP530 and the expected results of its thorough QT study, which are due in the first quarter of 2012. Given the new concerns with ondansetron, the thorough QT study results for APF530 now represent a significant milestone for AP Pharma.

Once approved, APF530 is poised to become the second injectable antiemetic to treat patients in both acute and delayed onset CINV. APF530 is effective in the delayed setting, or up to 5 days post treatment. Importantly, APF530 demonstrated non-inferiority to Aloxi in the Phase III program (n=1,341). The safety profile of granisetron is well known. Historically, granisetron has been safe and well-tolerated when comparing the incidence of adverse events to Aloxi. Also, antiemetics Kytril and Sancuso, that contain the same active ingredient, granisetron, have been on the market for years, further supporting APF530’s well-established safety profile.

APF530 has several advantages that should allow it to be competitive in a branded CINV marketplace. One significant differentiator is APF530’s route of administration. While Aloxi is administered via intravenous injection, APF530 is administered as a single subcutaneous injection. This provides increased convenience and dosing flexibility.

Not all patients respond to their first 5HT-3 therapy. Approximately 20%-30% of patients do not respond in the acute phase and up to 60% of patients do not respond adequately in the delayed phase of CINV. Cancer patients typically undergo multiple rounds of chemotherapy and those who do not respond to initial therapy will be eligible for APF530 in later rounds. For this reason, a substantial portion of patients will ultimately fail to respond to Aloxi and must be switched to another therapy. APF530 would benefit as the only alternative to Aloxi to treat both acute and delayed-onset CINV. In Phase III testing, APF530 achieved higher numerical complete response rates for treating CINV caused by some very difficult chemotherapy regimens and performed well in patients undergoing multiple rounds of chemotherapy relative to Aloxi. We believe APF530 is well positioned to capitalize on both new patients and Aloxi failures.

In conclusion, we believe the AP Pharma/APF530 story is rotating back into favor as investors focus on the NDA resubmission in 1H12 and the important results of the thorough QT study in 1Q12. We believe APF530’s impressive product profile will allow the drug to compete with Aloxi in a branded environment. The lack of awareness of the Company’s prospects offers investors an excellent opportunity before the upcoming inflection points starting in 1Q 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I have been compensated by the company that is the subject of this note for investor relations and consulting services, which includes 150,000 warrants to purchase shares of AP Pharma