A.P. Pharma: New Board Member Brings Great Expertise To Possible Launch Of APF530

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Smith On Stocks
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Investment Thesis and Price Target

I initiated coverage of A.P. Pharma (APPA.OB) with a buy at $0.42 per share on April 25, 2012. I am reiterating a buy at the current level of $0.64 per share. For more details on the fundamental outlook for A.P. Pharma, please refer to my initiation report called Unusual Potential For A Small Company and an important follow-up piece on July 22, 2012 called Side Effect Issue With Competitive Drug Is A Huge Positive. These reports document the assumptions that lead to key sales, fully diluted EPS cash per share as summarized in the following table:

Key Projections for A.P. Pharma
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
APF530 Revenues (000) 0 $45,500 $199,631 $184,868 $182,327
Fully diluted EPS ($0.06) $0.01 $0.22 $0.15 $0.13
Fully diluted shares (000) 251,122 415,689 664,307 666,968 669,640
Year end cash (000) $86,140 $53,096 $204,990 $309,289 $405,966
Year end cash per share $0.34 $0.13 $0.31 $0.46 $0.61
Source: SmithOnStocks Projections

My price target for late 2013 is arrived at by applying a P/E ratio of 20 to projected 2014 EPS of $0.22 and results in a price target of $4.40. My model showing cash building on the balance sheet is highly unlikely to occur. I think that management would likely use the cash to make product or company acquisitions that would likely result in additional EPS contributions in the years 2014 through 2016. There is also the possibility for an outright sale of the company.

Company Overview

A.P. Pharma is a specialty pharmaceutical company developing APF530, which is a subcutaneous formulation of granisetron being developed for the prevention of chemotherapy induced nausea and vomiting (OTCPK:CINV) in patients receiving moderately or highly emetogenic chemotherapy. A.P. Pharma plans to resubmit the APF530 new drug application by the end of this month. The Company's stock has risen significantly this year in anticipation of APF530 resubmission and potential approval. The Company has $67MM of cash, which should fund the Company well into commercialization and to the point of positive cash flow, if my assumptions are correct.

In late July, A.P. Pharma completed a private placement, which sold 102 million shares of common stock at $0.525 per share. The offering grossed $53.6MM and the net proceeds were $50.7MM. This significant cash infusion gave A.P. Pharma the necessary capital to begin the APF530 commercialization process. At about the same time, the Company appointed Robert Rosen to its Board of Directors. I believe that this is a significant event, given Mr. Rosen's impressive track record and expertise in commercializing oncology products.

Robert Rosen's Background

Currently, Mr. Rosen is a managing partner of Scotia Nordic LLC. Before that (2005-2011), he was the global head of oncology at Bayer Healthcare, where he led the development of the oncology business unit for the Americas, Europe, Japan, and Asia Pacific regions. At Bayer, he spearheaded the launch of Nexavar for the treatment of renal cell carcinoma and hepatocellular carcinoma; in 2011, Nexavar achieved annual sales of ~$1B.

From 2002 to 2005, Mr. Rosen was VP of the Sanofi-Synthèlabo (SNY) oncology business unit where he launched Eloxatin for colon cancer. In 2005, the third year of Eloxatin marketing, the drug achieved US sales of ~$1.1B. Clearly, Mr. Rosen has a proven and successful track record of managing commercial teams and successfully launching drugs at world-renowned pharma companies. This gives me confidence that he will be able to prepare APF530 for commercialization and successfully launch the product.

Mr. Rosen's Initial Actions

Under Mr. Rosen's direction, A.P. Pharma plans to hire core sales and marketing leadership consisting of 10 people by the end of 2012. Upon my projection for APF530 approval in the first half of 2013, 40 additional field sales representatives will be hired. This sales force should be sufficient to reach approximately 50% of the market. I am confident that a seasoned executive like Mr. Rosen will be able to successfully launch APF530.

Disclosure: I am long APPA.OB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

This article was written by

Smith On Stocks profile picture
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My name is Larry Smith. My career was spent on Wall Street as a biotechnology and pharmaceuticals analyst and also as Director of Research at Smith Barney and Hambrecht and Quist. I began my career in 1971 as a Wall Street analyst and started following the pharmaceutical industry in 1974. I was consistently selected to Institutional Investor All Star team for a ten year period ending in late 1983 (highest ranking was number 2) when I was named Director of Research at Smith Barney. In the early 1980s, I was one of the first Wall Street analysts to develop an interest in biotechnology. I made a research call on Genentech before it came public. When Smith Barney brought Amgen public in mid-1983, I was the analyst in charge of coverage and was the first Wall Street analyst to recommend the stock. In 1991, I joined Hambrecht & Quist as Director of Health Care research and also as biotechnology analyst. I chaired the H&Q health care conference for five years and believe that I played a meaningful role in its creation. It is now known as the JP Morgan conference which plays a pivotal role in today’s biotechnology industry. I am proud of my career and note that I have had meaningful interactions with over 500 biopharma companies in my career. I am now 78 and financially very comfortable. I am not associated with any biopharma or investment company. I am not dependent on and do not need any external income to live a comfortable life. I have no hidden agenda. While I am retired from a financial standpoint, I have enormous intellectual curiosity and continue to spend significant amounts of time on researching innovative companies and not just limited to biotechnology. I maintain a website called SmithOnStocks. Until early 2022, I used this as a basis for a subscription service for my research. I have ended this subscription service but occasionally write articles. There is no charge for accessing this website and any articles. You should not rely on anything I write on my website for investment advice although you may want to use the information in forming an investment decision. The same goes for any articles or comments that I might make on Seeking Alpha I want to alert you to NYSE Issue In 1999 in which I made an ethical breach that resulted in a suspension from being a registered representative in the securities industry for a period of time. I believe that this measure was harsh beyond any reasonable measure and totally unwarranted. I have gone to great lengths in this report to give my side of the story and I hope that you will read the in-depth account that I have provided. This suspension took place over 20 years ago and has long since ended. There has been no restriction from the NYSE for many years on my working as a registered representative if I were to choose to go through the required registration procedures. Still, this NYSE action is like a Scarlett letter that I carry. I would urge you to read the full account of the events that led to this NYSE action and if you do so I believe you will agree that this in no way reflects on my integrity and the way I have always conducted myself, then and now. I strongly believe that the action taken was excessive and I think that if you read my full account you will agree. People make mistakes. Bill Clinton lied under oath, was impeached and disbarred as a lawyer in Arkansas in connection with the Monica Lewinsky affair. However, society has judged him on the body of work that he has done. Suspensions in the security industry can result from serious infractions in which investors are defrauded or swindled. In the events that led to my suspension no investors lost money and as I explain in this report investors who followed my advice made significant amounts of money. Before you rush to any conclusions, let me tell you my story. I Am Proud in How I Have Conducted My Career Before I go into the details of this ethical breach, I want to emphasize that I have had a distinguished career on Wall Street. My record from 1971 when I started on Wall Street until 1999 was unblemished. I came to New York from Indiana with no business connections and no money but through hard work I became a highly regarded Wall Street analyst and was selected to the Institutional Investor All Star team in pharmaceuticals for ten years in a row. Based on my record as being the top or one of the top analysts at Smith Barney, I was selected to be head of research from 1981 until 1989. I also served on the Board of Directors at Smith Barney. Based on my strong reputation, Hambrecht and Quist approached me in 1989 to head their life sciences research effort and to run the annual H&Q (now JP Morgan) healthcare conference. I was a Managing Director and on the operating committee at H&Q. I left H&Q in the late 1990s because I disliked the bureaucracy that was such an integral part of being head of research. I had made enough money to be financially secure and I wanted to get back into doing what I loved, biotechnology research. I joined Tucker Anthony in 1997 as a biotechnology analyst. Explaining the Events That Led to the NYSE Issue Tucker Anthony had a sister firm called Sutro and a decision was made early in 1998 to move health care research from Tucker to Sutro. Tucker was an east coast based firm and Sutro was based in Los Angeles. Sutro leased a New York office to which I moved. It was here that an unfortunate train of events was set in motion that led to the NYSE action that put a stain on what I consider an outstanding career. When I moved from Tucker to Sutro, I maintained my brokerage accounts at Tucker. I conducted normal trading in this account for some months. Then the research administrative research manager for Sutro contacted me and said that for regulatory purposes I would have to move my account from Tucker to Sutro. After some time spent in looking for a broker to handle my account at Sutro I became frustrated. At that time, I had over $5 million in my brokerage accounts. While I was sophisticated in health care investing which made up 10% of my portfolio, I needed help with other parts of the portfolio. I could find no retail broker at Sutro that I wanted to trust my portfolio to. I asked and received approval to look for a broker outside of Sutro and contacted Schwab about finding an investment advisor there to manage my account.  While this was in process, the research administrative manager at Sutro called again and said that Sutro was probably planning to shut down the New York office and I would have to move to Los Angeles or leave the firm. Moving to Los Angeles was not an option for me as my roots were deep in New York. I informed her that given this choice I would soon be leaving Sutro rather then moving to Los Angeles and began to think about what to do. I came to the preliminary conclusion that I would start a consulting firm dealing in biotechnology. I also concluded that I would have to carefully manage my investment portfolio. It was here that I made a major mistake that I have regretted ever since. Frustrated that my money was tied up in Tucker and I was unable to trade in my account and unable to find a broker that I trusted, I decided to open an account at Schwab without a broker managing it. I indicated on the account transfer form that I was self-employed based on the assumption that I was going to be leaving Sutro imminently. This was my Bill Clinton moment and turned out to be a major mistake. I continued to work at Sutro while I was waiting for the New York office to be closed which I thought would be in a matter of days or weeks and during this time, I began to execute trades in my account at Schwab. However, after some weeks the research administrative manager at Sutro called and informed me that based on the response they had gotten from clients and the work that I was doing that the firm had reversed itself and now wanted to keep the office in New York and they were also willing to hire two assistants to aid me. There was also the promise of a significant bonus in the upcoming review that based on my work could amount to several hundreds of thousands of dollars. Not surprisingly, I decided to stay on at Sutro instead of leaving and starting my own firm. I then looked for and finally found a Sutro broker that I could trust to help manage my portfolio. The brokerage accounts at Schwab were opened in February of 1999 and transferred to Sutro in April 1999. When I moved my accounts to Sutro the compliance department at Sutro saw that there was this hiatus when I had an unauthorized account at another firm. This was reported to NYSE. NYSE Reviewed My Case and Took No Action for Three Years Management at Sutro looked very closely at what had occurred and decided that while it was certainly not something they could condone, it was a minor infraction and they thought that given my stellar and unblemished record that NYSE would not take any meaningful action other than a wrist slap. Sutro decided to be pre-emptive in administering the wrist slap and fined me and suspended me for one month. They thought that this would satisfy NYSE based on their interpretation of what had occurred. They wanted me to continue with the firm, paid the sizable bonus I was due and committed to pick up all legal fees. I then had a deposition with a lawyer from NYSE in early 2000. During a one day interview, he went over all of the details of the accounts that were held at Schwab and all of the trades that occurred in detail. He also looked at all of the reports that I had issued as an analyst during this time to compare to the trading in my account to the issuance of research reports. I then heard nothing more from the NYSE for three years. Sutro concluded as did I that this issue was behind us. Three years later in mid-2003, I heard from NYSE to my shock that they were re-opening the case. Why after three years was the case being re-opened? In talking to the lawyers at NYSE, I came to understand that this was the result of Elliott Spitzer’s attack on Wall Street research. Remember the famous case of Henry Blodgett who recommended stocks of investment banking clients to clients that he thought were actually sales. NYSE enforcement was under pressure because this unethical practice had been brought to light by Spitzer and they had missed it. They were under pressure to show how tough they could be as enforcers. They reviewed their records and came up with my case which they decided to reopen it in order to show that they were aggressive enforcers. They went over the same information that had been gathered in early 2000, but came up with an entirely different interpretation. They said that I effected stock transactions shortly before issuance of research reports which I had prepared and this was a violation of Exchange Rule 472.40(2) (iii). They also said that I failed to disclose that I held securities in stocks recommended in a research report. They said that I opened accounts at a member firm that concealed fact of my employment at another member firm; violated Exchange Rule 407(b). They recommended a censure and two and one-half year suspension. Two Stock Trades at Question The information on opening an account at another firm is something that I just discussed at length. This was not in dispute. However, NYSE focused on two stock trades that I made and explained the suspension largely on the basis of these two trades. I believe that they were clearly wrong in their conclusions. Let me discuss those trades in detail. The first trade was in Stericycle, a medical waste disposal company. I had been following the company for some time with a neutral rating. In my reports, I noted that the Company wanted to buy the medical waste disposal business of Waste Management and if they were successful, I would immediately go to a strong buy. This acquisition was announced on April 14, 2009 after the close at 4 PM EST. Because it was 1 PM in Los Angeles I held a conference call with Sutro’s traders and the salesforce and told them I was going to a strong buy on the stock. It was the practice of Sutro to initiate new ideas with a conference call in this manner. The traders and sales force would then go out to the clients with the idea. After this, the analyst would follow-up by publishing a note on First Call (an electronic distribution network) and this was done on April 15 This was then followed up by a written research report on April 16. On April 16, I bought 2500 shares of the stock at a price of $12. This was accepted practice at Sutro for research analysts buying stocks that they recommended. There was no requirement to wait for a period of time to buy the stock. The analyst was allowed to buy the stock at the same time as other Sutro employees and clients The NYSE judged my conduct on standards that were different from those that were accepted practices at Sutro. By today’s standards, the Sutro practices seem very loose but they were common at the time. This is why Sutro did not view this trade as a breach of conduct and kept me as an analyst. The NYSE also said that I did not disclose that I owned Stericycle in my written report. However, none of the analysts at Sutro were required at the time to do so. This was also standard operating procedure. Stericycle was a major success for investors. Adjusting for stock splits the stock traded at about $3.00 when I first recommended it. Fifteen years later, the stock is trading at about $119. This was one of my best recommendations ever. I held the Stericycle stock for many years and only sold it recently. The NYSE did not accept that my actions were in line with the practices of Sutro even though I produced a letter to that effect from the research administrative officer. I also argued that a $30,000 investment in a portfolio that amounted to $5 million at the time was de minimus. I argued that the stock was bought and maintained as a long term investment. I argued that it was an excellent money making idea for investors. The NYSE dismissed all of these arguments and maintained that I traded ahead of my recommendation. The second trade that the NYSE emphasized was a trade in Schering Plough. On April 18, the stock had traded down by 5%. I had an accumulate rating on the stock essentially telling investors to buy the stock for the long term, but connoting less emphasis than a buy. In the morning call to traders and salesmen, I alerted them to the price weakness, but told them there was no change in the fundamental outlook and there was no change in my price target. I was not intending to issue a report, but the research administrative manager told me that the price drop in Schering Plough based on my price target indicated 25% upside that was the accepted criteria for a buy recommendation. Hence, I needed to put out a report in which I upgraded my opinion from accumulate to buy. I bought the stock on April 20 at the same time as the written report was issued. I previously owned 500 shares and this increased my position to 1000 shares for a total investment of about $35,000 which again was within a $5 million portfolio. The NYSE again accused me of the same things as in the Stericycle situation. They said that I traded ahead of my recommendation and did not disclose that I owned the stock. My responses were the same as for Stericycle and were once again rejected. Was The NYSE Action Justified? I think that the NYSE action was out of all proportion to what actually transpired. I think the enforcement officers applied new standards in overturning the prior decision to take no action on this case that had been in effect for three years. They were under pressure to make a big splash in the Elliot Spitzer era to show how tough they were. My recommendations were solid recommendations and indeed the Stericycle recommendation was outstanding. I fully recognize that my decision to open the brokerage account at Schwab prior to resigning from Sutro was an ethical breach on my part even if I was planning to resign from Sutro. When I decided to stay with Sutro, I transferred my accounts immediately. I strongly and absolutely maintain that my trading in Schering-Plough and Stericycle was in accordance with policies in place at Sutro at the time. By today’s standards these seem loose, but this was common industry practice at the time. The NYSE review was conducted by a mediator and it was he that determined the punishment. He had spent his entire career as an enforcement officer for the NYSE. He was also friends with the NYSE lawyers on my case and sent out to lunch with them during the hearing. He was the judge, jury and executioner of my fate. As I look back, I question his objectivity and motives. In writing his opinion, he did not acknowledge documents from Sutro that showed that my stock trading disclosures were in-line with their internal procedures. I had no opportunity to review or correct his opinion in the opinion he wrote. In a country in which, guilt or innocence is established by one’s peers, mine was determined by a hanging judge with no experience in the securities business and an apparent pre-determined view on my actions.
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