Expert Financial Analysis and Reporting

Overview

A.P. Pharma has just released the disappointing news that it has received a Complete Response Letter for APF530. The press release described three issues that led to the CRL.

· With respect to chemistry, manufacturing and controls (CMC), the FDA has requested the refinement of one product quality analytical test method, and that certain deficiencies identified during facility pre-approval inspections be addressed.

· The FDA has requested that a human factors validation study evaluating the usability of the APF530 syringe system together with its proposed product labeling and instructions for use be conducted with product assembled using a validated, commercial process.

· With respect to clinical, the FDA has requested a re-analysis of the existing Phase 3 clinical data that reclassifies patients into those receiving moderately emetogenic chemotherapy (MEC) and highly emetogenic chemotherapy (HEC) according to the recently modified ASCO 2011 Guideline. The FDA did not request any new clinical studies.

The FDA appears to be satisfied with the clinical studies submitted with the NDA and has not requested any new studies, which would be both costly and lengthy. A key question is how long it will take for A.P. Pharma to respond to the three issues raised by the FDA. After the Company answers these requests, it will probably file a class II complete response and the FDA would likely establish a PDUFA date six months later. Based on past experience, which may or may not be applicable to this situation, as a minimum it will take six months to gather the information to respond to the FDA, suggesting a delay of one year or more.

The next key issue is what about the cash position? The Company raised $50 million in an equity offering in 3Q, 2012 that puts it in a reasonably good cash position. At the end of 2012, the Company had cash of $54 million. I think that the burn rate going forward could be about $3 million per quarter going forward. This suggests that the Company will have about $42 million of cash in one year, the most optimistic time at which APF 530 could gain approval. The Company is in a solid cash position to see its way through the process of resubmitting the NDA. I don't see the need for an equity offering in the next year or so.

Management Comments on Conference Call

Management held a conference call this morning. It started the conference call by saying that it now expected to launch AP530 in 1H, 2014. Previously it had guided to 2H, 2013. This was roughly in line with my thinking before the call. Management would not go into detail on the issues raised in the CRL nor how it intends to address them despite repeated questioning from analysts. They just reiterated guidance that they would launch in 1H, 2014.

Investment Conclusion

My guess is that APF530 could be launched in June of 2014. There is nothing in the CRL that suggests that the product won't ultimately gain approval nor does it significantly dim the potential once it is approved. Importantly, the Company also has a solid cash position so that it does not face an imminent financial crunch and will not likely have to finance between now and hoped for approval one year or more out.

The greatest new uncertainty that arises is that given the Company's record of CRLs, how we can be sure that this time they will be successful in gaining approval and the answer is that we can't be. However, these issues look to be resolvable. There remains significant promise for the product and the stock, in my opinion.

While this is extremely disappointing news, it is not hopeless and there remains the potential for the same type of commercial success that I initially projected. The next few months are not likely to provide clarity, but after that the Company is likely to be able to detail the steps needed to resubmit the NDA. At that point, investors are likely to focus on the potential for approval and I think that investors could begin to anticipate the approval once again. I want to see how the stock settles in the next few days before considering my next course of action. My best judgment is that I will stay with my current position. Faced with the decision of either buying or selling the stock at this price, I would be a buyer.