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Article by DailyStocks_admin    (04-29-13 12:13 AM)

Description

Filed with the SEC from Apr 18 to Apr 24:

Acura Pharmaceuticals (ACUR)
Care Capital decreased its holdings to 8,630,655 shares (18.3%), after it sold 1,519,652 shares from March 12 through April 23. Care did not disclose at what price it sold the shares.

BUSINESS OVERVIEW

Overview

We are a specialty pharmaceutical company engaged in the research, development and commercialization of technologies and products intended to address medication abuse and misuse. We have discovered and developed two proprietary technologies. Our Aversion® Technology is a mixture of inactive ingredients incorporated into pharmaceutical tablets and capsules intended to address some common methods of product tampering associated with opioid abuse. Pfizer Inc.’s Oxecta® (oxycodone HCl) tablets, CII is the first approved and marketed product utilizing Aversion and is commercialized under a license agreement we have with a subsidiary of Pfizer, or the Pfizer Agreement. We have also developed our Impede™ Technology which is a combination of inactive ingredients that prevent the extraction of pseudoephedrine from tablets and disrupt the direct conversion of pseudoephedrine from tablets into methamphetamine. We have launched in the United States Nexafed® (pseudoephedrine HC1) tablets formulated with our Impede Technology.

We have 7 additional opioid products utilizing Aversion in various stages of development. Pursuant to a September 24, 2012 letter agreement with Pfizer, all rights to these development-stage opioid products have reverted back to us. Our product containing hydrocodone bitartrate and acetaminophen utilizing the Aversion technology, or hydrocodone/acetaminophen , is the most advanced opioid product in development and the primary focus of our opioid development efforts. Hydrocodone/acetaminophen is the most widely prescribed and often abused opioid product in the United States. Pfizer previously completed a clinical study demonstrating the hydrocodone/acetaminophen product is bioequivalent to its reference listed drug. We filed an Investigational New Drug Application, or IND, with the Food and Drug Administration, or FDA, on December 20, 2012. We expect that the development program for our hydrocodone/acetaminophen product and our other Aversion opioid products in development will be consistent with that of Oxecta. We anticipate submitting a 505(b)(2) NDA with the FDA for our hydrocodone/acetaminophen product in the first half of 2014.

We launched Nexafed commercially in mid-December 2012 into the $1 billion United States over the counter market, or OTC, for cold and allergy products containing a decongestant. Nexafed was demonstrated in a clinical study to meet the FDA Guideline standards for bioequivalence to the reference drug Sudafed® marketed by Johnson & Johnson Corporation. We anticipate developing line extensions for our Nexafed franchise to capitalize on the many different combination offerings in the OTC cold/allergy market. We also have been working on the next generation of our Impede Technology in order to further improve our Nexafed franchise.

We also have discovered an early-stage technology which, in proof of concept laboratory tests, demonstrates the ability to limit the release of the active ingredient from tablets when multiple tablets are consumed simultaneously.

Our Strategy

Our goal is to become a leading specialty pharmaceutical company focused on addressing the growing societal problem of pharmaceutical drug abuse by developing a broad portfolio of products with abuse deterrent features and benefits. Specifically, we intend to:

•
Capitalize on our experience and expertise in the research and development of technologies that address medication abuse and misuse . We have two products commercially launched containing our Aversion and Impede Technologies. We continue to invest in improvements in these technologies and to innovate new technologies to address medication abuse and misuse.

•
Leverage our technologies by developing a full line of pharmaceutical products which utilize our proprietary technologies . Medication abuse and misuse is not limited to single drugs but often pervades entire drug categories. We intend to develop multiple products in the prescription opioid and OTC cold/allergy markets with our technologies.

•
Commercialize our products with our internal resources or license to strategically focused companies in the United States and other geographic territories . We have developed a small infrastructure to commercialize our OTC products that utilize the Impede Technology. We have licensed our Aversion Technology to Pfizer for use in Oxecta in the United States, Canada and Mexico. We are seeking licensing partners for our other Aversion technology worldwide and marketing partners for Nexafed outside the United States.

•
Maintain an efficient internal cost structure . We maintain an efficient internal cost structure focused on discovering new technologies and developing product formulations using those technologies. We also have a small, focused OTC marketing and sales team. We outsource many high cost elements of development and commercialization, such as clinical trials and commercial manufacturing that minimize required fixed overhead and capital investment and thereby reduces our business risk.

•
In-license or acquire technologies and/or products to expand our portfolio of technologies and products . We intend to pursue the in-license or acquisition of product candidates and technologies that will allow us to expand our portfolio of products. Such in-licensing or acquisition transactions, if successfully completed, of which no assurance can be given, may include product candidates or technologies for pain relief, addiction, and other drugs.

Aversion Technology Overview

Aversion Technology is a unique composition of inactive pharmaceutical ingredients utilized with an opioid or other drug susceptible of abuse to provide abuse deterrent functionality. We have three issued U.S. patents covering all of our Aversion Technology opioid products, which patents expire between 2023 and 2025. Our Aversion Technology products are intended to provide the same therapeutic benefits of the active drug ingredient as currently marketed products containing the same active pharmaceutical ingredient, while simultaneously discouraging some of the common methods of pharmaceutical product misuse and abuse described below.

The extent and manner in which any of the features described below will be described in the FDA approved label for our pipeline products will be dependent on the results of and the acceptance by the FDA of our and our licensees’ studies for each product.

Intended to Deter I.V. Injection of Opioids Extracted from Dissolved Tablets

Drug abusers may dissolve pharmaceutical tablets or capsules in water, alcohol, or other common solvents, filter the dissolved solution into a syringe, and inject the resulting fluid intravenously to obtain euphoric effects. Aversion Technology tablets dissolved in generally available solvents, including water or alcohol, into a volume and form suitable for intravenous injection, converts the tablet into a viscous gel mixture. We believe this gel will limit or impede drug abusers from extracting and injecting the active ingredients from our tablets.

Intended to Deter Nasal Snorting

Drug abusers may crush pharmaceutical tablets or capsules and intranasally snort the resulting powder to absorb active ingredient through the nasal passages to obtain euphoric effects. The combination of Aversion Technology inactive ingredients is intended to induce nasal passage discomfort if the tablets are snorted. We believe products which utilize Aversion Technology may be disliked and will discourage prospective nasal drug abusers from snorting crushed tablets or capsules.

Oxecta

Oxecta is a Schedule II narcotic indicated for the management of acute and chronic moderate to severe pain where the use of an opioid analgesic is appropriate. Oxecta utilizes our Aversion Technology. Pfizer received FDA approval for its 505(b)(2) NDA for Oxecta on June 17, 2011 and introduced the product into the market in February 2012. To our knowledge, Pfizer has not initiated marketing of Oxecta to physicians and is awaiting advice from the FDA on their proposed physician promotion materials which were submitted to the FDA in July 2012. As such, Pfizer’s attained no meaningful sales of Oxecta in 2012.

The safety and efficacy of Oxecta 5mg and 7.5mg tablets was established by demonstrating bioequivalence to commercially available oxycodone immediate-release tablets in the fasted state. Oxecta differs from oxycodone tablets when taken with a high fat meal though these differences are not considered clinically relevant, and Oxecta can be taken without regard to food. The FDA-approved label for Oxecta describes elements unique to our Aversion Technology, which differs from current commercially available oxycodone immediate-release tablets. The label for Oxecta includes the results from a clinical study that evaluated the effects of nasally snorting crushed Oxecta and commercially available oxycodone tablets, and limitations on exposing Oxecta tablets to water and other solvents and administration through feeding tubes. The clinical study evaluated 40 non-dependent recreational opioid users, who self-administered the equivalent of 15mg of oxycodone. After accounting for a first sequence effect, the study demonstrated:

•
30% of subjects exposed to Oxecta responded that they would not take the drug again compared to 5% of subjects exposed to immediate-release oxycodone;
•
subjects taking Oxecta reported a higher incidence of nasopharyngeal and facial adverse events compared to immediate-release oxycodone;
•
a decreased ability to completely insufflate two crushed Oxecta tablets within a fixed time period (21 of 40 subjects), while all subjects were able to completely insufflate the entire dose of immediate-release oxycodone; and
•
small numeric differences in the median and mean drug liking scores, which were lower in response to Oxecta than immediate-release oxycodone.

Although we believe these abuse deterrent characteristics differentiate Oxecta from immediate-release oxycodone products currently on the market, consistent with FDA guidance which requires epidemiology studies to support a claim of abuse deterrence, the clinical significance of the difference in drug liking and difference in response to taking the drug again in this study has not been established. There is no evidence that Oxecta has a reduced liability compared to immediate release oxycodone. Pfizer has agreed to a post-approval commitment with the FDA to perform an epidemiology study to assess the actual impact on abuse of Oxecta tablets.

Further, the Oxecta product label guides patients not to crush and dissolve the tablets or pre-soak, lick or otherwise wet the tablets prior to administration. Similarly, caregivers are advised not to crush and dissolve the tablets or otherwise use Oxecta for administration via nasogastric, gastric or other feeding tubes as it may cause an obstruction. Our laboratory studies demonstrated that the Oxecta tablet characteristics may change when Oxecta is exposed to certain solvents, including water.

Development of Hydrocodone/Acetaminophen



Our hydrocodone/acetaminophen product was previously under development by Pfizer who, before returning the product to us: (a) successfully removed niacin from the formulation, (2) demonstrated bioequivalence to a reference listed drug and (3) held a pre-IND meeting with the FDA. We expect our clinical development program for our hydrocodone/acetaminophen product to consist of:

•
A pharmacokinetic study in about 36 fasted subjects to establish bioequivalence of product made by a new contract manufacturer to the FDA’s reference listed drug and determine the food effect on our drug;
•
A pharmacokinetic study in about 24 subjects to establish safety compared to the reference listed drugs tramadol/acetaminophen (for acetaminophen) and hydrocodone bitartrate/ibuprofen (for hydrocodone);
•
A pharmacokinetic study in about 24 subjects demonstrating dose proportionality of our formulation;
•
A nasal abuse liability liking study in about 40 recreational drug users against a reference drug;
•
Laboratory studies demonstrating extraction, syringing and particle size characteristics of our product; and
•
An assessment of the routes of abuse of hydrocodone products.

We submitted an IND to the FDA for our hydrocodone/acetaminophen product on December 20, 2012 which became effective in late January 2013 and allows us to commence clinical trials. Based on the development program outlined above, we anticipate preparing and submitting a 505(b)(2) NDA for our hydrocodone/acetaminophen product in the first half of 2014.

We continue to evaluate possible partnering of our Aversion development products with alternative strategic partners.

U.S. Market Opportunity for Opioid Analgesic Products Utilizing Aversion Technology

The misuse and abuse of prescription drug products in general, and opioid analgesics in particular, is a significant societal problem that has been described as epidemic in nature by Joseph A. Califano, Jr., Chairman and President, National Center for Addiction and Substance Abuse at Columbia University, July 2005. Results from the 2009 National Survey on Drug Use and Health indicate prescription drug abusers have supplanted abusers of all illicit drugs except marijuana. The survey estimated that 35 million people in the United States, or more than 10% of the population, have engaged in the non-medical use of prescription opioid analgesics at some point in their lifetime. IR Opioid Products comprise the vast majority of this abuse compared with ER Opioid Products. In addition, it is estimated that more than 75 million people in the United States suffer from pain and the FDA estimates more than 45 million people receive a prescription for the opioid hydrocodone annually. For many pain sufferers, opioid analgesics provide their only pain relief. As a result, opioid analgesics are among the largest prescription drug classes in the United States with over 260 million tablet and capsule prescriptions dispensed in 2011 of which approximately 244 million were for IR Opioid Products and 16 million were for ER Opioid Products. However, physicians and other health care providers at times are reluctant to prescribe opioid analgesics for fear of misuse, abuse, and diversion of legitimate prescriptions for illicit use.

We expect our Aversion Technology opioid product(s), to compete primarily in the IR Opioid Product segment of the United States opioid analgesic market. IR Opioid Product prescriptions have grown at a 3.8% compounded annual rate over the last five years. Because IR Opioid Products are used for both acute and chronic pain, a prescription, on average, contains 62 tablets or capsules. According to IMS Health, in 2011, sales in the IR Opioid Product segment were approximately $2.1 billion, of which ~97% was attributable to generic products. Due to fewer identified competitors and the significantly larger market for dispensed prescriptions for IR Opioid Products compared to ER Opioid Products, we have initially focused on developing IR Opioid Products utilizing our Aversion Technology. Oxecta and our Aversion Technology products in development include the active opioid ingredients representing approximately 78% of the U.S. IR Opioid Product segment.

Despite considerable publicity regarding the abuse of OxyContin® extended-release tablets and other ER Opioid Products, U.S. government statistics suggest that far more people have used IR Opioid Products non-medically than ER Opioid Products. These statistics estimate that nearly four times as many people have misused the IR Opioid Products Vicodin®, Lortab® and Lorcet® (hydrocodone bitartrate/acetaminophen brands and generics) than OxyContin®. We estimate 60-95% of the 35 million lifetime U.S. opioid abusers have engaged in the non-medical use of the active ingredients in our IR Opioid product candidates. As indicated in the following chart, the top five abused opioid products are available only as IR Opioid Products.

Lifetime Non-Medical Use of Selected Pain Relievers, Age 12 or Older: 2010

In a 2011 survey of 400 opioid prescribing physicians conducted for us by an independent research firm, 39% of physicians indicated they were highly concerned with the diversion of their opioid prescriptions for non-medical purposes and 42% were highly concerned about opioid misuse by their patients. However, less than 17% of these same physicians indicated they were confident they could adequately identify patients who are diverting or misusing their opioid prescriptions. Further, 77% and 66% of the physicians indicated that abuse of their opioid prescription by injection and snorting, respectively, would likely lead to serious adverse health consequences for the abuser as compared to only 38% for abuse by oral administration.

A majority of pharmaceutical products in the United States are paid for by third-party payers such as insurers, pharmacy benefit managers, self-insured companies and the federal and state governments through Medicare, Medicaid and other health care programs. We believe our product candidates must demonstrate a clinical benefit to the patient and/or an economic benefit to third-party payers and/or a benefit to health care providers to receive favorable reimbursement status by the third-party payers, of which no assurance can be given.

Several independent organizations have estimated the potential cost impact of prescription opioid abuse to insurers. An analysis of health and pharmacy insurance claims between 1998 and 2002 for almost two million Americans conducted by Analysis Group, Inc. and others indicated that enrollees with a diagnosis of opioid abuse had average claims of approximately $14,000 per year higher than an age-gender matched non-opioid abuse sample. A 2007 report by the Coalition Against Insurance Fraud, after adjusting for inflation, estimated this excess cost per patient at more than $16,000 for 2007. By applying the U.S. government’s estimated 4.4 million annual opioid abusers, this organization concluded that abuse of IR and ER Opioid Products could cost health insurers up to $72.5 billion a year.

Product Labeling for Aversion Technology Products

In January 2013, the FDA published a draft guidance for industry on the evaluation and labeling of abuse-deterrent opioids. While this guidance is non-binding on the FDA, it outlines FDA’s current thinking on the labeling of abuse-deterrent products. FDA encourages sponsors to seek approval of proposed product labeling that sets forth the results of physiochemical, physiologic, pharmacodynamic, pharmacokinetic, and/or formal postmarketing studies that appropriately characterizes the abuse-deterrent properties of a product. To date, FDA has limited data correlating the potentially abuse-deterrent properties of certain opioid drug products with actual reduction in abuse or adverse events associated with abuse. When the data predict or show that a product’s potentially abuse-deterrent properties can be expected to, or actually do, result in a significant reduction in that product’s abuse potential, these data, together with an accurate characterization of what the data mean, should be included in product labeling.

We or our licensee may seek to include descriptions of studies that characterize the abuse-deterrent properties in the label for our Aversion Technology products in development. Although the FDA approved label for Oxecta contains limitations on exposing Oxecta tablets to water and other solvents and administration through feeding tubes, the FDA approved Oxecta label does not contain a description of the I.V. injection studies we performed to characterize the abuse deterrent properties of Oxecta. Pfizer has committed to the FDA to undertake epidemiological studies to assess the actual consequences of abuse of Oxecta in the market. The extent to which a description of the abuse-deterrent properties or results of epidemiological or other studies will be added to or included in the FDA approved product label for our products will be the subject of our discussions with the FDA as part of the NDA review process, even after having obtained approval of Oxecta. Further, because the FDA closely regulates promotional materials, even if FDA initially approves labeling that includes a description of the abuse deterrent properties of the product, the FDA’s Office of Prescription Drug Promotion, or OPDP, will continue to review the acceptability of promotional labeling claims and product advertising campaigns for our marketed products.

Pfizer Agreement

On October 30, 2007, we and King Pharmaceuticals Research and Development, Inc., now a wholly-owned subsidiary of Pfizer, entered into the Pfizer Agreement to develop and commercialize in the United States, Canada and Mexico certain opioid analgesic products utilizing our proprietary Aversion Technology. The Pfizer Agreement initially provided Pfizer with an exclusive license in the United States, Canada and Mexico, or the Pfizer Territory, for Oxecta (oxycodone HCl) Tablets and oxycodone HCl/acetaminophen tablets utilizing Aversion Technology. In addition, the Pfizer Agreement provided Pfizer with an option to license in the Pfizer Territory certain future opioid analgesic products developed utilizing Aversion Technology. Pfizer exercised its option to license two additional product candidates including an undisclosed immediate-release opioid analgesic tablet product and hydrocodone bitartrate/acetaminophen tablets, each of which utilize our Aversion Technology. On September 24, 2012, we entered into a letter agreement with Pfizer which amends the Pfizer Agreement and provides for the termination of Pfizer’s license to our Aversion® Technology used in the three development-stage products licensed to Pfizer and for the transfer of these products back to us. These development-stage products are hydrocodone bitartrate/acetaminophen tablets, oxycodone HCl/acetaminophen tablets and an undisclosed opioid. See the discussion above under the caption “Aversion Technology Opioid Products in Development” for further information regarding the development of these products.

Pursuant to the Pfizer Agreement, we and Pfizer formed a joint steering committee to oversee development and commercialization strategies for Oxecta. Pfizer is responsible, at its own expense, for all regulatory, manufacturing and commercialization activities for Oxecta in all Pfizer Territories. Subject to the Pfizer Agreement, Pfizer will have final decision making authority with respect to all regulatory and commercialization activities for Oxecta.

As of December 31, 2012, we had received aggregate payments of $78.5 million from Pfizer, consisting of a $30.0 million non-refundable upfront cash payment, $17.5 million in reimbursed research and development expenses relating to licensed products, $6.0 million in fees relating to Pfizer’s exercise of its option to license an undisclosed immediate-release opioid analgesic tablet product and hydrocodone bitartrate/acetaminophen tablets, a $5.0 million milestone fee relating to our successful achievement of the primary endpoints for our pivotal Phase III clinical study for Aversion oxycodone HCl with niacin tablets and a $20.0 million milestone fee relating to the FDA’s approval of the Oxecta Tablets NDA. We can also receive a one-time $50 million sales milestone payment upon the first attainment of $750 million in net sales of Oxecta across all Pfizer Territories. In addition, for Oxecta sales occurring on and following February 2, 2013 (the one year anniversary of the first commercial sale of Oxecta), Pfizer will pay us a royalty at one of six rates ranging from 5% to 25% based on the level of annual net sales for Oxecta across all Pfizer Territories, with the highest applicable royalty rate applied to such annual sales.

Pfizer’s royalty payment obligations for Oxecta expire on a country-by-country basis upon the later of (i) the expiration of the last valid patent claim covering Oxecta in such country, or (ii) 15 years from the first commercial sale of Oxecta in such country. No minimum annual fees are payable by either party under the Pfizer Agreement. If Pfizer, after consultation with us, enters into a license agreement with a third party to avoid or settle such third party’s allegations or claims regarding freedom to operate against Oxecta, Pfizer may deduct 50% of any royalties or other license payments it pays to such third party under such license, provided that the royalties payable to us are no less than 80% of the royalties otherwise due to us under the Pfizer Agreement.

The Pfizer Agreement expires upon the expiration of Pfizer’s royalty payment and other payment obligations under the Pfizer Agreement. Pfizer may terminate the Pfizer Agreement in its entirety at any time by written notice to us. We may terminate the Pfizer Agreement in its entirety if Pfizer commences any interference or opposition proceeding challenging the validity or enforceability of any of our patent rights licensed to Pfizer under the Pfizer Agreement. Either party has the right to terminate the Pfizer Agreement on a country-by-country basis if the other party is in material breach of its obligations under the Pfizer Agreement relating to such country, and to terminate the Agreement in its entirety in the event the other party makes an assignment for the benefit of creditors, files a petition in bankruptcy or otherwise seeks relief under applicable bankruptcy laws, in each case subject to applicable cure periods.

In the event of termination, no payments are due except those royalties and milestones that have accrued prior to termination under the Pfizer Agreement and all licenses under the Pfizer Agreement are terminated. For all Acura terminations and termination by Pfizer where we are not in breach, the Pfizer Agreement provides for the transition of development and marketing of the licensed products from Pfizer to us, including the conveyance by Pfizer to us of the trademarks and all regulatory filings and approvals solely used in connection with the commercialization of such licensed products and, in certain cases, for Pfizer’s supply of such licensed products for a transitional period at Pfizer’s cost plus a mark-up.

CEO BACKGROUND

At the Meeting, five individuals will be elected to serve as Directors until the next annual meeting, and until their successors are elected and qualified. During 2012, each of the nominees to the Board served as a Director. Mr. David Azad and Mr. Richard Markham, each a director during 2012, resigned from the Board effective December 31, 2012 and March 11, 2013, respectively.

Unless a shareholder WITHHOLDS AUTHORITY, a properly delivered proxy will be voted FOR the election of the persons named below, unless the proxy contains contrary instructions. Management has no reason to believe that any of the nominees will not be a candidate or will be unable to serve as a Director. However, in the event any nominee is not a candidate or is unable or unwilling to serve as a Director at the time of the election, unless the shareholder withholds authority from voting, the proxies will be voted for any nominee who shall be designated by the present Board of Directors to fill such vacancy.

Although our Certificate of Incorporation provides for a maximum of 11 directors, in accordance with the terms of a Voting Agreement dated February 6, 2004, as amended, by and among the Company, GCE Holdings LLC (“GCE”) Care Capital Investments II, LP (“Care Capital”), Essex Woodlands Health Ventures V, L.P. (“Essex”), Galen Partners III, L.P. (“Galen”) and others (the “Voting Agreement”), we have agreed that the Board of Directors shall be comprised of not more than seven members (or such greater number that is required to assure that we have a majority of independent directors after giving effect to the various designation rights described herein), one of whom shall be the designee of Care Capital, one of whom shall be the designee of Essex, and one of whom shall be the designee of Galen, in each case subject to certain minimum share holdings, one of whom is our Chief Executive Officer and three of whom are independent directors. The Voting Agreement provides that each of Care Capital’s, Essex’s and Galen’s right to designate one director will terminate when it or its affiliates (determined separately for each of Care Capital, Essex and Galen) fail to hold at least 3 million shares of our common stock (or warrants exercisable for such shares). The board designee of Essex is Immanuel Thangaraj. Mr. Azad, Galen’s director nominee, resigned in December 2012. Mr. Markham, Care Capital’s director nominee, resigned on March 11, 2013. To date, neither Galen nor Care Capital has nominated a replacement director under the Voting Agreement.

The name and age of each of the six nominees, his principal occupation and the period during which such person has served as a Director are set forth below.


Name of Nominee Age Position With the Company Director Since
Robert B. Jones 54 President and CEO and Director 2011
Bruce F. Wesson (1)(2)(3) 70 Director 1998
William G. Skelly(2)(3) 62 Director 1996
Immanuel Thangaraj(1) 42 Director 2002
George K. Ross (2)(3) 71 Director 2008


(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Strategic Transaction Committee.

Robert B. Jones has been our President and Chief Executive Officer since July 7, 2011. From April 2011 through July 6, 2011, Mr. Jones was our Interim President and Chief Executive Officer. Mr. Jones was our Senior Vice President and Chief Operating Officer from April 2008 to April 2011. From May, 2003 to March, 2008, Mr. Jones served first as the Vice President, Finance and then as Vice President, Strategy and Business Analysis of Adolor Corporation. From November 2000 to May, 2003 he served as Vice President, Finance and then as Chief Operating Officer of Opt-E-Script, Inc., a privately held personalized medicine company where Mr. Jones was responsible for all commercialization activities. Prior to that, Mr. Jones was Vice President, Sales and Marketing for Purepac Pharmaceutical Company. Mr. Jones received his M.B.A. from the University of North Carolina and a B.S. from Cornell University. Mr. Jones was appointed a director of the Company in July 2011.

Bruce F. Wesson has been a member of our Board of Directors since March, 1998. From January 1991 until June 30, 2011 Mr. Wesson was a Partner of Galen Associates, a health care venture firm, and a General Partner of Galen Partners III, L.P. Prior to January, 1991, he was Senior Vice President and Managing Director of Smith Barney, Harris Upham & Co. Inc., an investment banking firm. He currently serves on the Boards of Derma Sciences, Inc., and as Vice Chairman of the Board of MedAssets, Inc., each a publicly traded company. Mr. Wesson earned a Bachelor of Arts degree from Colgate University and a Masters of Business Administration from Columbia University.

William G. Skelly has been a member of our Board of Directors since May, 1996 and served as our Chairman from October, 1996 through June, 2000. Since 1990, Mr. Skelly has served as Chairman, President and Chief Executive Officer of Central Biomedia, Inc. and its subsidiary SERA, Inc. From 1985 to 1990, Mr. Skelly served as President of Martec Pharmaceutical, Inc. Mr. Skelly earned a Bachelor of Arts degree from Michigan State University and a Masters of Business Administration from the University of Missouri-Kansas City.

Immanuel Thangaraj has been a member of our Board of Directors since December, 2002. Mr. Thangaraj has been a Managing Director of Essex Woodlands Health Ventures, a venture capital firm specializing in the healthcare industry, since 1997. Prior to joining Essex Woodlands Health Ventures, he helped establish a telecommunication services company, for which he served as its CEO. Mr. Thangaraj holds a Bachelor of Arts and a Masters in Business Administration from the University of Chicago.

George K. Ross has been a member of our Board of Directors since January, 2008. Since April 2002, Mr. Ross has been a consultant to early stage businesses and a financial investor. From July 2005 through December 2010 he served as Executive Director, Foundations and Partnerships for World Vision U.S. in New York City. His business career has included senior financial officer and board member positions with both public and private companies in diverse industries. Mr. Ross was Executive Vice President and Chief Financial Officer and a board member of Tier Technologies Inc. from February 1997 to January 2000, which became a public company during this period. Mr. Ross is a Certified Public Accountant and earned a Bachelor of Arts degree from Ohio Wesleyan University and a Masters of Business Administration from Ohio State University.

The Board had determined that Messrs. Skelly, Wesson, Ross and Thangaraj are independent directors.
Executive Officers

Robert B. Jones, President and Chief Executive Officer.

Peter A. Clemens has been Senior Vice President, Chief Financial Officer and Secretary since April 2004. Mr. Clemens was our Vice President, Chief Financial Officer and Secretary from February 1998 to March 2004 and a member of our Board of Directors from June, 1998 to August, 2004. Mr. Clemens is a Certified Public Accountant and earned a Bachelor of Business Administration degree from the University of Notre Dame and a Masters of Business Administration from Indiana University. Age 60.

Albert W. Brzeczko, Ph.D., has been Vice President, Technical Affairs of Acura Pharmaceutical Technologies, Inc. since February 2009. From 1999 through 2009, Dr. Brzeczko was Vice President, Global Pharma New Product Development and Pharma Technologies for International Specialty Products, Inc., a contract services group specializing in the development of technologies for the bioenhancement of poorly soluble drugs. Prior to 1999, Dr. Brzeczko held various positions of increasing responsibility in pharmaceutical product development with UPM Pharmaceuticals, Banner Pharmacaps, Mylan Laboratories, and DuPont Merck. Dr. Brzeczko received a Bachelor of Science degree in biochemistry and a Ph.D. in pharmaceutical sciences from the University of Maryland. Age 56.

Robert A. Seiser has been a Vice President, Treasurer and Corporate Controller since April 2004. Mr. Seiser joined us in March 1998 as our Treasurer and Corporate Controller. Mr. Seiser is a Certified Public Accountant and earned a Bachelor of Business Administration degree from Loyola University of Chicago. Age 49.

James F. Emigh has been Vice President of Corporate Development since October 2011. From April 2004 to October 2011, Mr. Emigh was our Vice President of Marketing and Administration. Prior to such time, Mr. Emigh was our Vice President of Sales and Marketing. Mr. Emigh joined us in May, 1998, serving first as Executive Director of Customer Relations and then as Vice President of Operations. Mr. Emigh holds a Bachelor of Pharmacy degree from Washington State University and a Masters of Business Administration from George Mason University. Age 57.

J. Bradley Rivet has been Vice President of Marketing since October 2011. Prior to such time, Mr. Rivet was Vice President of Effcon Laboratories Inc. Mr. Rivet has also held various management positions with aaiPharma Inc. and Burroughs Welcome Co. Mr. Rivet received his Bachelor of Science degree from Louisiana State University. Age 59.

The term of office of each person elected as a director will continue until the next annual meeting of shareholders and until such person's successor has been elected and qualified. Officers are appointed by the Board of Directors and serve at the discretion of the Board, although the employment of Robert B. Jones, our President and Chief Executive Officer and Peter A.

MANAGEMENT DISCUSSION FROM LATEST 10K

Company Overview

We are a specialty pharmaceutical company engaged in the research, development and commercialization of technologies and products intended to address medication abuse and misuse. We have discovered and developed two proprietary technologies. Our Aversion® Technology is a mixture of inactive ingredients incorporated into pharmaceutical tablets and capsules intended to address some common methods of product tampering associated with opioid abuse. Pfizer Inc.’s Oxecta® (oxycodone HCl) tablets, CII is the first approved and marketed product utilizing Aversion and is commercialized under an October 2007 license agreement, or Pfizer Agreement, with a subsidiary of Pfizer. We have also developed our Impede™ Technology which is a combination of inactive ingredients that prevent the extraction of pseudoephedrine from tablets and disrupt the direct conversion of pseudoephedrine from tablets into methamphetamine. We have launched Nexafed® (pseudoephedrine HC1) tablets formulated with our Impede Technology.

We have 7 additional opioid products utilizing Aversion in various stages of development. Pursuant to a September 24, 2012 letter agreement with Pfizer, all rights to these development-stage opioid products have reverted back to us. Hydrocodone bitartrate with acetaminophen, or hydrocodone/acetaminophen , is the most advanced opioid product in development and the primary focus of our opioid development efforts. Hydrocodone/acetaminophen is the most widely prescribed and often abused opioid product in the United States. Pfizer previously completed a clinical study demonstrating the hydrocodone/acetaminophen product is bioequivalent to its reference listed drug. We filed an Investigation New Drug application, or IND, with the Food and Drug Administration, or FDA, on December 20, 2012. We expect that the development program for our hydrocodone/acetaminophen product and our other Aversion opioid products in development will be consistent with that of Oxecta. We anticipate submitting a 505(b)(2) New Drug Application, or NDA, with the FDA for our hydrocodone/acetaminophen product in the first half of 2014.

We launched Nexafed commercially in mid-December 2012 into the $1 billion United States over the counter, or OTC, market for cold and allergy products. Nexafed was demonstrated in a clinical study to meet the FDA Guideline standards for bioequivalence to the reference drug Sudafed® marketed by Johnson & Johnson Corporation. We anticipate developing line extensions for our Nexafed franchise to capitalize on the many different combination offerings in the OTC cold/allergy market. We also have been working on the next generation of our Impede Technology in order to further improve our Nexafed franchise.

We also have discovered an early-stage technology which, in proof of concept laboratory tests, demonstrates the ability to limit the release of the active ingredient from tablets when multiple tablets are consumed simultaneously.

Company’s Present Financial Condition

At December 31, 2012, we had cash, cash equivalents and marketable securities of $27.4 million compared to $35.7 million of cash and cash equivalents at December 31, 2011. We had working capital of $26.6 million at December 31, 2012 compared to working capital of $35.6 million at December 31, 2011. We had an accumulated deficit of approximately $335.2 million and $325.5 million at December 31, 2012 and December 31, 2011, respectively. We had a loss from operations of $9.7 million and a net loss of $9.7 million for the year ended December 31, 2012, compared to income from operations of $10.5 million and net income of $10.4 million for the year ended December 31, 2011. As of January 31, 2013 we had cash, cash equivalents and marketable securities of approximately $25.5 million.

During the year ended December 31, 2012, we recognized gross product sales of $6 thousand derived from the sale of our Nexafed Tablets to two regional wholesalers which were completely offset by a return goods reserve until demand for Nexafed is established. During the year ended December 31, 2011, we recognized revenues of $0.5 million derived from the amortized portion of the $30.0 million upfront cash payment received from Pfizer’s King Pharmaceuticals subsidiary in December 2007, and a $20.0 million milestone fee paid by Pfizer under the Pfizer Agreement relating to FDA approval of the NDA for Oxecta. During the year ended December 31, 2010, we recognized revenues of $3.3 million derived from the $1.1 million amortized portion of the $30.0 million upfront cash payment received from Pfizer’s King Pharmaceutical subsidiary in December 2007 and $2.2 million for reimbursement of research and development expenses for Oxecta Tablets. We have yet to generate any royalty revenues from Pfizer’s sale of Oxecta Tablets. To fund our continued operations, we expect to rely on our current cash resources, additional payments that may be made under Pfizer Agreement and under future license agreements with other pharmaceutical company partners, of which there can be no assurance of obtaining, and revenues from our commercialization of our Nexafed Tablets. Our cash requirements for operating activities may increase in the future as we continue to conduct pre-clinical studies and clinical trials for our product candidates, maintain, defend, and expand the scope of our intellectual property, including the prosecution of the Paragraph IV Proceedings, hire additional personnel, commercialize our Nexafed Tablets, or invest in other areas.

Our losses have resulted principally from costs incurred in connection with research and development activities, salaries and other personnel-related costs and general corporate expenses. Research and development activities include costs of pre-clinical studies, clinical trials, and clinical trial product supplies associated with our product candidates. Salaries and other personnel-related costs include non-cash, stock-based compensation associated with stock options and restricted stock units granted to employees and non-employee directors.

Results of Operations for the Years Ended December 31, 2012 and 2011

Revenue

In 2012 we recorded $6.0 thousand from gross product sales of Nexafed from two regional wholesalers which we completely offset with a returned goods reserve . This compares to revenues in 2011 of $20.5 million all from the Pfizer Agreement comprised of a $20.0 million milestone payment for achieving the FDA approval of Oxecta and the amortization of the final amount of the initial upfront fee received back in 2007.


Operating Expenses

Research and development expense during 2012 and 2011 were primarily for product candidates utilizing our Aversion and Impede Technologies, including costs of preclinical studies, clinical trials, clinical supplies and related formulation and design costs, salaries and other personnel related expenses, and facility costs. Included in the 2012 and 2011 results are non-cash stock-based compensation charges of $0.4 million and $0.5 million, respectively, associated with the grant of stock options and restricted stock units. Excluding the stock-based compensation expense, in 2012 there was a $0.2 million decrease in development expenses compared to 2011.

Marketing expenses during 2012 and 2011 consisted of market research studies on our Impede Technology. Our general and administrative expenses primarily consisted of legal, audit and other professional fees, corporate insurance, and payroll. Included in the 2012 and 2011 results are non-cash stock-based compensation charges of $1.3 million and $1.9 million, respectively, associated with the grant of stock options and restricted stock units. Excluding the stock-based compensation expense, in 2012 there was an increase of $0.7 million in marketing, general and administrative expenses compared to 2011 primarily attributable to Nexafed development and promotion.

Other Income (Expense)

In the fourth quarter of 2012 the Company amended its investment policy allowing greater flexibility in investment selections. As such, some investments were shifted from lower yielding money market funds to high grade corporate bonds resulting in significant improvement in interest income over the prior year.

Net Income (Loss)

The net loss of $9.7 million for 2012 includes no federal or state income tax benefit provisions due to uncertainty of their future utilization. In 2011, the Company was able to utilize existing net operating loss carryforwards to offset the majority of its 2011 federal and state income taxes. The income tax expense for 2011 is comprised of federal alternative minimum taxes as well as state income taxes totaling $0.1 million. The Company has maintained a full valuation allowance on its deferred tax asset due to the uncertainty of future utilization of the Company’s net operating losses.

Results of Operations for the Years Ended December 31, 2011 and 2010

Revenue

In December 2007, Pfizer paid us a $30.0 million upfront fee in connection with the closing of the Pfizer Agreement. Program fee revenue recognized during 2011 from amortizing this upfront fee was $0.5 million compared to $1.1 million in 2010. We have assigned an equal portion of the program fee revenue to each of three product candidates identified under the Pfizer Agreement. We have completed our development activities on all 3 product candidates, fully amortized the portion of the upfront fee for two product candidates in 2008, and fully amortized the portion of the upfront fee for the third product candidate in 2011. We had milestone revenue of $20.0 million and $0 in 2011 and 2010, respectively.

In 2011 we incurred no development or regulatory expenses relating to the licensed products pursuant to the Pfizer Agreement, and therefore recognized no collaboration revenue for such year. We do not expect collaboration revenue from Pfizer in 2012. The Company had collaboration revenue of $2.2 million for 2010.

Operating Expenses

Research and development expense during 2011 and 2010 were primarily for product candidates utilizing our Aversion and Impede Technologies, including costs of preclinical studies, clinical trials, clinical supplies and related formulation and design costs, salaries and other personnel related expenses, and facility costs. Included in the 2011 and 2010 results are non-cash stock-based compensation charges of $0.5 million and $1.7 million, respectively, associated with the grant of stock options and restricted stock units. Excluding the stock-based compensation expense, in 2011 there was a $2.0 million decrease in development expenses compared to 2010 primarily attributable to a reduction in development activities for our Aversion Technology product candidates.

Marketing expenses during 2011 and 2010 consisted of market research studies on our Aversion and Impede Technologies. Our general and administrative expenses primarily consisted of legal, audit and other professional fees, corporate insurance, and payroll. Included in the 2011 and 2010 results are non-cash stock-based compensation charges of $1.9 million and $5.1 million, respectively, associated with the grant of stock options and restricted stock units. Excluding the stock-based compensation expense, in 2011 there was an increase of $0.2 million in marketing, general and administrative expenses compared to 2010.

Other Income (Expense)

During 2011 and 2010, we had no debt and cash proceeds received pursuant to the Pfizer Agreement were invested in U.S. Treasury Bills and money market funds in accordance with the investment policy approved by our Board of Directors, resulting in minimal interest income in 2011 and 2010 due to the prevailing low variable, market rates of interest.

Net Income (Loss)

In 2011, the Company was able to utilize existing net operating loss carryforwards to offset the majority of its 2011 federal and state income taxes. The income tax expense is comprised of federal alternative minimum taxes as well as state income taxes totaling $0.1 million. The Company has maintained a full valuation allowance on its deferred tax asset due to the uncertainty of future utilization of the Company’s net operating losses. The net loss of $12.7 million for 2010 includes no federal or state income tax benefit provisions due to uncertainty of their future utilization. A state tax expense was recorded for the Company’s subsidiary operations apportioned to one state jurisdiction.

Liquidity and Capital Resources

At December 31, 2012, we had cash, cash equivalents and marketable securities of $27.4 million compared to $35.7 million in cash and cash equivalents at December 31, 2011. We had working capital of $26.6 million at December 31, 2012 compared to $35.6 million at December 31, 2011. Our investing activities in 2012 and 2011 were less than $0.2 million due to capital expenditures.

At January 31, 2013, we had cash, cash equivalents and marketable securities of approximately $25.5 million. We estimate that such cash reserves will be sufficient to fund the development of Aversion Technology and Impede Technology product candidates, and related operating expenses at least through the next 12 months.

Pending our receipt of royalty payments from Pfizer related to Oxecta, other milestone and royalty payments under similar license agreements anticipated to be negotiated and executed with other pharmaceutical company partners, and revenues from the commercialization of our Nexafed tablets, we must rely on our current cash reserves, including interest income from the investment of our cash reserves, to fund the development of our Aversion Technology, Impede Technology and related administrative and operating expenses. Our future sources of revenue, if any, will be derived from royalties under the Pfizer Agreement and milestone payments and royalties under similar license agreements with other pharmaceutical company partners, for which there can be no assurance, and from the commercialization of our Nexafed tablets.

The amount and timing of our future cash requirements will depend on regulatory and market acceptance of our product candidates and the resources we devote to the development and commercialization of our product candidates.

Off-Balance Sheet Arrangements

We do not engage in transactions or arrangements with unconsolidated or other special purpose entities.

Critical Accounting Policies

The preparation of our financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in our financial statements and accompanying notes. We evaluate our estimates on an ongoing basis, including those estimates related to contract agreements, research collaborations and investments. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following items in our financial statements require significant estimates and judgments:

Revenue Recognition, Deferred Program Fee Revenue and Collaboration Revenue

Revenue is generally realized or realizable and earned when there is persuasive evidence an arrangement exists, delivery has occurred or services rendered, the price is fixed and determinable, and collection is reasonably assured. The Company records revenue from its Nexafed product sales when the price is fixed and determinable at the date of sale, title and risk of ownership have been transferred to the customer, and returns can be reasonably estimated.

Nexafed was launched in the fourth quarter of 2012. The Company sells Nexafed in the United States to wholesale pharmaceutical distributors subject to the right of return for a period of up to six months after the product expiration. Nexafed currently has a shelf life of twenty-four months from the date of manufacture. Given the limited sales history of Nexafed, the Company currently cannot reliably estimate expected returns of the product at the time of shipment. Accordingly, the Company defers recognition of revenue on the product shipments of Nexafed until the right of return no longer exists or adequate history and information is available to estimate product returns.

In connection with Pfizer Agreement, we recognize program fee revenue, collaboration revenue and milestone revenue.

Program fee revenue is derived from amortized upfront payments, such as the $30.0 million upfront payment from Pfizer received in December 2007, and license fees, such as the $3.0 million option exercise fee paid by Pfizer’s King subsidiary to us in each of May 2008 and December 2008 upon the exercise of its option to license a third and fourth opioid analgesic product candidate under the Pfizer Agreement. We have assigned an equal portion of Pfizer’s $30.0 million upfront payment to each of three product candidates identified in the Pfizer Agreement and recognize the upfront payment as program fee revenue ratably over our estimate of the development period for each identified product candidate. We recognized $0, $0.5, $1.1 million, $3.1 million and $21.9 million of this program fee revenue in 2012, 2011, 2010, 2009 and 2008, respectively. We do not expect any further program fee revenue from Pfizer.

Collaboration revenue is derived from reimbursement of development expenses, which are invoiced quarterly in arrears, and are recognized when costs are incurred pursuant to the Pfizer Agreement. The ongoing research and development services being provided to Pfizer under the collaboration are priced at fair value based upon the reimbursement of expenses incurred pursuant to the collaboration with Pfizer. We recognized $0, $0, $2.2 million, $0.8 million and $11.5 million of collaboration revenue in 2012, 2011, 2010, 2009 and 2008, respectively. We do not expect any further collaboration revenue from Pfizer.

Milestone revenue is contingent upon the achievement of certain pre-defined events in the development of Oxecta Tablets and other product candidates licensed to Pfizer under the Pfizer Agreement. Milestone payments from Pfizer are recognized as revenue upon achievement of the “at risk” milestone events, which represent the culmination of the earnings process related to that milestone. Milestone payments are triggered either by the results of our research and development efforts or by events external to us, such as regulatory approval to market a product. As such, the milestones are substantially at risk at the inception of the Pfizer Agreement, and the amounts of the payments assigned thereto are commensurate with the milestone achieved. In addition, upon the achievement of a milestone event, we have no future performance obligations related to that milestone payment. Each milestone payment is non-refundable and non-creditable when made. In June 2008, Pfizer paid us a $5.0 million milestone payment for successfully achieving the primary endpoints in our pivotal Phase III study, AP-ADF-105 for Aversion oxycodone HCl with Niacin Tablets. In June 2011, Pfizer paid us a $20.0 million milestone fee relating to the receipt of FDA approval of the NDA for Oxecta. Under the Pfizer Agreement, we remain eligible to receive milestone payments for the achievement of certain net sales level of Oxecta and a regulatory milestone for the approval of Oxecta in another territory. There can be no assurance, however, that Pfizer will achieve these milestones.

Research and Development

Research and Development, or R&D, expenses include internal R&D activities, external CRO services and their clinical research sites, and other activities. Internal R&D activity expenses include facility overhead, equipment and facility maintenance and repairs, laboratory supplies, pre-clinical laboratory experiments, depreciation, salaries, benefits, and share-based compensation expenses. CRO activity expenses include preclinical laboratory experiments and clinical trial studies. Other activity expenses include regulatory consulting, and regulatory legal counsel. Internal R&D activities and other activity expenses are charged to operations as incurred. We make payments to the CRO's based on agreed upon terms and may include payments in advance of the study starting date. We review and accrue CRO expenses and clinical trial study expenses based on services performed and rely upon estimates of those costs applicable to the stage of completion of a study as provided by the CRO. Accrued CRO costs are subject to revisions as such studies progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. We have entered into several cancelable CRO arrangements and our obligations under these arrangements were approximately $1,527,000 and $133,000 at December 31, 2012 and 2011, respectively, for services to be incurred as subjects are enrolled and progress through the studies.

Income Taxes

We account for income taxes under the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and income tax basis of assets and liabilities and are measured using the enacted income tax rates and laws that will be in effect when the differences are expected to reverse. Additionally, net operating loss and tax credit carryforwards are reported as deferred income tax assets. The realization of deferred income tax assets is dependent upon future earnings. A valuation allowance against deferred income tax assets is required if, based on the weight of available evidence, it is more likely than not that some or all of the deferred income tax assets may not be realized. Because we realized taxable income in 2011 we were able to utilize a portion of our net operating loss carryforwards. At December 31, 2012, 100% of the remaining deferred income tax assets are offset by a valuation allowance due to uncertainties with respect to future utilization of net operating loss carryforwards. We recorded adjustments by way of increase of $2.5 million to the deferred income tax asset valuation allowance during 2009. This adjustment recognized a $2.5 million tax expense from income taxes in our income for 2009. If in the future it is determined that amounts of our deferred income tax assets would likely be realized, the valuation allowance would be reduced in the period in which such determination is made and a benefit from income taxes in such period would be recognized.

Stock Compensation

Compensation cost related to stock-based payment transactions is measured based on fair value of the equity or liability instrument issued. For purposes of estimating the fair value of each stock option unit on the date of grant, we utilized the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected volatility factor of the market price of our common stock (as determined by reviewing its historical public market closing prices). Our accounting for stock-based compensation for restricted stock units, or RSUs, is based on the fair-value method. The fair value of the RSUs is the market price of our common stock on the date of grant, less its exercise cost.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Forward-Looking Statements

Certain statements in this Report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Forward-looking statements may include, but are not limited to, our and our licensee’s ability to successfully launch and commercialize our products and technologies including Oxecta® Tablets and Nexafed® Tablets, the price discounting that may be offered by Pfizer for Oxecta®, the ability of us or our licensee’s to obtain necessary regulatory approvals and commercialize products utilizing our technologies and the market acceptance of and competitive environment for any of our products, expectations regarding potential market share for our products and the timing of first sales, our ability to enter into additional license agreements for our other product candidates, the ability to avoid infringement of patents, trademarks and other proprietary rights of third parties, and the ability of our patents to protect our products from generic competition, our ability to protect and enforce our patent rights in any paragraph IV patent infringement litigation, and the ability to fulfill the FDA requirements for approving our product candidates for commercial manufacturing and distribution in the United States, including, without limitation, the adequacy of the results of the laboratory and clinical studies completed to date, the results of laboratory and clinical studies we may complete in the future to support FDA approval of our product candidates and the sufficiency of our development to meet over-the-counter, or OTC, Monograph standards as applicable, the adequacy of the development program for our product candidates, including whether additional clinical studies will be required to support FDA approval of our product candidates, changes in regulatory requirements, adverse safety findings relating to our product candidates, whether the FDA will agree with our analysis of our clinical and laboratory studies and how it may evaluate the results of these studies or whether further studies of our product candidates will be required to support FDA approval, whether or when we are able to obtain FDA approval of labeling for our product candidates for the proposed indications and will be able to promote the features of our abuse discouraging technologies, whether our product candidates will ultimately deter abuse in commercial settings and whether our Impede technology will disrupt the processing of pseudoephedrine into methamphetamine. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail in this Report.

In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements.

Company Overview

We are a specialty pharmaceutical company engaged in the research, development and commercialization of products intended to address medication abuse and misuse, utilizing our proprietary Aversion® and Impede™ Technologies. Our products and product candidates are based on widely-used commercial products and do not alter the safety and efficacy of the active pharmaceutical ingredients.

Oxecta® Tablets CII, or Oxecta, was approved for marketing by the United States Food and Drug Administration, or FDA, on June 17, 2011. Oxecta represents the first immediate-release oxycodone product approved by the FDA that applies our Aversion Technology. Aversion is a mixture of inactive ingredients incorporated into pharmaceutical tablets and capsules designed to address some common methods of product tampering associated with abuse. Oxecta is being manufactured and commercialized by Pfizer under our October 2007 license agreement with a subsidiary of Pfizer and was made commercially available by Pfizer in February 2012. We are eligible to receive tiered royalties ranging from 5% to 25% on net sales of Oxecta pursuant to our agreement with Pfizer commencing in February 2013. The trademark Oxecta® is owned by Pfizer Inc.

On September 26, 2012, we announced that we entered into a letter agreement with Pfizer which provides for the termination of Pfizer’s license to our Aversion® Technology used in the three development-stage products licensed to Pfizer and for the transfer of these products back to us. These development-stage products are hydrocodone by bitartrate/acetaminophen tablets, oxycodone HCl/acetaminophen tablets and an undisclosed opioid. See the discussion below under the caption “Aversion Products in Development” for further information regarding the development of these products.

We have developed Nexafed®, an OTC immediate-release pseudoephedrine HCl tablet, utilizing our proprietary Impede Technology, which we intend to launch commercially in late 2012. Pseudoephedrine HCl, or PSE, is a widely-used nasal decongestant available in many non-prescription and prescription cold, sinus and allergy products, including Johnson & Johnson’s Sudafed® product. Our Impede Technology is a proprietary mixture of inactive ingredients that prevents the extraction of pseudoephedrine from tablets and disrupts the direct conversion of PSE from tablets into methamphetamine. The addition of the Impede Technology ingredients does not impact the efficacy of Nexafed

Oxecta®

Oxecta is a Schedule II narcotic indicated for the management of acute and chronic moderate to severe pain where the use of an opioid analgesic is appropriate. The safety and efficacy of Oxecta 5 mg and 7.5 mg tablets was established by demonstrating bioequivalence to commercially available oxycodone immediate-release tablets in the fasted state. Oxecta differs from oxycodone tablets when taken with a high fat meal though these differences are not considered clinically relevant, and Oxecta can be taken without regard to food. The FDA-approved label for Oxecta describes elements unique to our Aversion Technology, which differs from current commercially available oxycodone immediate-release tablets. The label for Oxecta includes the results from a clinical study that evaluated the effects of nasally snorting crushed Oxecta and commercially available oxycodone tablets, and limitations on exposing Oxecta tablets to water and other solvents and administration through feeding tubes. The clinical study evaluated 40 non-dependent recreational opioid users, who self-administered the equivalent of 15mg of oxycodone. After accounting for a first sequence effect, the study demonstrated:

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30% of subjects exposed to Oxecta responded that they would not take the drug again compared to 5% of subjects exposed to immediate-release oxycodone;

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subjects taking Oxecta reported a higher incidence of nasopharyngeal and facial adverse events compared to immediate-release oxycodone;

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a decreased ability to completely insufflate two crushed Oxecta tablets within a fixed time period (21 of 40 subjects), while all subjects were able to completely insufflate the entire dose of immediate-release oxycodone; and

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small n umeric differences in the median and mean drug liking scores, which were lower in response to Oxecta than immediate-release oxycodone .

Although we believe these abuse deterrent characteristics differentiate Oxecta from immediate-release oxycodone products currently on the market, consistent with FDA guidance which requires epidemiology studies to support a claim of abuse deterrence, the clinical significance of the difference in drug liking and difference in response to taking the drug again in this study has not been established. There is no evidence that Oxecta has a reduced liability compared to immediate release oxycodone. Pfizer has agreed to a post-approval commitment with the FDA to perform an epidemiology study to assess the actual impact on abuse of Oxecta tablets.

Further, the Oxecta product label guides patients not to crush and dissolve the tablets or pre-soak, lick or otherwise wet the tablets prior to administration. Similarly, caregivers are advised not to crush and dissolve the tablets or otherwise use Oxecta for administration via nasogastric, gastric or other feeding tubes as it may cause an obstruction. Our laboratory studies demonstrated that the Oxecta tablet characteristics may change when Oxecta is exposed to certain solvents, including water.

The market for IR oxycodone products is primarily serviced by generic manufacturers with an average price per tablet shipped from distribution centers to healthcare providers of $0.10 for a 5 mg tablet. Pfizer’s price to drug wholesalers and other direct customers for Oxecta is many fold the generic market price. We believe that Pfizer will have to enter into price discounting contracts with managed care and other end purchasers of IR oxycodone products, of which no assurance can be given.

Pfizer License, Development and Commercialization Agreement

In October 2007, we entered into a License, Development and Commercialization Agreement, or the Pfizer Agreement, with King Pharmaceuticals Research and Development, Inc., now a subsidiary of Pfizer, covering the United States, Canada and Mexico. Under the Pfizer Agreement, Pfizer will manufacture and commercialize Oxecta in the United States. The Pfizer Agreement also provided for Pfizer to develop and commercialize three additional opioid analgesic products utilizing our proprietary Aversion Technology, including hydrocodone / acetaminophen tablets, oxycodone/acetaminophen tablets and an undisclosed opioid (the “Development-Stage Products”). Our lead product, Oxecta® Tablets CII, or Oxecta, was approved for marketing by the United States Food and Drug Administration, or FDA, on June 17, 2011. Oxecta was made commercially available by Pfizer in February 2012. Commencing in February 2013 we are eligible to receive tiered royalties of 5%-25% on the annual net sales of Oxecta.

On July 27, 2012 we announced that Pfizer had provided us with notice of the exercise of its right to terminate the license to the Development-Stage Products and return such products to us. Oxecta is not subject to Pfizer’s termination notice and Pfizer will retain all rights and obligations relating to Oxecta under the Pfizer Agreement. On September 26, 2012 we further announced we entered into a letter agreement with Pfizer which provides for the termination of Pfizer's license to our Aversion Technology used in three Development-Stage Products.

Aversion Products in Development

Effective upon the execution of our letter agreement with Pfizer on September 26, 2012, we have the right to engage in the development of the products returned to us by Pfizer.

Our Aversion hydrocodone/acetaminophen product is the most advanced in development, with Pfizer having completed in February 2012 an open label, single dose, randomized, two period, two-way crossover study comparing such product to its reference listed drug. Such study demonstrated that the hydrocodone/acetaminophen product utilizing our Aversion Technology was bioequivalent to its reference listed drug. Such product was also the subject of a pre-IND meeting held with the FDA in May 2012.

We expect our clinical development program for our hydrocodone/acetaminophen product to consist of:

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A pharmacokinetic study to establish a bridge to a new contract manufacturer and safety compared to the reference listed drugs tramadol/acetaminophen (for acetaminophen) and hydrocodone bitartrate/ibuprofen (for hydrocodone);
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A pharmacokinetic study demonstrating dose proportionality and evaluating the food effect of our product;
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A nasal abuse liability liking study against a reference drug;
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Laboratory studies demonstrating extraction, syringing and particle size characteristics of our product; and
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An assessment of the routes of abuse of hydrocodone products.

We are assessing the documents and studies transferred to us by Pfizer and currently expect to submit an IND for our hydrocodone/acetaminophen product with the FDA by the end of 2012 which, if accepted by the FDA, will allow the commencement of clinical development in early 2013. Based on the development program outlined above, we anticipate preparing and submitting a 505(b)(2) NDA for our hydrocodone/acetaminophen product in the first half of 2014.

We continue to evaluate possible partnering of our Aversion development products with alternative strategic partners.

Paragraph IV ANDA Filings

On or about September 17, 2012, we believe the FDA internally changed the status of Oxecta to be considered a Reference Listed Drug (RLD). An RLD is the standard to which all generic versions must be shown to be bioequivalent and a drug company seeking approval to market a generic equivalent must refer to the RLD. By designated Oxecta as an RLD, the FDA was allowed to accept ANDAs referencing Oxecta.

On September 20, 2012, we announced that we had received a Paragraph IV Certification Notice under 21 U.S.C. 355(j) (a Paragraph IV Notice) from a generic sponsor of an ANDA for a generic drug listing Oxecta as the reference listed drug. Since such date, we have received similar Paragraph IV Notices from three other generic pharmaceutical companies that have filed ANDAs listing Oxecta as the reference drug. The Paragraph IV Notices refer to our U.S. Patent Numbers 7,201,920, 7,510,726 and 7,981,439, which cover our Aversion Technology and Oxecta. The Paragraph IV Notices state that each generic sponsor believes that such patents are invalid, unenforceable or not infringed. Pfizer has advised us that they will not exercise their first right under the Pfizer Agreement to control the enforcement of our patents licensed to Pfizer for Oxecta against these generic sponsors. As a result, we will take appropriate action to enforce our intellectual property rights and on October 31, 2012, we initiated suit against each of Watson Laboratories, Inc. - Florida, Par Pharmaceutical, Inc., Impax Laboratories, Inc. and Sandoz Inc. in the United States District Court for the District of Delaware alleging infringement of our patent no. 7,510,726 listed in the FDA’s Orange Book. The commencement of such litigation prohibits the FDA from granting approval of the filed ANDAs until the earliest of 30 months from the date the FDA accepted the application for filing, or the conclusion of litigation. The above actions are referred to as the “Paragraph IV Proceedings.”

Litigation is inherently uncertain and we cannot predict the outcome of the Paragraph IV Proceedings. If any of these generic companies prevails its respective lawsuit and is able to obtain FDA approval of its product, it may be able to launch its generic version of Oxecta prior to the expiration of our patents in 2025. Additionally, it is possible that other generic manufacturers may also seek to launch a generic version of Oxecta and challenge our patents. Any determination in the Paragraph IV Proceedings that our patents covering our Aversion Technology and Oxecta are invalid or unenforceable, in whole or in part, or that the products covered by generic sponsors’ ANDAs do not infringe our patents could have a material adverse affect on our operations and financial condition.

Citizen’s Petition filing with FDA

By designating Oxecta as an RLD, we believe the FDA has acknowledged that Oxecta contains unique properties and/or a unique label that is different from other FDA approved immediate-release oxycodone HCl tablets that do not contain abuse resistant characteristics. The Food and Drug Administration Safety and Innovation Act of July 2012, requires the FDA to promulgate guidance on the development of abuse-deterrent drug products. As such, we believe the ANDA applicants that refer to Oxecta as an RLD will have to have substantially equivalent, if not identical, abuse deterrent characteristics to be considered by the FDA as therapeutically equivalent to Oxecta. There can be no assurance, however, that the FDA’s guidance, once promulgated, will contain such requirements.

On September 21, 2012, Pfizer, as licensee of our Aversion Technology used in Oxecta under the Pfizer Agreement, filed a Citizen’s Petition with the FDA requesting that the FDA: (1) refrain from permitting an ANDA applicant to rely on Oxecta as a reference listed drug unless the ANDA applicant demonstrates that its product uses the same inactive ingredients as those in Oxecta; (ii) require an ANDA applicant seeking approval of a product that relies on Oxecta as the reference listed drug and uses inactive ingredients different from those in Oxecta to submit an NDA under Section 505(b)(2) of the Federal Food, Drug and Cosmetics Act; and (iii) refrain from rating a product as therapeutically equivalent to Oxecta unless it has the same inactive ingredients as Oxecta. The FDA has not yet responded to this Citizen’s Petition and there can be no assurance that the FDA will take some or all of the actions requested.

Nexafed ®

Our Nexafed product is an immediate-release pseudoephedrine HCl tablet which utilizes our patent pending Impede Technology. In addition to being a widely-used nasal decongestant available in many non-prescription and prescription cold, sinus and allergy products, PSE is also the starting material in the illicit manufacture of methamphetamine. Our Impede Technology, a proprietary mixture of inactive ingredients, prevents the extraction of PSE from tablets and disrupts the direct conversion of PSE from tablets into methamphetamine without affecting the effectiveness of Nexafed to provide the expected relief of nasal and sinus congestion. We have demonstrated that an initial formulation of Nexafed 30 mg tablets is bioequivalent to Johnson & Johnson’s Sudafed® 30 mg tablets and a leading generic store brand’s 30 mg tablets. Studies, sponsored by us at an independent laboratory and confirmed by a law enforcement agency, demonstrated our Impede Technology prevents the extraction of PSE from tablets for conversion into methamphetamine using what we believe are the two most common manufacturing methods, each requiring extraction of PSE as an initial step. A third, newer method of methamphetamine production known as the “one-pot” method involves the direct conversion of PSE from tablets into methamphetamine without first extracting and purifying the PSE. Laboratory tests conducted on our behalf by an independent CRO using the “one-pot” method demonstrated that our Impede Technology disrupted the direct conversion of PSE into methamphetamine. The study compared the amount of pure methamphetamine hydrochloride produced from Nexafed and Sudafed® tablets. Conducting multiple “one-pot” tests with a variety of commonly used solvents, and starting with one hundred 30 mg tablets of each product, the study demonstrated an average of 38% of the maximum possible yield of 2.7 grams of pure methamphetamine hydrochloride was recovered from Nexafed. Comparatively, approximately twice as much pure methamphetamine hydrochloride was recovered from Sudafed® tablets. Both products yielded a substantial amount of additional solids such that the purity of the total powder provided contained approximately 65% methamphetamine hydrochloride.

The completed scale-up of our manufacturing process to approximately 700,000 tablets per batch required a change to our formulation’s inactive ingredients to improve manufacturability and new stability data is being collected. Due to this change, another bioequivalence study is being conducted. We have already confirmed that this formulation change does not impact Nexafed’s properties of preventing extraction or disruption of the conversion of PSE into methamphetamine. We have commenced manufacturing process validation and expect to make Nexafed commercially available to pharmacies later this year. We intend to market Nexafed pursuant to the FDA’s OTC Monograph regulations that do not require the submission an ANDA or NDA with the FDA.

We expect our Impede Technology products containing PSE to compete in the highly competitive market for cold, sinus and allergy products generally available to consumers without a prescription. In 2009, AC Nielsen reported approximately $1.0 billion in sales of non-prescription products containing either PSE or phenylephrine as a nasal decongestant, of which approximately 47% contained PSE. Products in this category consist of many different formulations containing different active ingredients such as analgesics, cough suppressants and antihistamines and have strong consumer brand recognition. Commencing in 2006, the Federal Combat Methamphetamine Epidemic Act, or CMEA, has required all non-prescription PSE products to be held securely behind the pharmacy counter, has set monthly consumer purchase volume limits, and has necessitated consumer interaction with pharmacy personnel to purchase PSE-containing products. We intend to capitalize on this consumer-pharmacist interaction at the point of sale by soliciting distribution to pharmacies and educating and encouraging pharmacists to recommend Nexafed to their customers. In our 2012 survey of 215 chain and independent pharmacists, 164 indicated they had influence over the pharmacies’ product offerings. Of such pharmacists, 70% indicated they were likely to stock or recommend stocking Nexafed in their pharmacies. The 215 surveyed pharmacists also indicated a willingness to recommend Nexafed to over 50% of their customers who seek a pharmacist’s advice for a single ingredient nasal decongestant. We are establishing vendor relationships with several national and regional wholesalers who have verbally committed to stocking Nexafed which would provide distribution and product availability throughout the U.S. We have begun executing a plan to generate awareness of Nexafed with pharmacists to support stocking of Nexafed in pharmacies and generate consumer recommendations by the pharmacist. We expect to offer Nexafed in 24-count cartons at a price comparable to other branded 30 mg PSE tablet 24-count products.

Company’s Present Financial Condition

At October 28, 2012, we had cash and cash equivalents of approximately $28.8 million. We estimate that our current cash reserves will be sufficient to fund operations through at least the next 12 months.

We have yet to generate any product sales or royalty revenues from product sales. To fund our continued operations, we expect to rely on our current cash resources, royalty payments that may be made under Pfizer Agreement and under future license agreements with other pharmaceutical company partners, of which there can be no assurance of obtaining, and revenues, if any, from our commercialization of Nexafed. Our cash requirements for operating activities will increase in the future as we undertake the development of the three development-stage products returned to us by Pfizer under the Pfizer Agreement, maintain, defend, if necessary and expand the scope of our intellectual property, including the prosecution of the Paragraph IV Proceedings, hire additional personnel, scale up commercial supply of Nexafed, commercialize Nexafed, or invest in other areas.

CONF CALL

Peter Clemens - Senior VP and CFO

Thank you and good morning everyone. Thank you for joining us. Before we begin, I’d like to remind you that any discussion that takes place during this conference call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements reflect management’s current view of future events and operations, including but not limited to statements pertaining to the company’s expectations regarding OXECTA, licensed to Pfizer; commercial plans for the NEXAFED product; our ability to enter into additional license agreements for our other product candidates; the ability of our patents to protect our products from generic competition, and the company’s strategy for long term growth.

Forward-looking statements involve certain significant risks and uncertainties, and actual results may differ materially. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

Certain factors that may cause actual results to differ materially from the forward-looking statements are discussed in the company's press release issued yesterday evening and in the Risk Factors section and other sections of the company's Form 10-K for the year ended December 31, 2011, and the form 10-Q for the quarter ended September 30, 2012 as filed with the Securities and Exchange Commission yesterday evening.

Acura does not undertake to publicly update or revise any of its forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized.

I'll now turn the call over to Bob Jones, president and CEO of Acura Pharmaceuticals.
Bob Jones - President and CEO

Thanks, Pete. Good morning and thank you for joining us to discuss our third quarter 2012 financial results and corporate update. Let’s start with NEXAFED. NEXAFED is our nonprescription pseudoephedrine product that uses our IMPEDE technology. IMPEDE is an advanced polymer matrix that disrupts the extraction or conversion of the pseudoephedrine into the illicit drug methamphetamine hydrochloride, which is commonly known as meth.

We’ve commenced manufacturing process validation and remain on track to make NEXAFED commercially available to pharmacies in December. We intend to market NEXAFED pursuant to FDA’s OTC monograph regulations that do not require us to submit an NDA or ANDA with the FDA.

We are establishing vendor relationships with several national and regional wholesalers who have expressed willingness to stock NEXAFED, which has the potential to provide distribution and product availability throughout the United States.

We have begun executing a plan to generate awareness of NEXAFED with pharmacists to support stocking of NEXAFED in the pharmacies and generate consumer recommendations by the pharmacists. We have met numerous independent pharmacists from several states at recent trade shows, and have found an enthusiastic level of interest in NEXAFED. These pharmacists appear pleased that we intend to offer NEXAFED at a price comparable to similar branded products.

Now let me provide an update regarding our Aversion opioid products. Aversion opioid products are designed to discourage some of the common methods of tampering associated with the abuse and intentional misuse of opioids. On July 27 of this year, we announced Pfizer decided to return three Aversion opioid products in development to us while continuing to commercialize the approved product, OXECTA.

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