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Advancis Pharmaceutical Corporation (AVNC) Reports Full Year 2006 Results and 2007 Corporate Initiatives


3/28/2007 12:24:52 PM

GERMANTOWN, Md., March 27 /PRNewswire-FirstCall/ -- Advancis Pharmaceutical Corporation , a pharmaceutical company focused on developing and commercializing novel anti-infective products, today announced financial and operational results for the quarter and fiscal year ended December 31, 2006, and other corporate initiatives designed to fund its operations, preserve cash, and increase shareholder value.

Advancis reported fourth quarter 2006 revenue of $1.2 million, compared to revenue of $2.4 million in the third quarter of 2006 and $1.6 million in the fourth quarter of 2005. Full year 2006 revenue totaled $4.8 million, compared to full year 2005 revenue of $16.8 million. Product sales from the Company's Keflex(R) antibiotic made up all of the Company's revenue in 2006 and were $4.8 million for the year, essentially level with $4.8 million of product sales for the full year of 2005.

Total expenses for the fourth quarter of 2006 were $14.9 million, up from $12.2 million in the third quarter of 2006 and $8.3 million in the fourth quarter of 2005. For the full year of 2006, total expenses were $48.2 million, compared to $50.8 million during the full year of 2005.

Net loss was $13.8 million for the fourth quarter, compared to a net loss of $9.9 million in the third quarter of 2006 and a net loss of $6.4 million in the fourth quarter of 2005. Net loss per share applicable to common stockholders during the fourth quarter of 2006 was ($0.44), compared to a net loss per share of ($0.33) in the prior quarter, and a net loss per share of ($0.22) in the comparable quarter of last year. Net loss per share applicable to common stockholders for 2006 was ($1.38) compared to a net loss per share of ($1.20) in 2005. As of December 31, 2006, cash, cash equivalents and marketable securities totaled $15.4 million.

Following year-end, Advancis received a "refusal to file" letter from the U.S. Food and Drug Administration (FDA) for its once-daily Amoxicillin PULSYS New Drug Application (NDA), requesting additional information on the Company's planned commercial manufacturing processes. Advancis subsequently participated in a meeting with the Agency and obtained clarification on what additional information would be required by the FDA for the filing to be accepted. The Company resubmitted its NDA via the 505(b)(2) regulatory pathway on March 23, 2007.

"We achieved clinical and operational progress during 2006, and we look forward to continuing the advancement of our Amoxicillin PULSYS product following our NDA resubmission last week," stated Edward M. Rudnic, Ph.D., president and CEO of Advancis. "However, as we look forward into 2007, completing a financing and providing necessary capital to fund our business is a primary focus. Additionally, we have begun working with an investment bank to explore strategic alternatives."

OPERATIONAL HIGHLIGHTS Amoxicillin PULSYS -- NDA Filing Update

On December 14, 2006, Advancis submitted a NDA with the FDA for its once- daily Amoxicillin PULSYS product for the treatment of adults and adolescents with acute pharyngitis and/or tonsillitis (commonly referred to as strep throat). On February 12, 2007, Advancis received a "refusal to file" letter from the FDA for its once-daily Amoxicillin PULSYS NDA, requesting additional information on the Company's planned commercial manufacturing processes. In its letter, the FDA indicated that Advancis' application was not sufficiently complete in that it did not include a proposed commercial batch record or a detailed commercial process description with process parameters and in-process controls.

Advancis participated in a meeting with the FDA regarding the Company's NDA for its Amoxicillin PULSYS product on February 26, 2007. In that meeting, Advancis obtained clarity from the FDA on the additional information that was required for its NDA filing to be accepted.

Advancis agreed to provide the additional information on its commercial manufacturing processes requested by the FDA for the filing to be accepted, and resubmitted its NDA via the 505(b)(2) regulatory pathway on March 23, 2007. If the filing is accepted and the product approved, Advancis anticipates it could be ready for commercial launch of Amoxicillin PULSYS by as early as the first quarter of 2008, assuming the Company has sufficient capital resources to do so.

Amoxicillin is currently not approved for once-daily dosing to treat pharyngitis. If approved for marketing, physicians prescribing Amoxicillin PULSYS would have available the first once-daily product in the aminopenicillin class for the treatment of pharyngitis while utilizing approximately one-half the amount of amoxicillin currently used. About 15 million patients annually seek relief of sore throat symptoms in the United States.

Additional Capital Raising Initiatives and Cost Reductions for 2007

Advancis is currently pursuing the raise of additional capital and believes it has several available financing options. The Company expects to complete a financing within the next several weeks, with the goal of providing sufficient cash to fund the Company's operations into 2008. However, there can be no assurance that the Company will be able to do so. In addition, the Company cautions that its cash requirements in 2007 will be impacted by the continued market acceptance of Keflex 750 capsules and its level of spending for the remainder of the year.

In order to minimize the Company's financing requirements, it has initiated cost reductions including personnel reductions, postponement of PULSYS clinical development programs other than Amoxicillin PULSYS for adults and adolescents, and elimination of other discretionary spending. Advancis' future development efforts for its PULSYS product candidates and its ability to continue its business operations will be dependent upon its ability to secure additional capital.

Keflex(R) Capsules (Cephalexin, USP) -- Commercialization Update

During the fourth quarter, Advancis continued the commercialization of its new 750mg strength Keflex capsules through a targeted and dedicated national contract sales force of approximately 75 sales representatives and eight Advancis district sales managers (now seven district sales managers). Advancis contract sales representatives began directly promoting Keflex 750mg capsules to targeted physicians as well as providing patient starter samples in late July 2006.

In late September, Advancis commenced specific initiatives to significantly increase the number of pharmacies stocking Keflex 750. Based on these initiatives, the Company believes approximately 25,000 pharmacies carried Keflex 750 at the end of 2006, including several major retail pharmacy chains that stocked Keflex 750 in a majority of their stores.

Since its introduction, the number of prescriptions filled with Keflex 750mg capsules has continued to grow. Based on prescription data from IMS Health, approximately 6,000 prescriptions were filled for Keflex 750mg capsules for the week ended March 16, 2007. Advancis cautions against annualizing this weekly information.

Keflex PULSYS Product Development

During the fourth quarter of 2006, Advancis completed two additional Phase I studies for the development of a once-a-day Keflex product utilizing the Company's proprietary PULSYS(TM) technology. Based on the results from its Phase I studies, the Company believes it has completed its formulation development Phase I program for its Keflex PULSYS product candidate. Further development for Keflex PULSYS and/or Advancis' other product candidates, however, will be dependent upon the Company's ability to secure additional financial resources.

Advancis' once-daily Keflex PULSYS product candidate is designed to increase the convenience of cephalexin therapy, which is currently dosed two to four times daily for a period of seven to 14 days. There is currently no once-daily cephalexin product approved for marketing in the United States.

Investment Bank Retained to Explore Strategic Alternatives

Advancis announced that its board of directors has authorized the Company to evaluate various strategic alternatives to further enhance shareholder value. Advancis has retained an investment bank focused on the life sciences industry to assist in the evaluation of a full range of strategic alternatives available to the Company.

Strategic alternatives the Company may pursue could include, but are not limited to, continued execution of the Company's operating plan, the sale of some or all of the Company's assets, partnering or other collaboration agreements, or a merger or other strategic transaction. There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms. The Company does not intend to disclose developments with respect to this process unless and until the evaluation of strategic alternatives has been completed.

FINANCIAL DETAILS -- Total revenue, resulting entirely from net Keflex product sales, was $1.2 million in the fourth quarter of 2006, compared to net product sales of $2.4 million in the prior quarter and $1.6 million in the fourth quarter of 2005. Revenue for the full year of 2006 was $4.8 million, resulting from net Keflex product sales. Revenue totaled $16.8 million for the full year of 2005, consisting of Keflex product sales and revenue recognized under the Company's prior collaboration with Par Pharmaceutical Companies for Amoxicillin PULSYS. -- Operating expenses. Fourth quarter research and development expenses, primarily consisting of salaries, stock-based compensation, and related expenses for personnel and the costs of the Company's clinical trials and research initiatives, were $6.3 million, compared to $5.7 million in the previous quarter and $6.3 million in the fourth quarter of 2005. Increased sequential R&D expenses in the fourth quarter of 2006 primarily were due to an increase in clinical trial expenses. For the full year of 2006, total R&D expenses were $26.0 million, down from $39.7 million in the full year of 2005. Lower R&D expenses in 2006 resulted from the Company conducting only one Phase III clinical trial in 2006 versus two Phase III trials in 2005, as well as decreased salaries and related costs resulting from its workforce reduction in July 2005. Selling, general and administrative (SG&A) expenses totaled $8.3 million in the fourth quarter of 2006, up from $6.1 million in the third quarter of 2006, and $1.8 million in the fourth quarter of 2005. For the full year of 2006, total SG&A expenses were $21.3 million, up from $10.5 million in the prior year. Increased SG&A expenses were primarily due to selling and marketing costs associated with the launch of the Company's new Keflex 750mg product in the third quarter of 2006. Stock-based compensation recorded in the fourth quarter 2006 was a total of $0.5 million, of which $0.1 million was recorded in R&D expense and $0.4 million was recorded in SG&A expense. In the third quarter 2006 and fourth quarter 2005, total stock-based compensation expense was $1.1 million and ($0.1) million, respectively. -- Net loss for the fourth quarter of 2006 was $13.8 million. This compares to a net loss of $9.9 million in the third quarter of 2006, and $6.4 million in the fourth quarter of 2005. For the full year of 2006, net loss was $42.0 million, up from a net loss of $33.0 million over the full year of 2005. -- Net loss per share applicable to common stockholders for the fourth quarter of 2006 was ($0.44), compared to a loss per common share of ($0.33) in the prior quarter and ($0.22) in the fourth quarter of 2005. For the full year of 2006, net loss per share applicable to common stockholders was ($1.38), compared to ($1.20) in the full year of 2005. Higher net loss per share in 2006 compared to 2005 was mainly attributable to a decrease in total revenue in 2006 from the prior year and costs associated with the launch of the Company's new Keflex 750mg product in 2006. Per share figures were computed on the basis of a weighted average of 31.5 million shares outstanding in the fourth quarter of 2006, 30.3 million in the third quarter of 2006, and 29.7 million shares outstanding in the fourth quarter of 2005. Per share figures for the full year of 2006 were computed based on an average of 30.5 million shares outstanding, and 27.4 million shares outstanding for the full year of 2005. -- Cash and marketable securities increased by $2.8 million during the fourth quarter. Changes were composed of $16.7 million of net proceeds from the private placement of common stock, and $1.5 million for non- cash expenses; offset by $13.7 million of operating losses, and $0.7 million in loan payments, and $1.0 million for working capital changes and other items. -- The Balance Sheet at the end of the fourth quarter of 2006 reflected $15.4 million of unrestricted cash, cash equivalents and marketable securities, compared to $12.6 million as of September 30, 2006, and $29.4 million as of December 31, 2005. -- The Company's Form 10-K was filed on March 26, 2007 and included an unqualified integrated audit report with a going concern explanatory paragraph modification from the Company's independent registered public accounting firm, PricewaterhouseCoopers LLP. The integrated audit report states that the Company has suffered recurring losses and has insufficient liquidity to fund its ongoing operations that raise substantial doubt about the Company's ability to continue as a going concern. The Company believes that it has several available financing alternatives, and anticipates completing a financing transaction providing additional capital within the next several weeks. However, no assurance can be given that the Company will be able to successfully complete a financing. FINANCIAL GUIDANCE AND FUTURE CASH REQUIREMENTS

The Company provides the following estimates for its 2007 financial results. These estimates assume the Company completes a financing of approximately $20 million net proceeds in the near term. The Company needs to raise capital in order to fund its future operations. In order to minimize financing requirements in 2007, the Company has initiated cost reductions including personnel reductions, postponement of PULSYS clinical development programs other than Amoxicillin PULSYS for adults, and elimination of other discretionary spending.

Total revenue for 2007 is expected to be approximately $10 million to $14 million, resulting from Keflex product sales. Net loss for the year is expected to be between $36 million and $40 million, or approximately $0.99 to $1.10 per diluted common share, based on approximately 36.4 million outstanding shares. Non-cash charges for 2007, consisting primarily of stock- based compensation expenses and depreciation and amortization, are expected to be approximately $7 million. Total cash used in 2007 is estimated to be between $25 and $33 million.

In order to provide existing and prospective investors with additional information on our expected financial results and future cash requirements, we are providing the following additional forward-looking information and comments. These forward-looking statements are based on management's current expectations, and actual results could differ materially. Assumptions made by management for these estimates include, but are not limited to, the following:

a. Revenue -- The estimate of $10 to $14 million assumes that prescriptions filled for Keflex 750 will continue to increase by approximately 2,000 to 3,000 per month through 2007, which is consistent with the monthly trend to date for the product. Growth in prescriptions filled is expected to generate pharmacy orders to wholesalers, which in turn will generate orders to the Company. No assurance can be given, however, that Keflex 750 sales will increase from current levels, or that sales of Keflex 750 will not decline. The forecast also assumes that sales and marketing efforts for Keflex 750 continue at a significant level. The Company will continue to closely monitor the progress of Keflex 750 product sales and the related product, sales, and marketing expenses during the year with the objective of a level of cash receipts at least equal to cash expenditures.

b. Research and development expense -- Estimated research and development expense of approximately $20 to $22 million includes approximately $7 to $8 million for costs being paid by the Company to its third party contract manufacturer for Amoxicillin PULSYS, to allow them to complete the build-out of its contract manufacturing facility in Clonmel, Ireland and prepare for the potential FDA pre-approval inspection related to the Amoxicillin PULSYS New Drug Application. The forecast also assumes approximately $1 million is paid by the Company for equipment being installed at the Clonmel facility, which will be owned by the Company. Potential expenditures on research projects other than Amoxicillin PULSYS, such as Keflex PULSYS and the pediatric PULSYS program, have been postponed until additional financial resources are available.

c. Selling, general and administrative expense (SG&A) -- Estimated SG&A expense of approximately $23 to $26 million includes approximately $12 to $14 million for sales and marketing. These expenses include the sales force (field representatives provided by Innovex, a contract sales organization for the promotion of Keflex 750) and marketing and samples costs related to Keflex 750. Marketing costs have been reduced from levels incurred earlier in the Keflex 750 launch, reflecting a more focused approach and less general advertising. Sales force costs are under review, with a restructuring of the sales force being considered to increase its effectiveness and potentially decrease costs. General and administrative expenses in 2007 are expected to decrease compared to 2006 due to planned reductions in personnel costs and in discretionary spending.

d. Debt service -- Approximately $0.3 million is paid monthly to Merrill Lynch Capital for principal and interest on a term loan. The loan agreement requires that we maintain a minimum liquidity level (unrestricted cash and marketable securities) of $5 million.

e. Cash -- Cash used in 2007 is expected to total $25 million to $33 million. The rate of net cash used in the second half of the year is expected to be significantly lower than the first half due to lower research and development costs, lower general and administrative expenses, and higher cash receipts from product sales.

These 2007 estimates are forward-looking statements that involve risks and uncertainties, and actual results could vary materially.

ABOUT ADVANCIS PHARMACEUTICAL CORPORATION:

Advancis Pharmaceutical Corporation is a pharmaceutical company focused on the development and commercialization of anti-infective drug products that fulfill substantial unmet medical needs in the treatment of infectious disease. The Company is developing a portfolio of anti-infective drugs based on its novel biological finding that bacteria exposed to antibiotics in front-loaded staccato bursts, or "pulses," are killed more efficiently and effectively than those under standard treatment regimens. Based on this finding, Advancis has developed a proprietary, once-a-day pulsatile delivery technology called PULSYS(TM). By examining the resistance patterns of bacteria and applying its delivery technologies, Advancis has the potential to redefine infectious disease therapy and significantly improve drug efficacy, shorten length of therapy, and reduce drug resistance versus currently available antibacterial products. For more on Advancis, please visit http://www.advancispharm.com.

ABOUT KEFLEX:

Keflex(R) Capsules (Cephalexin, USP) is a first-generation cephalosporin antibiotic shown to be active against strains of both gram-positive and gram- negative aerobes in vitro and in clinical infections. Keflex is indicated for treatment of the following infections: respiratory tract infections, otitis media, skin and skin structure infections, bone infections, and genitourinary tract infections. Keflex is currently available in 250mg capsules, 500mg capsules, 750mg capsules, and powder for oral suspension. Keflex is contraindicated in patients with known allergy to the cephalosporin group of antibiotics. Before therapy with cephalexin is instituted, careful inquiry should be made to determine whether the patient has had previous hypersensitivity reactions to cephalexin, cephalosporins, penicillins, or other drugs. Keflex should be administered with caution in the presence of markedly impaired renal function or a history of gastrointestinal disease, particularly colitis. More information on Keflex and prescribing information are available at http://www.keflex.com

This announcement contains historical financial information as of and for the years and three-month periods ended December 31, 2006 and December 31, 2005 that is unaudited for the three-month periods ended December 31, 2006 and December 31, 2005, and Advancis assumes no obligation to update this information based on new information or future performance except as may be specifically required by applicable law or regulation. The unaudited annual financial information is subject to audit by independent accountants on an annual basis following the close of each calendar year.

This announcement contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. These statements are based on Advancis' current expectations and assumptions. These statements are not guarantees of future performance and are subject to a number of risks and uncertainties that would cause actual results to differ materially from those anticipated. The words, "believe," "expect," "intend," "anticipate," and variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward- looking. Statements in this announcement that are forward-looking include, but are not limited to, statements about the Company's product development and commercialization schedule, including, particularly, future plans with respect to its Amoxicillin PULSYS products; any statements regarding Dr. Rudnic's comments and expectations concerning the Company; the Company's initiatives to develop improved antibiotics; the Company's existing and anticipated collaborative agreements; and any financial forecasts and projections for 2007 and thereafter included under the Financial Guidance section of this announcement.

The actual results realized by Advancis could differ materially from these forward-looking statements, depending in particular upon the risks and uncertainties described in the Company's filings with the Securities and Exchange Commission. These include, without limitation, risks and uncertainties relating to the Company's financial results and the ability of the Company to (1) raise additional capital and continue as an ongoing concern, (2) increase Keflex 750 sales, (3) obtain FDA approval for its Amoxicillin PULSYS product candidate, (4) successfully reduce costs, (5) maintain compliance with its outstanding credit facility with Merrill Lynch Capital, (6) reach profitability, (7) prove that the preliminary findings for its product candidates are valid, (8) receive required regulatory approvals, (9) successfully conduct clinical trials in a timely manner, (10) establish its competitive position for its products, (11) develop and commercialize products that are superior to existing or newly developed competitor products, (12) develop products without any defects, (13) have sufficient capital resources to fund its operations, (14) protect its intellectual property rights and patents, (15) implement its sales and marketing strategy, (16) successfully attract and retain collaborative partners, (17) successfully commercialize and gain market acceptance for its Keflex products, (18) successfully obtain sufficient manufactured quantities of its drug products at acceptable rates, and (19) retain its senior management and other personnel. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date. Advancis undertakes no obligation to update or revise the information in this announcement, whether as a result of new information, future events or circumstances or otherwise.

ADVANCIS PHARMACEUTICAL CORPORATION CONDENSED STATEMENTS OF OPERATIONS Three Months Ended Twelve Months Ended December 31, December 31, (Unaudited) 2006 2005 2006 2005 Revenues: Product sales $1,243,847 $1,618,882 $4,810,410 $4,809,222 Contract revenue - - - 4,027,778 Reimbursement of development costs - - - 8,010,690 Total revenues 1,243,847 1,618,882 4,810,410 16,847,690 Costs and expenses: Cost of product sales 381,836 295,678 899,601 562,009 Research and development 6,273,581 6,268,105 25,973,844 39,729,441 Selling, general and administrative 8,287,656 1,769,835 21,288,968 10,515,302 Total expenses 14,943,073 8,333,618 48,162,413 50,806,752 Loss from operations (13,699,226) (6,714,736) (43,352,003) (33,959,062) Interest income 147,764 319,187 895,685 1,075,084 Interest expense (218,633) (27,645) (510,651) (120,891) Other income - 16,292 976,815 16,292 Net loss $(13,770,095) $(6,406,902) $(41,990,154) $(32,988,577) Basic and diluted net loss per share $(0.44) $(0.22) $(1.38) $(1.20) Shares used in calculation of basic and diluted net loss per share 31,503,384 29,688,121 30,535,965 27,421,516 ADVANCIS PHARMACEUTICAL CORPORATION CONDENSED BALANCE SHEETS December 31, 2006 2005 ASSETS Current assets: Cash and cash equivalents $14,856,738 $18,116,968 Marketable securities 522,723 11,314,090 Restricted cash - 418,244 Accounts receivable, net 303,514 756,764 Notes receivable from officer - 121,500 Inventories, net 2,077,390 219,451 Prepaid expenses and other current assets 1,682,685 797,253 Total current assets 19,443,050 31,744,270 Property and equipment, net 11,764,627 14,450,627 Restricted cash 872,180 1,182,680 Deposits and other assets 1,548,585 884,312 Intangible assets, net 8,377,327 9,535,003 Total assets $42,005,769 $57,796,892 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $2,285,736 $1,686,487 Accrued expenses and advances 7,817,224 7,071,731 Lines of credit and short-term debt 6,888,889 895,204 Note payable 75,000 - Deferred product revenue 189,000 - Total current liabilities 17,255,849 9,653,422 Lines of credit - noncurrent portion - 597,208 Note payable - 75,000 Accrued severance - noncurrent portion - 1,235,394 Deferred contract revenue 11,625,000 11,625,000 Deferred rent and credit on lease concession 1,252,900 1,268,857 Total liabilities 30,133,749 24,454,881 Commitments and contingencies Stockholders' equity: Preferred stock, undesignated - - Common stock, par value 363,625 297,652 Capital in excess of par value 164,593,930 144,766,213 Deferred stock-based compensation - (623,051) Accumulated deficit (153,085,462) (111,095,308) Accumulated other comprehensive loss (73) (3,495) Total stockholders' equity 11,872,020 33,342,011 Total liabilities and stockholders' equity $42,005,769 $57,796,892 ADVANCIS PHARMACEUTICAL CORPORATION CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31, 2006 2005 Cash flows from operating activities: Net loss $(41,990,154) $(32,988,577) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 3,919,267 4,044,419 Stock-based compensation 3,404,063 535,786 Deferred rent and credit on lease concession (15,957) 47,629 Amortization of premium on marketable securities 204,525 253,483 (Gain) or loss on disposal of fixed assets 23,185 (16,292) Recognition of advance payment for potential sale of Keflex (1,000,000) Changes in: Accounts and notes receivable 574,751 (406,648) Inventories (1,857,939) (39,713) Prepaid expenses and other current assets (885,432) 247,136 Deposits other than on property and equipment, and other assets (30,096) (62,394) Accounts payable 599,249 (2,200,076) Accrued expenses and advance


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