Markets for Our Products

Opioid Analgesics

We expect Oxecta®, to compete primarily in the market for immediate release opioid products or IR Opioid Products. IMS Health reports that, in 2011, IR oxycodone products held just 6% (14.8 million dispensed prescriptions) of the 244 million prescription market for IR Opioid Products. Comparatively, hydrocodone bitartrate/acetaminophen IR products account for 55% of the IR Opioid prescription market while oxycodone hydrochloride/acetaminophen accounted for 16%. These latter two combination drugs are under development by Pfizer using our Aversion® Technology.

IMS Health reports that the 14.8 million prescriptions for IR oxycodone products contained 1.6 billion tablets. Comparatively, IMS Health reports that 1.8 billion IR oxycodone tablets, or 13% more, were shipped from drug distribution centers to all healthcare providers during the 12 months ending November 2011. A majority of this difference can be attributed to distribution channels such as hospitals and federal facilities that consume product without a corresponding prescription. This difference increases to 25% for the 5 mg IR oxycodone products.

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 guarantees can be given.

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.

In a 2011 survey of 400 opioid prescribing physicians conducted for us by an independent research firm, 39% of physicians indicated that they were highly concerned with the diversion of their opioid prescriptions for non-medical purposes and 42% were highly concerned about opioid abuse 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.

OxyContin®, Vicodin®, Lortab®, Lorcet®, Darvon®, Darvocet®, Ultram®, Percocet®, Percodan®, Tylox®, Tylenol®, and Demerol® are registered trademarks of others.

Non-Opioid Products In Development

Our stimulant product in development utilizes our Aversion® Technology and is intended for the treatment of attention deficit disorder. Stimulant products are classified as Schedule II controlled substances by the DEA. According to Drugs of Abuse, published by the DEA, stimulants are abused in manners similar to opioid analgesics. The 2009 National Survey on Drug Use and Health estimates that 9.1 million people have abused prescription stimulants at some point in their lifetime and 1.9 million have abused stimulants in the past year. In 2008, IMS Health reported 21.2 million prescriptions were dispensed for stimulant products.

Our stimulant product is intended to be encompassed by our U.S. patent issued in July 2011.

Nasal Decongestants

PSE is a widely-used nasal decongestant available in many non-prescription and prescription cold, sinus and allergy products. PSE is sold in products as the only active ingredient in both immediate and extended-release products. In addition, PSE is combined with other cold, sinus and allergy ingredients such as pain relievers, cough suppressants and antihistamines. PSE also competes against phenylephrine, an alternate nasal decongestant available in non-prescription products. Our 2010 market research study showed that 93% of the 204 pharmacists surveyed believe that PSE has superior efficacy as a nasal decongestant compared to phenylephrine. Due to the CMEA, many cold, sinus and allergy products replaced PSE with phenylephrine to avoid the security and consumer sales volume restrictions imposed by the CMEA on PSE products.

Methamphetamine is a highly addictive illicit drug used non-medically by an estimated 13 million people at some point in their lifetime. In 2006 regulations relating to over-the counter sale of PSE products were amended with the enactment of the Federal Combat Methamphetamine Epidemic Act, or CMEA. The CMEA was enacted in response to an alarming increase in and widespread conversion of PSE containing products into methamphetamine. Among other things, the CMEA requires retail stores to maintain their inventory of PSE containing products in a secured location and restricts the amount of PSE products a store can sell to an individual customer. Implementation of the CMEA initially reduced the number of illegal methamphetamine laboratory seizures reported by the Drug Enforcement Administration, or DEA, as the then most commonly used process for conversion of PSE to methamphetamine required substantial quantities of PSE. However, a newer process for converting PSE to methamphetamine requires less PSE. Possibly as a result of this new conversion process, the DEA reported 2010 clandestine methamphetamine laboratory seizures increased 84% over the low reported in 2007. Impede™ Technology is designed to deter the conversion of PSE to methamphetamine, including by use of both the older and newer conversion processes. In response to the ongoing methamphetamine problem, several local jurisdictions (state, counties and/or local municipalities) have enacted or propose to enact legislation to require a physician’s prescription to obtain a PSE-containing product.

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 (such as Sudafed®, Claritin-D®, and Zyrtec-D®) have strong consumer brand recognition and, in some cases, prescription drug heritage. Category leading brands are often supported by national mass marketing and promotional efforts. Consumers often have a choice to purchase a less expensive store brand. Store brands contain the same active ingredients as the more popular national brands but are not supported by large marketing campaigns and are offered at a lower price. Non-prescription products are typically distributed through retail outlets, including drug store chains, food store chains, independent pharmacies, and mass merchandisers. The distribution outlets for PSE products are highly consolidated. According to Chain Drug Review, the top 50 drug, food and mass merchandising chains operate approximately 40,000 pharmacies in the U.S., of which 58% are operated by the four largest chains. Our survey of PSE 30mg tablet prices at these top four drug chains indicates that branded PSE products were priced, on average, to the consumer at approximately $0.25 per tablet as compared to approximately $0.12 per tablet for the corresponding store brand.

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. A separate market study conducted on our behalf showed that approximately one-third of consumers seek a pharmacist’s recommendation for their nasal decongestant and, as a result of the CMEA, are required to do so to purchase PSE containing products. We intend to capitalize on this consumer-pharmacist interaction at the point of sale by soliciting distribution to the pharmacies and engaging pharmacists to recommend Nexafed™ to their customers. We may form a small national account sales staff to sell Nexafed™ to regional and national retail drug chains. We are also considering creating a Nexafed™ product awareness through local television, radio, and print advertising. No assurance can be given, however, that pharmacy chains will stock our Nexafed™ product or that consumers will purchase our Nexafed™ product.

Product Labeling for Impede™ Technology Products

We intend to market our Nexafed™ product pursuant to the FDA’s OTC Monograph regulations, which require that our product have labeling as specified in the regulations. We believe, however, we can advertise the extraction characteristics and benefits of our Nexafed™ product which is supported by our research studies.

We expect that our other Impede™ Technology products marketed pursuant to an NDA or ANDA will be subject to a label approved by the FDA. We expect that such a label will require submission of our scientifically derived abuse liability data and we intend to seek descriptions of our abuse liability studies in the FDA approved product label, although there can be no assurance that this will be the case.