Markets for Our Products

Opioid Analgesics

Results from the 2009 National Survey on Drug Use and Health estimated that 35.0 million people, or more than 10% of the population, have used prescription opioid analgesics non-medically at some point in their lifetime. In addition, it is estimated that more than 75 million people in the U.S. suffer from pain, which is more than the number of people with diabetes, heart disease and cancer combined. 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 U.S. with over 260 million tablet and capsule prescriptions dispensed in 2010 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 and abuse and possible diversion of legitimate prescriptions for illicit use.

We expect our Aversion® Technology opioid product candidates to compete primarily in the IR Opioid Product segment of the US opioid analgesic market, a segment at a 4% compounded annual rate over the last five years. On average, an IR Opioid Product prescription contains approximately 57 tablets or capsules. According to the 2009 National Survey on Drug Use and Health, prescription drug abusers have supplanted abusers of all illicit drugs except marijuana. Of these abused prescription products, IR Opioid Products, which typically provide rapid onset of analgesia and require dosing every 4 to 6 hours, comprise the vast majority of this abuse compared with ER Opioid Products, which release their opioids gradually over a 12 to 24 hour period. 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 Aversion Technology.

According to IMS Health, in 2010, sales in the IR Opioid Product segment, comprised of 97% generic products, were $2.0 billion. Assuming the FDA approves differentiated label claims of the abuse deterrent features and benefits of our product candidates, of which no assurance can be given, we anticipate that our Aversion Technology IR Opioid Products licensed to King will be premium priced compared to generic products resulting in the growth of sales in the IR Opioid Product market segment. All definitive pricing decisions relating to such Aversion opioid products will be made by King.

Despite considerable publicity regarding the abuse of OxyContin® 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 4 times as many people have misused the IR Opioid Products Vicodin®, Lortab® and Lorcet® (hydrocodone bitartrate/acetaminophen brands and generics) as have ever abused OxyContin. We estimate 60-95% of the 35.0 million lifetime US opioid abusers have non-medically used 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.

We have completed, through an independent market research firm, three physician market research studies with 282, 401 and 435 opioid prescribing U.S. based physicians, respectively. A sampling of key findings from these approximately 1,100 physicians includes:

Physicians are keenly aware of opioid analgesic abuse

• The 282 physicians surveyed estimated on average that about one out of six prescriptions for oxycodone and hydrocodone containing products are abused.
• 94% of the 435 physicians surveyed experienced at least one suspicious incident regarding opioid abuse in the past month, while nearly 64% experienced four or more discretely different incidents regarding opioid abuse in the past month.

Physicians are personally concerned with opioid abusers impact to their respective practices

• Following the survey of 282 physicians, the researchers concluded, “abuse [of opioid analgesics] is a particular problem for physicians because many are not fully sure who is abusing these opioids, and they view such abuse as a legal threat to their practice.” “More than half [of the physicians surveyed] believe their physician colleagues are more concerned about avoiding state review [of their opioid prescribing habits] than meeting [professional association] pain guidelines [for their patients].”
• After the survey of 435 physicians the researchers concluded “the primary motive for prescribing the Aversion Technology product[s] is the concern physicians have about opioid abuse and the threat it represents to their practice.”

Physicians are favorably inclined toward prescribing opioids with abuse deterrent features and benefits

• 94% of the 401 physicians surveyed indicated that they would either prescribe one of the Aversion Technology products profiled in the market research questionnaire for one of their last five patients receiving an opioid prescription or they are aware of a patient in their practice for whom Aversion Technology products would be an appropriate choice.
• 57% of the 435 physicians indicated that their opioid analgesic prescribing would increase if they were more certain they were not aiding abusers.
• Following the survey of 401 physicians, the researchers concluded “these [Aversion Technology oxycodone products] would disproportionately replace current immediate release oxycodone [and oxycodone/acetaminophen] prescriptions, but would also draw substantial volume from hydrocodone/acetaminophen products.”

Overall, we believe the availability of opioid analgesics with the abuse deterrent features, including products using our Aversion Technology (with or withoug niacin), will impact the selection of products used for relief of pain. Our market research survey of the 401 physicians indicated that of the prescriptions likely to be written for our product candidates that utilize oxycodone, 59% will be switched from immediate release products containing either oxycodone or hydrocodone, with the remaining 41% being switched from other currently marketed opioid analgesic products such as codeine, propoxyphene, morphine and tramadol. Our market research surveys of 401 physicians and 435 physicians, respectively, suggest that the particular combination of ingredients [i.e. with or without niacin] does not appear to have a substantial effect on the estimated brand market share potential of our Acurox® product candidates.

A majority of pharmaceutical products in the U.S. 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 entitlement 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 favored reimbursement status by the third party payers, of which no assurance can be given.

Independent estimates have been made assessing the potentially significant cost impact of prescription opioid abuse to insurers. An analysis of health and pharmacy insurance claims between 1998 and 2002 for almost 2 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 inflated this excess cost per patient to more than $16,000 for 2007, and by applying the U.S. government’s estimated 4.4 million annual opioid abusers, concluded that opioid abuse could costs 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.

Other Abused Drug Classes

The US Drug Enforcement Administration identifies drugs with abuse potential with a DEA Scheduling from I through IV, with I being the most prone to abuse. Other pharmaceutical product categories identified as potentially abuseable include tranquillizers (brand products such as Valium®, Xanax®, Halcion® and Ativan®), stimulants (brand products such as Dexedrine®, Adderall®, Ritalin® and Concerta®) and sedatives (brand products such as Nembutal®, Butisol®, and Seconal®). According to IMS Health, the abused non-opioid drugs have sizable, established U.S. markets. The U.S. Drug Enforcement Administration reports these non-opioid abused drugs may be misused in ways which can be addressed to our Aversion Technology. While we do not currently focus significant resources on this area, we believe that the application of Aversion Technology to these non-opioid products may have a similar regulatory process and could result in a significant market opportunity for us.

Xanax®, Valium®, Ativan®, Klonopin®, Ritalin®, Adderall®, Dexedrine®, Concerta®, Seconal®, Halcion®, Nembutol®, and Butisol® are registered trademarks of others.

Nasal Decongestants

Pseudoephedrine or 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 Combat Methamphetamine Epidemic Act or 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. 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.

Methamphetamine is a highly addictive illicit drug used non-medically by an estimated 13 million people at some point in their lifetime. 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 2009 clandestine methamphetamine laboratory seizures increased 62% 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.

Our Impede Technology products containing PSE will 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. As a result of the CMEA 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 the pharmacies of national and regional drug chains and educating and encouraging pharmacists to recommend Nexafed Tablets (formerly known as Impede PSE Tablets) to their customers. In a 2010 survey of 204 pharmacists, pharmacists indicated they would recommend Nexafed, if available in the pharmacy, more than competing products. We also may create Nexafed product awareness through television, radio, and print advertising.

Product Labeling for Impede Technology Products

We believe 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