We sell medical foods
and generic and branded pharmaceuticals through employed sales representatives and independent distributors. Product sales are
invoiced upon shipment at Average Wholesale Price (“AWP”), which is a commonly used term in the industry, which invoices
include reductions for rapid pay discounts, under four models:
CCPI receives no revenue
in the physician direct or distributor direct models because it does not provide collection and billing services to the physician
clients.
In the physician managed
model and in the hybrid model, CCPI has a billing and claims processing service agreement with the physician client relating to
our products. That agreement includes a service fee defined as a percentage of collections on all claims plus all or a portion
of any penalties and interest collected. CCPI prepares the claim on behalf of the physician and administers the claim through collection.
Collections from commercial insurers generally occur within 90 days. While ultimate collectability of workers’ compensation
claims is very high, most workers’ compensation claims are denied on first claim attempt and can take from 45 days to five
years to collect. The initial denial begins a process of correspondence designed to clear denial objections, submission of workers’
compensation lien filings against insurer settlements on behalf of physicians and settlement hearings. Because fees are only earned
by CCPI upon collection of the claim and the fee is not determinable until the amount of the collection of the claim is known,
CCPI recognizes revenue at the time that collections are received. In examples 3 and 4 above, CCPI recognized $200 of revenue in
each case on the date of collection and the fee CCPI received was based upon actual collections.
The impact of this
extended collection cycle on CCPI revenue is that revenue is delayed until collection of the claims on behalf of the physician.
This has a direct impact on CCPI’s revenue and cash flow because CCPI’s revenue is recognized upon receipt of the claims
collection on behalf of the physician.
No returns of product
are allowed except products damaged in shipment, which has been insignificant.
The rapid pay discounts
to the AWP offered to the physician or distributor, under the business models described above, vary based upon the expected payment
term from the physician or distributor. The discounts are derived from the Company’s historical experience of the collection
rates from internal sources and updated for facts and circumstances and known trends and conditions in the industry, as appropriate.
As described in the business models above, we recognize provisions for rapid pay discounts in the same period in which the related
revenue is recorded. We believe that our current provisions appropriately reflect our exposure for rapid pay discounts. These rapid
pay discounts, have typically ranged from 40% to 83% of Average Wholesale Price and we have monitored our experience ratio periodically
over the prior twelve months and have made adjustments as appropriate.
On November 20, 2012
TMP entered into an agreement with Cambridge Medical Funding Group to assign physicians account receivables under California Workman’s
Compensation. Subject to physician’s approval, Cambridge will pay 23% of California Work Comp Fee Schedule on all approved
claims within 5 days of claim receipt. TMP will take the cost of product and billing fee out of the payment with the remainder,
if any, remaining for the physician. After Cambridge has collected 38% of billed amounts, the remaining amount will be split 75/25
in favor of the physicians. TMP will withhold any further unpaid costs and the rest will go to the physician. Under this model,
physicians will be paid on every dispensement rather than having to wait until claims are paid. In addition, TMP is paid for all
products within 2 weeks of the doctor dispensing product. Physicians have the option of remaining on the traditional physician
managed model or switching to the new model. The Cambridge Medical Funding Group agreement allows for payment within 7-10 for all
products dispensed and billed for participating doctors in California Workman’s Compensation. The agreement between Cambridge
Medical Funding Group and the Company contains a 30-day termination clause within the first 6 months that either party can exercise.
It is possible that either party may cancel the agreement, which could adversely affect the Company’s cash flow and revenue.
Example: The physician
signs a purchase agreement with TMP with a rapid pay discount of 78% if paid within 21 days. The physician orders 100 bottles of
product with an AWP of $100. TMP issues an invoice for $2200 if paid with 21 days and when Cambridge makes their payment, the cost
of product is withheld to cover the invoice before any funds are forwarded to the doctor. The physician is still ultimately responsible
for payment of our products directly to TMP, even if Cambridge chooses not to fund any given claim for products.
Due to substantial
uncertainties as to the amount of and timing and collectability of revenues derived from our Physician Managed Model (PMM) and
Hybrid Model, which can take in excess of five years to collect, these revenues are recorded when collectability is reasonably
assured, which in the case of these two business models, is when the payment is received and any applicable rapid pay discount
offered in the product purchase agreement is applied to the original gross invoice. We have recorded revenues for 2012 and 2011
on this basis. As a result revenues for the two periods are substantially lower that what would have been reported for 2011. Details
of our restatement of previously reported results are included in note 8 to the consolidated financial statements found elsewhere
in this report.
Total revenue for the
three months ended September 30, 2012 decreased $382,466, or 15.6%, to $2,076,532, from the restated amount of $2,458,998 for the
three months ended September 30, 2011. Product revenue decreased $547,187, or 23.2%, from the restated prior year $2,359,493 to
$1,812,306, primarily due to decreased collections in our PMM and Hybrid businesses resulting from a decrease in product shipments
and claims filed. PMM and Hybrid revenues are based on payments received regardless of when the original invoice and shipment occurred.
Product revenue for the respective periods is further described in the following schedule:
Service revenue increased
$164,721 or 165.5%, from $99,505 in the three months ended September 30, 2011 to $264,226 in the three months ended September 30,
2012 due to increased collections primarily because we increased our collections staff, and outsourced a portion of our collection
activity and we increased the billing service fee percentage by CCPI, our billing and claims collection subsidiary. Starting with
the quarter ended September 30, 2011 we decreased the CCPI fee charged to physician clients from 20 percent to a range of 5 to
10 percent as a courtesy under our billing and collection services. During the three months ended September 30, 2012 we increased
the average fee charged to our CCPI customers.
The cost of products
sold increased $304,914, or 91.2%, from $334,157 in the three months ended September 30, 2011 to $639,071 in the three months ended
September 30, 2012 and the percentage of cost of product sold to product revenue increased from 14.2% for the three months ended
September 30, 2011 to 35.3% for the three months ended September 30, 2012. This increase includes $278,724 reflecting prior errors
in accounting for a product return in connection with an advanced purchase for a pending contract which did not come to fruition.
Due to the change in revenue recognition policy costs of products shipped are a period expense while revenue is recognized on payment
under our PMM and Hybrid Models.
The cost of services
sold for the three months ended September 30, 2012 increased $57,864, or 13.8%, from $419,361 for the three months ended September
30, 2011 to $477,225 for the three months ended September 30, 2012 and the percentage cost of service sold to service revenue decreased
from 421.4% to 180.6% in those periods. These costs increased primarily because we increased our collections staff, and outsourced
a portion of our collection activity. While expenses are recognized in the period incurred, the fee charged by CCPI is recognized
upon the collection of the claim on behalf of the physician client, which may occur in future periods. Starting with the quarter
ended September 30, 2011 we decreased the CCPI fee charged to physician clients from 20 percent to a range of 5 to 10 percent as
a courtesy under our billing and collection services. During the three months ended September 30, 2012 we increased the average
fee charged to our CCPI customers.
Operating Expenses
Operating expenses
for the three months ended September 30, 2012 decreased $696,045 or 22.0%, to $2,467,865 from $3,163,910 for the three months ended
September 30, 2011 but increased from 128.7% of revenue to 118.8% of revenue because of higher operating expenses relative to revenue.
Operating expenses consist of research and development expense and selling, and general and administrative expenses. The decrease
in operating expenses is described below under
Selling, General and Administrative Expense.
Research and Development Expense
Research and development
expenses for the three months ended September 30, 2012 decreased $13,784, or 27.2%, to $36,816 from $50,600 for the three months
ended September 30, 2011. The level of expense varies from year to year depending on the number of clinical trials that we have
in progress. While we don’t currently have any formal ongoing clinical trials or studies in progress, we continue to research
new potential products and may engage in future clinical trials or studies.
Selling, General and Administrative
Expense
Selling, general and
administrative expense, including salaries, wages and benefits, facility expenses, professional fees, marketing, office expenses,
and travel and entertainment expense for the three months ended September 30, 2012 decreased $682,261 or 21.9%, to $2,431,049 from
$3,113,310 for the three months ended September 30, 2011. The decrease in general and administrative expense was primarily due
to the fact that the three months ended September 30, 2011 included a one-time charge of $675,000 for compensation expense in connection
with the death of our former Chairman Elizabeth Charuvastra and to and lower professional fees and costs associated with the filing
of our registration statement which statement was withdrawn in June of 2012.
Interest Expense
Interest expense for
the three months ended September 30, 2012 was $326,587 compared with $583,739 for the three months ended September 30, 2011. Interest
expense includes a non-cash charge of $60,637 for interest on notes payable to related parties and $171,680 discount on warrants
issued to related parties. The year earlier amount included interest and penalties in connection with our originally filed 2010
income tax returns. In June of this year we amended those returns based on a change in our revenue recognition policy and if the
IRS and the California Franchise Tax Board accept these amended returns we expect to receive refunds of all payments made in connection
with our 2010 returns.
Derivative Revaluation
During the three months
ended September 30, 2012, we issued 1,158,981 warrants to purchase our common stock at an exercise price $1.00 that contained ratcheting
provisions. The ratcheting provisions of these warrants created a derivative liability under ASC 815-40,
Derivatives and Hedging
. Accordingly,
the value of this beneficial conversion feature has been classified as a derivative liability on the accompanying balance sheet. On
a quarterly basis, the value of the beneficial conversion feature is adjusted and reflected in the statement of operations as “Derivative
Revaluation” under “Other Income and Expense” and as “Derivative Liability” on the balance sheet.
As of September 30, 2012, the aggregate value of the Derivative Liability associated with the above warrants amounted to $426,625. The
initial aggregate Derivative Liability value upon the issuance dates amounted to $437,402. Derivative Revaluation income
was $10,777 for the three months ended September 30, 2012.
Current and Deferred Income Taxes
As a result of our
assessment that the collection of certain sales could not be reasonably assured at the time of sale, these sales did not meet the
criteria of a sale for tax purposes. The Company recalculated its 2010 and 2011 tax liabilities and determined that no income taxes
are owed for either year. We have filed amended tax returns for 2010 and intend to file our 2011 returns using a change in accounting
method consistent with our financial results restatement. We believe that filing such returns will suspend collection and enforcement
efforts by both the IRS and the FTB. We further understand that filing such returns will likely result in tax audits on the part
of both agencies. There can be no assurances that the agencies will accept our amended returns and will not pursue collection and
enforcement efforts.
We had no current income
tax expense for the three months ended September 30, 2012 and September 30, 2011. Deferred income tax benefit for the three months
ended September 30, 2012 decreased $177,175 or 23.3 %, to $581,996 from $759,171 for the three months ended September 30, 2011.
Net Loss
Net Loss for the three
months ended September 30, 2012 was $1,241,443 compared to net loss of $1,282,998 for the three months ended September 30, 2011.
The decreased loss was primarily due to lower operating expenses, partially offset by lower revenues.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED, 2012 AND 2011
TARGETED MEDICAL PHARMA, INC.
CONSOLIDATED STATEMENTS OF INCOME
Nine Months ended September 30, 2012
and 2011
|
|
Nine Months
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2012
|
|
|
Sales
|
|
|
2011
|
|
|
Sales
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Sales
|
|
$
|
4,416,121
|
|
|
|
90.1
|
%
|
|
$
|
6,390,818
|
|
|
|
93.0
|
%
|
Service Revenue
|
|
$
|
483,822
|
|
|
|
9.9
|
%
|
|
$
|
478,437
|
|
|
|
7.0
|
%
|
Total Revenue
|
|
|
4,899,943
|
|
|
|
100.0
|
%
|
|
|
6,869,255
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Product Sold
|
|
$
|
1,008,742
|
|
|
|
20.6
|
%
|
|
$
|
876,090
|
|
|
|
12.8
|
%
|
Cost of Services Sold
|
|
$
|
1,363,549
|
|
|
|
27.8
|
%
|
|
$
|
1,089,823
|
|
|
|
15.9
|
%
|
Total Cost of Sales
|
|
|
2,372,291
|
|
|
|
48.4
|
%
|
|
|
1,965,913
|
|
|
|
28.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit
|
|
|
2,527,652
|
|
|
|
51.6
|
%
|
|
|
4,903,342
|
|
|
|
71.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
$
|
94,089
|
|
|
|
1.9
|
%
|
|
$
|
119,720
|
|
|
|
1.7
|
%
|
Selling, General and Administrative
|
|
$
|
7,209,421
|
|
|
|
147.1
|
%
|
|
$
|
8,674,171
|
|
|
|
126.3
|
%
|
Total Operating Expenses
|
|
|
7,303,510
|
|
|
|
171.2
|
%
|
|
|
8,793,891
|
|
|
|
128.0
|
%
|
Net Income (Loss) before Other Income
|
|
|
(4,775,858
|
)
|
|
|
-97.5
|
%
|
|
|
(3,890,549
|
)
|
|
|
-56.6
|
%
|
Other Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income (Expense)
|
|
|
(2,269,244
|
)
|
|
|
-46.3
|
%
|
|
|
(583,739
|
)
|
|
|
-8.5
|
%
|
Derivative Revaluation
|
|
|
10,777
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Investment Income
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
7,638
|
|
|
|
0.1
|
%
|
Total Other Income
|
|
|
(2,258,467
|
)
|
|
|
-46.1
|
%
|
|
|
(576,101
|
)
|
|
|
-8.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) before Taxes
|
|
|
(7,034,325
|
)
|
|
|
-143.6
|
%
|
|
|
(4,466,650
|
)
|
|
|
-65.0
|
%
|
Deferred Income Tax (Benefit)
|
|
|
(1,992,142
|
)
|
|
|
-40.7
|
%
|
|
|
(1,660,466
|
)
|
|
|
-24.2
|
%
|
Net Income (Loss) before Comprehensive Income
|
|
|
(5,042,183
|
)
|
|
|
-102.9
|
%
|
|
|
(2,806,184
|
)
|
|
|
-40.9
|
%
|
Unrealized Gain or (Loss) on Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification for losses included in Net Income
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(3,209
|
)
|
|
|
0.0
|
%
|
Comprehensive Income (Loss)
|
|
$
|
(5,042,183
|
)
|
|
|
-102.9
|
%
|
|
$
|
(2,809,393
|
)
|
|
|
-40.9
|
%
|
Revenue
Due to substantial
uncertainties as to the amount of and timing and collectability of revenues derived from our Physician Managed Model (PMM) and
Hybrid Model, which can take in excess of five years to collect, these revenues are recorded when collectability is reasonably
assured, which in the case of these two business models, is when the payment is received and any applicable rapid pay discount
offered in the product purchase agreement is applied to the original gross invoice. We have recorded revenues for 2012 and 2011
on this basis and restated revenues for the quarterly periods in 2011 and the 2010 annual period. As a result revenues for the
two periods are substantially lower that what would have been reported for 2011 and what was reported for 2010. Details of our
restatement of previously reported results are included in note number 8 found elsewhere in this report.
Total revenue for the
nine months ended September 30, 2012 decreased $1,969,312, or 28.7%, to $4,899,943, from the restated amount of $6,869,255 for
the nine months ended September 30, 2011. Product revenue decreased $1,974,697, or 30.9%, from the restated prior year $6,390,818
to $4,416,121, primarily due to decreased collections in our PMM and Hybrid businesses resulting from reduced product shipments
and fewer claims filed. PMM and Hybrid revenues are based on payments received regardless of when the original invoice and shipment
occurred. Product revenue for the respective periods is further described in the following schedule:
|
|
Nine Months ended
|
|
September 30,
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Basis
|
|
|
|
|
Sales
|
|
|
|
|
|
Sales
|
|
PMM/Hybrid
|
|
cash
|
|
|
2,892,866
|
|
|
|
65.5
|
%
|
|
|
3,683,209
|
|
|
|
57.6
|
%
|
Direct/Distributor
|
|
accrual
|
|
|
1,523,255
|
|
|
|
34.5
|
%
|
|
|
2,809,752
|
|
|
|
44.0
|
%
|
Credits
|
|
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(102,142
|
)
|
|
|
-1.6
|
%
|
Total
|
|
|
|
|
4,416,121
|
|
|
|
100.0
|
%
|
|
|
6,390,819
|
|
|
|
100.0
|
%
|
Service revenue increased
$5,385 or 1.1%, from $478,437 in the nine months ended September 30, 2011 to $483,822 in the nine months ended September 30, 2012
due to an increase collections primarily because we increased our collections staff, and outsourced a portion of our collection
activity and we increased the billing service fee percentage by CCPI, our billing and claims collection subsidiary which was offset
by lower collection volume. Starting with the quarter ended , 2011 we decreased the CCPI fee charged to physician clients from
20 percent to a range of 5 to 10 percent as a courtesy under our billing and collection services. During the three months ended
September 30, 2012 we increased the average fee charged to our CCPI customers.
Cost of Products Sold
The cost of products
sold increased $132,652, or 15.1%, from $876,090 in the nine months ended September 30, 2011 to $1,008,742 in the nine months ended
September 30, 2012 and the percentage of cost of product sold to product revenue increased from 13.7% for the nine months ended
September 30, 2011 to 22.8% for the nine months ended September 30, 2012. This increase includes $278,724 reflecting prior period
adjustments due to errors in accounting for a product return in connection with an advanced purchase for a pending contract which
did not come to fruition. Due to the change in revenue recognition policy costs of products shipped are a period expense while
revenue is recognized on payment under our PMM and Hybrid .
Cost of Services Sold
The cost of services
sold for the nine months ended September 30, 2012 increased $273,726, or 25.1%, from $1,089,823 for the nine months ended September
30, 2011 to $1,363,549 for the nine months ended September 30, 2012 and the percentage cost of service sold to service revenue
increased from 227.8% to 281.8% in those periods due to higher costs and lower collections. These costs increased primarily because
we increased our collections staff and outsourced a portion of our collection activity. While expenses are recognized in the period
incurred, our fee is recognized upon the collection of the claim on behalf of the physician client, which may occur in future periods.
Starting with the quarter ended September 30, 2011 we decreased the CCPI fee charged to physician clients from 20 percent to a
range of 5 to 10 percent as a courtesy under our billing and collection services. During the three months ended September 30, 2012
we increased the average fee charged to our CCPI customers.
Operating Expenses
Operating expenses
for the nine months ended September 30, 2012 decreased $1,490,381 or 16.9%, to $7,303,510 from $8,793,891 for the nine months ended
September 30, 2011 but increased from 128.0% of revenue to 149.1% of revenue because of the higher expense in relation to revenue.
Operating expenses consist of research and development expense and selling, and general and administrative expenses. The decrease
in operating expenses is described below under
Selling, General and Administrative Expense.
Research and Development Expense
Research and development
expenses for the nine months ended September 30, 2012 decreased $25,631, or 21.4%, to $94,089 from $119,720 for the nine months
ended September 30, 2011. The level of expense varies from year to year depending on the number of clinical trials that we have
in progress. While we don’t currently have any formal ongoing clinical trials or studies in progress, we continue to research
new potential products and may engage in future clinical trials or studies.
Selling, General and Administrative
Expense
Selling, general and
administrative expense, including salaries, wages and benefits, facility expenses, professional fees, marketing, office expenses,
and travel and entertainment expense for the nine months ended September 30, 2012 decreased $1,464,750 or 16.9%, to $7,209,421
from $8,674,171 for the nine months ended September 30, 2011. The decrease in general and administrative expense was primarily
due to the fact that the nine months ended September 30, 2011 included a one-time charge of $675,000 for compensation expense in
connection with the death of our former Chairman Elizabeth Charuvastra and to and lower professional fees and costs associated
with the filing of our registration statement which statement was withdrawn in June of 2012 and lower expenses in connection with
becoming a public company , and a decrease in legal fees.
Interest Expense
Interest expense
for the nine months ended September 30, 2012 was $2,269,244 compared with $583,739 for the nine months ended September 30,
2011. Interest expense for the nine months ending September 30, 2012 includes a non-cash charge of $135,939 for interest on
notes payable to related parties and a non-cash charge of $2,039,575 for discounts on warrants issued to related parties. The
year earlier amount included interest and penalties in connection with our originally filed 2010 income tax returns. In June
of this year we amended those returns based on a change in our revenue recognition policy and if the IRS and the California
Franchise Tax Board accept these amended returns we expect to receive refunds of all payments made in connection with our
2010 returns.
Derivative Revaluation
During the nine months
ended September 30, 2012 , we issued 1,158,981 warrants to purchase our common stock at an exercise price $1.00 that contained
ratcheting provisions. The ratcheting provisions of these warrants created a derivative liability under ASC 815-40,
Derivatives
and Hedging
. Accordingly, the value of this beneficial conversion feature has been classified as a derivative liability
on the accompanying balance sheet. On a quarterly basis, the value of the beneficial conversion feature is adjusted
and reflected in the statement of operations as “Derivative Revaluation” under “Other Income and Expense”
and as “Derivative Liability” on the balance sheet. As of September 30, 2012, the aggregate value of the Derivative
Liability associated with the above warrants amounted to $426,625. The initial aggregate Derivative Liability value
upon the issuance dates amounted to $437,402. Derivative Revaluation income was $10,777 for the nine months ended September
30, 2012.
Current and Deferred Income Taxes
As a result of our
assessment that for certain sales’ collectability at the time of the sale could not be reasonably assured, these sales did
not meet the criteria of a sale for tax purposes. The Company recalculated its 2010 and 2011 tax liabilities and determined that
no income taxes are owed for either year. We filed amended tax returns for 2010 and intend to file our 2011 returns using a change
in accounting method consistent with our financial results restatement. We believe that filing such returns will suspend collection
and enforcement efforts by both the IRS and the FTB. We further understand that filing such returns will likely result in tax audits
on the part of both agencies. There can be no assurances that the agencies will accept our amended returns and will not pursue
collection and enforcement efforts.
We had no current income
tax expense for the nine months ended September 30, 2012 and September 30, 2011. Deferred income tax benefit for the nine months
ended September 30, 2012 increased $331,676 or 20.0 %, to $1,992,142 from $1,660,466 for the nine months ended September 30, 2011.
Net Loss
Net Loss for the nine
months ended September 30, 2012 was $5,042,183 compared to net loss of $2,809,393 for the nine months ended September 30, 2011.
The increased loss was primarily due to lower revenues, partially offset by lower operating expenses.
FINANCIAL CONDITION
Our negative working
capital of $9,261,674 as of September 30, 2012, increased by $4,678,098 from our December 31, 2011 working capital of $4,583,576.
The larger negative balance was primarily due to the increase in notes payable to related parties and an increase in accounts payable
and accrued expenses. Inventory increased by $358,381. Notes payable to related parties increased by $3,710,435 during the nine
months ended September 30, 2012, and accounts payable and accrued expenses increased by $1,514,400.
Accounts Receivable
As a result of our
change in revenue recognition policy, as of September 30, 2012 we have $37,106,714 in unrecorded revenues that potentially will
be recorded as revenue by TMP in the future as our CCPI subsidiary secures claims payments on behalf of our PMM and Hybrid Customers.
Except for collection expenses incurred by CCPI in future periods, all expenses associated with these unrecorded revenues including
cost of products sold have already been reflected in our financial statements. In addition, due to loss carry forwards we should
not incur current tax liabilities for a substantial portion of these unrecorded revenues.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2011
AND 2010
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2011
|
|
|
Sales
|
|
|
2010
|
|
|
Sales
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Sales
|
|
$
|
8,282,734
|
|
|
|
94.0
|
%
|
|
$
|
6,544,311
|
|
|
|
85.9
|
%
|
Service Revenue
|
|
|
526,934
|
|
|
|
6.0
|
%
|
|
|
1,078,166
|
|
|
|
14.1
|
%
|
Total Revenue
|
|
|
8,809,668
|
|
|
|
100.0
|
%
|
|
|
7,622,477
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Product Sold
|
|
|
1,249,522
|
|
|
|
14.2
|
%
|
|
|
1,228,722
|
|
|
|
16.1
|
%
|
Cost of Services Sold
|
|
|
1,507,511
|
|
|
|
17.1
|
%
|
|
|
1,343,770
|
|
|
|
17.6
|
%
|
Total Cost of Sales
|
|
|
2,757,033
|
|
|
|
31.3
|
%
|
|
|
2,572,492
|
|
|
|
33.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit
|
|
|
6,052,635
|
|
|
|
68.7
|
%
|
|
|
5,049,985
|
|
|
|
66.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
163,081
|
|
|
|
1.9
|
%
|
|
|
320,106
|
|
|
|
4.2
|
%
|
Selling, General and Administrative
|
|
|
11,670,092
|
|
|
|
132.5
|
%
|
|
|
6,305,805
|
|
|
|
82.7
|
%
|
Total Operating Expenses
|
|
|
11,833,173
|
|
|
|
134.4
|
%
|
|
|
6,625,911
|
|
|
|
86.9
|
%
|
Net Loss before Other Income
|
|
|
(5,780,538
|
)
|
|
|
-65.7
|
%
|
|
|
(1,575,926
|
)
|
|
|
-20.6
|
%
|
Other Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income (Expense)
|
|
|
(875,783
|
)
|
|
|
-9.9
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Grant Income
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
733,439
|
|
|
|
9.6
|
%
|
Investment Income
|
|
|
7,641
|
|
|
|
0.1
|
%
|
|
|
3,970
|
|
|
|
0.1
|
%
|
Total Other Income
|
|
|
(868,142
|
)
|
|
|
9.8
|
%
|
|
|
737,409
|
|
|
|
9.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss before Taxes
|
|
|
(6,648,680
|
)
|
|
|
-75.5
|
%
|
|
|
(838,517
|
)
|
|
|
-10.9
|
%
|
Income Taxes
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Deferred Income Tax (Benefit)
|
|
|
(2,471,630
|
)
|
|
|
-28.1
|
%
|
|
|
(332,404
|
)
|
|
|
-4.4
|
%
|
Net Loss before Comprehensive Income
|
|
|
(4,177,050
|
)
|
|
|
-47.4
|
%
|
|
|
(506,113
|
)
|
|
|
-6.5
|
%
|
Unrealized Gain or (Loss) on Investments
|
|
|
(3,209
|
)
|
|
|
0.0
|
%
|
|
|
1,530
|
|
|
|
0.0
|
%
|
Reclassification for losses included in Net Income
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
3,659
|
|
|
|
0.0
|
%
|
Reclassification for losses included in Net Income
|
|
|
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Comprehensive Loss
|
|
$
|
(4,180,259
|
)
|
|
|
-47.4
|
%
|
|
$
|
(500,924
|
)
|
|
|
-6.5
|
%
|
Revenue
Due to substantial
uncertainties as to the amount of and timing and collectability of revenues derived from our Physician Managed Model (PMM) and
Hybrid Model, which can take in excess of five years to collect, it was determined that these revenues did not meet the criteria
for recognition in accordance with ASC 605, Revenue Recognition. These revenues are required to be recorded when collectability
is reasonably assured, which in the case of these two business models, is when the payment is received and any applicable rapid
pay discount offered in the product purchase agreement is applied to the original gross invoice. We have recorded revenues for
2011 on this basis and restated revenues for the 2010 period. As a result revenues for the two periods are substantially lower
that what would have been reported for 2011 and what was reported for 2010. Accounts receivable as now reported are lower by over
$33 million from what would have been reported for December 31, 2011 without the change in revenue recognition policy. Details
of our restatement of previously reported results are included in note number 15. to our audited financial statements found elsewhere
in this report.
Total revenue for the
12 months ended December 31, 2011 increased $1,187,191 , or 15.6%, to $8,809,668 from the restated amount of $7,622,477 for the
12 months ended December 31, 2010. Product revenue increased $1,738,423, or 26.6%, from the restated prior year $6,544,311 to $8,282,734,
primarily due to increased collections in our PMM and Hybrid businesses.. Product revenue for the respective periods is further
described in the following schedule:
Revenue
|
|
|
|
|
|
|
Recognition
|
|
|
|
|
|
|
Basis
|
|
2011
|
|
|
2010
|
|
PMM/Hybrid cash
|
|
|
4,937,529
|
|
|
|
3,134,775
|
|
Direct/Distributor accrual
|
|
|
3,483,474
|
|
|
|
3,535,561
|
|
Credits
|
|
|
(138,269
|
)
|
|
|
(126,025
|
)
|
Total
|
|
|
8,282,734
|
|
|
|
6,544,311
|
|
2011 revenues exclude
$3,052,793 in amounts invoiced in 2011 to a new distributor under a contract that requires minimum purchases of $8,000,000 by September
30, 2012 in connection with sale of our products to nursing homes. The entire invoiced amount of $3,052,793 was outstanding at
December 31, 2011. Because this is a substantial new account with limited payment history, and limited operating history, collectability
cannot be reasonably assured at the time of sale.
Service revenue decreased
$551,232 or 51.1%, from $1,078,166 in the prior year to $526,934 due to a decrease in the billing service fee percentage by CCPI,
our billing and claims collection subsidiary. Starting with the quarter ended June 30, 2011 we decreased the CCPI fee charged to
physician clients as a courtesy under our billing and collection services.
Cost of Products Sold
The cost of products
sold for the 12 months ended December 31, 2011 increased $20,800, or 1.7%, from $1,228,722 to $1,249,522 and the percentage of
cost of product sold to product revenue decreased from 15.1% for the 12 months ended December 31, 2011 compared to 18.8% for the
12 months ended December 31, 2010. This decreased percentage is primarily due to the change in revenue recognition policy whereby
cost of products shipped is expensed on a current basis while revenue is recognized on payment under our PMM and Hybrid Models.
Cash-based revenue increased at a greater rate than shipments.
Cost of Services Sold
The cost of services
sold for the 12 months ended December 31, 2011 increased $163,741, or 12.2%, from $1,343,770 for the 12 months ended December 31,
2010 to $1,507,511 for the 12 months ended December 31, 2011 and the percentage cost of service sold to service revenue increased
from 125% to 286% in those periods. These costs increased primarily because we increased our collections staff to handle increased
billing and collections processing activity and because revenue is not recognized until received while expenses are recognized
in the period incurred, our fee is recognized upon the collection of the claim on behalf of the physician client, which may occur
in future periods. Starting with the quarter ended June 30, 2011 we decreased the CCPI fee charged to physician clients as a courtesy
under our billing and collection services.
Operating Expenses
Operating expenses
for the 12 months ended December 31, 2011 increased $5,207,262 or 78.6%, to $11,833,173 from $6,625,911 for the 12 months ended
December 31, 2010 and increased from 86.9% of revenue to 134% of revenue. Operating expenses consist of research and development
expense and selling, and general and administrative expenses. Changes in these items are further described below.
Research and Development Expense
Research and development
expenses for the 12 months ended December 31, 2011 decreased $157,025, or 49.1%, to $163,081 from $320,106 for the 12 months ended
December 31, 2010 primarily due to a lower level of research and development activity. The level of expense varies from year to
year depending on the number of clinical trials that we have in progress. While we don’t currently have any formal ongoing
clinical trials or studies in progress, we continue to research new potential products and may engage in future clinical trials
or studies.
Selling, General and Administrative
Expense
Selling, general and
administrative expense, including facility expenses, professional fees, marketing, office expenses, travel and entertainment and
provision for bad debt for the 12 months ended December 31, 2011 increased $5,364,287 or 85.1%, to $11,670,092 from $6,305,805
for the 12 months ended December 31, 2010. The increase in general and administrative expense was primarily due to higher professional
fees and filing costs associated with the filing of an S-1, associated expenses in connection with preparations to become a public
company , an increase in legal fees related to regulatory compliance, and the accrual of $675,000 in salary continuation death
benefit to the estate of our former chairman Elizabeth Charuvastra who died on September 26, 2011.
Current and Deferred Income Taxes
As a result of our
assessment that for certain sales’ collectability at the time of the sale could not be reasonably assured, these sales did
not meet the criteria of a sale for tax purposes. The Company recalculated its 2010 and 2011 tax liabilities and determined that
no income taxes are owed for either year. We intend to file amended tax returns for 2010 and to file our 2011 returns using a change
in accounting method consistent with our financial results restatement. We believe that filing such returns will suspend collection
and enforcement efforts by both the IRS and the FTB. We further understand that filing such returns will likely result in tax audits
on the part of both agencies. There can be no assurances that the agencies will accept our amended returns and will not pursue
collection and enforcement efforts.
We had no current income
tax expense in 2011 or in the restated year of 2010. Deferred income tax benefit for the 12 months ended December 31, 2011 increased
$2,139,226 or 744 %, to $2,471,630 from $332,404 for the 12 months ended December 31, 2010.
Net Income
Net Loss for the 12
months ended December 31, 2011 was $4,177,050 compared to net loss of $506,113 for the 12 months ended December 31, 2010. The decrease
in net income was primarily due to a $ 5,207,262 increase in operating expenses described above and the $750,000 accrual of interest
expense and penalties on unpaid income taxes.
FINANCIAL CONDITION
Our negative working
capital of $4,583,575 as of December 31, 2011 decreased $4,857,702 from our December 31, 2010 working capital of $274,127. Accounts
receivable increased from $455,458 on December 31, 2010 to $899,493 on December 31,. This increase in accounts receivable was offset
by a $2,204,948 increase in notes payable to related parties (before discounts resulting from the issuance of warrants) , and an
increase of $3,430,379 in accounts payable and accrued expenses.
Accounts Receivable
As a result of our
change in revenue recognition policy, as of December 31, 2011 we now have $33,767,274 in unrecorded revenues that potentially will
be recorded as revenue in the future as our CCPI subsidiary secures claims payments on behalf of our PMM and Hybrid Customers.
Except for collection expenses incurred by CCPI, all expenses associated with these unrecorded revenues including cost of products
sold have already been reflected in our financial statements. In addition, due to loss carry forwards we should not incur current
tax liabilities for a substantial portion of these unrecorded revenues. Unrecorded revenues increased by $10,829,608 or 47.2% in
the 12 months ended December 31, 2011 compared with the 12 months ended December 31, 2010. The $33,767,274 in unrecorded revenues
by year are as follows:
Year ended December 31, 2011
|
|
$
|
10,829,606
|
|
|
|
|
|
|
Year ended December 31, 2010
|
|
$
|
11,492,962
|
|
|
|
|
|
|
Year ended December 31, 2009
|
|
$
|
11,444,706
|
|
See the “
Business Model
”
discussion above and the discussions of “
Revenue Recognition”, ,
and “
Allowance for Doubtful Accounts”
under the
“Critical Accounting Policies”
discussion below.
LIQUIDITY AND CAPITAL RESOURCES
We have historically
financed operations through equity transactions and related party loans. As of September 30, 2012 our principal source of liquidity
was potential related party loans. Due to the uncertainty of our ability to meet our current operating and capital expenses, in
their report on our audited annual financial statements as of and for the years ended December 31, 2011 and 2010, our independent
auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our consolidated
financial statements contain additional note disclosures describing the circumstances that led to this disclosure by our independent
auditors. As of September 30, 2012 there is substantial doubt about our ability to continue as a going concern as the continuation
and expansion of our business is dependent upon obtaining further financing, development of revenue streams with shorter collection
times and accelerating collections on our physician managed and hybrid revenue streams.
The Company continues
to experience negative operating cash flow. Since July 1, 2011 the Company has supplemented the funding of its operations primarily
through borrowings from a related party, the Elizabeth Charuvastra and William Shell Family Trust. Through November 7, 2012
these loans total $4,975,334 of which $3,112,000 have occurred since December 31, 2011. The Company continues to pursue additional
sources of liquidity including asset-based loans and selective sale of some of the $37.1 million in invoices payable to the Company
by our physician and distributor customers. We may also consider raising money through an equity transaction. Until and unless
these efforts prove successful the Company will continue to rely on related party loans as a supplemental source of liquidity. There
can be no assurance that future financing can be obtained on terms acceptable to the Company.
Through December 31,
2009, we reported income to the Internal Revenue Service on the cash basis. Beginning with the year ended December 31, 2010, we
reported our taxable income on the accrual basis as of, for the quarter ended December 31, 2010; we surpassed the gross receipts
threshold set in the Internal Revenue Code of 1986, as amended, which requires a switch from cash to accrual method. The impact
of this change in reporting method is that more income taxes are current under the accrual method compared to deferred under the
cash method.
The Company filed its
2010 federal and state tax returns in April 2011 and June 2011, respectively, without including payment for amounts due and has
not made estimated tax payments for the 2011 tax year. The Company had entered into agreements with the Internal Revenue Service
and the California Franchise Tax Board to extend the payment of these taxes over a mutually agreeable period of time. We paid $450,000
of the approximately $3,600,000 owed to the IRS and $175,000 of the approximately initial $1,000,000 owed to the California Franchise
Tax Board. We were unable to pay the remaining installment payments.
As a result of our assessment that for certain sales’
collectability at the time of the sale could not be reasonably assured, these sales did not meet the criteria of a sale for tax
purposes. The Company recalculated its 2010 and 2011 tax liabilities and determined that no income taxes are owed for either year.
We filed amended tax returns for 2010 in June of 2012 and in September 2012 filed our 2011 returns using a change in accounting
method consistent with our financial results restatement. We believed that filing such returns will suspend collection and enforcement
efforts by both the IRS and the FTB. We further understood that filing such returns would likely result in tax audits on the part
of both agencies. The IRS commenced its audit in November 2012 and meanwhile has suspended collection and enforcement efforts.
The FTB has assigned its tax auditor but has not yet set a date to commence the audit. The FTB has not formally suspended collection
and enforcement efforts but has continued to extend its Notice of Suspension deadlines on a quarterly basis pending the outcome
of the eventual audit. There can be no assurances that the agencies will accept our amended returns and will not pursue collection
and enforcement efforts.
Net cash used by operating
activities for the nine months ended September 30, 2012 was $2,598,013 compared to $1,996,529 cash used by operating activities
for the nine months ended September 30, 2011.
Net cash used by investing
activities was $257,641 for the nine months ended September 30 , 2011 and $330,759 cash used by investing activities for the nine
months ended September 30 , 2011. During the nine months ended September 30, 2012 and 2011, we incurred internal software
development costs for our
PDRx
claims management and collection system of $145,779 and $488,147, respectively and purchased
property and equipment of $111,862 and $83,819 respectively. Historically, capital expenditures have been financed by cash from
operating activities and related party loans. We sold $241,207 of investments in the nine months ended September 30, 2011.
During the nine months
ended September 30, 2012, we have received $2,980,000 in exchange for promissory notes issued to the EC and WS Family Trust of
which Dr. Shell, our Chief Executive Officer is a trustee. Details of these loans are discussed above in Note 4.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance
sheet arrangements that have a material current effect, or that are reasonably likely to have a material future effect, on our
financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures,
or capital resources.
CONTRACTUAL OBLIGATIONS
The Company leases
its operating facility under a lease agreement expiring February 28, 2015 at the rate of $13,183 per month and several smaller
storage spaces rented on a month-to-month basis. The Company, as lessee, is required to pay for all insurance, repairs
and maintenance and any increases in real property taxes over the lease period on the operating facility.
CRITICAL ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial
statements include accounts of TMP and its wholly owned subsidiary, CCPI, collectively referred to as “the Company”.
All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, TMP and CCPI share the
common operating facility, certain employees and various costs. Such expenses are principally paid by TMP. Due to the nature of
the parent and subsidiaries relationship, the individual financial position and operating results of TMP and CCPI may be different
from those that would have been obtained if they were autonomous.
Accounting estimates
The preparation of
financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
Under the following revenue models (each
of which is described in detail above) product sales are invoiced upon shipment:
|
·
|
Physician Direct Sales Model
(1% of revenue for the nine months ended September 30, 2012); and
|
|
·
|
Distributor Direct Sales Model
(30% of revenue for the nine months ended September 30, 2012).
|
Due to substantial
uncertainties as to the timing and collectability of revenues derived from our Physician Managed and Hybrid models (also described
in more detail above), which can take in excess of five years to collect, we have determined that these revenues did not meet the
criteria for recognition in accordance with ASC 605,
Revenue Recognition
. These revenues are therefore required to be recorded
when collectability is reasonably assured, which the Company has determined is when the payment is received.
|
·
|
Physician Managed Model
(46% of revenue for the nine months ended September 30, 2012); and
|
|
·
|
Hybrid Model
(13% of revenue for the nine months ended September 30, 2012).
|
Allowance for doubtful accounts
Under the direct sales
to physician and direct sales to distributor models, product is sold under terms that allow substantial discounts (40-88%) for
payment within terms. With such substantial discounts, it is rare that an invoice is not paid within terms. We have not experienced
any write offs associated with these revenue models.
Under the Company’s
physician managed model and hybrid model, CCPI performs billing and collection services on behalf of the physician client and deducts
the CCPI fee and product invoice amount from the reimbursement received by CCPI on behalf of the physician client before the reimbursement
is forwarded to the physician client. Extended collection periods are typical in the workers compensation industry with payment
terms extending from 45 days to in excess of five years. The physician remains personally liable for purchases of product from
TMP and, during this long collection cycle, TMP retains a security interest in all products sold to the physician along with the
claims receivable that result from sales of the products. CCPI maintains an accounting of all managed accounts receivable on behalf
of the physician and regularly reports to the physician. As described above, due to uncertainties as to the timing and collectability
of revenues derived from these models, revenue is recorded when payment is received therefore no allowance for doubtful accounts
is necessary.
In addition to the
bad debt recognition policy above, it is also TMP’s policy to write down uncollectible loans and trade receivables when the
payer is no longer in existence, is in bankruptcy or is otherwise insolvent. In such instances our policy is to reduce accounts
receivable by the uncollectible amount and to proportionally reduce the allowance for doubtful accounts.
Inventory valuation
Inventory is valued
at the lower of cost (first in, first out) or market and consists primarily of finished goods.
Impairment of long-lived assets
The long-lived assets
held and used by the Company are reviewed for impairment no less frequently than annually or whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate that the
cost of any long-lived assets may be impaired, an evaluation of recoverability is performed. No asset impairment was recorded at
September 30, 2012 or at September 30, 2011.
Intangible assets
Indefinite lived intangible
assets are measured for impairment at least annually, and more often when events indicate that an impairment may exist. Intangible
assets with finite lives, including patents and internally developed software (primarily the Company’s PDRx system), are
stated at cost and are amortized over their useful lives. Patents are amortized on a straight line basis over their statutory lives,
usually fifteen to twenty years. Internally developed software is amortized over three to five years. Intangible assets with indefinite
lives are tested annually for impairment, during the fiscal fourth quarter and between annual periods, if impairment indicators
exist, and are written down to fair value as required.
Fair value of financial instrument
:
The Company’s
financial instruments are accounts receivable and accounts payable. The recorded values of accounts receivable and accounts payable
approximate their values based on their short term nature.
Derivative Financial Instruments:
The Company’s
objectives in using derivative financial instruments are to obtain the lowest cash cost-source of funds. Derivative liabilities
are recognized in the consolidated balance sheets at fair value based on the criteria specified in FASB ASC topic 815-40 "
Derivatives and Hedging - Contracts in Entity’s own Equity
". The estimated fair value of the derivative liabilities
is calculated using the Black-Scholes-Merton method where applicable and such estimates are revalued at each balance sheet date,
with changes in value recorded as other income or expense in the consolidated statement of operations. As a result of the Company’s
adoption of ASC topic 815-40, effective January 1, 2009 some of the Company’s warrants are now accounted for as derivatives.
As of September 30, 2012, 1,158,981 warrants were classified as derivative liabilities. Each reporting period the warrants are
re-valued and adjusted through the caption “derivative revaluation” on the consolidated statements of operations.
Income taxes
The Company determines
its income taxes under the asset and liability method. Under the asset and liability approach, deferred income tax assets and liabilities
are calculated and recorded based upon the future tax consequences of temporary differences by applying enacted statutory tax rates
applicable to future periods for differences between the financial statements carrying amounts and the tax basis of existing assets
and liabilities. Generally, deferred income taxes are classified as current or non-current in accordance with the classification
of the related asset or liability. Those not related to an asset or liability are classified as current or non-current depending
on the periods in which the temporary differences are expected to reverse. Valuation allowances are provided for significant deferred
income tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. The Company
currently has $37.1 million in unrecognized revenue which is based on the total discounted amounts owed to it by its PMM and Hybrid
Model Customers. Although the uncertainties as to the timing and collectability of revenues derived from these models prevent the
current recognition of revenue under ASC 605, the Company does estimate that it will collect sufficient revenues before the expiration
of the net operating loss deductions. Thus the Company expects that it will utilize the existing net operating losses against future
income taxes and therefore a valuation allowance against the Deferred Tax Asset-Long Term is not deemed necessary as of the date
of the financial statements.
The Company recognizes
tax liabilities by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit
is recognized, and also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in
interim periods, disclosure and transition. The minimum threshold is defined as a tax position that is more likely than not to
be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes,
based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that
is greater than fifty percent likely of being realized upon ultimate settlement. To the extent that the final tax outcome of these
matters is different than the amount recorded, such differences impact income tax expense in the period in which such determination
is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax
expense.
Stock-Based Compensation
The Company accounts
for stock option awards in accordance with ASC 718. Under ASC 718, compensation expense related to stock-based payments is recorded
over the requisite service period based on the grant date fair value of the awards. Compensation previously recorded for unvested
stock options that are forfeited is reversed upon forfeiture. The Company uses the Black-Scholes option pricing model for determining
the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair
value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock.
The Company’s
accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions
of ASC 505-50. Accordingly, the measurement date for the fair value of the equity instruments issued is determined at the earlier
of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant
or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement. Stock-based compensation is a non-cash expense because we settle
these obligations by issuing shares of our common stock from our authorized shares instead of settling such obligations with cash
payments.
Earnings Per Share
The Company utilizes
FASB ASC 260, “Earnings per Share”. Basic income (loss) per share is computed by dividing income (loss) available to
common stockholders by the weighted-average number of common shares outstanding. Diluted income (loss) per share is computed similar
to basic income (loss) per share except that the denominator is increased to include the number of additional common shares that
would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Common
equivalent shares are excluded from the computation if their effect is anti-dilutive.
The following potential
common shares have been excluded from the computation of diluted net income (loss) per share for the periods presented where the
effect would have been anti-dilutive:
At September 30,
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2012
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2011
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Options outstanding
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2,018,444
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933,091
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Research and development
Research and development
costs are expensed as incurred. In instances where we enter into agreements with third parties for research and development activities
on our behalf, we may prepay fees for services at the initiation of the contract. We record the prepayment as a prepaid asset and
amortize the asset into research and development expense over the period of time the contracted research and development services
are performed. Most contract research agreements include a ten year records retention and maintenance requirement. Typically, we
expense 50% of the contract amount upon completion of the clinical trials and 50% over the remainder of the record retention requirements
under the contract research organization contract.
DESCRIPTION OF BUSINESS
Targeted Medical Pharma,
Inc. is a specialty pharmaceutical company that develops and commercializes nutrient-based and pharmaceutical-based therapeutic
systems. We began our operations as Laboratory Industry Services LLC, a Nevada limited liability company, which was founded in
1996 by Elizabeth Charuvastra, our former Executive Chairman and Vice President of Regulatory Affairs, and William E. Shell, MD,
our Chief Executive Officer and Chief Scientific Officer. Laboratory Industry Services is an independent diagnostic testing facility.
In 1999, Ms. Charuvastra and Kim Giffoni, our Executive Vice President of Foreign Sales and Investor Relations, co-founded Targeted
Medical Foods, a California general partnership, which was converted into a California limited liability company in 2002, to develop
medical food products. In 2003, Targeted Medical Foods formed Physician Therapeutics LLC, a Nevada limited liability company and
a majority-owned subsidiary of Targeted Medical Foods, to distribute medical food products. In 2006, Targeted Medical Foods reorganized
as a Delaware corporation and changed its name to Targeted Medical Pharma, Inc. Physician Therapeutics LLC and Laboratory Industry
Services LLC became divisions of Targeted Medical Pharma, Inc. In 2007, we formed Complete Claims Processing Inc., a California
corporation and our wholly-owned subsidiary, as a specialty billing and collection services company to provide billing and collection
services relating to our products dispensed by physician clients and to physician clients of some of our distributors.
We develop and sell
a line of patented prescription medical food products that are currently sold in the United States through a network of distributors
and directly to physicians who dispense medical foods and other pharmaceutical products through their office practices. Our proprietary
patented technology uses a five component system to allow uptake and use of important neurotransmitter precursors to produce the
neurotransmitters that control autonomic nervous system function such as sleep and pain perception. The neurotransmitters addressed
by our patents include nitric oxide, acetylcholine, serotonin, norepinephrine, epinephrine, dopamine and histamine. The technology
addresses neuron specificity and elimination of attenuation, or tolerance that is characterized by the need for increased dosage.
The combination of the neurotransmitters and their precise proportions allows for a wide range of products. There are six issued
patents and nine pending applications that cover aspects of the inventions.
We presently ship product
to 34 states: Arkansas, Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Kansas,
Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nevada, New Mexico, New York, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Washington and Wisconsin, although the vast majority
(84%) of our sales are in the state of California.
We believe that medical
foods will continue to grow in importance over the coming years. There is an increasing prevalence of chronic diseases that are
candidates for treatment with neurotransmitter-based medical foods, such as sleep disorders, Gulf War Illness, cognitive dysfunction,
macular degeneration, and pulmonary disorders. Additionally, the aging population will see an increased incidence of intolerance
to traditional drugs related to changes in metabolic function that lead to increased and more dangerous drug side effects. Congress,
the Food and Drug Administration (FDA), the Center for Medicare & Medicaid Services and private insurance companies are focusing
increased efforts on pharmacovigilance (The branch of the pharmaceutical industry which assesses and monitors the safety of drugs
either in the development pipeline or which have already been approved for marketing) to measure and reduce these adverse health
consequences. In our experience there is a high level of acceptance of medical foods as a therapy by patients, and the medical
community is increasingly accepting that these therapeutic agents are viable alternatives to prescription drugs.
Medical foods are neither
dietary nor nutritional supplements. From a regulatory standpoint, the FDA took steps in 1988 to encourage the development of medical
foods by regulating this product category under the Orphan Drug Act. The term medical food, as defined in Section 5(b) of the Orphan
Drug Act is a “food which is formulated to be consumed or administered enterally under the supervision of a physician and
which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements,
based on recognized scientific principles, are established by medical evaluation.” This definition was incorporated by reference
into the Nutrition Labeling and Education Act of 1990.
These regulatory changes
have reduced the costs and time associated with bringing medical foods to market, as beforehand medical foods were categorized
as drugs until 1972 and then as “foods for special dietary purposes” until 1988. The field of candidates for development
into medical foods is always expanding due to constant advances in the understanding of the science of nutrition and disease, coupled
with advances in food technology increasing the number of products that can be formulated and commercialized.
We distribute our products
through an internal sales staff and a network of independent distributors to approximately 1,023 physicians in the United States.
With recent reductions in physician reimbursements for medical services by Medicare, workers compensation and private insurance
companies, many physicians are actively seeking additional sources of practice revenues. We act on behalf of the dispensing physician
to secure contracts with third party payers and, through our proprietary software, can bill for dispensed drugs and medical food
products. The average wholesale price (AWP) for medical food is set by us under the terms of our federal re-labeler license. The
AWP price is the price billed to the physician and the insurance company. Certain applicable timely payment discounts and distributor
discounts can reduce the net payable to us on behalf of the physician or distributor. At the time of sale estimates for these discounts
are recorded.
The traditional process
for prescribing and delivering medications to patients is inefficient, unnecessarily costly and error-prone. Physicians write virtually
all of the approximately three billion annual prescriptions, resulting in errors and necessitating millions of telephone inquiries
from pharmacies for clarification and correction. The pharmacist or managed care organization checks this information only after
the physician writes the prescription. The inability of pharmacists and managed care organizations to communicate with physicians
at the time the physician is writing the prescription has made it difficult to manage pharmaceutical costs. The existing process
further inconveniences the patient, who must travel from the physician’s office to a pharmacy and must often wait for the
prescription to be filled.
We have developed and
marketed nine core medical foods and 48 convenience-packed therapeutic systems consisting of a medical food and a generic pharmaceutical,
which physicians can prescribe and dispense together. Our nine medical foods and our 48 convenience-packed products are identified
elsewhere in this registration statement.
A convenience-packed
product is a box containing a 30-day supply of a generic pharmaceutical and a 30-day supply of a medical food product. The box
is appropriately labeled and contains separate plain-English inserts providing patient information about the generic pharmaceutical
and the medical food.
Following the receipt
of the FDA warning letter on April 8, 2010 and to facilitate discussions with the FDA, we voluntarily stopped providing completed
convenience packs. Instead, we supplied the components of the convenience packs to our physician clients so they could dispense
the components packaged together to their patients. We provide our physician clients an appropriately labeled box containing the
medical food product and a package insert. The physician combines the medical food and the generic pharmaceutical and assembles
the convenience pack at the time of dispensing. The
PDRx
system prints the box label and patient instructions. After we
stopped assembling convenience-packed products, sales of individual medical foods and pharmaceutical products rose to make up for
the loss of sales of convenience packs and our overall revenue was not impacted. As of the date of this filing, we continue to
provide the components of the convenience packs to our physician clients and they assemble the convenience packs for their patients.
We have found that providing the various components and permitting our physician clients to assemble the convenience packs at the
time they are dispensed to the patient is more convenient and cost effective.
Our convenience-packed
therapeutic systems address pain syndromes, sleep disorders, hypertension and metabolic syndrome. We developed these convenience-packed
products at the request of physician clients to allow for the administration of the appropriate FDA-approved dose of a drug co-administered
with a medical food that optimizes the use of the approved drug product under its approved labeling. Most often, the optimal dose
co-administered with a medical food is the lowest FDA-approved and recommended dose that maintains the efficacy and reduces the
side effects of the drug. Clinical practice, observation studies and independent controlled clinical trials have shown that co-administration
of a pharmaceutical with a medical food product allows the physician to select the optimal dose of both agents. To date, three
independent, double blind randomized controlled trials have been conducted using co-administration of a drug and a medical food
product. The trials included the study of trazadone with the medical food product Sentra PM to measure responses in patients with
sleep disorders. Another study included the co-administration of naproxen with the medical food product Theramine to measure responses
in patients with chronic, established back pain. The third study used the co-administration of ibuprofen with the medical food
product Theramine to measure the responses in patients with chronic, established back pain. These clinical trials were on specific
convenience-packed products Trazamine, Theraproxen and Theraprofen. These double blind controlled trials yielded positive results
in the areas of pain and sleep disorders. In these trials, drug side effects were reduced at the lowered drug doses. We have also
performed a cost effectiveness analysis of gastrointestinal side-effect reduction comparing Theramine to NSAIDS. The analysis shows
that by shifting pain management to Theramine base management and reducing the incidence of gastrointestinal hemorrhage associated
with NSAID administration substantial savings to the health care system can be achieved. All convenience-packed drugs are within
the FDA-approved label dose. These convenience packs are registered in the FDA National Drug Code (NDC) database and, in our experience,
all convenience-packed products have been routinely reimbursed by third party payers.
In October 2010, we
were awarded three grants under the Qualified Therapeutic Discovery Project tax credit totaling approximately $733,000 by the U.S.
federal government for our work completed in 2010 and which the Company uses to continue work on its existing projects. The Qualified
Therapeutic Discovery Project tax credit, which a recipient may elect to receive as a grant as we did, was enacted as part of the
Patient Protection and Affordable Care Act of 2010 and established a pool for grants to small biotechnology companies developing
novel therapeutics which show potential to (a) result in new therapies that either treat areas of unmet medical need, or prevent,
detect, or treat chronic or acute diseases and conditions, (b) reduce long-term health care costs in the United States, or (c)
significantly advance the goal of curing cancer within the next 30 years.
The market for the
sale of prepackaged medications to physicians for on-site point-of-care dispensing includes medications distributed for general
medical practice, occupational health, workers compensation, and urgent care and pain clinics. On-site dispensing offers healthcare
providers the opportunity to improve financial performance by adding an incremental source of revenue and reducing expenses related
to prescription transmission, communications with pharmacists and billing and processing. From a patient’s perspective, the
dispensing of medications at the point-of-care provides an increased level of convenience, privacy and treatment compliance. Patients
who do not wish to receive medicines dispensed at the point-of-care are able to access our products through selected pharmacies
who order product directly from us.
We support our physician
clients with a proprietary pharmacy claims processing service specifically designed for billing and collecting insurance reimbursement
from private insurance, workers compensation and Medicare for our medical food products, therapeutic systems, generic and branded
drugs. Our wholly-owned subsidiary, Complete Claims Processing Inc., provides this service to physician offices for the specific
purpose of optimizing insurance reimbursement for dispensed products.
We have developed a
proprietary billing system based on recent advances in Cloud computing. Cloud computing is a technology that uses the internet
and central remote servers to maintain data and applications. Cloud computing allows businesses to use applications without direct
installation and access files at any computer with internet access. This technology allows for much more efficient computing by
centralizing storage, memory, processing and bandwidth while remaining in compliance with all laws and regulations relating to
protected health information.
Each physician client
purchases from us a “Thin Client” device directly connected to our servers. A “Thin Client” device is an
internet portal terminal. It looks like a computer but has minimal memory and no hard drive. The “Thin Client” connects
each physician to our central servers, on which all data concerning the physician’s dispensing and billing are kept. These
central servers are used to serve multiple clients such that a change in our proprietary billing software will be reflected immediately
on all “Thin Client” devices. This system also allows information to be delivered directly to us for purposes of future
sales and educational content. Each physician’s use of controlled substances is documented and reported to the Drug Enforcement
Administration as required by law. This system is covered by a patent application that we expect to mature into an issued patent
in the near future. Our billing system utilizes a combination of two unique identifying numbers and a computer recognition algorithm
to bill third party payers on behalf of the physician. The following two patent applications for this process have been submitted:
1. US Pat. Application. No. 11/804,085 Filing date: May 17, 2007 Status: Request for Continued Examination and Response to office
action filed on December 27, 2010. US Pat. No. 8,370,172 was issued February 5, 2013. 2. US Pat. Application. No. 12/966,720 Filing
date: December 13, 2010 Status: The company received an office action and is preparing a response to the office action to be filed
on or before February 12, 2013. The functional utility of this system is currently protected by the issued trade secret and by
issued US Pat. No. 8,370,172 and this patent application and by US Pat. Application No. 13/759,007 filed February 4, 2013.
Additional patent applications
for medical foods convenience-packed products are in the process of being written and filed. Specifically, Targeted Medical Pharma,
Inc. has recently filed for three patent applications at the USPTO covering technology for stimulating in vivo differentiation
of stem and progenitor cells for producing red blood cells, growth hormone, and testosterone. Specifically, these three patent
applications cover compositions and methods for augmenting and sustaining amino acid delivery for stimulating in vivo differentiation
of stem and progenitor cells for producing red blood cells, growth hormone, and testosterone. Further, these three patent applications
include additional disclosure covering other embodiments for stimulating in vivo differentiation of stem and progenitor cells to
produce additional tissue and cell types. We are awaiting receipt of the examination results of these three patent applications
from the USPTO, which we expect to receive with respect to each of the three applications on or before April 30, 2013.
Our Business Strategy
Our objective is to
become the leading provider of medication solutions based on our patented therapeutic systems for improved patient outcomes and
point-of-care tools designed to automate the physician’s work flow.
Our strategy to achieve
this objective includes the following:
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Accelerating sales of our medication management solutions through expansion of marketing efforts, conversion of traditional
dispensing-only physician clients to the
PDRx
system and development of strategic alliances with physician practice management
system vendors and managed care organizations.
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Increasing customer utilization of our medication management products to enhance the patient care and practice revenue for
physicians through a combination of quality customer service, physician and ancillary staff education and development of specific
disease management solutions.
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Distinguishing Characteristics of Our Products
and Services
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Unique medical food and medical food convenience packs therapeutic systems
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We sell nine core medical food products using patented technology that uses amino acids to produce and modulate neurotransmitters
in specific diseases. Convenience packs contain a pharmaceutical and a medical food product as a therapeutic system
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Development of practice-specific formularies
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Each medical practice is involved in the management of patients with specific diseases. A formulary of medical food products
and pharmaceutical therapies is developed for specific individual medical practices.
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Branded and generic pharmaceuticals
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We manage the ordering, delivery, dispensing and tracking of branded and generic pharmaceuticals
in each physician client’s practice.
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PDRx medication management solutions
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PDRx
is our proprietary computer program used to facilitate and track dispensed medical food and drug products in a
physician client’s practice.
PDRx
facilitates a physician client’s management of inventory and the dispensing
physician is alerted to replenish products as necessary.
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Claims processing to insurance payers on behalf of customer physicians
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Complete Claims Processing Inc. (CCPI) is our wholly-owned subsidiary that manages the billing of our medical food and drug
products to third party payers on behalf of a physician client or a physician client of a distributor utilizing CCPI’s billing
and collection services.
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Claims collection management
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CCPI manages the collections on claims submitted to third party payers on behalf of a physician
client or a physician client of a distributor utilizing CCPI’s billing and collection services.
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Physician reporting and accounts receivable management
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We submit a monthly report to each dispensing physician client that includes information about submitted claims and reimbursements
received.
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Adjudication, both database and real-time
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We provide physician client’s with electronic access to a drug knowledge database with comprehensive, up-to-date clinical
and pricing information. This is important at point-of-care to determine what drugs and medical foods are covered under a specific
insurance plan and the amount of co- payment and/or patient responsibility.
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Physician and ancillary staff education
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We maintain a Medical Science Liaison department to inform physician clients on the appropriate use of our medical food products
and to teach ancillary staff the correct procedures for storing pharmaceutical products at the point-of-care site
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Controlled substance reporting in California
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In California all physicians who dispense Schedule II, Schedule III, and Schedule IV controlled substances must provide the
dispensing information to the Department of Justice on a weekly basis through the Controlled Substance Utilization Review and Evaluation
System (CURES). We track this dispensing history in our
PDRx
software and file the CURES report on behalf of the physician
client.
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Business Organization
We have three principal
business operations, one of which is a wholly-owned subsidiary and two of which are divisions, organized as follows:
Physician Therapeutics (PTL)
PTL is a division of
our company and distributes proprietary medical foods and generic and branded pharmaceuticals to dispense in California, Arizona,
Kansas, Missouri, South Carolina, Nevada, Pennsylvania, Florida, Washington, Colorado, North Carolina, Oregon, Illinois, Idaho,
Maryland, Georgia, Tennessee, Alabama, and Ohio. We plan to expand our sales force into additional states. For purposes of physician
reimbursement by insurance carriers, we have developed state specific contracts between the physician and the insurance carrier
that take into account state by state regulation of physician dispensing.
Laboratory Industry Services (LIS)
LIS is a division of
our company and is certified by the Center for Medicare and Medicaid Services (CMS) as an “Independent Diagnostic Testing
Facility” that performs the technical analysis of certain diagnostic procedures in both the clinical setting and as a Core
Laboratory for research applications. Founded in 1996, LIS has developed proprietary software applications for measuring autonomic
nervous system function. These systems have been used in the development of our products to provide measurable physiological end
points that ensure safety and efficacy during product development. LIS represents less than 0.1% of TMP revenue.
Complete Claims Processing, Inc. (CCPI)
CCPI is our wholly-owned
subsidiary. CCPI provides billing and collection services relating to our products on behalf of dispensing physician clients to
private insurance, workers compensation and Medicare claims. CCPI bills for medical foods, generic pharmaceuticals and branded
pharmaceuticals that PTL sells. Neither PTL nor CCPI produce generic or branded pharmaceuticals. CCPI bills for all products that
have recognized and appropriately registered NDC numbers.
Background of Physician Dispensing of
Pharmaceuticals
In a March 2009 study
by Wolters Kluwer Pharma Solutions, Inc. found that the rate of unfilled prescriptions has increased, from both denials and abandonment.
Health plan denials of commercial prescription claims in 2009 were 8.1% for new prescriptions and 4.2% for refills; denials of
new brand name drug prescriptions (10.3% in 2009) were down 1.4% from 2008, but were up 22.5% since 2006 (denials are prescriptions
that have been submitted to a pharmacy but rejected by a patient’s health plan). Abandoned prescriptions (those that are
submitted to a pharmacy but are never picked up) as a percent of commercial prescription drug claims were 6.3% for new prescriptions
and 2.6% for refills in 2009; for new brand name prescriptions, the abandonment rate was up 23% from 2008 and up 68% from 2006.
Together, health plan denials and patient abandonment resulted in 14.4% of all new, commercial plan prescriptions going unfilled
in 2009, up 5.5% from 2008. A 2009 study by Wolters Kluwer Pharma Solutions, Inc. found that the cost of drug-related morbidity,
including poor adherence (not taking medication as prescribed by doctors) and suboptimal prescribing, drug administration, and
diagnosis, is estimated to be as much as $289 billion annually, about 13% of total health care expenditures. The barriers to medication
adherence are many: cost, side effects, the difficulty of managing multiple prescriptions, patients’ understanding of their
disease, forgetfulness, cultural and belief systems, imperfect drug regimens, patients’ ability to navigate the health care
system, cognitive impairments, and a reduced sense of urgency due to asymptomatic conditions. Wolters Kluwer Pharma Solutions,
Inc., Pharma Insight 2009: Patients take More Power Over Prescription Decisions (March 2010),
Physician dispensing
envisages a dual role for the physician - prescribing medication and dispensing medicines to patients at “point-of-care.”
The conventional role of the physician is the prescription of medicine that is subsequently dispensed at a pharmacy. Although this
physician-dispensing concept is currently being followed by a mere 10% of physicians in the country, it is gaining momentum because
of the inherent benefits to both physicians and patients. A 1989 report by the Office of the Inspector General entitled
“Physician
Drug Dispensing, An Overview of State Regulation”
indicated that approximately 5% of physicians in the United States
dispensed drugs at the point of care. In a report entitled
Physician Dispensing Market Overview
, Knowledge Source Inc. estimates
that the percentage of physicians selling prescription medication to their patients could grow from its current less than 10% to
25% in the next five to ten years. The benefits of point-of-care dispensing to physicians and patients are set forth below.
Until the early 20th
century, pharmacists manufactured medications and physicians prescribed and dispensed them. The trend changed around early to mid
20th century, when physicians only prescribed medications, pharmaceutical companies manufactured them and pharmacists dispensed
them. This trend seems to be changing once again. The practice of physician dispensing is gaining momentum because of its inherent
advantages to both patients and physicians. It increases the physician’s revenue and makes it more convenient for patients,
by providing them with a one-stop solution for their medical care.
Benefits of Physician Dispensing:
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Increased Practice Revenue
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Reduced Pharmacy Callback
: In a March 2002 article in
Pharmaceutical Executive
entitled
Tipping
the Balance of Power With Digital Patient Information
, Mary Johnston Turner cites a 1999 Institute of Medicine study that estimated
that every pharmacy call-back cost physician practices $5 - $7 to pull and review the chart and return the call. With
the average physician writing 30 prescriptions and handling approximately 30 requests for refills a day, the dollars add up quickly.
Ms. Turner noted that, with only 15 call-backs per day that amounts to over $25,000 of expense. These costs and time losses can
be reduced with physician dispensing.
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Improved Patient Care and Patient Compliance
: Writing and dispensing errors will be reduced. The compliance
rate of patients receiving prescriptions filled at the point-of-care and taking the medicines as directed will improve. The overall
health care costs will be reduced with improved compliance. An article entitled
“Medication Compliance Research: Still
So Far to Go”
, which was published in the Summer 2003 issue of the
Journal of Applied Research
, discusses how
the active involvement of patients and physicians in the medication process can improve compliance. When the physician has first-hand
knowledge of patient compliance with medications, modifications to drug regime can be made to reduce harmful drug side effects.
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Reduction of Adverse Drug Events
: Illegible writing of prescriptions, unclear abbreviations, unclear or inappropriate
dosages, and unclear telephone/verbal orders cost primary care practices a large sum of money as overheads and these can be avoided
with physician dispensing of medications. In a 2006 IOM Report entitled
Preventing Medication Errors 2006
, the authors indicated
that, by writing prescriptions electronically, doctors and other providers can avoid many of the mistakes that accompany handwritten
prescriptions, as electronic processing ensures that all the necessary information is provided and legible.
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Increased Convenience
: It is more convenient for the patients as they will not need to drive to the pharmacy
and wait for dispensing of the prescription. Patients can receive their medication at the point-of-care with physician dispensing
and save time spent on commuting and waiting at the pharmacy. This will be especially convenient for the disabled, elderly patients
and parents with sick children.
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Lower Cost Substitution
: Since physicians are aware of the costs of different medications, they can make
substitutions on-the-spot for needy patients, or if a particular medication is not available. Pharmacists on the other hand would
have to call the physician and wait for the physician to call back to approve any change required. This loss of vital time can
be avoided with physician dispensing.
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In 44 out of 50 states
in the U.S., physician dispensing of prescription drugs is legal subject to specified regulations. In six other states, there are
restrictions on this practice and, in Utah, the restrictions are severe enough that, in practical terms, physician dispensing is
effectively prohibited altogether. In September of 2010, Utah promulgated rules for revisions of their laws to allow for physician
dispensing of approved drugs. Texas, New York and New Jersey have limitations on the number of units that may be dispensed at any
one time. We believe that physician dispensing improves the health of patients and it increases the physician’s practice
revenue. In addition, we believe overall healthcare costs for patients are reduced with higher compliance rates achieved through
physician dispensing.
Medical Foods Products Industry Overview
The science of nutrition
was long overlooked and underdeveloped and now has shown that the sick and elderly have special nutritional needs that cannot be
met by traditional adult diets. Medical nutrition has emerged as an attractive segment in the food industry today.
Recent research has
shown that a number of diseases are associated with metabolic imbalances and that patients in treatment have specific nutritional
requirements. Some examples are osteoporosis and osteopenia, insomnia, IBS, and heart disease. Many older Americans have or will
develop chronic diseases that are amenable to the “therapeutic,” dietary management benefits of medical foods. Medical
foods help address these diseases and conditions in a drug-free way with food-based ingredients, yet are a medical product taken
under supervision by a physician. The term “medical foods” does not pertain to all foods fed to sick patients. Medical
foods are foods that are specially formulated and processed (as opposed to a naturally occurring foodstuff used in a natural state)
for the patients who is seriously ill or who requires the product as a major treatment modality according to FDA regulations.
Medical foods consist
of “natural” ingredients very similar to dietary ingredients used in supplements: vitamins, minerals, botanicals, and
amino acids. They are the same constituents that occur naturally, but in a medical-foods formula are in concentrated, “therapeutic”
amounts - beyond simply modifying or augmenting the diet. Medical foods are intended for a vulnerable population suffering from
a particular chronic disease and so have special, extra-rigorous guarantees of safety. All ingredients must be GRAS (Generally
Recognized As Safe) or be FDA-approved food additives. Medical foods are taken under the supervision of a physician who monitors
and adjusts the food ‘dosage.’ In addition, under FDA guidelines and the one regulation, even though pre-market FDA
approval is not required for a medical food, the official requirements and responsibilities for the manufacturer, in terms of safety,
are greater than for supplements, including solid scientific support for the formula as a whole. For these reasons, medical foods
have greater guarantees of efficacy than dietary supplements.
Dietary supplements
are beneficial for maintaining good health, but cannot treat or even manage any disease or abnormal condition. Medical foods can
help bridge the gap for older patients who may need more than supplements to stay healthy, but may not want to take prescription
drugs, or add to the Rx or OTC drugs they are already taking. More and more information is available to MDs about medical foods
and how to use them to help patients. Of note is a recent online piece written by Richard Isaacson, assistant professor of neurology
and medicine at the University of Miami, Miller School of Medicine. In ‘Medical Foods: Overview of an Emerging Science,'
Isaacson said, “Medical foods offer physicians an additional tool for approaching and managing various medical conditions.
They can help improve the symptoms and/or slow the progression of a specific chronic condition, and they are complementary to approved
pharmacologic therapies.” Isaacson concluded by saying medical foods “represent an entirely different scientific and
medical approach to managing diseases.” Medical Foods Boom Along with Baby Boomers, Susan D. Brienza, Esq., Functional Ingredients,
Feb. 28, 2010.
Competition
According to Kalorama
Information Services, the size of the medical foods market is uncertain and information about this market is primarily contained
in the larger clinical nutrition market data. Competition in the clinical nutrition market is dominated by a handful of companies,
ranging from global nutritional manufacturers to leading pharmaceutical companies. In the US a number of small companies have emerged
to address specific areas of disease with prescription Medical Foods. These companies include Nestle Nutrition, PamLab LLC, Primus
Pharmaceuticals Inc., Neptune Technologies & Bioresources Inc., Abbot Nutrition, and Accera Inc. The majority of competitive
participation is in developed regions such as the United States, Western Europe, and Japan. However, many companies are expanding
into less developed regions, intensifying competition in less tapped markets. China, for example, is among the expanding competitive
regions as companies continue to break into the growing demand for clinical nutrition in new world markets. Companies highlighted
in the study published in Clinical Nutrition Products: World Markets, 3rd Edition, include:
Reimbursement for Medical Food Prescriptions
Domestic reimbursement
groups in the United States include cash customers, private insurance, Medicare, Medicaid and Workers’ Compensation insurance.
We have obtained the billing codes, National Drug Codes (“NDC”) and Average Wholesale Prices (“AWP”) for
both our medical food products and convenience-packed pharmaceutical products, which enable our products to be submitted for insurance
reimbursement. The NDC is a unique product identifier used in the United States for drugs intended for human use. The Drug Listing
Act of 1972 requires registered drug establishments to provide the Food and Drug Administration (FDA) with a current list of all
drugs manufactured, prepared, propagated, compounded, or processed by it for commercial distribution. Drug products are identified
and reported using the NDC. The NDC numbers and AWP pricing have been accepted by the registration authorities and are included
in the listings of the major drug databases, including First DataBank, Medispan, Red Book and the FDA NDC database.
Medicare
Department of Health
and Human Services data show that, as of February 16, 2010, approximately 41.8 million (90%) of the 46.5 million eligible Medicare
beneficiaries, had drug coverage. The total number of beneficiaries in a Medicare Part D plans was 27.7 million (60%), including
17.7 million beneficiaries (38%) in stand-alone prescription drug plans and 9.9 million (21%) in Medicare Advantage drug plans.
Another 14.2 million beneficiaries (31%) had coverage from either employer or union retiree plans including FEHB and TRICARE (8.3
million, or 18%) and drug coverage from the VA and other sources (5.9 million, or 13%). About 4.7 million Medicare beneficiaries
(10%) had no drug coverage.
The Medicare Part D
drug benefit shifted spending from the private sector and Medicaid to Medicare, making Medicare the nation’s largest public
payer of prescription drugs (from 7% in 2005 to 60% in 2008). Medicare prescription drug spending as a share of total US prescription
spending rose from 2% in 2005 to 22% in 2008. Medicare prescription drug spending totaled $52.1 billion in 2008, an increase of
13% over 2007.
Medicaid
Medicaid is the joint
federal-state program that pays for medical assistance to 60 million low-income individuals and is the major source of outpatient
pharmacy services to the nonelderly low-income population. Although prescription drugs is an optional service, all state Medicaid
programs cover prescription drugs for most beneficiary groups, although there are important differences in state policies with
regard to copayments, preferred drugs, and the number of prescriptions that can be filled. Since January 1, 2006, states have been
required to make payments to Medicare to help finance Medicare drug coverage for those who are dually eligible for both Medicare
and Medicaid. We currently intend to enter the Medicaid marketplace through our proprietary billing system provided by CCPI.
Workers’ Compensation
The workers’
compensation market operates differently than the Medicare and commercial insurance markets. Injured workers are covered, in general,
by state-administered workers’ compensation policies. The workers may select their own physician. Initial claims for reimbursement
of professional and prescription expenses can be paid within 45 days but many claims are subject to a long collection cycle that
may last in excess of five years. CCPI maintains an active claims submission and collection department. In 2009, according to National
Council of Compensation Insurance, the national premium for workers compensation carriers was $34 billion.
While ultimate collectability
of workers’ compensation claims is very high, most workers’ compensation claims are denied on first claim attempt and
can take from 45 days to in excess of five years from the initial submission of a claim to collect. The initial denial begins a
process of correspondence designed to clear denial objections, submission of workers’ compensation lien filings against insurer
settlements on behalf of physicians and settlement hearings, which denial and appeal process is more thoroughly described elsewhere
in this report.
Highlights of Growth Strategy
We believe that we can grow our business
using the following strategies:
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Expand workers comp marketplace first in California and then nationally.
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Penetrate the large private insurance market nationally focusing on markets with substantial
PPO and private markets.
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Penetrate the Medicare marketplace, concentrating on patients with advantage plans and supplemental
Medicare policies.
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Penetrate the Medicaid marketplace which will become the largest patient population under Obama
care.
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Leverage proprietary technology to create, distribute, market, and provide insurance reimbursement for prescription products
that encompass prescription medical food, convenience-packed pharmaceutical products and generic and branded drugs
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Our products are routinely
reimbursed by third party payers such as private insurance, workers compensation and Medicare. Products are distributed primarily
through dispensing physicians and selected pharmacies. In the physician dispensing environment revenues are redirected from reimbursement
to pharmacies to the physician who is acting as both the prescriber and the dispenser of medical therapies.
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Expand internal sales distributions and expand the Physician Office Distribution (POD) while adding mail-order pharmacies
for physicians who do not wish to dispense
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The POD channel sells
directly to physicians, who profit by prescribing and dispensing medical foods products, convenience packs and generic and branded
pharmaceuticals. Current pricing pressure on healthcare insurance reimbursements has made physicians extremely receptive to carrying
our products, which, in addition to their therapeutic value and scientifically-validated efficacy, provide much desired additional
income for the physician. A large number of physicians do not want to directly dispense to patients but are receptive to prescribing
side effect free medications through both mail-order pharmacies and conventional pharmacy distribution systems
The Company entered
into a distribution agreement in August 2011 with Kalisthenics, Inc., which agreement was amended in September 2011 that calls
for an initial minimum annual purchase of $8 million of the Company’s medical food products for sale to nursing homes on
an exclusive basis in California. The agreement has an initial term of five years and can be renewed for an additional five years.
Exclusivity is contingent on the distributor meeting the annual minimum purchase amount. The product discounts specified in the
agreement are contingent on timely payment for all products shipped and invoiced. If such payments are not made per terms specified
in the agreement the discounts will not apply and product pricing will be based on the Company’s published average wholesale
price (“AWP”). In November 2011 this agreement was assigned to JI Medical, Inc. (doing business as Ramat Medical).
As to date, the minimum purchase amount per the agreement had not been met, but TMP has not exercised it rights under the contract
to terminate exclusivity. The Company anticipates that the contract will perform once the enteral nutrition products are introduced
in the second quarter of 2013 (for further explanation, see below).
On April 6, 2012,
TMP entered into an agreement with Rx Meds LLC for sales of TMP products in Long Term Care facilities in 9 states: NY, NJ, CT,
PA, MA, IL, OH, TX and FL. Rx Meds will act as exclusive independent brokers paid on a commission basis. Rx Meds commission is
based on the price the product is sold, with a minimum net revenue to TMP after payment of all Medicare/Medicaid rebate fees and
commissions. The agreement does not preclude distributors from selling product in the nine states to customers. Rx Meds may also
work as brokers in other states with the exception of California, but on a nonexclusive basis. To date, payment by Medicare Part
D has been delayed. There is a cumbersome reimbursement process for non-covered Medicare drugs. The Company is utilizing
that system for obtaining approval of its products. The Company’s success rate is approximately 50% of claims that
have gone through the entire process. Until this process is more consistent, the performance of the long term care contract
will be delayed.
In addition, the Company
is in final stages of completing prototype systems for the administration of the Company’s TCT technology as powdered forms
without capsules. These products are designed for enteral nutrition through use of feeding tubes. These products will be dispensed
per 100 calories and will be billed under part B Medicare. The Company anticipates introduction of these products in the second
quarter of 2013. Existing codes and formulary price structures exist under part B Medicare. There are existing codes for the payment of powders in long term care facilities using feeding tubes.
The codes and prices are set and utilized by multiple other companies. It is anticipated that the Company’s new version
of powdered TCT products will not experience problems with Medicare Part D reimbursement.
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Military (Wounded Warriors, hospitals, VA)
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TMP initiated a study
involving military veterans who had served in the First and Second Gulf Wars and now suffer with post-traumatic stress syndrome
(“PTSD”), a condition that has been difficult to treat. The study was an open label protocol looking at PTSD patients
given Sentra am and Sentra pm. Primary and secondary outcomes used several standardized questionnaires, captured via an online
platform. The study began upon enrollment in August, 2011. Twenty five subjects completed the study by December, 2011 and an interim
analysis was performed. Patients showed a statistically significant improvement in all primary outcomes of a magnitude such that
the safety monitoring committee for the study appointed by the Company stated that it was no longer ethical to withhold treatment
because of the positive results. Publication of the study is pending.
In addition, the Company has initiated
studies with the military joint command for use of the products within the active duty military. These protocols involve acute
and chronic back pain. Narcotic use within the military is increasing because of these back pain syndromes and a side effect free
back pain product would have substantial use within the military community. The protocols will be performed at Fort Bragg and
Fort Hood. The Company has been approved for the federal fee schedule including both codes and pricing. A sales force is being
established to market to establish veterans hospitals and active duty military hospitals.
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Expand international sales through partners and distributors
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As of the date hereof,
we have not made any international sales through partners and distributors. We currently market four products into Japan and have
recently signed an exclusive distribution agreement for the sale of our proprietary products into the Middle East region.
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Expand our reach into the PPO insurance and Medicare markets
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We have been heavily
reliant on the worker’s compensation insurance market that provides reimbursement through both distributors and internally-managed
physician accounts. Payment protocols under the workers compensation system delay payment up to five years or longer for reimbursement.
The Medicare and private insurance markets generally reimburse in 20 to 60 days from the date that the bill is submitted, which
would improve cash flow considerably. The market for patients with private insurance and Medicare is dramatically larger than the
workers compensation market alone.
As additional clinical
trials are conducted to support the scientific basis of prescribing our products in conjunction with generic and branded pharmaceuticals
the plan is to demonstrate the ability to increase effectiveness, reduce total cost of treatment, and reduce the attenuation of
drugs while reducing the dangerous side effects of some drugs. It is estimated that more than 130 convenience-packed products can
be created based on current products. The patent application for convenience packed products cites 136 different variations. In
2010 we were awarded three grants under the U.S. Government’s Qualifying Therapeutic Discovery Project (QTDP) program established
under Section 48D of the Internal Revenue Code. Our grant awards were specifically related to the applications submitted for our
research and development efforts addressing the nutritional management of diseases with safe, therapeutic formulations sourced
from bioactive compounds and co-administered with generic drugs.
The Andrews Research
Institute is conducting a double-blind, placebo controlled, investigator initiated study on Theramine in patients after knee arthroscopy
for chondroplasty, to determine if Theramine can reduce use of narcotics post surgical intervention. Dr. Gabriel Halperin is near
completion of an open label study of Percura in the treatment of peripheral neuropathy. An open-label study examining the efficacy
of ESS-1818 in the treatment of chronic anemia has been initiated, with other trials contemplated for this product starting in
the second quarter. Several other institutions have applied for investigator initiated grants in the areas of fibromyalgia, chronic
pain, and migraine prevention which are being evaluated by the company at this time.
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Enforcement of the Company’s patent on billing systems
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In February 2013,
the Company was issued a patent number 8,370,172 that covers the use of the physician identification number NPI in
conjunction with a unique physician’s identification number that allows billing by computer systems using these unique
identification numbers. The Company is developing a plan for enforcement of this issued patent. The patent may cover a large
percentage of the 10 billion prescriptions dispensed in the United States each year. The Company’s strategy will
initially focus on physicians that directly dispense products to patients and those physicians’ billing
companies. Following this initial strategy, the Company will expand its enforcement to the other point-of-care
physicians and billing systems.” The Company is exploring direct infringers who may have been knowingly violating the
patent application during the post-publication timeframe. The size and scope of this business is currently under exploration.
The patent covers dispensing of medical foods, convenience kits and pharmaceuticals as prescribed by point of
care physicians.
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Stem cell related products
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The Company has developed
a nutrient-based system for stimulation of the bodies progenitor stem cell systems and filed patent applications for the general
system and individual products. The initial products include stimulation of red blood cell progenitor cells, neurons, insulin producing
progenitor cells and testosterone producing progenitor cells. The nutrient-based systems will be marketed as medical foods. The
first initial prototype has been test marketed as a peripheral neuron stimulating system for use in diabetic neuropathy. Initial
clinical trials have been performed. Two clinical trials have been performed in normal subjects for oral stimulation of red blood
cells and progenitor red blood cells as measured by reticulocyte formation. A clinical trial is underway to assess red blood cell
progenitor simulation in patients with chronic disease in including anemia of old age, AIDS and the anemia associated with malignancy.
These products address large markets which are difficult to quantify at this time. The nutrient-based stimulation of stem cells
does not require harvesting transformation and reinjection of transformed stem cells. The nutrient-based stimulation and transformation
of stem cells contains an inhibitory off switch. It is anticipated that the red blood cell stimulating system will be available
for marketing sometime in 2014.
Products and Services
Medical Foods
Medical foods are a
distinct product category - different from both drugs and from dietary supplements - regulated by the FDA.
The medical food category, defined by the Orphan Drug Act of 1988 and an FDA regulation, includes such criteria as: specially formulated,
administered orally, with on-going physician supervision, and intended for patients with a disease or abnormal condition characterized
by a distinctive nutritional requirement or metabolic imbalance. The precise statutory definition is as follows: “The term
“medical food” means a food which is formulated to be consumed or administered enterally under the supervision of a
physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional
requirements, based on recognized scientific principles, are established by medical evaluation.”
The FDA’s May
2007 Guidance for Industry states “The term medical food is defined in section 5(b) of the Orphan Drug Act. The term ‘medical
food’ does not pertain to all foods fed to sick patients. Medical foods are foods that are specially formulated and processed
(as opposed to a naturally occurring foodstuff used in a natural state) for the patient who is seriously ill or who requires the
product
as a major treatment modality
. Medical foods are only for a patient receiving active and ongoing medical supervision
wherein the patient requires medical care on a recurring basis for, among other things, instructions on the use of the medical
food.” [Emphasis added.]
Medical foods must
make a documented claim for the dietary management of a particular disease or condition, based on meeting the particular nutritional
requirements of a specific. A medical food may not be intended for a condition that may be addressed by merely a change in the
diet, e.g., a gluten-free diet for gluten sensitivity. Because they are highly specialized foods - and not dietary supplements - they
are not exempt from the GRAS requirements The term GRAS means Generally Recognized as Safe. It is a term that the FDA uses to designate
ingredients for food as safe for use without further testing or review. The FDA maintains lists of such GRAS ingredients both the
form and dose. Ingredients in Medical Foods must be GRAS. Accordingly, all the ingredients in PTL products must be GRAS. This is
the basis for the FDA’s position that medical foods do not require pre-approval. In addition, it is the GRAS designation
that substantially reduces the development cost of PTL products. The largest proportion of expenditures for drug development is
used to estimate safety since proving safety depends on the relative risk i.e. 1 in 100 adverse rate versus 1 in 1,000,000. Finding
a 1 in 1,000,000 adverse event is very expensive but necessary if 20,000,000 people will take the drug. The primary ingredients
in PTL products are amino acids that are GRAS. Thus, all of their ingredients must either have GRAS status or be FDA-approved food
additives. Medical foods currently marketed in the United States include products for inborn errors of metabolism and nutrient
management of such conditions as healing from burns, osteoporosis, AIDS, and kidney disease. In some cases a medical food may provide
the sole nutrient/ food for a patient (e.g., a throat cancer victim). Medical foods are administered both in hospitals and in clinical
practice, out-patient settings.
We have developed proprietary
medical food formulations based on our patented
Targeted Cellular Technology
, or TCT. The unifying foundation of our products
is a focus on managing diseases and disorders caused in whole or in part by changes in nutritional requirements related to specific
diseases that result in functional neurotransmitter depletion. These core medical food products are related to the production of
the chemical messengers that are known as neurotransmitters. Neurotransmitters are intimately involved in the disease process and
can be modulated through medically supervised nutritional management. Many pharmaceutical agents also operate through a neurotransmitter
mechanism. Pharmaceutical agents act by blocking or manipulating neurotransmitter pathways, such as selective serotonin re-uptake
inhibitors (SSRIs). Many diseases create accelerated utilization of certain nutrients that are not able to be replaced by the normal
diet alone. Functional depletion of neurotransmitters is also associated with injury, prescription drug use, stress, and chemical
exposure. Our medical foods are effective for the dietary management of such conditions by supplying the specific and distinctive
nutrients that the patient needs.
Medical foods do not
require approval from the FDA before marketing, thereby reducing the entry cost significantly compared to pharmaceuticals using
neurotransmitter mechanisms. We market our medical foods as prescription-only products, requiring a physician prescription. Our
products cannot be marketed directly to consumers, but must - in contrast to over-the-counter products - have
continuous physician supervision, which we enforce with our prescription-only labeling appellation, and sale and distribution only
through physicians and pharmacies.
The manufacture of
our medical foods is outsourced in its entirety under a contract that was extended for an additional five years in December 2011.
We currently market nine core medical food products listed below, each of which have a shelf life of three years.
Disease Management with Medical Foods
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AppTrim
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Metabolic Syndrome/ obesity
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AppTrim-D
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Metabolic Syndrome/obesity
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GABAdone
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Sleep Disorders associated with anxiety
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Hypertensa
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Hypertension
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Lister-V
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Viral infections
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Sentra AM
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Cognitive disorders/fatigue
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Sentra PM
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Sleep disorders associated with depression
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Theramine
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Pain disorders/Fibromyalgai
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Trepadone
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Osteoarthritis, joint disorders
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Percura
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Peripheral Neuropathy
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Our product,
Theramine
accounts
for more than 43% sales in the 9 months ended September 30, 2012 and more than 41% in the year ended December 31, 2011. Pain is
a complex process that is mediated by neurotransmitters which transmit signals originating from a pain-inducing stimulus to specific
centers in the brain where it is perceived. Pain is exacerbated by the presence of inflammation which increases sensitivity to
pain-inducing stimuli. Patients with pain syndromes benefit from increased availability of the specific neurotransmitters involved
in modulating the pain process complemented by antioxidants and anti-inflammatory agents that reduce inflammation.
Theramine
is formulated to provide specific neurotransmitters with well-defined roles in the modulation of pain and a blend of antioxidants,
anti-inflammatory agents, and immunomodulators to moderate the effects of inflammation on the pain response.
Theramine
provides
neurotransmitters that address the pain cycle and the inflammatory cascade and target the neurotransmitters nitric oxide, GABA,
serotonin and glutamate that have primary effects on inhibition of pain cycles.
Theramine
also targets the inflammatory
cascade through the histidine/histamine axis, which provides anti-inflammatory ACTH release from the pituitary gland, with subsequent
release of anti-inflammatory molecules.
Theramine
results in inhibition of the inflammatory cascade at its proximal portions.
Thus, the complete cascade of the inflammatory systems is inhibited, including anti-inflammatory prostaglandins and T cell long-term
inflammatory markers. NSAIDS such as ibuprofen, naproxen and Celebrex inhibit only prostaglandins.
In 2009, we completed
a double-blind-controlled trial of patients with chronic established back pain. In this trial,
Theramine
was compared to
naproxen both alone and with co-administration of the two agents.
Theramine
was shown to be more effective than naproxen
in reducing back pain, and the two agents were better than naproxen alone. In addition, this trial showed that
Theramine
reduced the inflammatory marker C-reactive protein, while naproxen in low dose actually increased inflammatory markers. Reduction
of back pain, using the Roland Morris index, was more than 76%, compared to no change with low dose naproxen.
The Company has recently
completed a double blind controlled trial of
Theramine
and Ibuprofen in 128 patients with chronic established back pain.
There were three groups randomly assigned treatment. The groups included ibuprofen 200 mg daily alone,
Theramine
two capsules
twice daily and
Theramine
with ibuprofen. The study duration was 28 days per patient. Ibuprofen reduced back pain by 20%,
Theramine
by 60% and
Theramine
with ibuprofen by over 80%. Ibuprofen increased both C - reactive protein and interleukin-6
while
Theramine
reduced these inflammatory markers. Ibuprofen inhibited amino acid uptake reducing amino acid turnover while
Theramine
improved amino acid uptake. Ibuprofen treatment increased the need for increased amino acid administration while
Theramine
improved amino acid utilization. Ibuprofen increased the nutritional requirement of back pain syndromes.
These data indicate
that
Theramine
is both a potent pain reduction agent and an inhibitor of inflammation. The double-blind placebo-controlled
data show there is no significant side effects of
Theramine
. We also completed an analysis of gastrointestinal hemorrhage
associated with
Theramine
administration. A significant complication of the use of non-steroidal anti-inflammatory agents
such as naproxen and ibuprofen is gastrointestinal hemorrhage that are expensive to treat and can cause death. We have shown that
in more than 63 million daily doses of
Theramine
alone or in combination with other pain agents such as non-steroidal anti-inflammatory
agents there has not been a single reported case of gastrointestinal hemorrhage. The expected incidence of such events in this
cohort would have been between 400 and 4000 gastrointestinal hemorrhages. The elimination or significant reduction of gastrointestinal
hemorrhage when
Theramine
is used compared to use of non-steroidal anti-inflammatory agents such as naproxen and ibuprofen
could significantly reduce health care costs.
In addition to
Theramine
,
which is our leading product in terms of sale, the products
Sentra PM
and
GABAdone
that address chronic sleep disorders
are second and third in terms of product sales. These two products elicit the production of serotonin, acetylcholine and GABA,
the primary neurotransmitters responsible for the initiation and maintenance of sleep. The concentrations and proportion of the
formula do not result in morning grogginess or memory loss common with the use of pharmaceutical sleep aids. A significant portion
of Company sales arise from
Sentra AM
, a product that increases acetylcholine, the central neurotransmitter associated with
alertness, cognitive function and memory. It is also a central neurotransmitter associated with amelioration of the symptoms of
fibromyalgia.
Convenience-Packed Products
We have developed 48
convenience-packed products consisting of medical foods formulations and generic pharmaceuticals, which physicians can prescribe
and dispense together to optimize drug dosages and achieve a therapeutic effect, while reducing drug side effects and costs. A
convenience-packed product is a box containing a 30-day supply of a generic pharmaceutical and a 30-day supply of a medical food
product. The box is appropriately labeled and contains separate plain-English inserts providing patient information about the generic
pharmaceutical and the medical food. An example of a convenience kit is a box that contains Theramine 90 capsules and a separate
bottle of Naproxen 250mg 30 tablets, both representing a month’s supply of product, with two separate bottles in a single
box.
Following the receipt of the FDA warning
letter on April 8, 2010 and to facilitate discussions with the FDA, we voluntarily stopped providing completed convenience packs.
Instead, we supplied the components of the convenience packs to our physician clients and they could dispense the components packaged
together to their patients. We provide our physician clients an appropriately labeled box containing the medical food product and
a package insert. The physician purchases the pharmaceutical and assembles the convenience pack at the time of dispensing. The
PDRx
system prints the box label and patient instructions. After we stopped assembling convenience-packed products, sales of
individual medical foods and pharmaceutical products rose to make up for the loss of sales of convenience packs and our overall
revenue was not impacted. As of the date of this report, we continue to provide the components of the convenience packs to our
physician clients and they assemble the convenience packs for their patients. We have found that providing the various components
and permitting our physician clients to assemble the convenience packs at the time they are dispensed to the patient is more convenient
and cost effective. For a more complete discussion of the FDA warning letter and the Company’s relations with the FDA with
respect to the FDA warning letter, please see the section of this report titled “
Business - Government Regulation - FDA
Warning Letter
”.
Our convenience-packed
products include therapies for pain syndromes, sleep disorders, hypertension, viral infections and metabolic syndrome. Three double
blind controlled trials have been performed on these products with positive results showing that adjunctive therapy with a medical
food product can reduce the drug dose while maintaining efficacy and reducing side effects the use of pharmaceutical agents co-administered
with medical foods allows the physician to select the optimal dose of the pharmaceutical. These double blind controlled trials
yielded positive results in the areas of chronic, established back pain and sleep disorders. In these trials, drug side effects
were reduced at the low drug doses and the potential for gastrointestinal hemorrhage was also reduced when NSAIDS were used as
part of the convenience pack with the medical food Theramine. The convenience packed drugs are within the FDA-approved label dose.
These convenience packs are registered in the FDA National Drug Code (NDC) database and all convenience-packed products have been
routinely reimbursed by third party payers.
The results of one
of the Theramine trials have been in the
American Journal of Therapeutics
online in November 2010 and in print March 2012.
A pharmacoeconomic analysis of Theramine versus NSAID’s was published in the
Journal of Pharmacy Research
in May 2012.
The results of a trial on Sentra pm in the
Journal of Central Nervous System Disease
in April 2012. Publication of other
trial results planned for the near future.
The results of one of the Theraproxen trials
have been published in the November 2010 edition of the
American Journal of Therapeutics
, and publication of the results
of the other two trials is planned in the immediate future.
The results of a clinical
trial on a stand-alone medical food product, GABAdone, were published in
American Journal of Therapeutics
in the March/April
2010 issue in an article titled “A Randomized, Placebo-Controlled Trial of an Amino Acid Preparation on Timing and Quality
of Sleep.”
The following table illustrates our 48
convenience packs.
CONVENIENCE
PACK
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INDICATION
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MEDICAL
FOOD
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GENERIC
DRUG
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BRAND
NAME OF DRUG (FOR
REFERENCE PURPOSES
ONLY)
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1 Appbutamone
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Metabolic Syndrome
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AppTrim
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bupropion
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Wellbutrin
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2 Appbutamone - D
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Metabolic Syndrome
|
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AppTrim - D
|
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bupropion
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Wellbutrin
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3 Appformin
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Metabolic Syndrome
|
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AppTrim
|
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metformin
|
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Glucophage
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4 Appformin - D
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Metabolic Syndrome
|
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AppTrim - D
|
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metformin
|
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Glucophage
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5 Gabavale-5
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Sleep a/o Anxiety
|
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GABAdone
|
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diazepam
|
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Valium
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6 Gabazolamine
|
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Sleep a/o Anxiety
|
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GABAdone
|
|
alprazolam
|
|
*Xanax
|
7 Gabazolpidem-5
|
|
Sleep a/o Anxiety
|
|
GABAdone
|
|
zolpidem
|
|
Ambien
|
8 Gabazolamine-0.5
|
|
Anxiety
|
|
GABAdone
|
|
alprazolam
|
|
*Xanax
|
9 Gabitidine
|
|
Sleep a/o Anxiety w/GI
|
|
GABAdone
|
|
ranitidine
|
|
Zantac
|
10 Gaboxetine
|
|
Sleep a/o Anxiety
|
|
GABAdone
|
|
fluoxetine
|
|
Prozac
|
11 Hypertenevide-12.5
|
|
Heart Failure/Hypertension
|
|
Hypertensa-90
|
|
carvedilol
|
|
Coreg
|
12 Hypertenipine-2.5
|
|
Hypertension
|
|
Hypertensa-90
|
|
amlodipine
|
|
Norvasc
|
13 Hypertensolol
|
|
Hypertension
|
|
Hypertensa-90
|
|
metoprolol
|
|
Lopressor
|
14 Lytensopril
|
|
Hypertension
|
|
Hypertensa
|
|
lisinopril
|
|
Zestril
|
15 Lytensopril-90
|
|
Hypertension
|
|
Hypertensa-90
|
|
lisinopril
|
|
Zestril
|
16 Prazolamine
|
|
Muscle Spasms
|
|
Theramine
|
|
carisoprodol
|
|
Soma
|
17 Rimantalist
|
|
Viral Infection
|
|
Lister V
|
|
rimantadine
|
|
Flumadine
|
18 Senophylline
|
|
Cognitive Disorders
|
|
Sentra AM
|
|
theophylline
|
|
Quibron-T
|
19 Sentradine
|
|
Sleep a/o Depression w/GI
|
|
Sentra PM
|
|
ranitidine
|
|
Zantac
|
20 Sentraflox AM-10
|
|
Mood Disorders
|
|
Sentra AM
|
|
fluoxetine
|
|
Prozac
|
21 Sentralopram AM-10
|
|
Depression
|
|
Sentra AM
|
|
citalopram
|
|
Celexa
|
22 Sentravil PM-25
|
|
Sleep a/o Depression
|
|
Sentra PM
|
|
amitriptyline
|
|
Elavil
|
23 Sentrazolam AM-0.25
|
|
Anxiety/Mood Disorders
|
|
Sentra AM
|
|
alprazolam
|
|
*Xanax
|
24 Sentrazolpidem PM-5
|
|
Sleep a/o Depression
|
|
Sentra PM
|
|
zolpidem
|
|
Ambien
|
25 Sentroxatine
|
|
Sleep a/o Depression
|
|
Sentra PM
|
|
fluoxetine
|
|
Prozac
|
26 Strazepam
|
|
Sleep a/o Anxiety
|
|
Sentra PM
|
|
temazepam
|
|
Restoril
|
27 Therabenzaprine-60
|
|
Muscle Spasms
|
|
Theramine
|
|
cyclobenzaprine
|
|
Flexeril
|
28 Therabenzaprine-90
|
|
Muscle Spasms
|
|
Theramine
|
|
cyclobenzaprine
|
|
Flexeril
|
29 Therabenzaprine-90-5
|
|
Muscle Spasms
|
|
Theramine
|
|
cyclobenzaprine
|
|
Flexeril
|
30 Theracodeine-300
|
|
Pain
|
|
Theramine
|
|
codeine/acetaminophen
|
|
Tylenol #3
|
31 Theracodophen-Low-90
|
|
Pain
|
|
Theramine
|
|
hydrocodone/acetaminophen
|
|
Vicodin 5
|
32 Theracodophen-325
|
|
Pain
|
|
Theramine
|
|
hydrocodone/acetaminophen
|
|
Norco - 10
|
33 Theracodophen-650
|
|
Pain
|
|
Theramine
|
|
hydrocodone/acetaminophen
|
|
Lorcet
|
34 Theracodophen-750
|
|
Pain
|
|
Theramine
|
|
hydrocodone/acetaminophen
|
|
Vicodin ES
|
35 Therafeldamine
|
|
Inflammation and Pain
|
|
Theramine
|
|
piroxicam
|
|
Feldene
|
36 Therapentin-60
|
|
Nerve Pain
|
|
Theramine
|
|
gabapentin
|
|
Neurontin 300
|
37 Therapentin-90
|
|
Nerve Pain
|
|
Theramine
|
|
gabapentin
|
|
Neurontin 300
|
38 Theraprofen-60
|
|
Inflammation and Pain
|
|
Theramine
|
|
ibuprofen
|
|
Motrin 600
|
39 Theraprofen-90
|
|
Inflammation and Pain
|
|
Theramine
|
|
ibuprofen
|
|
Motrin 600
|
40 Theraprofen-800
|
|
Pain
|
|
Theramine
|
|
ibuprofen
|
|
Motrin
|
41 Theraproxen
|
|
Inflammation and Pain
|
|
Theramine
|
|
naproxen
|
|
Naprosyn
|
42 Theraproxen-90
|
|
Inflammation and Pain
|
|
Theramine
|
|
naproxen
|
|
Naprosyn
|
43 Theraproxen-500
|
|
Inflammation and Pain
|
|
Theramine
|
|
naproxen
|
|
Naprosyn
|
44 Theratramadol-60
|
|
Pain
|
|
Theramine
|
|
tramadol
|
|
Ultram
|
45 Theratramadol-90
|
|
Pain
|
|
Theramine
|
|
tramadol
|
|
Ultram
|
46 Trazamine
|
|
Sleep a/o Depression
|
|
Sentra PM
|
|
trazadone
|
|
Desyrel
|
47 Trepoxen-250
|
|
Osteoarthritis
|
|
Trepadone
|
|
naproxen
|
|
Naprosyn
|
48 Trepoxicam-7.5
|
|
OA/ Rheumatoid Arthritis
|
|
Trepadone
|
|
meloxicam
|
|
Mobic
|
PDRx Software Dispensing Program
We have developed a
proprietary computer-based dispensing solution that facilitates physician dispensing, provides inventory control and regulatory
reporting. The dispensed products include medical foods and generic pharmaceuticals. The proprietary system, “
PDRx
,”
is based on a cloud computing system that directly communicates dispensing data from the physicians’ offices to our management
servers. Cloud computing is a technology that uses the internet and central remote servers to maintain data and applications. Cloud
computing allows businesses to use applications without installation and access files at any computer with internet access. This
technology allows for much more efficient computing by centralizing storage, memory, processing and bandwidth while remaining in
compliance with all laws and regulations relating to protected health information.
The
PDRx
cloud
computing physician management system consists of two components: hardware consisting of a “Thin Client” network terminal,
printer and bar code scanner, and
PDRx
, a proprietary software application that is administered from the Company’s
servers.
Each physician purchases
from us a “Thin Client” device directly connected to our servers. A “Thin Client” device is an internet
portal terminal. It resembles a computer but has minimal memory and no hard drive. The “Thin Client” connects each
physician to our central servers, on which all data concerning the physician’s dispensing and billing are kept. The
PDRx
software remains on Company servers and remains the property of the Company. These central servers are used to serve multiple clients
such that a change in
PDRx
will be reflected immediately on all “Thin Client” devices. This system also allows
information to be delivered directly to us for purposes of future sales and educational content. Each physician’s use of
controlled substances is documented and reported to the Drug Enforcement Administration as required by law. No fee is charged for
the use of the
PDRx
software. Although the Company derives no revenue from a physician client’s use of the
PDRx
software, it enables CCPI to more efficiently process claims on behalf of a physician client.
A physician’s
office can dispense a one-month supply of medications complete with dispensing label and patient instructions in approximately
ten seconds. We have automatic surveillance programs that monitor physician dispensing rates and inventory. Using a max-min system,
we can then generate a flag to physicians to reorder product as necessary. The growth of this distribution network has accelerated
during the last twelve months, and we are currently adding between three and eleven physician groups per month. There are currently
approximately 225 physician groups that are now using the
PDRx
system.
Billing and Collections
CCPI is our wholly-owned
subsidiary that provides billing and collection services relating to our products on behalf of dispensing physician clients to
private insurance, Medicare, and workers’ compensation insurance. CCPI retains a percentage of all collections made for claims
made on behalf of physicians in accordance with our billing services agreement and recognizes revenue upon collection of the claim.
CCPI’s billing and collection services aid the physician in obtaining reimbursement for dispensed products. The physician
is entitled to the residual amount of a claim after deducting CCPI’s fee and TMP’s product invoice. This business model
allows physicians to participate in the revenue stream from dispensing of pharmaceuticals. Our billing system utilizes a combination
of two unique identifying numbers and a computer recognition algorithm to bill third party payers on behalf of the physician. The
following two patent applications for this process have been submitted:
1. US Pat. Application. No. 11/804,085
Filing date: May 17, 2007 Status: Request for Continued Examination and Response to office action filed on December 27, 2010. US
Pat. No. 8,370,172 was issued February 5, 2013.
2. US Pat. Application. No. 12/966,720
(pending) Filing date: December 13, 2010 Status: The company received an office action and is preparing a response to the office
action to be filed on or before February 12, 2013. The functional utility of this system is currently protected by trade secret
and by issued US Pat. No. 8,370,172 and this patent application and by US Pat. Application No. 13/759,007 filed February 4, 2013.
Diagnostic Testing
Laboratory Industry
Services, a division of our company, is a certified “Independent Diagnostic Testing Facility” that performs the technical
analysis of certain diagnostic procedures in both the clinical setting and as a physiologic laboratory for research applications.
Founded in 1996, LIS has developed proprietary software applications for measuring autonomic nervous system function and assessment
of cardiac risk from drugs that prolong the QT interval and thereby increase the risk of cardiac arrhythmia. In electrocardiography
the QT interval is a measure of the time between the start of the Q wave and the end of the T wave in the heart's electrical cycle.
In general, the QT interval represents electrical depolarization and repolarization of the left and right ventricles. A prolonged
QT interval is a biomarker for ventricular tachyarrhythmias and a risk factor for sudden death. This measurement is used to determine
drug safety.
These systems have
been used in the development of our products to provide measurable physiological end points that ensure safety and efficacy. LIS
provides services to clinicians, the pharmaceutical industry and governmental entities in research trials.
LIS receives insurance
reimbursement from private insurance and Medicare specifically for the technical component of the analysis of each test when tests
are performed for patients referred from clinical practice. When LIS contracts with research facilities, a set price is agreed
upon prior to the start of each study reflecting the complexity and data analysis of each study. Recently, LIS has performed a
large study for the Veteran’s Administration examining autonomic nervous system activity in Gulf War veterans. The result
of a similar study performed by us on Gulf War I veterans was published in the
American Journal of Medicine
in October 2004.
Generic and Branded Pharmaceutical Distribution
Line
We introduced our generic
and branded pharmaceutical distribution line in July of 2010 and now offer 151 generic products and seven branded products, which
have shelf lives ranging from two to three years. Physician clients who dispense drugs at the point of care use a formulary of
therapeutic agents that they utilize on a regular basis depending upon their medical specialty. The Company sells these drugs to
the physicians who take the usual pharmacy markup and sell them to the patient. We increased the number of drugs that we provide
in 2010 and added seven branded drugs for specialized use. According to an article entitled “
The Use of Medicines in
the United States: Review of 2010
” published in April 2011 by the IMS Health Inc., generic pharmaceuticals accounted
for 78% of retail prescriptions in 2010, up from 63% in 2006. In addition, spending on branded pharmaceuticals fell .7% in 2010
while spending on generic pharmaceuticals rose 21.7%.
The following is a
glossary of certain industry terms used in the description of our business in this report.
Inflammation cascade:
Inflammation
is the end-result of these inflammatory responses comprised of various physiologic reactions occurring in the body in its response
to an injurious agent (e.g. viruses, microbes, mechanical or chemical trauma, etc.). These reactions include proximal vasodilation
while distal constriction of blood vessels, increased leukocytic migration and activity, seepage of plasma proteins, increased
sensitivity to pain with the increased release of bradykinin, and other chemicals by specialized cells.
Inflammatory cascade through the histidine-histamine
axis:
The amino acid histidine is converted to the neurotransmitter histamine. In the brain, the histamine stimulates the pituitary
gland to produce ACTH that initiates the cortisol anti-inflammatory initiator
The Oswestry Disability Index:
This
is a commonly used outcomes measurement tool for assessing the disabling effects of lumbar spinal disorders.
Roland-Morris Disability Questionnaire:
This is a commonly used outcomes measurement tool for assessing the disabling effects of lumbar spinal disorders.
QT-Interval:
In electrocardiography
the QT interval is a measure of the time between the start of the Q wave and the end of the T wave in the heart's electrical cycle.
In general, the QT interval represents electrical depolarization and repolarization of the left and right ventricles. A prolonged
QT interval is a biomarker for ventricular tachyarrhythmias and a risk factor for sudden death. This measurement is used to determine
drug safety.
Technology and Intellectual Property
Proprietary Technology
The proprietary
Targeted Cellular Technology
® (“TCT”) platform allows reduced concentrations of amino acids to generate effective amounts of nerve and brain
cell messengers, known as neurotransmitters, to target specific cells in the body to optimize cell function. Amino acids are the
building blocks of protein that allow the body to produce these neurotransmitters that regulate most bodily functions. Increasing
the body’s own neurotransmitter production allows for improved sleep function, improved cognitive function, mitigation of
pain, blood pressure regulation, improved lung function, appetite regulation and amelioration of complex medical syndromes with
minimal potential for adverse effects. Our medical food products have effects similar to drugs in addressing the specific accelerated
nutritional requirements of diseases. These products can be administrated alone or with traditional pharmaceuticals under medical
supervision. Six years of clinical use and three double blind clinical trials have demonstrated that the adjunctive use of a medical
food product with a traditional pharmaceutical can provide optimum drug dose that conforms to the lowest FDA labeled dose. We have
received six patents on the TCT process, one on the CCPI claims billing and processing of medication claims by point-of-care physicians
technology, and nine pending patent applications covering our TCT technology and CCPI claims billing and processing of medication
claims by point-of-care physicians technology, and we maintain trademarks, trade secrets, and proprietary methods, as further set
forth below.
Patents
The nutrient-based and pharmaceutical product
development process involves extensive trade secrets and pending and issued patent protections. The patents related to the
Targeted
Cellular Technology
platform were assigned from the inventors, Elizabeth Charuvastra, RN and William Shell M.D., who are also,
respectively, former Chairman of our Board of Directors and our Chief Executive Officer.
The Company filed three patent applications
at the USPTO covering technology for stimulating in vivo differentiation of stem and progenitor cells for producing red blood cells,
growth hormone, and testosterone. Specifically, these three patent applications cover compositions and methods for augmenting and
sustaining amino acid delivery for stimulating in vivo differentiation of stem and progenitor cells for producing red blood cells,
growth hormone, and testosterone. Further, these three patent applications include additional disclosure covering other embodiments
for stimulating in vivo differentiation of stem and progenitor cells to produce additional tissue and cell types. Additionally,
the Company has recently filed a continuation patent application claiming benefit to the original CCPI claims billing and processing
of medication claims by point-of-care physicians patent application to seek allowed claims for additional systems and methods directed
to this technology. Further, the Company has recently filed a pending patent application covering additional embodiments of the
CCPI claims billing and processing of medication claims by point-of-care physicians technology. This patent application claims
priority benefit to the recently issued parent technology contained in issued US Pat. No. 8,370,172.
We currently own, or have exclusive rights
to, the following issued patents and pending patent applications:
Pat. No./App.
Serial No.
|
|
Title
|
|
Owner
|
|
Product(s)/Product
Candidate(s)
|
|
Expiration
|
7,674,482 (USA)
|
|
Method and compositions for potentiating pharmaceuticals with amino acid based medical foods
|
|
Targeted Medical Pharma, Inc.
|
|
Medical foods for producing acetylcholine and serotonin for improved sleep
|
|
3/22/2026
|
7,601,369 (USA)
|
|
Composition and method to augment and sustain neurotransmitter production
|
|
Targeted Medical Pharma, Inc.
|
|
Method for enhancing epinephrine and norepinephrine neurotransmitter activity
|
|
8/27/2022
|
7,595,067 (USA)
|
|
Composition and method to augment and sustain neurotransmitter production
|
|
Targeted Medical Pharma, Inc.
|
|
Method for stimulating nitric oxide production and white blood cell production for improved antiviral activity
|
|
8/27/2022
|
7,582,315 (USA)
|
|
Composition and method to augment and sustain neurotransmitter production
|
|
Targeted Medical Pharma, Inc.
|
|
Method for enhancing serotonin neurotransmitter activity
|
|
8/27/2022
|
7,585,523 (USA)
|
|
Composition and method to augment and sustain neurotransmitter production
|
|
Targeted Medical Pharma, Inc.
|
|
Method for enhancing acetylcholine neurotransmitter activity
|
|
8/27/2022
|
8,370,172 (USA)
|
|
System and method for submitting medication claims by point-of-care physicians
|
|
Targeted Medical Pharma, Inc.
|
|
CCPI claims billing and processing of medication claims by point-of-care physicians
|
|
4/2/2032
|
4719832 (Japan)
|
|
Composition and method to augment and sustain neurotransmitter production
|
|
Targeted Medical Pharma, Inc.
|
|
Composition for stimulating nitric oxide production and white blood cell production in order to produce antiviral activity
|
|
8/18/2023
|
03791695.4 (Europe pending)
|
|
Composition and method to augment and sustain neurotransmitter production
|
|
Targeted Medical Pharma, Inc.
|
|
Method for enhancing neurotransmitter activity
|
|
N/A
(1)
|
2010-79658 (Japan pending)
|
|
Composition and method to augment and sustain neurotransmitter production
|
|
Targeted Medical Pharma, Inc.
|
|
Omnibus claim commensurate with specification
|
|
N/A
(2)
|
07753759.5 (Europe pending)
|
|
Method and compositions for potentiating pharmaceuticals with amino acid based medical foods
|
|
Targeted Medical Pharma, Inc.
|
|
Composition for use in a method for the treatment of viral infections by stimulating nitric oxide and white blood cell production
|
|
N/A
(3)
|
2009-501565 (Japan pending)
|
|
Method and compositions for potentiating pharmaceuticals with amino acid based medical foods
|
|
Targeted Medical Pharma, Inc.
|
|
Medical food for enhancing neurotransmitter activity
|
|
N/A
(4)
|
Pat. No./App.
Serial No.
|
|
Title
|
|
Owner
|
|
Product(s)/Product
Candidate(s)
|
|
Expiration
|
12/966,720 (USA pending)
|
|
System and methods for submitting medication claims by point-of-care physicians
|
|
Targeted Medical Pharma, Inc.
|
|
CCPI claims billing and processing of medication claims by point-of-care physicians
|
|
N/A
(5)
|
13/759,007 USA pending)
|
|
System and methods for submitting medication claims by point-of-care physicians
|
|
Targeted Medical Pharma, Inc.
|
|
CCPI claims billing and processing of medication claims by point-of-care physicians
|
|
N/A
(6)
|
2003/025955 PCT
|
|
Composition and method to augment and sustain neurotransmitter production
|
|
Targeted Medical Pharma, Inc.
|
|
Method for enhancing acetylcholine neurotransmitter activity. Method for enhancing epinephrine and norepinephrine neurotransmitter activity. Method for enhancing serotonin neurotransmitter activity.
|
|
N/A
(7)
|
2007/007157 PCT
|
|
Composition and method for potentiating pharmaceuticals with amino acid based medical foods
|
|
Targeted Medical Pharma, Inc.
|
|
Medical foods for producing acetylcholine and serotonin for improved sleep.
|
|
N/A
(8)
|
13/115,963 (USA pending)
|
|
Composition and Method to Augment and Sustain Amino Acid Delivery for Stimulating In Vivo Differentiation of Stem and Progenitor Cells
|
|
Targeted Medical Pharma, Inc.
|
|
Products to augment and sustain amino acid delivery for stimulating in vivo differentiation of stem and progenitor cells to produce red blood cells.
|
|
N/A
(9)
|
13/115,965 (USA pending)
|
|
Composition and Method to Augment and Sustain Amino Acid Delivery for Stimulating In Vivo Differentiation of Stem and Progenitor Cells
|
|
Targeted Medical Pharma, Inc.
|
|
Products to augment and sustain amino acid delivery for stimulating in vivo differentiation of stem and progenitor cells to produce growth hormone.
|
|
N/A
(10)
|
13/115,967 (USA pending)
|
|
Composition and Method to Augment and Sustain Amino Acid Delivery for Stimulating In Vivo Differentiation of Stem and Progenitor Cells
|
|
Targeted Medical Pharma, Inc.
|
|
Products to augment and sustain amino acid delivery for stimulating in vivo differentiation of stem and progenitor cells to produce testosterone.
|
|
N/A
(11)
|
2012/ PCT
|
|
Composition and Method to Augment and Sustain Amino Acid Delivery for Stimulating In Vivo Differentiation of Stem and Progenitor Cells
|
|
Targeted Medical Pharma, Inc.
|
|
Products to augment and sustain amino acid delivery for stimulating in vivo differentiation of stem and progenitor cells to produce red blood cells.
|
|
N/A
(12)
|
2012/ PCT
|
|
Composition and Method to Augment and Sustain Amino Acid Delivery for Stimulating In Vivo Differentiation of Stem and Progenitor Cells
|
|
Targeted Medical Pharma, Inc.
|
|
Products to augment and sustain amino acid delivery for stimulating in vivo differentiation of stem and progenitor cells to produce growth hormone.
|
|
N/A
(13)
|
2012/ PCT
|
|
Composition and Method to Augment and Sustain Amino Acid Delivery for Stimulating In Vivo Differentiation of Stem and Progenitor Cells
|
|
Targeted Medical Pharma, Inc.
|
|
Products to augment and sustain amino acid delivery for stimulating in vivo differentiation of stem and progenitor cells to produce testosterone.
|
|
N/A
(14)
|
|
(1)
|
The Company’s foreign counsel in Europe report that the patent application is in good order, but that they are unable
to provide a timeframe for the examination of this patent application at this time.
|
|
(2)
|
The Japanese Patent Office (“JPO”) has issued an office action at this time and it is being translated presently.
A response will be timely filed.
|
|
(3)
|
The Company’s foreign counsel in Europe report that the patent application is in good order, but that they are unable
to provide a timeframe for the examination of this patent application at this time.
|
|
(4)
|
The Japanese Patent Office (“JPO”) has issued an office action at this time and it is being translated presently.
A response will be timely filed.
|
|
(5)
|
A request to reconsider current USPTO decision will be filed by February 12, 2013. This patent application contains method
claims relating to the CCPI claims billing and processing of medication claims by point-of-care physicians technology.
|
|
(6)
|
This patent application was filed on February 4, 2013 and is a continuation patent application of the issued parent patent
application (U.S. Pat. No. 8,370,172). It contains computer system and method claims that claim priority to the parent patent application.
It also claims priority benefit to the parent patent application filing date.
|
|
(7)
|
This PCT patent application is abandoned. All desired national and regional patent applications claiming benefit to this PCT
patent application have been filed and are listed above.
|
|
(8)
|
This PCT patent application is abandoned. All desired national and regional patent applications claiming benefit to this PCT
patent application have been filed and are listed above.
|
|
(9)
|
The Company expects to receive a communication from the USPTO on or before April 30, 2013
|
|
(10)
|
The Company expects to receive a communication from the USPTO on or before April 30, 2013
|
|
(11)
|
The Company expects to receive a communication from the USPTO on or before April 30, 2013
|
|
(12)
|
PCT patent application including claims of pending US Patent Application No. 13/115,963. National and/or regional phase patent
applications to be filed based on this PCT patent application by November 25, 2013.
|
|
(13)
|
PCT patent application including claims of pending US Patent Application No. 13/115,965. National and/or regional phase patent
applications to be filed based on this PCT patent application by November 25, 2013.
|
|
(14)
|
PCT patent application including claims of pending US Patent Application No. 13/115,967. National and/or regional phase patent
applications to be filed based on this PCT patent application by November 25, 2013.
|
Trademarks
We utilize trademarks on all current products
and believe that having distinguishing marks is an important factor in marketing our products. Currently, we have nine U.S. registered
trademarks on the principal register at the United States Patent and Trademark Office (“USPTO”) and we have two common
law trademarks. These marks are listed below. We believe that having distinctive marks for any additional products that we develop
will also be an important marketing characteristic. We have not sought any foreign trademark protection for our products or product
candidates at this time. U.S. trademark registrations generally are for fixed, but renewable, terms.
We currently own, or have exclusive rights
to, the following registered trademarks:
Registered Trademarks
Registration
No./ Serial No.
|
|
Mark
|
|
Owner
|
|
Product(s)/Product Candidate(s)
|
3010777
|
|
TARGETED CELLULAR TECHNOLOGY
|
|
Targeted Medical Pharma, Inc.
|
|
Medical foods for enhancing neurotransmitter production
|
3053172
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PHYSICIAN THERAPEUTICS
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Targeted Medical Pharma, Inc.
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Medical foods
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3156064
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APPTRIM
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Targeted Medical Pharma, Inc.
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AppTrim-D
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3515912
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THERAMINE
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Targeted Medical Pharma, Inc.
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Theramine
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3569823
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SENTRA AM
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Targeted Medical Pharma, Inc.
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Sentra AM
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3569826
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SENTRA PM
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Targeted Medical Pharma, Inc.
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Sentra PM
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Registration
No./ Serial No.
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Mark
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Owner
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Product(s)/Product Candidate(s)
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3569829
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HYPERTENSA
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Targeted Medical Pharma, Inc.
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Hypertensa
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3569820
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TREPADONE
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Targeted Medical Pharma, Inc.
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Trepadone
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3569818
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GABADONE
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Targeted Medical Pharma, Inc.
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GABAdone
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85/497,368
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APPTRIM
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Targeted Medical Pharma, Inc.
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AppTrim-D
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We currently own, or have exclusive rights
to, the following common law trademarks:
Common Law Trademarks
Mark
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Owner
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Product(s)/Product
Candidate(s)
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PHYSICIAN THERAPEUTICS
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Targeted Medical Pharma, Inc.
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Wholesale distributorships featuring dietary supplements and medical foods; Wholesale distributor of medical foods and convenience packs
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Targeted Medical Pharma, Inc.
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Wholesale distributor of medical foods and convenience packs
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Copyrights
We have developed a number of properties
that we believe qualify for exclusivity in terms of the U.S. Copyright Act, among them:
Software Programs
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Digital Echocardiogram Annotation & Automated Reporting: A proprietary
program for annotating measurements of the heart from echocardiogram video tapes. Program contains automated transfer to patient
specific reports. This program is used internally and not licensed.
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TheoX: A proprietary program that analyzes distribution of QT interval
and heart rate variability data over a 24-hour period. The program is designed to assess risk of potential for lethal cardiac arrhythmias
using prolongation of the QT interval as a marker. Used to assess drug safety and contains an automated report system with enhanced
graphic images of the EKG. This program is used internally and not licensed.
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Taos: A proprietary program for annotation of 12-lead electrocardiographic
data to measure QT and JT intervals retrospectively. Used internally by Laboratory Industry Services to provide core laboratory
services.
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Lifestyles Obesity Management Software Program: A proprietary program
for MS Word that allows physicians to calculate an individual patient’s time to goal weight with a daily calorie prescription
to achieve the goal. The program generates a printed report to be provided to the patient and is used in conjunction with the Lifestyles
Patient Workbook. This program is distributed to physicians who use our obesity management product,
AppTrim
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PDRx
:
PDRx
is a proprietary computer system to facilitate
point-of-care dispensing in the physician client’s office. The system is a cloud-based system using Citrix interfaces, Hewlett
Packard terminals and Microsoft cloud computing software. The dispensing program resides on our virtual servers and is distributed
to physicians through virtual desktops using a Citrix system The program operates on a thin client portal, which is a small computer
in the physician client’s office dedicated to the
PDRx
system and allows physicians to dispense medications in their
office, track inventory, initiate orders, initiate insurance claims, provide reports to regulatory authorities and manage receivables
through our servers. The servers including the virtual servers are located in a hardened datacenter with co-location to our central
servers. The co-location of mirrored servers at a dedicated and secured data site provides redundancy and security of dispensing
data.
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CCPI Software: A computer system for initiating, managing and transmitting
claims relating to our products to insurance companies. This program has extensive reporting mechanisms for physicians and distributors.
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Publications
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Lifestyles Patient Workbook: Lifestyles Patient Workbook distributed
to patients by the physician for use in conjunction with Lifestyles Obesity Management Software Program. This publication is in
binder format and contains educational materials related to dietary choices, exercise choices, sample menus, and recipes. Also
included is a daily food intake and daily exercise record that is designed to allow the physician to examine a patient’s
daily diet.
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Product Monographs: Each of our products is backed by a detailed product
monograph created by clinicians and food scientists that outlines the accelerated nutritional requirements of a particular disease
or condition. Extensive peer reviewed references from the published medical and scientific literature are cited.
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Billing and Collections
CCPI is our wholly-owned subsidiary that
provides billing and collection services relating to our products on behalf of dispensing physician clients to private insurance,
Medicare, and workers’ compensation insurance. CCPI retains a percentage of all collections made for claims made on behalf
of physicians in accordance with our billing services agreement and recognizes revenue upon collection of the claim. CCPI’s
billing and collection services aid the physician in obtaining reimbursement for dispensed products. The physician is entitled
to the residual amount of a claim after deducting CCPI’s fee and TMP’s product invoice. This business model allows
physicians to participate in the revenue stream from dispensing of pharmaceuticals. Our billing system utilizes a combination of
two unique identifying numbers and a computer recognition algorithm to bill third party payers on behalf of the physician. The
following patent and pending patent applications for this technology have been filed or issued:
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1.
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US Pat. No. 8,370,172; Issue date: February 5, 2013.
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US Pat. Application. No. 12/966,720 (pending); Filing date: December 13, 2010; Status: A request to reconsider current USPTO
decision will be filed by February 12, 2013. This patent application contains method claims relating to the CCPI claims billing
and processing of medication claims by point-of-care physicians technology. The functional utility of this system is currently
protected by the issued trade secret and by issued US Pat. No. 8,370,172 and this patent application and the following patent application.
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US Pat. Application No.: 13/759,007; Filing date: February 4, 2013; Status: Recently filed and awaiting first communication
from USPTO. This patent application contains method claims relating to the CCPI claims billing and processing of medication claims
by point-of-care physicians technology.
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Medical Foods Manufacturing and Sources
and Availability of Raw Materials
We outsource the manufacturing
of our medical food products to a cGMP registered producer, Arizona Nutritional Supplements (ANS), under an exclusive contract
that automatically renewed for an additional five years in December 2011 and will now expire in December 2016. We have vetted a
second manufacturing facility and have determined that we could immediately transfer manufacturing without a significant disruption
in the business in the event that there is a disruption at our current manufacturing facility. cGMP refers to the current Good
Manufacturing Practice Regulations promulgated by the US Food and Drug Administration (FDA) under the authority of the Food, Drug,
and Cosmetic Act of 1938. These regulations, which have the force of law, require that manufacturers, processors, and packagers
of drugs, medical devices, some food, and blood take proactive steps to ensure that their products are safe, pure, and effective.
cGMP regulations address issues including recordkeeping, personnel qualifications, sanitation, cleanliness, equipment verification,
process validation, and complaint handling. Currently, we provide the manufacturer with a formula and manufacturing specifications.
ANS sources and purchases raw ingredients and manufactures the products to our specifications. All raw materials are subject to
rigorous testing at the time of acquisition and during the manufacturing process for purity. Stability testing is also performed
by the manufacturer. Products are then shipped to the distribution center.
The raw materials used
in the manufacture of our medical foods are primarily amino acids, which are used in multiple products and are readily available
from various sources. Small amounts of botanicals are used in formulations as co-factors. The raw ingredients for our medical foods
are sourced from multiple vendors and we have not experienced any shortages in these materials.
Research and Development
We develop candidate
formulas for potential medical food products in a process that involves extensive translational research of the existing medical
and scientific literature and their applicability to various diseases. We have developed a database that contains in excess of
150,000 peer-reviewed published articles, which we have extracted from various national and international databases and identified
as useful in our process of commercializing developments in neuroscience over the past 30 years.
With the database as
the basis for formula development, our team of scientists then develops formulas and manufactures prototypes that undergo laboratory
testing for safety and efficacy. One of our strengths is the selection of appropriate and relevant testing methodologies. Once
a prototype has been created, a small batch is produced and crossover clinical trials are then performed to assess the ability
of the new product to produce neurotransmitters using physiologic endpoints. Double blind controlled trials are then performed.
The clinical trials are outsourced to an independent contract research organization (CRO) that indentifies and contracts with independent
sites throughout the United States that gather appropriate data. Our Scientific Advisory Board reviews data analysis and supervises
writing and publication of trial results. All clinical trials are performed with independent Institutional Review Board (IRB) approval.
In addition, all trial protocols are submitted to the FDA for review. However, the FDA does not routinely review the submitted
protocols because medical foods and the related studies do not require FDA pre-approval and our products are comprised of ingredients
that have been categorized by the FDA as GRAS (i.e., generally recognized as safe).
While there is no pre-approval
mechanism at the FDA for medical food products, all such products must have validation of their effectiveness prior to being marketed.
Because all medical food products are required to contain ingredients that are GRAS, there are no safety testing requirements.
We validate the effectiveness of our products by clinical testing, including double blind, randomized clinical trials.
We file patents for
new inventions through our scientists. We also publish both peer-reviewed and internally-generated publications. There are seven
pending patent applications including five using TCT technology and two pending patent applications on the billing process. The
five pending patent applications using TCT technology are foreign applications to extent the intellectual property protection beyond
the United States where these five patents have already been issued.
Our research and development
includes performance of early clinical studies and double blind placebo controlled trials. (Studies on therapeutic treatments for
pain in human subjects do not permit IRB approval for the use of a placebo arm in clinical trials due to ethics considerations).
We maintain an in-house research staff and outsource double-blind trials to an independent clinical research organization. All
clinical trials are performed in the United States.
In October 2010, we
received an aggregate of approximately $733,000 in grants from the United States federal government under the Qualified Therapeutic
Discovery Project (QTDP) tax credit enacted as part of the Patient Protection and Affordable Care Act of 2010. The QTDP tax credit
provides companies with a credit or grant of up to 50% of qualified investments made in approved projects in 2010, which permits
companies to continue work already in progress. The QTDP tax credit is targeted at biotechnology companies with potential to advance
U.S. competitiveness in the fields of medical and biological sciences and likelihood to create high quality and high paying jobs
in the United States. A taxpayer may elect to take a grant in lieu of the credit as we did. A qualifying therapeutic discovery
project is one that is designed: (i) to treat or prevent diseases or conditions by conducting pre-clinical activities, clinical
trials or related activities in an effort to secure product approval by the FDA; (ii) to diagnose or determine molecular factors
related to a disease or condition by developing molecular diagnostics to guide therapeutic decisions; or (iii) to develop a product,
process or technology to further the administration or delivery of therapeutics. The QTDP credit or grant is in an amount equal
to 50% of the qualified investments for a taxable year.
The U.S. Treasury Secretary
certified only those projects that showed reasonable potential to develop new therapies that either treat areas of unmet medical
need or prevent, detect or treat chronic or acute diseases and conditions, reduce long-term health care costs in the U.S. or advance
the goal of curing cancer within the next 30 years. Applications were reviewed by the Internal Revenue Service and the Department
of Health and Human Services. One of the grants we received was for the further development of existing formulas to provide pain
relief while reducing the addiction potential of opiates using a generic drug co-administered with a medical food product. The
second grant was related to the further development of a product to improve the quality of sleep in the aging population without
altering mental clarity and memory using a generic drug co-administered with a medical food product. The third grant related to
the further development of a treatment for patients exhibiting symptoms of Gulf War Illness using a generic drug co-administered
with a medical food product. Gulf War Illness is a form of brain injury that is associated with neurogenerative disease such as
Lou Gehrig Disease and early forms of dementia.
Sales and Marketing
We distribute products
through a network of distributors and an internal sales force that sells products directly to dispensing physician clients. There
are currently thirteen distributors selling our products to their networks and nine internal sales representatives who sell directly
to physicians. Physicians purchase products from PTL for dispensing directly to their patients. Physician Therapeutics also distributes
generic and branded pharmaceuticals to physicians in 30-day prepack units that it purchases from wholesalers. This process is referred
to as “point-of-care dispensing.” We believe that physicians find these solutions attractive because incorporating
these systems into their office work flow can increase efficiency and profitability for the practice, reduce medication errors,
improve patient compliance and improve the quality of patient care by reducing drug side effects.
The Company is never
reimbursed by insurance companies or governmental agencies. We sell product to physicians and distributors under purchase contracts
that hold them responsible for payment for the product. Per that contract, title passes at the point of shipment and invoices are
generated upon shipment. If the physician never dispenses the product, he remains responsible for payment of the product either
at a discount within terms or at gross invoice amount if beyond terms. Under the Physician Managed Model (“PMM”) and
Hybrid Model, all of this remains true with the addition that CCPI acts on the physician’s behalf to submit and collect claims.
We call these claims our managed accounts receivable and they are not recorded on our books since they are collectively the receivables
of the physician. We maintain a security interest in this managed accounts receivable and our product invoices to the physician
are paid from this managed accounts receivable but, even if no claims are ever collected the physician remains responsible for
payment. Each month as collections are made from various agencies on behalf of the physician client, we take the amount received
for the claim, deduct CCPI’s billing services fee, and deduct the net amount due from the physician for the product on invoices
to him from PTL/TMP and the remainder is sent to the physician. If there are insufficient claims to cover product invoices the
Company historically has come to mutually acceptable agreements with physician clients whereby the Company retains a portion of
the claims reimbursement due to the physician client from CCPI to reduce outstanding balances due from the physician client to
the Company. As a result, we have not, to date, exercised our security interest to enforce payment from a physician client.
Our propriety dispensing
system,
PDRx
, allows physicians to dispense prescription products and generic pharmaceuticals directly to patients using
the hardware and software provided in the
PDRx
system rather than by the patient taking a paper prescription to a pharmacy.
In addition, physicians can elect to utilize CCPI’s billing and collection services relating to our products to collect reimbursement
from private insurance, workers’ compensation or Medicare.
BUSINESS MODEL
Revenue Models
TMP markets medical foods and generic and
branded pharmaceuticals through employed sales representatives and independent distributors. Product sales are invoiced upon shipment
at Average Wholesale Price (“AWP”), which is a commonly used term in the industry, with varying rapid pay discounts,
under four models: Physician Direct Sales, Distributor Direct Sales, Physician Managed and Hybrid.
Revenue Recognition
:
Under the following revenue models product
sale revenues are recognized upon shipment:
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Physician Direct Sales Model
; and
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Distributor Direct Sales Model
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Due to substantial
uncertainties as to the timing and collectability of revenues derived from our Physician Managed and Hybrid models described below,
which can take in excess of five years to collect, we have determined that these revenues did not meet the criteria for recognition
in accordance with SAB Topic 13,
Revenue Recognition
. These revenues are therefore required to be recorded when collectability
is reasonably assured, which the Company has determined is when the payment is received.
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Physician Managed Model
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In the
nine months ended September 30, 2012 and the years ending December 31, 2011 and 2010, the Company issued
billings to Physician Managed and Hybrid model customers aggregating $10.0 million, $16.16 million and $15.70
million, respectively, which were not recognized as revenues or accounts receivable in the accompanying consolidated
financial statements at the time of such billings. Direct costs associated with these revenues are expensed as incurred.
Direct costs associated with these billings aggregating $1.01 million, $1.25 million and $1.23 million respectively, were
expensed in the accompanying consolidated financial statements at the time of such billings. However, in accordance with the
revenue recognition policy described above, the Company recognized revenues from certain of these customers when cash was
collected aggregating $2.9 million, $4.9 million and $3.1 million in 2011 and 2010, respectively. As of September 30, 2012,
December 31, 2011 and 2010, the Company had contractual receivables from its Physician Managed and Hybrid model customers
totaling $37.1 million $33.8 million and $23.0 million respectively, which are not reflected in the accompanying consolidated
balance sheet as of such dates.
CCPI receives no revenue
in the physician direct or distributor direct models because it does not provide collection and billing services to these customers.
In the Physician Managed and Hybrid models, CCPI has a billing and claims processing service agreement with the physician. That
agreement includes a service fee defined as a percentage of collections on all claims. Because fees are only earned by CCPI upon
collection of the claim and the fee is not determinable until the amount of the collection of the claim is known, CCPI recognizes
revenue at the time that collections are received.
No returns of products
are allowed except products damaged in shipment, which has been insignificant.
The rapid pay discounts
to the AWP offered to the physician or distributor, under the models described above, vary based upon the expected payment term
from the physician or distributor. The discounts are derived from the Company’s historical experience of the collection rates
from internal sources and updated for facts and circumstances and known trends and conditions in the industry, as appropriate.
As described in the models above, we recognize provisions for rapid pay discounts in the same period in which the related revenue
is recorded. These rapid pay discounts, have typically ranged from 40% to 88% of Average Wholesale Price and we have monitored
our experience ratio periodically over the prior twelve months and have made adjustments as appropriate.
Allowance for doubtful accounts
:
Under the direct sales
to physician and direct sales to distributor models, product is sold under terms that allow substantial discounts (40-88%) for
payment within terms. With such substantial discounts, it is rare that an invoice is not paid within terms under these models.
We have not experienced any write offs associated with these revenue models.
Under the Company’s
physician managed model and hybrid model, CCPI performs billing and collection services on behalf of the physician client and deducts
the CCPI fee and product invoice amount from the reimbursement received by CCPI on behalf of the physician client before the reimbursement
is forwarded to the physician client . Extended collection periods are typical in the workers compensation industry with payment
terms extending from 45 days to in excess of five years. The physician remains personally liable for purchases of product from
TMP and, during this long collection cycle, TMP retains a security interest in all products sold to the physician along with the
claims receivable that result from sales of the products. CCPI maintains an accounting of all managed accounts receivable on behalf
of the physician and regularly reports to the physician. As described above, due to uncertainties as to the timing and collectability
of revenues derived from these models, revenue is recorded when payment is received therefore no allowance for doubtful accounts
is necessary.
In addition to the
bad debt recognition policy above, it is also TMP’s policy to write down uncollectible loans and trade receivables when the
payer is no longer in existence, is in bankruptcy or is otherwise insolvent. In such instances our policy is to reduce accounts
receivable by the uncollectible amount and to proportionally reduce the allowance for doubtful accounts.
A la carte Goods and Services
PTL and CCPI also offer
some a la carte goods and services to physicians under all the above described models, such as computer hardware and software that
assist in dispensing and billing and other services relating to contracting and business management. These goods and services account
for a small percentage of the Company’s overall revenue and business operations.
U.S. Distribution
There are currently
13 distributors selling our products to their networks and nine internal sales representative employees who sell directly to physicians.
The initial sales of our products were in the California workers compensation market.
Our sales currently
are primarily in California, but we also sell to physicians and distributors in Arizona, Kansas, Missouri, South Carolina, Nevada,
Pennsylvania, Florida, Washington, Colorado, North Carolina, Oregon, Illinois, Idaho, Maryland, Georgia, Tennessee, Michigan Alabama,
and Ohio. The Company has a small presence in each of these states and is actively marketing through either distributors or sales
representatives in these states. Marketing efforts entail distribution of updated medical food education materials and product
sheets, both in hard copy and online. These materials focus on specific products and discuss context-specific use with accompanying
support materials. The Company distributes this information at professional conferences, through direct mail materials, to pain
and rehabilitation specialists, sleep centers and skilled nursing facilities. We primarily market to orthopedic surgeons, pain
specialists, rheumatologists treating fibromyalgia and physical medicine specialists. With the initiation of physician dispensing
and insurance reimbursement into the private insurance market, we have begun to address internal medicine, primary care medicine,
and psychiatry, as well.
Marketing plans also
include localized, region-specific Web sites for awareness and education about medical foods with links to the Company’s
main Web site for more in-depth education. In addition, the Company is preparing press kits, which include information about the
Company, management and product backgrounds. The Company is also developing presentations for use in varied mobile applications,
such as flash drives, briefing dossiers, conference materials and iPad sales support. In addition, the Company has compiled road
show and briefing materials on the Company’s medical food products to be presented by the Company’s Chief Executive
Officer and other senior executives to invited medical groups and for one-on-one briefings with media personnel. The Company is
also evolving its use of online media through the creation of spall-space advertisements, quick advertisements linking back to
the Company’s Web site and for use in targeted online publications.
We have been collecting
reimbursement from the workers compensation systems in California and Florida since 2004. Revenue from our physician customers
under PMM plus our distributors utilizing CCPI’s services for their physician customers under our Hybrid Model accounts for
approximately 75% of our sales for the nine months ended September 30, 2012 and 59% of our sales for the year ended December 31,
2011.
The Company’s
initial sales efforts were to physician clients practicing within the workers’ compensation market because of the initial
connections made with physicians in that market and because there were existing mechanisms for reimbursement. Workers’ compensation
physicians were already performing in office dispensing of drugs and were amenable to introducing a new product line. Since 2009,
we have developed a framework, business processes and technical infrastructure for obtaining reimbursement in the much larger commercial
insurance reimbursement market. We have found success in this market over the last year and intend to focus our efforts toward
this market in the coming year. We believe that we will see the mix of workers’ compensation to commercial move toward a
more even split, especially as the Company expands its business out of California. California is one of the only states where physicians
have workers’ compensation-only practices. The majority of physicians will treat a mixture of patients covered by various
payers. As we expand our business into additional states, we expect to target physicians treating patients covered by private insurance
by focusing on media outlets and conferences of particular interest to those types of practices.
Foreign Distribution
We have a contract
to distribute products in countries in the Middle East region, including rights we have granted an agent-distributor to distribute
into Algeria, Morocco, Tunisia, Bahrain, Egypt, Iraq, Jordan, Kuwait, Libya, Morocco, Oman, Qatar, Saudi Arabia, Sudan, Syria,
Tunisia, UAE, Yemen and Turkey. In addition, we have entered into a letter of intent to co-develop a medical food product with
a foreign company. Our international activities account for less than 1% of our sales but we expect it to grow in the future. As
of the date hereof, we have not made any international sales through our partners or distributors.
Japan
We plan on distributing
our medical food products as concentrated nutrients in Japan through a local distributor, J-Network, Inc. Certain products were
reformulated to meet Japanese regulatory requirements. For example, Japan does not allow the inclusion of 5-hydroxytryptophan in
imported therapeutic products, but does accept L-tryptophan, an ingredient that is not acceptable in the United States as a medical
food ingredient. Sales to Japan have increased steadily over the last two years from less than $200,000 to approximately $450,000.
The sales contract
formerly in place with J-Network, Inc. expired in 2009 and the Company elected not to renew the contract as sales minimums were
not being met. The relationship is continuing on a month-to-month basis. J-Networks has a non-exclusive license to sell certain
products at the prices charged during the term of the agreement. The cost of product to J-Networks shall be as provided in the
pricing schedule, subject to annual increase. J-Networks is not obligated to make any minimum monthly purchases. However, J-Networks
will work with the Company to market the products in Japan and ensure it maintains sufficient product on hand to meet demand.
Middle East
In March of 2010,
we entered into an Agency Agreement with BioMatrix Pharma Inc. for the sale and distribution of our products into the Middle East
Region, exclusive of Israel. Our products are currently in the process of registration in Lebanon and other countries in the region,
including Algeria, Morocco, Tunisia, Bahrain, Egypt, Iraq, Jordan, Kuwait, Libya, Morocco, Oman, Qatar, Saudi Arabia, Sudan, Syria,
Tunisia, UAE, Yemen and Turkey. The Agency Agreement, dated March 29, 2010 is an exclusive license between the Company and BioMatrix
Pharma for the sale of ten (10) medical food formulas into twenty (20) countries located in the Middle East region. TMP granted
BioMatrix the right for sale and marketing of the products within the territory. TMP has retained the manufacturing rights and
will ship product directly to BioMatrix. TMP has the right to limit exclusivity for the sale and marketing of the products within
a particular country in the territory if BioMatrix fails to launch a product within twenty-four (24) months. The products are subject
to annual minimum purchasing ordering terms of 5,000 bottles the first year, 12,500 bottles the second year, 17,500 the third year,
increasing at the rate of ten (10%) for each and every year thereafter. Upon execution of the agreement, BioMatrix paid TMP a licensing
fee of $25,000. Pricing per one month’s supply of 60, 90, or 120 capsule bottles is $12.00 USD forwarded FOB Los Angeles.
We received our first payment of $32,455 on November 21, 2012 on this contract, with an additional $32,455 due in 90 days.
Government Regulation
Statutory Definition and One FDA Regulation
Under the Federal Food,
Drug, and Cosmetic Act of 1938 (FFDCA), products are regulated on the basis of their intended use. Their intended use is determined
by the objective factors surrounding their use. Numerous categories and subcategories of products exist under the FFDCA, e.g. food,
food additive, dietary supplement, Generally Recognized as Safe (GRAS) food component, new drug, GRAS and Effective (GRAS/E) drug
for over the counter use, and GRAS/E drug for use under the supervision of a physician. The categories overlap and products can
fall within more than one category depending on their intended use.
The FDA has provided
little guidance on the regulation of medical foods, as it is still a relatively new and evolving category of product under the
FFDCA.
Our medical food products
are defined and regulated by the Food and Drug Administration, or FDA. The term medical food, as defined in Section 5(b) of the
Orphan Drug Act is a “food which is formulated to be consumed or administered enterally, or by mouth, under the supervision
of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional
requirements, based on recognized scientific principles, are established by medical evaluation.” The FDA advises that it
considers the statutory definition of medical foods to “narrowly” constrain the types of products that fit within the
category of food (see May 2007 Guidance, and Food Labeling; Reference Daily Intakes and Daily Reference Values; Mandatory Status
of Nutrition Labeling and Nutrition Content Revision proposed rule.) This is a Final Rule, binding regulation, on nutrition labeling
for conventional foods.
The one FDA regulation
pertaining to medical foods exempts them from the nutrition labeling requirements that apply to conventional foods, but they are
subject to special labeling requirements. Under 21 C.F.R. sec. 101.9 (j)(8),
(j) The following foods are exempt from
this section or are subject to special labeling requirements:
(8) Medical foods as defined in section
5(b) of the Orphan Drug Act. A medical food is a food which is formulated to be consumed or administered enterally under the supervision
of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional
requirements, based on recognized scientific principles, are established by medical evaluation. A food is subject to this exemption
only if: (i) It is a specially formulated and processed product (as opposed to a naturally occurring foodstuff used in its natural
state) for the partial or exclusive feeding of a patient by means of oral intake or enteral feeding by tube; (ii) It is intended
for the dietary management of a patient who, because of therapeutic or chronic medical needs, has limited or impaired capacity
to ingest, digest, absorb, or metabolize ordinary foodstuffs or certain nutrients, or who has other special medically determined
nutrient requirements, the dietary management of which cannot be achieved by the modification of the normal diet alone; (iii) It
provides nutritional support specifically modified for the management of the unique nutrient needs that result from the specific
disease or condition, as determined by medical evaluation; (iv) It is intended to be used under medical supervision; and (v) It
is intended only for a patient receiving active and ongoing medical supervision wherein the patient requires medical care on a
recurring basis for, among other things, instructions on the use of the medical food.
Unlike for drugs and
for dietary supplements, there is no overall regulatory schema for medical foods, or even a pending proposed rule, meaning that
no FDA rulemaking is in progress. However, a very detailed Advanced Notice of Proposed Rulemaking (ANPR) entitled “Regulation
of Medical Foods,” was published in the Federal Register on Nov. 29, 1996. This ANPR never progressed to a proposed rule,
the Notice and Comment procedure, and an eventual Final Rule (binding regulation). However, in the view of our attorneys, it still
represents (in conjunction with the May 2007 Guidance) FDA’s position and policy on medical foods. This ANPR was in effect
withdrawn, because on April 22, 2003, the FDA published a proposal to withdraw numerous long-pending proposed rules, including
this ANPR. The FDA cited as its reasons for withdrawal, first, that the subjects are not a regulatory priority, and agency resources
are limited, second, the proposed rules have become outdated due to advances in the science or changes in the products or the industry
regulated, or changes in legal or regulatory contexts; and, third, to eliminate uncertainty, so that the FDA or the private sector
may resolve underlying issues in ways other than those in the proposals. In May 2007, the FDA issued its Guidance to Industry,
presumably because the medical foods sector was growing, but it did not engage in a formal rulemaking procedure, either because
it did not have the resources and/or because the medical foods category is still lower priority than drugs and medical devices.
Regulatory Requirements
Overview:
Medical
foods are FDA-regulated, but there is no complete set or schema of regulations. There is no pre-market approval, or even pre-market
notification to the FDA required. Rather, it is the responsibility of manufacturer and marketer to test for safety and efficacy
before marketing and selling. The developer of a medical food must adhere closely to the statutory definition, and to the descriptions
of a medical food in the one regulation regarding exemption from nutrition labeling, and in the May 2007 Guidance. (The parameters
for a valid medical food are also spelled out in several FDA Warning Letters, e.g., those sent to Metagenics, Nestle Healthcare.)
In the absence of a specific regulatory schema, we and our regulatory counsel have paid close attention to the numerous contrasts
with both dietary supplements and with prescription drugs. (See regulation, FDA May 2007 Guidance, and the Warning Letter to Garden
of Life.) All elements of the medical food product must indicate that the “intended use” of the product is for the
dietary management of a disease, and not for the cure or prevention of a disease.
Threshold Issue:
The manufacturer must demonstrate that the disease or condition to be targeted - scientifically and medically - is
a disease with distinctive (or unique) nutritional requirements (ANPR 1996). The FDA has stated that this is a “narrow category,”
(2007 Guidance, recent Warning Letter to Bioenergy) and that whether a product is valid for this category depends on the published
medical science of the disease and its origins. The targeted disease or condition may be, or caused by, a metabolic imbalance or
deficiency or the accelerated requirements for a certain nutrient caused by a disease state. Thus, we and our Scientific Advisory
Committee begin with a comprehensive in-house report documenting the distinctive nutritional requirements of the disease as the
crucial first step in research and development.
Formulation:
A medical food may not be a single ingredient formula - otherwise, that product would be a dietary supplement
for a nutrient deficiency. (FDA Field Guides) A medical food formula must go beyond a mere modification of the diet. (FDA regulation;
2007 Guidance) The formula must meet/ satisfy the distinctive nutritional requirements, not merely ameliorate the symptoms. For
example, Glucosamine or MSM, or an herb’s “active” constituent may indeed help osteoarthritis. But first the
company must demonstrate that these nutrients are the distinctive nutritional requirements for osteoarthritis. The test is: Does
this formula bring the patient from the abnormal condition or disease state (with distinctive nutritional requirements) back to
the equilibrium of a healthy state?
Safety
: There are no particular or mandated FDA pre-market safety studies
required of the formula as a whole. However, all ingredients must be either GRAS or approved food-additives. (See FDA letter to
Industry (2001) regarding no botanicals or “novel” ingredients permitted in “functional foods”; and the
ANPR. Since medical foods are typically taken with prescription drugs, the developer must assess whether any medical food/drug
interactions pose a risk assessment. Many ingredients have been determined by the FDA to be GRAS and are listed as such by regulation.
Other ingredients may achieve self-affirmed GRAS status through a panel of experts on that particular substance that author a GRAS
Report. The standard for an ingredient to achieve GRAS status requires not only technical demonstration of non-toxicity and safety,
but also general recognition and agreement on that safety by experts in the field. All ingredients used us in our medical foods
are either FDA-approved food additives or have GRAS status. Note that the GRAS requirement for ingredients (above) is arguably
a higher safety standard than the risk/benefit analysis required for pharmaceuticals. Like any evolving area, especially where
no premarket approval is required, the FDA reserves the right to raise questions about the qualification of products within any
category as well as the labeling, manufacturing safety, of those products. A variety of informal and formal legal options exist
for the Agency to raise these issues. For medical foods, the FDA has taken little regulatory action, although questions about the
manufacture and labeling of such products have arisen.
Efficacy
: No
particular FDA pre-market efficacy studies are required by the FDA or by Congressional statute, similar to or comparable to Phase
2 & 3 trials for prescription drugs. But a company must have clinical trials or other tests to demonstrate that the formula,
when taken as directed, meets the distinctive nutritional requirements of the particular disease. The test for effectiveness may
be amelioration of the “endpoints of the disease”. In terms of the standard for substantiation of claims, the FDA has
stated that the level of evidence must be at least as high as that to support an unqualified health claim, which is “significant
scientific agreement.”
Manufacturing:
There are no “good manufacturing practice” (GMP) regulations for medical foods in particular. Drug GMPs
are not required, nor are the relatively new dietary supplement GMPs required; only food GMPs are required. But note the “medical
foods paradox” spelled out in the ANPR. The paradox is that medical foods are intended for a vulnerable patient population,
under a physician’s care, and yet there are no specific FDA regulations for this category of product, whereas there are very
specific and rigorous regulations and requirements for the manufacture and labeling of conventional foods. The manufacture of our
medical foods is outsourced in its entirety under a contract that expires in December 2016. We use a state of the art facility,
which manufactures only nutritional supplements and medical foods.
Labeling:
As for all food labels, printing
must be legible, and many required elements must be conspicuous:
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Statement of Identity: is MEDICAL FOOD For the dietary management of _______
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Must include: “Must be administered under the supervision of a physician.”
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An accurate statement of the net quantity of contents
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Ingredient listing (in the absence of both a required Nutrition Facts box or a Supplement Facts
box - no complete set of labeling regulations for medical foods exist yet). See 2007 Guidance:
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“Medical foods
are foods and therefore their label must contain a statement of identity (the common or usual name of the product) (21 CFR 101.3),
an accurate statement of the net quantity of contents (21 CFR 101.105), the name and place of business of the manufacturer, packer,
or distributor (21 CFR 101.5), and a complete list of ingredients, listed by their common or usual name and in descending order
of predominance (21 CFR 101.4). In addition, all words, statements, and other information required by or under authority of the
Federal Food, Drug, and Cosmetic Act (FFDCA) to appear on a label or labeling of a medical food must appear with prominence and
conspicuousness (21 CFR 101.15). . . . Medical foods also must be labeled in conformance with the principal display panel requirements
(21 CFR 101.1), the information panel requirements (21 CFR.101.2), and the misbranding of food requirements (21 CFR 101.18).”
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Distributed by: [Co. Name and Mailing Address] (2007 Guidance). Reporting of serious adverse events
is voluntary, not required; so a toll-free number is not required.
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If the formula contains or is derived from any of the 8 major allergens, the ingredient list must
contain or be followed by a prominent caution, e.g., CONTAINS WHEAT. (Food Allergen Labeling and Consumer Protection Act of 2004,
and May 2007 FDA Guidance)
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The Directions must be clear and precise, e.g., Take 2 capsules in the morning with other food,
or as directed by your physician. (2007 Guidance)
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Many companies include the Rx symbol or “Rx only” but there is no precise law currently
on this. There is no explicit requirement for prescription only, though this is implied by statute; medical foods may not be sold
in mainstream stores or over-the-counters, because supervision of physician is required on an on-going basis.
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Many companies include a package insert or prescribing information in the box (but there is no
law on this issue).
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Marketing:
A
medical food is a food product thus, the FDA does not regulate advertisements and promotional activities according to the pharmaceutical
statutes and regulations; there is no side effects Disclaimer or fair balancing required, e.g., in DTC advertising of drugs on
television. However, the FDA has a very broad definition of “labeling”; thus all promotional materials, including websites,
are under the authority, monitoring and enforcement of FDA. The Federal Trade Commission (FTC) also has joint jurisdiction with
the FDA over food products, per a 1983 Memorandum of Understanding. Thus, all advertising claims - both express and implied - must
be true, accurate, well-substantiated, and not misleading. All websites, print ads, infomercials, exhibit booth materials, testimonials,
and endorsements must be reviewed by the regulatory counsel with both an FDA and an FTC perspective. A company must be careful
re-disseminating “off-label use” materials, i.e., as a drug or a drug alternative.
Enforcement:
Enforcement is post-market, mostly via annual FDA inspections of food facilities - including packaging, distribution
facilities, and fulfillment houses, as well as the manufacturer. (Field Guides for Compliance) But see FDA Warning Letters sent
to Efficas: FDA also gathers material at trade shows/ conferences, and examines websites. FTC has joint jurisdiction, and performs
sophisticated Internet searches, both randomly and at the request of the FDA or of a competitor.
Medical Foods and Pharmaceuticals
Medical foods are distinguished
from the broader category of foods for special dietary use and from foods that make health claims by the requirement that medical
foods be intended to meet distinctive nutritional requirements of a disease or condition, be used under medical supervision and
intended for the specific dietary management of a disease or condition. To be considered a medical food, a product must, at a minimum,
meet the following criteria: the product must be a food for oral or tube feeding; the product must be labeled for the dietary management
of a specific medical disorder, disease or condition for which there are distinctive nutritional requirements; and the product
must be intended to be used under medical supervision (see regulation, above). Additionally, we are licensed by the FDA as a pharmaceutical
re-packager and the Company is permitted to purchase and re-distribute scheduled medications and package and re-label products.
We are subject to periodic inspections of facilities, marketing materials and products by FDA inspectors; these are routine inspections
conducted without prior notice every one or two years
Claims for both medical
foods and drugs must be supported by scientific data or clinical data. Medical foods may also have intrinsic safety obtained through
“generally recognized as safe” (GRAS) status of the ingredients, including the common use of the food or food component
in people. For GRAS/E products that have been used for a material time and extent or under the supervision of a physician the support
for the use can be provided by scientific or clinical data. No premarket approval by FDA is required. By contrast, the safety and
therapeutic claims of a product labeled for a new drug use, i.e., one that is not GRAS/E must be pre-approved by the FDA through
extensive clinical testing in animals and then humans.
Thus, for a medical
food (or, e.g., a GRAS prescription product), the FDA requires scientific data and often human clinical studies to substantiate
claims but preapproval by the Agency to market the product is not required. Claims for both medical foods and drugs must be supported
by solid laboratory and clinical data. Medical foods have intrinsic safety obtained through GRAS status of the ingredients, including
use of the food or food additive in millions of people. By contrast, the safety and therapeutic claims of a product labeled a drug
must be pre-approved by the FDA through extensive clinical testing in animals and then humans.
For a medical food,
the FDA implies that human clinical studies are required, per the FDA’s ANPR (above), and based on the manufacturer’s
and marketer’s responsibility that any health/ medical product be demonstrated to be efficacious before it is marketed and
sold. This is a fundamental principle under both the FDA and the FTC, for all health-related products
Medical foods are administered
and supervised by physicians, allowing a range of existing human studies to be used to support claims. The standard for medical
foods allows use of published science from a variety of sources to support disease and nutritional functional deficiency claims.
Our ingredients and formulas are well-researched and supported by voluminous scientific literature, in-house Monographs, and clinical
trials.
We have followed the
regulatory compliance counsel from the beginning of its research and development on medical foods.
Point-of-Care Dispensing by Physicians
In 44 out of 50 states
in the U.S., physician dispensing of prescription drugs is legal subject to specified regulations. In six other states, there are
restrictions on this practice and, in Utah, the restrictions are severe enough that, in practical terms, physician dispensing is
effectively prohibited altogether. In September of 2010, Utah promulgated rules for revisions of their laws to allow for physician
dispensing of approved drugs. Texas, New York and New Jersey have limitations on the number of units that may be dispensed at any
one time.
Many of the states
allowing physician dispensing for profit have regulations relating to licensure, storage, labeling, record keeping and the degree
of supervision required by the physician over support personnel who assist in the non-judgmental tasks associated with physician
dispensing, such as retrieving medication bottles and affixing labels. We regularly monitor these laws and regulations, in consultation
with legal counsel and the governing agencies, to assist customers in understanding them so that they can materially comply.
Stark II
Congress enacted significant
prohibitions against physician self-referrals in the Omnibus Budget Reconciliation Act of 1993. This law commonly referred to as
“Stark II,” applies to physician dispensing of outpatient prescription drugs that are reimbursable by Medicare or Medicaid.
Stark II, however, includes an exception for the provision of in-office ancillary services, including a physician’s dispensing
of outpatient prescription drugs, provided that the physician meets the requirements of the exception.
Good Manufacturing Practices
The Company is subject
to regulation by and licensure with the FDA, the DEA and various state agencies. Among the regulations applicable to the Company
are the FDA’s “good manufacturing practices.” Medical foods must comply with all applicable requirements for
the manufacture of foods, including the Current Good Manufacturing Practices regulations and Registration of Food Facilities requirements.
Ingredients used in medical foods must be approved food additives or a food additive that is subject to an exemption for investigational
use if the ingredients are not GRAS.
Anti-Kickback Statute and HIPAA Criminal
Laws
We are subject to various
federal and state laws pertaining to health care “fraud and abuse.” The federal Anti-Kickback Statute makes it illegal
for any person, including a pharmaceutical, biologic, or medical device company (or a party acting on its behalf), to knowingly
and willfully solicit, offer, receive or pay any remuneration, directly or indirectly, in exchange for, or to induce, the referral
of business, including the purchase, ordering or prescription of a particular item or service, or arranging for the purchase, ordering,
or prescription of a particular item or service for which payment may be made under federal healthcare programs such as Medicare
and Medicaid. In 1996, under the Health Insurance Portability and Accountability Act (HIPAA), the Anti-Kickback Statute was expanded
to be made applicable to most federal and state-funded health care programs. The definition of “remuneration” has been
broadly interpreted to include any item or service of value, including but not limited to gifts, discounts, the furnishing of free
supplies or equipment, commercially unreasonable credit arrangements, cash payments, waivers of payments or providing anything
at less than its fair market value. Several courts have interpreted the Anti-Kickback Statute’s intent requirement to mean
that if any one purpose of an arrangement involving remuneration is to induce referrals of business reimbursable by a federal healthcare
program, the statute has been violated. Penalties for violations include criminal penalties, civil sanctions and administrative
actions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federally-funded healthcare programs.
In addition, some kickback allegations have been held to violate the federal False Claims Act, which is discussed in more detail
below.
The federal Anti-Kickback
Statute is broad and prohibits many arrangements and practices that may be lawful in businesses outside of the healthcare industry.
Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous and beneficial arrangements, Congress
created several exceptions in the Social Security Act and has authorized the U.S. Department of Health and Human Services (HHS)
to publish regulatory “safe harbors” that exempt certain practices from enforcement action under the Anti-Kickback
Statute prohibitions. For example, there are safe harbors available for certain discounts to purchasers, personal services arrangements
and various other types of arrangements. However, safe harbor protection is only available for transactions that satisfy all of
the narrowly defined safe harbor provisions applicable to the particular remunerative relationship. We seek to comply with such
safe harbors whenever possible. Conduct and business arrangements that do not strictly comply with all the provisions of an applicable
safe harbor, while not necessarily illegal, face an increased risk of scrutiny by government enforcement authorities and an ongoing
risk of prosecution.
In addition, many states
have adopted laws similar to the federal Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients
for healthcare services reimbursed by any third-party payer, not only the Medicare and Medicaid programs or other governmental
payers. At least one state, California, also has adopted a law requiring pharmaceutical companies to implement compliance programs
to prevent and deter conduct that may violate fraud and abuse laws that comply with the voluntary industry guidelines and the Office
of Inspector General (OIG) compliance guidance. While we believe we have structured our business arrangements to comply with these
laws, it is possible that the government could find that such arrangements violate these laws, which could have a material adverse
effect on our business, results of operations and financial condition.
HIPAA created two new
federal crimes: health care fraud and false statements relating to health care matters. The health care fraud statute prohibits
knowingly and willfully executing a scheme to defraud any health care benefit program, including private payers. A violation of
this statute is a felony and may result in fines, imprisonment or exclusion from federal and state health care programs such as
Medicare and Medicaid. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material
fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health
care benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment. Additionally,
HIPAA granted expanded enforcement authority to HHS and the U.S. Department of Justice (DOJ) and provided enhanced resources to
support the activities and responsibilities of the OIG and DOJ by authorizing large increases in funding for investigating fraud
and abuse violations relating to health care delivery and payment.
HIPAA Compliance and Privacy Protection
The Health Insurance
Portability and Accountability Act of 1996 (HIPAA) established for the first time comprehensive federal protection for the privacy
and security of health information. The HIPAA standards apply to three types of organizations, or “Covered Entities:”
health plans, health care clearing houses, and health care providers who conduct certain health care transactions electronically.
Covered Entities must have in place administrative, physical and technical standards to guard against the misuse of individually
identifiable health information. Additionally, some state laws impose privacy protections more stringent than HIPAA’s. There
are also international privacy laws, such as the European Data Directive, that impose restrictions on the access, use, and disclosure
of health information. All of these laws may impact our business. We are a Covered Entity subject to HIPAA privacy and security
standards. Our activities must also comply with other applicable privacy laws. Our failure to comply with these privacy laws or
significant changes in the laws restricting our ability to obtain tissue specimens and associated patient information could significantly
impact our business and our future business plans. We maintain strict procedures and policies to remain compliant with these patient
confidentiality requirements.
HITECH Act
The Health Information
Technology for Economic and Clinical Health (HITECH) Act promotes the adoption and meaningful use of health information technology.
The HITECH Act addresses the privacy and security concerns associated with the electronic transmission of health information, in
part, through several provisions that strengthen the civil and criminal enforcement of the HIPAA rules.
The HITECH Act establishes
four categories of violations that reflect increasing levels of culpability and four corresponding tiers of penalty amounts that
significantly increase the minimum penalty amount of each violation. The maximum penalty amount is $1,500,000 for repeated violations
of the same provision. In addition, the HITECH Act permits the imposition of penalties if the Covered Entity did not know, and
with the exercise of reasonable diligence, would not have known, of the violation. Such violations are now punishable under the
lowest tier of penalties. In addition, the HITECH Act prohibits the imposition of penalties for violations corrected within a 30-day
period so long as those violations were not due to willful neglect.
False Claims Laws
Pursuant to various
federal and state false claims laws, the submission of false or fraudulent claims for payment may lead to civil money penalties,
criminal fines and imprisonment, and/or exclusion from participation in Medicare, Medicaid and other federally funded health care
programs. These false claims statutes include the federal False Claims Act, which allows the federal government or private individuals
to bring suit alleging that an entity or person knowingly submitted (or caused another person or entity to submit or conspired
to submit) a false or fraudulent claim for payment to the federal government or knowingly used (or caused to be used) a false record
or statement to obtain payment from the federal government. The federal False Claims Act may also be violated if a person files
a false statement in order to reduce, avoid, or conceal an obligation to pay money to the federal government, or engages in conduct
that may violate the Anti-Kickback Statute. Several pharmaceutical and medical device companies have settled claims based on the
federal False Claims Act for conduct involving, among other examples, providing free product to purchasers with the exception that
federally-funded health programs would be billed for the product, or instances in which a manufacturer has marketed its product
for unapproved and non-reimbursable purposes. A person who files suit may be able to share in amounts recovered by the government
in connection with such suits. Such suits, known as
qui tam
actions, have increased significantly in recent years and have
increased the risk that a health care company will have to defend a false claims action, enter into settlements that may include
corporate integrity agreements requiring disclosures to the federal government, pay fines or be excluded from the Medicare and/or
Medicaid programs as a result of an investigation arising out of such an action. The scope of the federal false Claims Act was
significantly expanded in both the Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21 (2009), and in the Patient Protection
and Affordable Care Act of 2010, Pub. L. No. 111-148 (2010). In addition, a number of states have enacted similar laws prohibiting
the submission of false or fraudulent claims to a state government. We are not aware of any qui tam actions pending against us.
However, no assurance can be given that such actions may not be filed against us in the future, or that any non-compliance with
such laws would not have a material adverse effect on our business, results of operations and financial condition.
State Regulatory Requirements
Each state has its
own regulations concerning physician dispensing, restrictions on the corporate practice of medicine, anti-kick back and false claim
regulations. In addition, each state has a board of pharmacy that regulates the sale and distribution of drugs and other therapeutic
agents. Some states require that a physician obtain a license to dispense prescription products. When considering the commencement
of business in a new state, we solicit the opinion of healthcare counsel regarding the expansion of operations into that statement
and utilize local counsel when necessary.
Other United States Regulatory Requirements
In the United States,
the research, manufacturing, distribution, sale, and promotion of drug and biological products are subject to regulation by various
federal, state, and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly
the Health Care Financing Administration), other divisions of the United States Department of Health and Human Services (e.g.,
the Office of Inspector General), the United States Department of Justice and individual United States Attorney offices within
the Department of Justice, and state and local governments. Pricing and rebate programs must comply with the Medicaid rebate requirements
of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended. If products are made
available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements
apply. All of these activities are also potentially subject to federal and state consumer protection, unfair competition, and other
laws. In addition, we may be subject to federal and state laws requiring the disclosure of financial arrangements with health care
professionals.
California Board of Pharmacy
We maintain an active
Wholesale Pharmacy License in California. A wholesaler permit is required before any company selling dangerous drugs or devices
for resale or distribution in California may do business in California.
Foreign Regulatory Requirements
We may be subject to
widely varying foreign regulations, which may be quite different from those of the FDA, governing clinical trials, manufacture,
product registration and approval, and pharmaceutical sales. Whether or not FDA approval has been obtained, we must obtain a separate
approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement of product marketing
in these countries. In certain countries, regulatory authorities also establish pricing and reimbursement criteria. The approval
process varies from country to country, and the time may be longer or shorter than that required for FDA approval.
Reimbursement and Pricing Controls
In many of the markets
where we would commercialize a product, the prices of pharmaceutical products are subject, by law, to direct price controls and
to drug reimbursement programs with varying price control mechanisms. Public and private health care payers control costs and influence
drug pricing through a variety of mechanisms, including the setting of reimbursement amounts for drugs and biological products
covered by Medicare Part B based on their Average Sales Prices calculated by manufacturers in accordance with the Medicare Prescription
Drug, Improvement, and Modernization Act, as amended, through negotiating discounts with the manufacturers, and through the use
of tiered formularies and other mechanisms that provide preferential access to certain drugs over others within a therapeutic class.
Payers also set other criteria to govern the uses of a drug that will be deemed medically appropriate and therefore reimbursed
or otherwise covered. In particular, many public and private health care payers limit reimbursement and coverage to the uses of
a drug that are either approved by the FDA or that are supported by other appropriate evidence (for example, published medical
literature) and appear in a recognized drug compendium. Drug compendia are publications that summarize the available medical evidence
for particular drug products and identify which uses of a drug are supported or not supported by the available evidence, whether
or not such uses have been approved by the FDA. For example, in the case of Medicare coverage for physician-administered oncology
drugs, the Omnibus Budget Reconciliation Act of 1993, with certain exceptions, prohibits Medicare carriers from refusing to cover
unapproved uses of an FDA-approved drug if the unapproved use is supported by one or more citations in the American Hospital Formulary
Service Drug Information, the American Medical Association Drug Evaluations, or the United States Pharmacopoeia Drug Information.
Another commonly cited compendium, for example under Medicaid, is the DRUGDEX Information System.
The foregoing description
of laws and regulations affecting health care companies is not meant to be an all-inclusive discussion of aspects of federal and
state fraud and abuse laws that may affect our business, results of operations and financial condition. Health care companies operate
in a complicated regulatory environment. These or other statutory or regulatory initiatives may affect our revenues or operations.
No assurance can be given that our practices, if reviewed, would be found to be in compliance with applicable fraud and abuse laws
(including false claims laws and anti-kickback prohibitions), as such laws ultimately may be interpreted, or that any non-compliance
with such laws or government investigations of alleged non-compliance with such laws would not have a material adverse effect on
our business, results of operations and financial condition.
FDA Warning Letter
On April 8, 2010, the
FDA issued a warning letter to PTL. FDA warning letters are not final FDA actions but are investigative tools used by the agency
to elicit corrective action. A company that receives a warning letter is expected to respond to the FDA by presenting a corrective
plan to address issues raised. The April 8, 2010 warning letter asserted that certain convenience packs appeared to be unapproved
new drugs. The warning letter asserted that convenience packs were intended to diagnose, treat or cure disease and therefore should
be categorized as new drugs. The letter also stated that the convenience packs were not generally recognized as safe and effective
for their intended use and also asserted that the products appeared to be intended for self-administration without medical supervision.
To facilitate discussions with the FDA, we voluntarily stopped providing our physician clients with completed convenience packs.
The Company responded
to the FDA in a letter dated April 26, 2010. In the response, we asserted that our products were medical food convenience packs.
We indicated that the FDA had a long history of recognizing convenience kits and had a published guidance for their use. We indicated
that our convenience packs contain two FDA regulated products - a pharmaceutical and a medical food. Both products are
either approved by the FDA, i.e. the pharmaceutical, or a medical food containing ingredients that are generally recognized and
safe for their intended use, or GRAS. The Company’s plan outlined in the April 26, 2010 letter included a request for a meeting
with the FDA to further clarify their objections.
A meeting was held
on August 3, 2010 in Irvine, CA with FDA representatives from both the Regional Office in California and Washington, D.C. (via
teleconference). An officer from the Prescription Drug Division asserted that it was her position that the medical food alters
the pharmacokinetics of the pharmaceutical contained in the convenience pack (the length of time that the drug remained in the
blood) and, on that basis, asserted that the convenience packs were unapproved new drugs. We presented an 800 page study commissioned
by the FDA in 1982 concluding that amino acids did not alter the pharmacokinetics of drugs. Secondly, the FDA officer presented
a patient package insert that explained to the patient that the medical food could lead to a reduction of the dose of the pharmaceutical
contained in the convenience pack. The Company agreed that the language was inartful. A senior FDA representative then pointed
out that, if the claim was altered to allow the physician to determine the right dose of the drug, reducing, increasing or not
changing usual dose, then the claim would fall under the practice of medicine, which the FDA does not regulate. Finally, the FDA
representative was unaware that we had an FDA approved IND (Investigational New Drug Number) and that under that IND we had been
submitting protocols to the Drug Branch (CDER) of the FDA since 2001. The Company had received several letters from CDER indicating
that our convenience packs were not new drugs. The FDA requested copies of these letters, which were subsequently provided to the
FDA unit responsible for the Warning Letter. The Company agreed that, until a formal response to the meeting was filed, the Company
would not ship convenience packs or components of convenience packs.
The Company formally
responded to the FDA in a letter dated September 13, 2010. In that letter, we summarized the issues presented at the August 3,
2010 meeting. The Company again indicated to the FDA that the agency had a long history of recognizing convenience kits and had
published a formal guidance document that outlined the rules for distribution of convenience kits. The Company reiterated its position
that placing one FDA product in a kit with a second FDA regulated product does not create a new drug as long as one product does
not alter the other and vice versa. More specifically, the Company believes that, with the appropriate labeling and accompanying
instructions to physicians and patients, there is no legal bar to use of a convenience pack for two such products each in full
compliance with all FDA laws and regulations.
We agreed to remove
from our patient materials and promotional materials a claim that the co-administration of our medical foods with the prescription
drug could reduce the dose of the prescription drug. We further agreed to refrain from providing any materials that would promote
any off-label use of a prescription drug, including both indication and dose of the drug. The FDA generally gives a formal response
in writing in 30 days. If the FDA does not respond within 30 days, it is accepted industry practice to operate on the assumption
that the plan has been accepted by the FDA. To date, we have received no response to our September 13, 2010 letter. Accordingly,
the Company began to provide components of the convenience kits in October 2010 to physician clients, who would then assemble the
convenience pack for their patients.
Following the receipt
of the FDA warning letter on April 8, 2010 and to facilitate discussions with the FDA, we voluntarily stopped providing completed
convenience packs. Instead, we supplied the components of the convenience packs to our physician clients and they could dispense
the components packaged together to their patients. We provide our physician clients an appropriately labeled box containing the
medical food product and a package insert. The physician purchases the pharmaceutical and assembles the convenience pack at the
time of dispensing. The
PDRx
system prints the box label and patient instructions. After we stopped assembling convenience-packed
products, sales of individual medical foods and pharmaceutical products rose to make up for the loss of sales of convenience packs
and our overall revenue was not impacted. As of the date of this report, we continue to provide the components of the convenience
packs to our physician clients and they assemble the convenience packs for their patients. We have found that providing the various
components and permitting our physician clients to assemble the convenience packs at the time they are dispensed to the patient
is more convenient and cost effective.
In January 2011, the
FDA Structured Product Labeling, or SPL, division requested a teleconference with the Company. This teleconference was led by the
head of the FDA’s National Drug Code database registration. The FDA SPL division indicated that it had determined to register
the Company’s convenience packs in the National Drug Code database as a Medical Food-Drug Convenience Kit. Subsequently,
the FDA has registered 38 of our convenience kits after careful review of all labels and claims. This official listing can be examined
on the government Web site Daily Med at www.dailymed.com. The information from the National Drug Code database flows through to
all commercial databases such as First DataBank, Medispan and Red Book. Third party payers rely on the information in these commercial
databases when determining reimbursements for pharmaceutical products.
Also in January 2011,
inspectors from the Southwest Regional Office of the FDA inspected Company facilities and reviewed medical food labels without
comment. A formal report will be issued by the agency in four to six months after laboratory analysis of product samples is complete.
No deficiencies in the facility or operations were noted during the inspection. As of February 2012, we have not received a formal
report and no additional inspections have occurred or been scheduled.
Competition
We provide services
in a segment of the healthcare industry that is highly fragmented and extremely competitive. Our actual and potential competitors
in the United States and abroad may include major specialty pharmaceutical, biotechnology, packaged food and medical food companies
such as Nestle Nutrition, PamLab LLC, Primus Pharmaceuticals Inc., Neptune Technologies & Bioresources Inc., Abbot Nutrition
and Accera Inc. Many of our potential competitors have considerably greater financial, technical, marketing, research and other
resources than we do, which may allow these competitors to discover important information and technology before we do. It is anticipated
that competition will continue to increase due to such factors as increased consumer awareness and company publications. Our competitors
may succeed in developing products that circumvent our technologies or product candidates. Also, our competitors may succeed in
developing technologies or products that are more effective than those that will be developed by us or that would render our technology
or product candidates less competitive or obsolete.
In addition, we are
developing our product candidates to complement certain methods for treating various conditions . If those methods change, it is
likely that the demand for our services and product candidates would significantly decline or cease altogether. The development
of new or superior competing technologies or products, or a change in the methodology of treating the ailments that our products
address, could affect our competitive position and harm our business. Moreover, these competitors may offer broader product lines
and have greater name recognition than us and may offer discounts as a competitive tactic.
Additionally, several
development-stage companies are currently making or developing product candidates that compete with or will compete with our potential
products. Competitors may succeed in developing, obtaining approval from the FDA or marketing technologies or products that are
more effective or commercially attractive than our potential products or that render our technologies and current or potential
products obsolete. Competitors may also develop proprietary positions that may prevent us from commercializing product candidates.
We believe that there
are no competitors in medication management that offer a comprehensive solution with ease of use, accessibility, information content
and financial opportunity for physicians comparable to ours, especially the availability of patented medical food and medical food
convenience-packs. In the emerging market for medical food products we have gained a competitive position due to our adherence
to the letter of the statute that requires physician supervision and prohibits sales directly to the consumer. By promoting the
PTL brand to physicians we have been able to establish a presence in the medical community. Our patented products and clinical
trials have validated the clinical utility of medical foods as standalone products as well as an adjunct to pharmaceuticals in
certain specified disease states.
The medical foods
sector is a small part of the greater market for clinical nutrition products worldwide. Because we have strived to abide by and
exceed the legal requirements for medical food marketing we have set ourselves apart from our competitors. We have constituted
an active Medical Advisory Board that consists of practicing physicians well versed in scientific research methods. In addition,
we have employed the services of Dr. Arline MacDonald, a nutrition scientist to write our product monographs. We have also conducted
a series of independent controlled clinical trials to validate the efficacy of our products. The results of two of these trials
have been published in peer reviewed medical journals. We believe that the only other medical food company that has performed this
level of scientific validation is Accera Inc., a company specializing in neurodegenerative diseases that currently markets a single
medical food product.
To our knowledge, there
is no other company in our industry that has created a complete solution for the dispensing, billing and collection of reimbursements
from third party payers for point-of-care dispensed therapeutic agents. We sell medical foods, generic and branded drugs directly
to the physician. The financial opportunity for practicing physicians is created when the physician acts as both the prescriber
and the dispenser of drugs and medical foods. Other providers of these products to physicians depend upon the cash-and-carry model,
where the patient pays for the product at the point of care and there is no insurance billing. By developing a system where we
arrange for a contract between the dispensing physician and the insurance carrier, a mechanism for the patient and the physician
is created to bill for products in the same manner that a pharmacy bills.