October 27, 1998

RECOMMENDATION: BUY

Access Pharmaceuticals, Inc. (OTC: AXCS)

"An Emerging Pharmaceutical Company -- Reduced-Risk Business Model"

SUMMARY INVESTMENT CONSIDERATIONS

Access Pharmaceuticals, Inc. ("AXCS") is an emerging pharmaceutical company developing a portfolio of drugs and advanced drug delivery systems. We characterize AXCS as an emerging pharmaceutical company, rather than a traditional biotech company, as we believe its business model has components that are less risky than the typical one-compound, or one-technology-platform, biotech company. These components include: one FDA-approved product on the market (amlexanox), a unique cancer drug candidate (Polymer Platinate AP5070), one delivery technology (ResiDerm) with multiple products in development and a corporate partner, and a strategy of generating revenues from licensing and royalties, rather than manufacturing in-house. AXCS intends to continue to partner its technology to defray the high costs and spread the risks associated with clinical development of pharmaceuticals, and to take advantage of partners’ expertise in clinical trial progression, manufacturing and marketing. We believe AXCS shares, which currently trade OTC, are undervalued, and we recommend purchase of AXCS common stock by investors tolerant of the risks associated with micro-cap, OTC equity investments. AXCS intends to apply for listing on NASDAQ or AMEX upon meeting listing requirements.

1. Diverse Product and Technology Portfolio

• Amlexanox: AXCS has partnered with Block Drug Company on amlexanox, the only FDA-approved product for the treatment of canker sores. AXCS is actively licensing the product internationally, exploring alternative indications, and developing alternative delivery vehicles that should grow licensing fees and royalty revenues.
• Polymer Platinate AP5070: AXCS is developing Polymer Platinate for the treatment of cancer (current market for platinates exceeds $800 million). Polymer Platinate provides for greater levels of platinum to be delivered to the tumor, for longer periods of time, translating into greater efficacy and lower toxicity.
• ResiDerm: In collaboration with Strakan Ltd., AXCS is developing a zinc-based topical delivery system, which provides for rapid delivery of a drug into the skin, with limited systemic absorption.

2. Lower Risk, High Flexibility Strategy

   • By aggressive out-licensing and partnering, we believe AXCS can accelerate the time-to-market for its products, access manufacturing and marketing expertise of more established partners, while maintaining a lower head-count and managing its cash resources.
   • We believe AXCS offers a lower-risk business model when compared to traditional biotech investments.

3. Compelling Valuation at Current Levels; Potential Acquisition Candidate

• We believe AXCS’ amlexanox program is fairly valued at $5 to $7 per share, or two to three times current price levels; AXCS’ other products and technologies at least double that fair value estimate.
• We believe AXCS’ products and technologies would be extremely attractive to many other biotechnology companies searching to back-fill product pipelines in this very difficult market.

COMPANY BACKGROUND & OVERVIEW

Founded originally in 1974 as Chemex Corporation, the Company changed its name to Chemex Pharmaceuticals in 1983, and became Access Pharmaceuticals, Inc. ("AXCS") as a result of a merger with a company of the same name, in January 1996. In 1998, AXCS raised $5.0 million in a series of three private placements of common stock, and is committed to raising an additional $4.0 million depending upon market conditions. On June 18, 1998, AXCS (in conjunction with the closing of the first private placement), effected a recapitalization through a one-for-twenty reverse stock split. AXCS currently trades OTC, although the Company intends to apply for listing on NASDAQ or AMEX upon meeting listing requirements.

AXCS is building a profitable pharmaceutical company through the development and out-licensing of its drug delivery technology platforms, and the commercialization of its lead product, amlexanox. AXCS uses site-directed targeting and controlled release of therapeutic agents to enhance the clinical effectiveness and reduce the toxicity of a broad range of FDA-approved pharmaceuticals. AXCS has several proprietary platform technologies. Its Bio-Responsive Polymers are novel drug delivery systems that use the biological characteristics of the disease to target sites of the disease activity. Its applications include use in the development of therapeutics and diagnostics. AXCS’ ResiDerm technology is a zinc-based topical delivery system that the Company hopes will be used to improve the efficacy of numerous topically delivered compounds, such as acne treatments, steroids, vitamin D, retinoids and anti-fungals, by enhancing dermal uptake and reducing systemic absorption of the drugs.

CURRENTLY MARKETED PRODUCT – APHTHASOL (AMLEXANOX) & FUTURE APPLICATIONS

Amlexanox 5% Paste

In December 1996, the FDA approved Aphthasol, a 5% amlexanox oral paste, for the treatment of canker sores (aphthous ulcers). Aphthasol is the only FDA-approved product for canker sores currently available in the US, and was jointly developed by AXCS and Block Drug Company under a joint venture agreement. Block Drug purchased the product from AXCS in early 1997, agreeing to pay AXCS royalties on sales. AXCS has subsequently sub-licensed from Block Drug rights to amlexanox 5% paste internationally (excluding Japan and Israel).

Following its December 1997 launch, we estimate that current US sales of Aphthasol are running at about $3.0 million annually. This past June, Block Drug began marketing Aphthasol to a much broader physician base, which we anticipate should increase sales significantly. Our model incorporates very modest royalty revenues in 1999, as AXCS is currently "working-off" pre-paid royalties associated with the sale of the product to Block Drug by Chemex. Royalties from US sales should pick up in 2000. In addition, our model assumes a continued stream of licensing and royalty revenues generated from international activities. The patent on amlexanox 5% paste for the indication of canker sores expires in 2011. The Company is expecting Aphthasol to be sold over the counter to a much broader patient base beginning in 2002.

Further Indications for Amlexanox

AXCS intends to pursue two additional indications for amlexanox: oral lichen planus and mucositis.

Oral Lichen Planus: Lichen planus is a chronic, inflammatory disorder that affects and estimated 0.5 to 2.0% of the general population. It primarily affects women in their 40’s and 50’s and can affect the skin, the oral mucosa (lining of the mouth), or both. According to industry sources, 50% of the patients with skin lesions will have oral involvement, whereas 25% of all patients will have only oral lesions. Complete remissions are rare and there is currently no cure for the disease. Current treatment involves either topical or systemic administration of corticosteroids, vitamin A or cyclosporine, all of which carry undesirable side effects.

AXCS, with the formulations developed through its agreement with ViroTex (see below), is pursuing an amlexanox product in a gel form to treat oral lichen planus. The Company anticipates filing an IND to begin human trials in the US and in the UK in the first quarter of 1999. If all goes well, the Company could receive approval in the UK, Europe and the U.S. in the first half of 2001. It is the Company’s intention to begin licensing product rights out during Phase III trials and post approval. These license agreements will most likely be similar to AXCS’ current agreements on canker sores, and therefore should include upfront and milestone payments and royalties on sales. Our model reflects these assumptions.

Mucositis: Mucositis involves ulceration of the mouth, including the epithelium of the cheeks, lips, soft palate and ventral surface of the tongue. Mucositis is a common complication of chemotherapy (approximately 40% of patients) and virtually all patients who receive radiation therapy to the head and neck develop oral mucositis. Ulcer sizes can vary from a few millimeters in diameter to greater than one centimeter. They not only cause patient discomfort, but can also lead to difficulties in swallowing, nutritional deprivation and can cause therapy to be interrupted. The ulcers can also provide an entry place for bacteria and fungus to enter the patient. Currently, there are no universally accepted treatments for mucositis and treatments that are available are not considered adequate.

Currently Block Drug is developing amelanox for mucositis in a mouthwash formulation under an open IND, with clinical studies to commence shortly. AXCS is exploring alternative formulations of amlexanox for this indication as well. Ideally, the Company hopes to develop the product in a spray formulation, and is anticipating an IND filing in the US and UK during the first half of 1999. We are estimating that amlexanox for mucositis could receive US, UK and European approval during 2001.

ViroTex Agreement: AXCS recently signed a development agreement with ViroTex Corporation of Houston, Texas, a developer of proprietary drug delivery systems that use the skin and mucosa as the primary site of delivery. ViroTex is developing an innovative BEMA delivery system (BioErodible MucoAdhesive), which uses a thin film that adheres to the inside of the mouth and erodes over time, and its MCA gel (MucoCutaneous Absorption) that adheres well to wet or damp skin, and can be adapted to an aerosol spray delivery system. AXCS is funding development of these technologies for use with amlexanox, and anticipates having completed formulations ready for clinical trials within months. Block Drug will have access to any product developed under the AXCS/ViroTex agreement, and will share in the development costs by way of reduction in the royalty AXCS will pay Block for international sales.

POLYMER PLATINATE AP5070 — AXCS’ LEAD CANCER DRUG

In collaboration with the University of London School of Pharmacy, AXCS is developing Polymer Platinate AP5070, a soluble, synthetic polymer conjugate formulation of platinum for first-line treatment of solid tumors. The platinates are one of the most widely used groups of chemotherapeutic agents used in treating solid tumors despite their significantly toxic side effect profiles and observed tumor resistance. Currently only cisplatin, carboplatin and oxaliplatin have been approved for clinical use, however, these treatments alone have created a growing market of over $800 million worldwide.

Growing tumors have physical properties that make them permeable to circulating small particles and large molecules. They also have limited drainage capabilities, allowing molecules to become trapped and concentrated inside the tumors. It has been shown that polymer-drug conjugates can be concentrated in tumor tissue 10 to 100 times higher than would be seen after administration of free drug.

AP5070, a conjugate formulation of platinum, has been rationally designed to reduce drug toxicity and enhance anti-tumor activity with the hope that the conjugate can overcome the development of drug resistance. In animal studies, AP5070 demonstrated improved efficacy over standard cisplatin at the maximum tolerated dose, reduced toxicity over standard cisplatin and enhanced tumor uptake and retention of platinum. More specifically, AP5070 has delivered up to 63 times the amount of platinum to tumors than cisplatin alone and was 2.5 times more effective in inhibiting tumor growth. In addition, up to 15 times more platinum has been administered using AP5070, which could have positive clinical implications given that platinum has a steep dose-response curve.

The Company has applied to the EORTC (the European Organization for Research and Treatment of Cancer) to have AP5070 included in its Phase I/II clinical program. Management expects to initiate clinical studies in Europe in mid-1999, which should continue to the end of 2001. With successful Phase III trials and fast-track approval, we estimate that AXCS could receive FDA and UK approval during the first half of 2002. As with its other programs, AXCS should begin to receive license fees in 2000 as it licenses rights to polymer platinate throughout the world. Our model reflects this, and assumes royalties begin in the second half of 2002.

AXCS’ TOPICAL DELIVERY SYSTEM – RESIDERM

ResiDerm Zinc Delivery System

AXCS is developing ResiDerm as a platform technology to improve the efficacy of topically delivered compounds such as acne treatments, steroids, vitamin D, retanoids and anti-fungals. The technology is based upon a use patent whereby zinc salts are complexed with pharmaceutical agents in a topical vehicle, which creates the "reservoir effect" in the skin. The reservoir effect has the advantages of:

• Increasing the amount of topical active drug that can be absorbed into the skin or membrane, potentially increasing activity and efficacy (in-vitro studies showed that greater than three times more drug was transported into the skin to improve therapy, with no transport through the skin);
• Decreasing the drug transit time into the skin or membrane;
• And reducing systemic absorption of the drug, potentially avoiding undesired side effects.

AXCS and Strakan Ltd. have executed a worldwide license agreement where Strakan will develop the zinc technology into certain topical products. Under the terms of the agreement, Strakan will be responsible for development costs, will make milestone payments (which could commence in 1999), and will pay royalties on worldwide sales. Strakan has trademarked ResiDerm .

Strakan has targeted the following products for development as the highest development priorities:

• ResiDerm with clindamycin phosphate for acne (ResiDerm A)
• ResiDerm with vitamin D for psoriasis (ResiDerm D)
• ResiDerm with retinoic acid for acne and photo-aging

ResiDerm A: Strakan and AXCS are developing ResiDerm A incorporating clindamycin, currently the leading antibiotic for the indication of acne. Strakan is currently expecting to begin Phase II clinical trials in Europe in the fourth quarter of 1998, with Phase III trials beginning in the US and Europe during the second quarter of 1999. ResiDerm A is being formulated as an easy-to-apply gel. Unlike a competitive European product which requires mixing by the pharmacist and has a one-month shelf life, ResiDerm A will be stable as a formulated gel. AXCS believes the benefits attributed to the reservoir effect should enhance the efficacy of clindamycin.

The global anti-acne market is estimated to be approximately $1.1 billion, of which over $600 million is attributed to the US market.

ResiDerm D: Topical vitamin D is currently used to treat psoriasis, and is believed to work by inhibiting abnormal cell proliferation. Current vitamin D preparations are effective in approximately 30% of cases, but can cause local irritation and other side effects with prolonged use (due to systemic absorption). AXCS believes that a ResiDerm product incorporating potent vitamin D could enable higher doses, and be more effective with fewer side effects. Strakan has commenced formulation optimization studies.

AXCS’ CORE DRUG DELIVERY TECHNOLOGIES IN DEVELOPMENT

AXCS’ Bio-Responsive Polymers seek to apply a disease-specific approach to improve the drug delivery process with polymer carrier formulations to enhance the therapeutic effects and reduce the toxicity of a broad range of products. The Company believes that its ability to trigger drug release at the desired site of action could have broad therapeutic applications in cancer, infection, inflammation and certain auto-immune diseases.

In addition to the synthetic soluble drug delivery technology incorporated in the AP5070 polymer platinate compound, which utilizes the "hyperpermeable" vasculature at tumor sites to accumulate drug, AXCS is developing additional polymer systems including:

Carbohydrate Polymer Drug Delivery Technology–During certain disease processes, changes occur in the vascular endothelium. A number of receptors on the endothelium and on underlying tissue recognize certain carbohydrates. AXCS exploits this recognition by using carbohydrate carriers that can facilitate the delivery of certain drugs to very specific sites. The Company believes that its technology has applications in therapeutic areas such as cancer, inflammation and infection.

AXCS is utilizing this technology to develop a site-selective MRI contrast agent to improve site selectivity, longer site contrast, the ability to clearly delineate tumor boundaries and metastases and obtain additional valuable information on prognosis, function, therapeutic response monitoring and anatomy in cancer which could be a major competitive advantage of the technology. Due to AXCS’ current emphasis on amlexanox, polymer platinate and ResiDerm , this is not a development priority at this time.

Condensed Phase Polymer Drug Delivery Technology–This technology approach was recently published in Nature entitled "A Synthetic Mimic of the Secretory Granule." A multi-component drug delivery system has been engineered to mimic nature’s own mechanism for the storage and triggered release of bioactive substances by secretory granules (one of the means by which nature stores and delivers substances in response to specific biological signals). The technology has now been significantly advanced to the point where animal testing using an anticancer agent is planned to commence shortly.

Although it is not reflected in our financial model, we believe these are important assets that offers some upside to AXCS in the future.

SUMMARY OF MILESTONES

Given the number of product programs, clinical trials and licensing/partnering activity on-going, we anticipate a steady stream of news from AXCS over the next 12 months. We have listed a number of the anticipated milestones below, particularly with respect to the polymer platinate, amlexanox and ResiDerm programs.

• Finalize agreement with EORTC for Polymer Platinate AP5070 Phase I/II clinical trials
• Commence Phase II clinical study for ResiDerm A
• Commence Phase I/II clinical study for amlexanox for mucositis indication
• Commence Phase IV clinical study for amlexanox prevention of ulcer formulation

• Commence Phase I clinical study for Polymer Platinate AP5070
• Commence Phase III clinical study for ResiDerm A
• File IND for mucoadhesive spray formulation of amlexanox, and commence Phase II clinical study for mucositis indication
• File IND for additional amlexanox formulations: biogradeable disc and mucoadhesive gel
• Commence Phase II studies for amlexanox for additional indications: oral lichen planus and bioadhesive disc for canker sores
• Additional international license agreements for amlexanox

FINANCIAL INFORMATION AND VALUATION DISCUSSION

With the guidance of AXCS management, which included a review of anticipated product revenues as generated both by the Company and by its licensees, we have generated five-year financial projections (see below). We believe that the license fees and royalty revenue projections are achievable, and are based on conservative revenue targets of its licensees. AXCS is somewhat constrained in its current development activities because of limitations in managerial and financial resources (e.g. not developing the MRI contrast agent product). As such, we believe there is additional upside based on partnering of other products and technologies not fully discussed in this report. We believe our margin assumptions are also achievable. Given its partnering strategy, high operating and net margins should be achievable.

Valuation: We have provided a variety of different valuation methodologies, including discounted cash flow (using EBITDA as a cash flow proxy), terminal P/E multiples, and terminal operating income multiples. Regardless of the valuation methodology, AXCS’ share price appears undervalued at its current level. We believe current fair value to be in the range of $10 to $15 per share based on the amlexanox, polymer platinate and ResiDerm programs alone. Manipulating the model, we have attributed individual values to these programs as well (amlexanox: $5 to $7 per share; polymer platinate: $3 to $5 per share; ResiDerm : $3 to $5 per share), based upon a share base of 5 million shares (assumes additional funding this year, as mentioned above). As the Company is not spending its valuable resources on manufacturing "bricks and mortar," we like AXCS’ ability to adjust R&D and G&A expenditures based upon generation of licensing fees and royalties.

"Why is the current valuation so low?" We believe there are a number of possible reasons, few of which have to do with AXCS’ current product programs or prospects. First, AXCS is a corporate "re-start" which is currently trading OTC. It has no visibility on Wall Street, and given its low stock price and OTC trading, AXCS has no prior research sponsorship and no institutional investor following. Second, after the 1-for-20 reverse stock split, the number of shares outstanding and float are very small. This has the tendency to increase volatility, and the share price has drifted downward over the past two months on very low trading volumes. We believe that the shares can trade upward on very little volume as well, as the AXCS story becomes better known by the investment community.

Earnings Model and Valuation Analyses: click here

MANAGEMENT & SCIENTIFIC ADVISORS

Kerry P. Gray has served as President and Chief Executive Officer of AXCS since its inception in January 1996. Mr. Gray was instrumental in the merger of Chemex with API where he was appointed President and Chief Executive Officer in June, 1993. Before joining API, Mr. Gray held the position of Vice President and Chief Financial Officer of PharmaScience, Inc. a company he co-founded that specializes in the area of drug delivery. Previously, he was Senior Vice President Americas, Australia and New Zealand for Rhone-Poulenc Rorer.

Mr. Stephen B. Thompson has served as Chief Financial Officer of the Company since its inception. From 1990 until January, 1996 he held the position of Controller and Administration Manager of API. Before such time he served as Controller of Robert E. Woolley, Inc.

David P. Nowotnik, Ph.D. is Vice President, Research and Development. Dr. Nowotnik had been with Guilford Pharmaceuticals, Inc. from 1994 and 1998 in the position of Senior Director, Product Development responsible for a team of scientists developing polymeric controlled-release drug delivery systems. From 1988 to 1994 he was with Bristol-Myers Squibb working in the area of discovery of technetium radiopharmaceuticals and MRI contrast agents. From 1977 to 1988 he was with Amersham International leading the project which resulted in the discovery and development of Ceretec.

Scientific Advisors

Stephen B. Howell, M.D. Dr. Howell is a Professor of Medicine at the University of California, San Diego, and Director of the clinical investigation and development of therapeutics program of the UCSD Cancer Center. Dr. Howell is a recipient of the Milken Foundation prize for his contributions to the field of cancer chemotherapy. He also serves on the National Research Council of the American Cancer Society and the editorial boards of several medical journals. Dr. Howell was a founder of DepoTech Corporation and inventor of the intellectual property around which DepoTech was formed.

Charles G. Smith, Ph.D. Dr. Smith is a consultant to the pharmaceutical industry. After having held Senior Research and Development positions with a number of pharmaceutical companies, including being President, Squibb Institute for Medical Research and Vice President, Research and Development, Revlon Health Care Group. He was directly involved or administratively responsible for research and development programs that have led to the marketing of approximately 20 major products. Dr. Smith was also a founder Vanguard Medica Ltd., a UK public biotechnology company.

RISK CONSIDERATIONS

This section of the document is provided to remind potential investors to undertake a prudent level of due diligence prior to making an investment in the securities of Access Pharmaceuticals, Inc. For a complete description of risks and uncertainties to AXCS’ business, see the "Risk Factors" section in AXCS’ SEC filings which can be accessed directly from the SEC Edgar filings at www.SEC.gov on the internet. Other potential risks include:

• Market risk: Like many small-cap and micro-cap stocks, AXCS’ share price is depressed and trading near its 52-week low. Investors should consider technical risks common to many small-cap or micro-cap stock investments and OTC equity investments, including liquidity levels, small float, risk of dilution, dependence on key personnel, dependence on single products or technologies, and the strength of competitors that may be larger, better capitalized and hold dominant market positions.
• Regulatory risk: There is no guarantee that AXCS’ products will be approved by the US FDA or international regulatory bodies for marketing in the US or abroad.
• Competitive risk: The pharmaceutical industry is extremely competitive, in particular because of its large market potential, and many companies are developing treatments for cancer and other areas targeted by AXCS.

FOR ADDITIONAL INFORMATION

Contact SmallCaps Online LLC — 212-554-4158

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SOURCES FOR ADDITIONAL INFORMATION

The following are website addresses offering related information, and links to other sources of information.

www.SmallCapsOnline.com SmallCaps Online’s site for company information and research

www.FDA.gov US Food and Drug Administration homepage

www.Cancernet.nci.nig.gov National Institute of Cancer homepage

www.aacr.org American Association for Cancer Research homepage

www.WHO.int World Health Organization homepage

www.AMA-Assn.org American Medical Association homepage

www.SEC.gov U.S. Securities and Exchange Commission, with links to EDGAR filings

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