10-Q 1 acrx20200331_10q.htm FORM 10-Q acrx20200331_10q.htm
 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549
 



FORM 10-Q

 


 

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended March 31, 2020

 

or

 

 TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from              to

 

Commission File Number: 001-35068
 


 

ACELRX PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)
 


 

Delaware

41-2193603

(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)

 

351 Galveston Drive

Redwood City, CA 94063

(650) 216-3500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Securities registered pursuant to Section 12(b) of the Act:

     

Title of Each Class:

Trading symbol(s)

Name of Each Exchange on Which registered:

Common Stock, $0.001 par value

ACRX

The Nasdaq Global Market

     

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer

Accelerated filer

       

Non-accelerated filer

☐ 

Smaller reporting company

       

Emerging growth company

   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)    Yes  ☐    No  ☒

 

As of May 7, 2020, the number of outstanding shares of the registrant’s common stock was 80,763,751.

 



 

1

 

 

ACELRX PHARMACEUTICALS, INC.

 

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2020

 

Table of Contents

 

     

Page

 

Part I. Financial Information

    5  
           

Item 1.

Financial Statements

    5  
           
 

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 (unaudited)

    5  
           
 

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2020 and 2019 (unaudited)

    6  
           
 

Condensed Consolidated Statements of Stockholders’ Deficit for the three months ended March 31, 2020 and 2019 (unaudited)

    7  
           
 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)

    8  
           
 

Notes to Condensed Consolidated Financial Statements (unaudited)

    9  
           

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    21  
           

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

    30  
           

Item 4.

Controls and Procedures

    30  
           

Part II. OTHER Information

    30  
           

Item 1.

Legal Proceedings

    30  
           

Item 1A.

Risk Factors

    30  
           

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

    62  
           

Item 3.

Defaults Upon Senior Securities

    62  
           

Item 4.

Mine Safety Disclosures

    62  
           

Item 5.

Other Information

    62  
           

Item 6.

Exhibits

    63  

 

Unless the context indicates otherwise, the terms “AcelRx,” “AcelRx Pharmaceuticals,” “we,” “us” and “our” refer to AcelRx Pharmaceuticals, Inc. “DSUVIA”, “ACELRX” and “Zalviso” are registered trademarks, all owned by AcelRx Pharmaceuticals, Inc. This report also contains trademarks and trade names that are the property of their respective owners.

 

2

 

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, or Form 10-Q, contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by that section. The forward-looking statements in this Form 10-Q are contained principally under “Part I. Financial Information - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II. Other Information - Item 1A. Risk Factors”. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:

 

 

failure to satisfy the required conditions and otherwise complete our planned acquisition of Tetraphase Pharmaceuticals, Inc., or Tetraphase, pursuant to the Agreement and Plan of Merger, or merger agreement, on a timely basis or at all;

 

 

the expected benefits and potential value created by the proposed merger and co-promotion agreement with Tetraphase for our stockholders, including the ownership percentage of our stockholders in the combined organization immediately following the consummation of the proposed merger;

 

 

legal proceedings relating to the proposed merger with Tetraphase and the outcome of such legal proceedings;

 

 

the inherent risks, costs and uncertainties associated with integrating the businesses in the proposed merger with Tetraphase successfully and risks of not achieving all or any of the anticipated benefits of the proposed merger with Tetraphase, or the risk that the anticipated benefits of the proposed acquisition may not be fully realized or take longer to realize than expected;

 

 

our estimates regarding the sufficiency of our cash resources, expenses, including those related to the consummation of the proposed acquisition, capital requirements and needs for additional financing, and our ability to obtain additional financing.

 

 

the uncertainties and impact arising from the worldwide COVID-19 pandemic, including restrictions on the ability of our sales force to contact and communicate with target customers and resulting delays and challenges to our commercial sales of DSUVIA;

 

 

our success in commercializing DSUVIA® (sufentanil sublingual tablet, 30 mcg) in the United States, including the marketing, sales, and distribution of the product;

 

 

the size and growth potential of the markets for DSUVIA, and Zalviso, if approved in the United States, and our ability to serve those markets;

 

 

our ability to maintain regulatory approval of DSUVIA in the United States, including effective management of and compliance with the DSUVIA Risk Evaluation and Mitigation Strategies, or REMS, program;

 

 

acceptance of DSUVIA by physicians, patients and the healthcare community, including the acceptance of pricing and placement of DSUVIA on payers’ formularies;

 

 

the integration and performance of any businesses we acquire;

 

 

our ability to develop sales and marketing capabilities in a timely fashion, whether alone through recruiting qualified employees, by engaging a contract sales organization, or with potential future collaborators;

 

 

successfully establishing and maintaining commercial manufacturing with third parties;

 

 

our ability to manage effectively, and the impact of any costs associated with, potential governmental investigations, inquiries, regulatory actions or lawsuits that may be brought against us;

 

 

continued demonstration of an acceptable safety profile of DSUVIA;

 

 

effectively competing with other medications for the treatment of moderate-to-severe acute pain in medically supervised settings, including IV-opioids and any subsequently approved products;

 

 

our ability to maintain regulatory approval of DZUVEO™ in the European Union or EU, and enter into a collaboration agreement with a strategic partner for the commercialization of DZUVEO in Europe;

 

 

our ability to manufacture and supply DZUVEO in Europe to any future strategic partner;

 

3

 

 

our ability to manufacture and supply Zalviso to Grünenthal GmbH, or Grünenthal, in accordance with their forecast and the Manufacture and Supply Agreement with Grünenthal;

 

 

the status of the Collaboration and License Agreement with Grünenthal or any other future potential collaborations, including potential milestones and royalty payments under the Grünenthal agreement and obligations under the Purchase and Sale Agreement with PDL BioPharma, Inc., or PDL;

 

 

our ability to successfully execute the pathway towards a resubmission of the Zalviso® (sufentanil sublingual tablet system) New Drug Application, or NDA, and subsequently obtain and maintain regulatory approval of Zalviso in the United States and comply with any related restrictions, limitations, and/or warnings in the label of Zalviso, if approved;

 

 

the outcome of any potential FDA Advisory Committee meeting held for Zalviso;

 

 

our ability to successfully commercialize Zalviso, if approved in the United States;

 

 

the rate and degree of market acceptance of Zalviso, if approved in the United States;

 

 

our ability to obtain adequate government or third-party payer reimbursement;

 

 

our ability to attract additional collaborators with development, regulatory and commercialization expertise;

 

 

our ability to successfully retain our key commercial, scientific, engineering, medical or management personnel and hire new personnel as needed;

 

 

regulatory developments in the United States and foreign countries;

 

 

the performance of our third-party suppliers and manufacturers, including any supply chain impacts or work limitations resulting from shelter-in-place orders related to COVID-19;

 

 

the success of competing therapies that are or become available;

 

 

the accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;

 

 

our liquidity and capital resources; and

 

 

our ability to obtain and maintain intellectual property protection for DSUVIA/DZUVEO and Zalviso.

 

In addition, you should refer to “Part II. Other Information - Item 1A. Risk Factors” in this Form 10-Q for a discussion of these and other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

4

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

AcelRx Pharmaceuticals, Inc.

 

Condensed Consolidated Balance Sheets

(In thousands, except share data)

   

March 31, 2020

(Unaudited)

   

December 31,
201
9(1)

 

Assets

               

Current Assets:

               

Cash and cash equivalents

  $ 23,886     $ 14,684  

Short-term investments

    28,839       51,453  

Accounts receivable, net

    567       432  

Inventories, net

    3,099       3,295  

Prepaid expenses and other current assets

    1,654       1,824  

Total current assets

    58,045       71,688  

Operating lease right-of-use assets

    3,722       3,928  

Property and equipment, net

    14,670       14,552  

Other assets

    902       1,188  

Total Assets

  $ 77,339     $ 91,356  

Liabilities and Stockholders’ Deficit

               

Current Liabilities:

               

Accounts payable

  $ 3,248     $ 1,720  

Accrued liabilities

    4,122       5,528  

Long-term debt, current portion

    6,611       4,630  

Deferred revenue, current portion

    411       411  

Operating lease liabilities, current portion

    1,008       970  

Liability related to the sale of future royalties, current portion

    321       352  

Total current liabilities

    15,721       13,611  

Long-term debt, net of current portion

    19,133       20,517  

Deferred revenue, net of current portion

    2,754       2,833  

Operating lease liabilities, net of current portion

    3,421       3,640  

Liability related to the sale of future royalties, net of current portion

    90,792       91,683  

Other long-term liabilities

    799       490  

Total liabilities

    132,620       132,774  

Commitments and Contingencies

               

Stockholders’ Deficit:

               

Common stock, $0.001 par value—200,000,000 shares authorized as of March 31, 2020 and December 31, 2019; 80,415,751 and 79,573,101 shares issued and outstanding as of March 31, 2020 and December 31, 2019

    80       79  

Additional paid-in capital

    358,670       356,609  

Accumulated deficit

    (414,031 )     (398,106 )

Total stockholders’ deficit

    (55,281 )     (41,418 )

Total Liabilities and Stockholders’ Deficit

  $ 77,339     $ 91,356  

 

(1) The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited financial statements as of that date included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

See notes to condensed consolidated financial statements.

 

5

 

 

AcelRx Pharmaceuticals, Inc.

 

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

  

   

Three Months Ended
March 31,

 
   

2020

   

2019

 

Revenue:

               

Product sales

  $ 274     $ 126  

Contract and other collaboration

    112       139  

Total revenue

    386       265  

Operating costs and expenses:

               

Cost of goods sold

    1,511       1,230  

Research and development

    1,412       1,377  

Selling, general and administrative

    13,311       9,976  

Total operating costs and expenses

    16,234       12,583  

Loss from operations

    (15,848 )     (12,318 )

Other expense:

               

Interest expense

    (855 )     (376 )

Interest income and other (expense) income, net

    (65 )     627  

Non-cash interest income (expense) on liability related to future sale of royalties

    843       (1,607 )

Total other expense

    (77 )     (1,356 )

Net loss

  $ (15,925 )   $ (13,674 )

Comprehensive loss

  $ (15,925 )   $ (13,674 )

Net loss per share of common stock, basic and diluted

  $ (0.20 )   $ (0.17 )

Shares used in computing net loss per share of common stock, basic and diluted – See Note 12

    80,057,405       78,788,790  

 

See notes to condensed consolidated financial statements.  

 

6

 

 

AcelRx Pharmaceuticals, Inc.

 

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity

(Unaudited)

(in thousands, except share data)

 

   

Common Stock

   

Additional
Paid-in
Capital

   

Accumulated
Deficit

   


Total
Stockholders’
Equity (Deficit)

 
   

Shares

   

Amount

                         

Balance as of December 31, 2019

    79,573,101     $ 79     $ 356,609     $ (398,106 )   $ (41,418 )

Stock-based compensation

                1,146             1,146  

Restricted stock units vested

    216,399                          

Tax payments related to shares withheld for restricted stock units vested

                (86 )           (86 )

Net proceeds from issuance of common stock in connection with equity financings

    431,800       1       783             784  

Issuance of common stock upon ESPP purchase

    194,451             218             218  

Net loss

                      (15,925 )     (15,925 )

Balance as of March 31, 2020

    80,415,751     $ 80     $ 358,670     $ (414,031 )   $ (55,281 )

 

 

 

   

Common Stock

   

Additional
Paid-in
Capital

   

Accumulated
Deficit

   


Total
Stockholders’
Equity (Deficit)

 
   

Shares

   

Amount

                         

Balance as of December 31, 2018

    78,757,930     $ 78     $ 349,194     $ (345,019 )   $ 4,253  

Cumulative effect adjustment for adoption of ASU No. 2016-02

                      153       153  

Stock-based compensation

                1,107             1,107  

Issuance of common stock upon exercise of stock options

    13,583             31             31  

Issuance of common stock upon ESPP purchase

    85,135       1       238             239  

Net loss

                      (13,674 )     (13,674 )

Balance as of March 31, 2019

    78,856,648     $ 79     $ 350,570     $ (358,540 )   $ (7,891 )

 

See notes to condensed consolidated financial statements.

 

7

 

 

AcelRx Pharmaceuticals, Inc.

 

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)  

   

Three Months
Ended March 31,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net loss

  $ (15,925 )   $ (13,674 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Non-cash royalty revenue related to royalty monetization

    (84 )     (79 )

Non-cash interest (income) expense on liability related to royalty monetization

    (843 )     1,607  

Depreciation and amortization

    487       328  

Non-cash interest expense related to debt financing

    271       99  

Stock-based compensation

    1,146       1,107  

Other

    111       (150 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (135 )     (172 )

Inventories

    88       (1,549 )

Prepaid expenses and other assets

    461       (1,315 )

Accounts payable

    1,528       1,477  

Accrued liabilities

    (1,209 )     (809 )

Operating lease liabilities

    (181 )     (153 )

Deferred revenue

    (79 )     43  

Net cash used in operating activities

    (14,364 )     (13,240 )

Cash flows from investing activities:

               

Purchase of property and equipment

    (73 )     (658 )

Purchase of investments

    (12,757 )     (3,871 )

Proceeds from maturities of investments

    35,480       4,900  

Net cash provided by investing activities

    22,650       371  

Cash flows from financing activities:

               

Payment of long-term debt

          (2,064 )

Net proceeds from issuance of common stock in connection with equity financings

    784        

Net proceeds from issuance of common stock through equity plans

    218       270  

Payment of employee tax obligations related to vesting of restricted stock units

    (86 )      

Net cash provided by (used in) financing activities

    916       (1,794 )

Net increase (decrease) in cash and cash equivalents

    9,202       (14,663 )

Cash and cash equivalents—Beginning of period

    14,684       87,975  

Cash and cash equivalents—End of period

  $ 23,886     $ 73,312  

 

See notes to condensed consolidated financial statements.  

 

8

 

AcelRx Pharmaceuticals, Inc.

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except where otherwise noted)

 

 

 

1. Organization and Summary of Significant Accounting Policies

 

The Company

 

AcelRx Pharmaceuticals, Inc., or the Company or AcelRx, was incorporated in Delaware on July 13, 2005 as SuRx, Inc., and in January 2006, the Company changed its name to AcelRx Pharmaceuticals, Inc. The Company’s operations are based in Redwood City, California.

 

AcelRx is a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings. DSUVIA® (known as DZUVEO in Europe) and Zalviso®, are both focused on the treatment of acute pain, and each utilize sufentanil, delivered via a non-invasive route of sublingual administration, exclusively for use in medically supervised settings. On November 2, 2018, the U.S. Food and Drug Administration, or FDA, approved DSUVIA for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. The commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. In June 2018, the European Commission, or EC, granted marketing approval of DZUVEO for the treatment of patients with moderate-to-severe acute pain in medically monitored settings. AcelRx is further developing a distribution capability and commercial organization to continue to market and sell DSUVIA in the United States. In geographies where AcelRx decides not to commercialize products by itself, the Company may seek to out-license commercialization rights. The Company currently intends to commercialize and promote DSUVIA/DZUVEO outside the United States with one or more strategic partners, although it has not yet entered into any such arrangement. The timing of the resubmission of the Zalviso new drug application, or NDA, is in part dependent upon the finalization of the FDA’s new opioid approval guidelines and process. AcelRx intends to seek regulatory approval for Zalviso in the United States and, if successful, potentially promote Zalviso either by itself or with strategic partners. Zalviso is approved in Europe and is currently being commercialized by Grünenthal GmbH, or Grünenthal.

 

DSUVIA/DZUVEO

 

DSUVIA, known as DZUVEO in Europe, approved by the FDA in November 2018 and approved by the EC in June 2018, is indicated for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. DSUVIA was designed to provide rapid analgesia via a non-invasive route and to eliminate dosing errors associated with IV administration. DSUVIA is a single-strength solid dosage form administered sublingually via a single-dose applicator, or SDA, by healthcare professionals. Sufentanil is an opioid analgesic currently marketed for intravenous, or IV, and epidural anesthesia and analgesia. The sufentanil pharmacokinetic profile when delivered sublingually avoids the high peak plasma levels and short duration of action observed with IV administration.

 

DSUVIA was approved with a Risk Evaluation and Mitigation Strategy, or REMS, which restricts distribution to certified medically supervised healthcare settings in order to prevent respiratory depression resulting from accidental exposure. DSUVIA is only distributed to facilities certified in the DSUVIA REMS program following attestation by an authorized representative to comply with appropriate dispensing and use restrictions of DSUVIA. To become certified, a healthcare setting is required to train their healthcare professionals on the proper use of DSUVIA and have the ability to manage respiratory depression. DSUVIA is not available in retail pharmacies or for outpatient use. As part of the REMS program, the Company monitors distribution and audits wholesalers’ data, evaluates proper usage within the healthcare settings and monitors for any diversion and abuse. AcelRx will de-certify healthcare settings that are non-compliant with the REMS program.

 

Zalviso

 

Zalviso delivers 15 mcg sufentanil sublingually through a non-invasive delivery route via a pre-programmed, patient-controlled analgesia, or PCA, system. Zalviso is approved in Europe and is in late-stage development in the United States. The Company had initially submitted to the FDA an NDA seeking approval for Zalviso in September 2013 but received a complete response letter, or CRL, on July 25, 2014. Subsequently, the FDA requested an additional clinical study, IAP312, designed to evaluate the effectiveness of changes made to the functionality and usability of the Zalviso device and to take into account comments from the FDA on the study protocol. In the IAP312 study, for which top-line results were announced in August 2017, Zalviso met safety, satisfaction and device usability expectations. These results will supplement the three Phase 3 trials already completed in the Zalviso NDA resubmission.

 

9

 

On December 16, 2013, AcelRx and Grünenthal entered into a Collaboration and License Agreement, or the License Agreement, which was amended effective July 17, 2015 and September 20, 2016, or the Amended License Agreement, which grants Grünenthal rights to commercialize the Zalviso PCA system, or the Product, in the 28 European Union, or EU, member states, at the time of the agreement, plus Switzerland, Liechtenstein, Iceland, Norway and Australia (collectively, the Territory) for human use in pain treatment within, or dispensed by, hospitals, hospices, nursing homes and other medically supervised settings, (collectively, the Field). In September 2015, the EC approved the marketing authorization application, or MAA, previously submitted to the EMA, for Zalviso for the management of acute moderate-to-severe post-operative pain in adult patients. On December 16, 2013, AcelRx and Grünenthal, entered into a Manufacture and Supply Agreement, or the MSA, and together with the License Agreement, the Agreements. Under the MSA, the Company will exclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. On July 22, 2015, the Company and Grünenthal amended the MSA, or the Amended MSA, effective as of July 17, 2015. The Amended MSA and the Amended License Agreement are referred to as the Amended Agreements.

 

Proposed Acquisition of Tetraphase Pharmaceuticals, Inc.

 

On March 15, 2020, the Company entered into the Agreement and Plan of Merger with Tetraphase Pharmaceuticals, Inc., or Tetraphase, and Consolidated Merger Sub, Inc., a Delaware corporation and indirect wholly-owned subsidiary of the Company, or Merger Sub. Pursuant to the merger agreement, (i) each share of Tetraphase common stock issued and outstanding immediately prior to the effective time of the merger will automatically be converted into the right to receive 0.6303 shares of the Company’s common stock, subject to certain adjustments pursuant to the terms of the merger agreement, and a contingent value right, or CVR, that could provide up to an additional aggregate $12.5 million to Tetraphase stockholders upon the achievement of net sales of XERAVA™ within the applicable timeframes, and any cash payable in lieu of fractional shares; and (ii) Merger Sub will merge with and into Tetraphase, with Tetraphase continuing as the surviving entity and a wholly-owned subsidiary of the Company. The merger agreement also provides that (i) each option to purchase Tetraphase common stock, whether vested or unvested, will terminate at the closing, (ii) each unvested (a) restricted stock unit representing the right to vest in and be issued shares of Tetraphase common stock that vests in whole or in part contingent upon the attainment of one or more performance goals, or Company PRSU, and (b) each restricted stock unit representing the right to vest in and be issued shares of Tetraphase common stock that is not a Company PRSU shall vest in full and (iii) each warrant to purchase shares of Tetraphase common stock shall be treated in accordance with its terms, or as modified in any voting agreement or exchange agreement entered into with an applicable holder of such warrant. The closing of the merger is expected following the special meeting of the stockholders of Tetraphase expected to be held on June 8, 2020.

 

The Company estimates that, upon completion of the merger, AcelRx shareholders will own approximately 85.4% of the combined company, and Tetraphase shareholders and certain other Tetraphase equityholders will own approximately 14.6% on a fully diluted basis.

 

Co-Promotion Agreement

 

On March 15, 2020, the Company entered into the Co-Promotion Agreement with Tetraphase to co-promote DSUVIA and Tetraphases’s XERAVA™ (eravacycline), which is FDA approved for the treatment of complicated intra-abdominal infections. Under the terms of this agreement, each company is responsible for maintaining compliance under the agreed marketing and promotion plan and achieving a minimum number of sales calls for each product. Either party can terminate the agreement with 15 months written notice. In the event of a change of control, or CoC, of either party, the CoC party will be subject to meeting certain performance standards, and if these performance standards are not met, then a royalty of 10% of net sales on the CoC party’s product will be payable to the non-CoC party until the end of the agreement. The non-CoC party will also be able to solicit the employees of the CoC party in the event of a change of control and have the right to terminate the agreement with one month’s written notice. There were no material revenues or expenses related to the Co-Promotion Agreement in the three months ended March 31, 2020.

 

The Company has incurred recurring operating losses and negative cash flows from operating activities since inception. Although Zalviso was approved for sale in Europe on September 18, 2015, the Company sold the majority of the royalty rights and certain commercial sales milestones it is entitled to receive under the Amended License Agreement with Grünenthal to PDL BioPharma, Inc., or PDL, in a transaction referred to as the Royalty Monetization. The FDA approved DSUVIA in November 2018 and the Company began its commercial launch of DSUVIA in the first quarter of 2019. As a result, the Company expects to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.

 

Except as the context otherwise requires, when we refer to "we," "our," "us," the "Company" or "AcelRx" in this document, we mean AcelRx Pharmaceuticals, Inc., and its consolidated subsidiary. “DZUVEO” is a trademark, and “ACELRX”, “DSUVIA” and “Zalviso” are registered trademarks, all owned by AcelRx Pharmaceuticals, Inc. This report also contains trademarks and trade names that are the property of their respective owners.

 

10

 

Principles of Consolidation

 

The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, ARPI LLC, which was formed in September 2015 for the sole purpose of facilitating the Royalty Monetization. All intercompany accounts and transactions have been eliminated in consolidation. Refer to Note 7 “Liability Related to Sale of Future Royalties” for additional information.

 

Reclassifications

 

Certain prior year amounts in the Condensed Consolidated Financial Statements have been reclassified to conform to the current year's presentation.

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the United States. Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

 

Operating results for the three months ended March 31, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The Condensed Consolidated Balance Sheet as of December 31, 2019, was derived from the Company’s audited financial statements as of December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the SEC. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which includes a broader discussion of the Company’s business and the risks inherent therein.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Management evaluates its estimates on an ongoing basis including critical accounting policies. Estimates are based on historical experience and on various other market-specific and other relevant assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

 

Restructuring Costs

 

The Company's restructuring costs consist of employee termination benefit costs. Liabilities for costs associated with the cost reduction plan are recognized when the liability is incurred and are measured at fair value. One-time termination benefits are expensed at the date the Company notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period.

 

On March 16, 2020, in connection with entering into the Co-Promotion Agreement, the Company initiated a reduction in headcount, designed to eliminate the overlap with the Tetraphase commercial team in order to more efficiently commercialize DSUVIA alongside the Tetraphase commercial team and reduce operating expenses. The Company eliminated 30 positions, primarily within the commercial organization. For the three months ended March 31, 2020, the Company incurred $0.5 million in employee termination benefits related to this restructuring, $0.2 million of which remained unpaid at March 31, 2020.

 

The headcount reduction was completed in the first quarter of 2020. No additional expenses are anticipated in connection with this cost reduction plan.

 

Significant Accounting Policies

 

The Company’s significant accounting policies are detailed in its Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes to the Company’s significant accounting policies during the three months ended March 31, 2020, from those previously disclosed in its 2019 Annual Report on Form 10-K.

 

Recently Issued Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments,” or ASU 2016-13. ASU 2016-13 replaces the incurred loss impairment model in current GAAP with a model that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for the Company beginning January 1, 2023, with early adoption allowed beginning January 1, 2020. In May 2019, the FASB issued ASU 2019-05, “Financial Instruments – Credit Losses”, or ASU 2019-05, to allow entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. The new effective dates and transition align with those of ASU 2016-13. Management is currently assessing the date of adoption and the impact ASU 2016-13 and ASU 2019-05 will have on the Company, but it does not anticipate adoption of these new standards to have a material impact on the Company’s financial position, results of operations and cash flows.

 

11

 

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating its contracts and the optional expedients provided by the new standard.

 

 

2. Investments and Fair Value Measurement

 

Investments

 

The Company classifies its marketable securities as available-for-sale and records its investments at fair value. Available-for-sale securities are carried at estimated fair value based on quoted market prices or observable market inputs of almost identical assets, with the unrealized holding gains and losses included in accumulated other comprehensive income (loss). Marketable securities which have maturities beyond one year as of the end of the reporting period are classified as non-current.

 

The table below summarizes the Company’s cash, cash equivalents and investments (in thousands):

 

   

As of March 31, 2020

 
   

Amortized Cost

   

Gross Unrealized
Gains

   

Gross Unrealized
Losses

   

Fair
Value

 

Cash and cash equivalents:

                               

Cash

  $ 3,188     $     $     $ 3,188  

Money market funds

    16,102                   16,102  

Commercial paper

    4,596                   4,596  

Total cash and cash equivalents

    23,886                   23,886  
                                 

Short-term investments:

                               

U.S. government agency securities

    2,008                   2,008  

Commercial paper

    25,155                   25,155  

Corporate debt securities

    1,676                   1,676  

Total short-term investments

    28,839                   28,839  

Total cash, cash equivalents and short-term investments

  $ 52,725     $     $     $ 52,725  

 

 

   

As of December 31, 2019

 
   

Amortized Cost

   

Gross Unrealized
Gains

   

Gross Unrealized
Losses

   

Fair
Value

 

Cash and cash equivalents:

                               

Cash

  $ 1,957     $     $     $ 1,957  

Money market funds

    598                   598  

Commercial paper

    12,129                   12,129  

Total cash and cash equivalents

    14,684                   14,684  
                                 

Short-term investments:

                               

U.S. government agency securities

    14,268                   14,268  

Commercial paper

    27,131                   27,131  

Corporate debt securities

    10,054                   10,054  

Total short-term investments

    51,453                   51,453  

Total cash, cash equivalents and short-term investments

  $ 66,137     $     $     $ 66,137  

 

12

 

As of March 31, 2020 and December 31, 2019, none of the available-for-sale securities held by the Company had material unrealized losses. There were no other-than-temporary impairments for these securities at March 31, 2020 or December 31, 2019. No gross realized gains or losses were recognized on the available-for-sale securities and, accordingly, there were no amounts reclassified out of accumulated other comprehensive income (loss) to earnings during the three months ended March 31, 2020 and March 31, 2019.

 

As of March 31, 2020 and December 31, 2019, the contractual maturity of all investments held was less than one year.

 

Fair Value Measurement

 

The Company’s financial instruments consist of Level I and II assets and Level III liabilities. Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. For Level II instruments, the Company estimates fair value by utilizing third party pricing services in developing fair value measurements where fair value is based on valuation methodologies such as models using observable market inputs, including benchmark yields, reported trades, broker/dealer quotes, bids, offers and other reference data. Such Level II instruments typically include U.S. treasury, U.S. government agency securities and commercial paper. As of March 31, 2020, and December 31, 2019, the Company held, in addition to Level II assets, a contingent put option liability associated with the Loan Agreement with Oxford. See Note 5 “Long-Term Debt” for further description. The Company’s estimate of fair value of the contingent put option liability was determined by using a risk-neutral valuation model, wherein the fair value of the underlying debt facility is estimated both with and without the presence of the default provisions, holding all other assumptions constant. The resulting difference between the two estimated fair values is the estimated fair value of the default provisions, or the contingent put option, which is included under other long-term liabilities on the Condensed Consolidated Balance Sheets. Changes to the estimated fair value of this liability is recorded in interest income and other income (expense), net in the Condensed Consolidated Statements of Comprehensive Loss. The fair value of the underlying debt facility is estimated by calculating the expected cash flows in consideration of an estimated probability of default and expected recovery rate in default and discounting such cash flows back to the reporting date using a risk-free rate.

 

The following table sets forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy (in thousands):

 

   

As of March 31, 2020

 
   

Fair Value

   

Level I

   

Level II

   

Level III

 

Assets

                               

Money market funds

  $ 16,102     $ 16,102     $     $  

U.S. government agency securities

    2,008             2,008        

Commercial paper

    29,751             29,751        

Corporate debt securities

    1,676             1,676        

Total assets measured at fair value

  $ 49,537     $ 16,102     $ 33,435     $  

Liabilities

                               

Contingent put option liability

  $ 746     $     $     $ 746  

Total liabilities measured at fair value

  $ 746     $     $     $ 746  

 

13

 

   

As of December 31, 2019

 
   

Fair Value

   

Level I

   

Level II

   

Level III

 

Assets

                               

Money market funds

  $ 598     $ 598     $     $  

U.S. government agency securities

    14,268             14,268        

Commercial paper

    39,260             39,260        

Corporate debt securities

    10,054             10,054        

Total assets measured at fair value

  $ 64,180     $ 598     $ 63,582     $  

Liabilities

                               

Contingent put option liability

  $ 437     $     $     $ 437  

Total liabilities measured at fair value

  $ 437     $     $     $ 437  

 

The following tables set forth a summary of the changes in the fair value of the Company’s Level III financial liabilities for the three months ended March 31, 2020 and March 31, 2019 (in thousands):

 

   

Three Months
Ended
March 31, 2020

 

Fair value—beginning of period

  $ 437  

Change in fair value of contingent put option associated with the Loan Agreement

    309  

Fair value—end of period

  $ 746  

 

   

Three Months
Ended
March 31, 2019

 

Fair value—beginning of period

  $ 121  

Change in fair value of contingent put option associated with the Prior Agreement with Hercules (see Note 5)

    (23 )

Fair value—end of period

  $ 98  

 

 

3. Inventories, net

 

Inventories consist of raw materials, work in process and finished goods and are stated at the lower of cost or net realizable value and consist of the following (in thousands):

 

   

Balance as of

 
   

March 31, 2020

   

December 31, 2019

 

Raw materials

  $ 1,146     $ 1,153  

Work-in-process

          593  

Finished goods

    1,953       1,549  

Total

  $ 3,099     $ 3,295  

 

During the three months ended March 31, 2020, the Company recorded an inventory impairment charge of $0.1 million, primarily related to DSUVIA inventory that may expire before being sold.

 

14

 

 

4. Revenue from Contracts with Customers

 

The following table summarizes revenue from contracts with customers for the three months ended March 31, 2020 and 2019 into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors (in thousands):

   

Three Months Ended March 31,

 
   

2020

   

2019

 

Product sales:

               

DSUVIA

  $ 155     $ 47  

Zalviso

    119       79  

Total product sales

    274       126  

Contract and other collaboration:

               

Non-cash royalty revenue related to Royalty Monetization (See Note 7)

    84       85  

Royalty revenue

    28       26  

Other revenue

          28  

Total revenues from contract and other collaboration

    112       139  

Total revenue

  $ 386     $ 265  

 

For additional details on the Company’s accounting policy regarding revenue recognition, refer to Note 1 “Organization and Summary of Significant Accounting Policies - Revenue from Contracts with Customers” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

Product Sales

 

The Company’s commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. Zalviso is sold in Europe by the Company’s collaboration partner, Grünenthal.

 

Contract and Other Collaboration

 

Amended License Agreement

 

Under the Amended License Agreement with Grünenthal, the Company is eligible to receive approximately $194.5 million in additional milestone payments, based upon successful regulatory and product development efforts ($28.5 million) and net sales target achievements ($166.0 million). Grünenthal will also make tiered royalty and supply and trademark fee payments in the mid-teens up to the mid-twenties percent range, depending on the level of sales achieved, on net sales of Zalviso. A portion of the tiered royalty payment, exclusive of the supply and trademark fee payments, will be paid to PDL BioPharma, Inc. or PDL, in connection with the Royalty Monetization. For additional information on the Royalty Monetization with PDL, see Note 7 “Liability Related to Sale of Future Royalties”. Unless earlier terminated, the Amended License Agreement continues in effect until the expiration of the obligation of Grünenthal to make royalty and supply and trademark fee payments, which supply and trademark fee continues for so long as the Company continues to supply the Product to Grünenthal. The Amended License Agreement is subject to earlier termination in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party, upon the bankruptcy or insolvency of either party, or by Grünenthal for convenience.

 

Amended MSA

 

Under the terms of the Amended MSA with Grünenthal, the Company will manufacture and supply the Product for use in the Field for the Territory exclusively for Grünenthal. The Product will be supplied at prices approximating the Company’s manufacturing cost, subject to certain caps, as defined in the MSA Amendment. The MSA Amendment requires the Company to use commercially reasonable efforts to enter stand-by contracts with third parties providing significant supply and manufacturing services and, under certain specified conditions, permits Grünenthal to use a third-party back-up manufacturer to manufacture the Product for Grünenthal’s commercial sale in the Territory.

 

15

 

The Amended Agreements entitle the Company to receive up to $28.5 million in milestone payments upon the achievement of certain regulatory and product development milestones which relate to post approval product enhancements, expanded market opportunities and manufacturing efficiencies for Zalviso and require future research, development and regulatory activities. These milestone payments are excluded from the transaction price as they are considered payments for optional additional services that Grünenthal may elect in the future. When these services are elected, they will be considered as a new contract under ASC Topic 606 and will not impact the revenue recognition of the performance obligations identified under Amended Agreements.

 

The Amended Agreements also include milestone payments related to specified net sales targets, totaling $166.0 million. These payments are considered sales-based license royalties under ASC Topic 606 and will be recognized apart from the other contract consideration when the related sales occur.

 

The Company recognizes revenue from license rights when the customer can use and benefit from the license rights. The Company recognizes revenue from its services performance obligations over time using a cost-to-cost input method which best represents the incremental benefit that the customer receives as control is transferred.

 

Contract Liability

 

At March 31, 2020, approximately $3.1 million of deferred revenue, $0.3 million of which represented the current portion, was attributable to the significant and incremental discount on Zalviso manufacturing services for Grünenthal under the Amended Agreements. This deferred revenue is being recognized on a straight-line basis over the period such discount is made available to Grünenthal, which is estimated to continue through 2029.

 

The following table presents changes in the Company’s contract liability for the three months ended March 31, 2020 (in thousands):

 

   

Balance at Beginning

of the Period

   

Additions

   

Deductions

   

Balance at

the end

of the Period

 

Contract liability:

                               

Deferred revenue – Amended Agreements

  $ 3,148     $     $ (79 )   $ 3,069  

Deferred revenue – Other

    96                   96  

Deferred revenue

  $ 3,244     $     $ (79 )   $ 3,165  

 

For the three months ended March 31, 2020 and 2019, the Company recognized the following revenue from performance obligations satisfied (in thousands):

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 

Amounts included in contract liabilities at the beginning of the period:

               

Performance obligations satisfied – Amended Agreements

  $ 79     $ 79  

New activities in the period from performance obligations satisfied:

               

Performance obligations satisfied – Amended Agreements

    40       28  

Total revenue from performance obligations satisfied

  $ 119     $ 107  

 

 

5. Long-Term Debt

 

Prior Agreement with Hercules

 

On March 2, 2017, the Company entered into an Amended and Restated Loan and Security Agreement with Hercules Capital Funding Trust 2014-1 and Hercules Technology II, L.P., or Hercules, or the Prior Agreement. On May 30, 2019, the Company used approximately $8.9 million of the proceeds from the Loan Agreement with Oxford (described below) to repay its outstanding obligations under the Prior Agreement, including the outstanding principal plus accrued interest of $7.4 million, and the End of Term Fee of $1.3 million. The Company accounted for the termination of the Prior Agreement as a debt extinguishment and, accordingly, incurred a loss of approximately $0.2 million associated with the unamortized End of Term Fee.

 

Interest expense related to the Prior Agreement was $0.4 million, $0.1 million of which represented amortization of the debt discount, for the three months ended March 31, 2019.

 

Loan Agreement with Oxford

 

On May 30, 2019, the Company entered into the Loan Agreement with Oxford Finance LLC, or Oxford, as the Lender. Under the Loan Agreement, the Lender made a term loan to the Company in an aggregate principal amount of $25.0 million, or the Loan, which was funded on May 30, 2019. The Company used approximately $8.9 million of the proceeds from the Loan to repay its outstanding obligations under the Prior Agreement, as described above. After deducting all loan initiation costs and outstanding interest on the Prior Agreement, the Company received $15.9 million in net proceeds.

 

16

 

In connection with the Loan Agreement, on May 30, 2019, the Company issued warrants to the Lender and its affiliates, or the Warrants, which are exercisable for an aggregate of 176,679 shares of the Company’s common stock with a per share exercise price of $2.83. The Warrants have been classified within stockholders’ deficit and accounted for as a discount to the loan by allocating the gross proceeds on a relative fair value basis. For further discussion, see Note 9 “Warrants”.

 

Interest expense related to the Loan Agreement was $0.8 million, $0.2 million of which represented amortization of the debt discount, for the three months ended March 31, 2020.

 

Non-Interest Bearing Payments for the Construction of Leasehold Improvements

 

In August 2019, the Company entered into a Site Readiness Agreement, or SRA, with Catalent Pharma Solutions, LLC, or Catalent, in contemplation of entering into a commercial supply agreement for its product DSUVIA at a future date. Under the SRA, the Company is building out a suite within Catalent’s production facility in Kansas City. If additional equipment and facility modifications are required to meet the Company’s product needs, the Company may be required to contribute to the cost of such additional equipment and facility modifications. The Company has determined that it is the owner of the leasehold improvements related to the build-out which will be paid for in four installments of $0.5 million through July 2022. The leasehold improvements are recorded as property and equipment, net, in our Condensed Consolidated Balance Sheets. As of March 31, 2020, $1.7 million of these leasehold improvements have been capitalized. The total obligation under the SRA is $2.0 million all of which has been incurred as of March 31, 2020. The effective interest rate related to the payments at March 31, 2020 was 14.35%.

 

 

6. Leases

 

The Company leases office and laboratory space for its corporate headquarters, located at 301 – 351 Galveston Drive, Redwood City, California, and has entered into an agreement to sublease approximately 47% of this office and laboratory space. In addition, the Company has entered into an agreement for commercial supply manufacturing services related to the Company’s Zalviso drug product with a contract manufacturing organization, which it accounts for as an operating lease.

 

The components of lease expense are presented in the following table (in thousands):

 

   

Three Months
Ended
March 31, 20
20

 

Operating lease costs

  $ 340  

Sublease income

    (150 )

Net lease costs

  $ 190  

 

The weighted average remaining lease term and discount rate related to the operating leases are presented in the following table:

 

    March 31, 2020  

Weighted-average remaining term – operating lease (in years)

    3.83  

Weighted-average discount rate – operating lease

    11.72 %

 

Future minimum lease payments as of March 31, 2020 are presented in the following table (in thousands):

 

Year:

       

2020 (remaining nine months)

  $ 953  

2021

    1,305  

2022

    1,345  

2023

    1,386  

2024

    116  

Total future minimum lease payments

    5,105  

Less imputed interest

    (676 )

Total

  $ 4,429  

 

17

 

Reported as:

Operating lease liabilities

  $ 1,008  

Operating lease liabilities, net of current portion

    3,421  

Total lease liability

  $ 4,429  

 

Cash paid for amounts included in the measurement of lease liabilities included $0.3 million in operating cash flows used for operating leases.

 

Future minimum sublease payments as of March 31, 2020 are presented in the following table (in thousands):

 

Year:

       

2020 (remaining nine months)

  $ 446  

2021

    610  

2022

    629  

2023

    648  

2024

    54  

Total future minimum sublease payments

  $ 2,387  

 

The rent receivable balance is reported in the balance sheet as follows (in thousands):

 

Reported as:

Prepaid expenses and other current assets

  $ 82  

Other assets

    331  

Total rent receivable

  $ 413  

 

 

7. Liability Related to Sale of Future Royalties

 

In September 2015, the Company entered into the Royalty Monetization with PDL for which it received gross proceeds of $65.0 million. Under the Royalty Monetization, PDL will receive 75% of the European royalties under the Amended License Agreement with Grünenthal, as well as 80% of the first four commercial milestones worth $35.6 million (or 80% of $44.5 million), up to a capped amount of $195.0 million over the life of the arrangement.

 

The Company periodically assesses the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than the Company’s initial estimates or the timing of such payments is materially different than its original estimates, the Company will prospectively adjust the amortization of the liability and the effective interest rate. During the three months ended June 30, 2019, the Company made a material revision to its estimates which resulted in an interest income rate on the Royalty Monetization liability balance at a prospective average rate of approximately 4.2%, which will be applied over the remaining term of the agreement. The change in estimate of future payments to PDL was a result of lower projected European royalties and milestones from sales of Zalviso over the life of the liability. The change in estimate results in interest income being recognized prospectively, over the remaining term of the agreement, as the estimated expected payments are less than the $65.0 million in gross proceeds received. The Company currently estimates that future payments to PDL over the remaining life of the arrangement will be approximately $20 million, therefore, a contingent gain of approximately $45 million may be recognized when it is realized upon expiration of the liability at the end of the Royalty Monetization term. Due to the significant judgments and factors related to the estimates of future payments under the Royalty Monetization arrangement, there are significant uncertainties surrounding the amount and timing of payments and the probability of realization of the estimated contingent gain.

 

The change in estimate reduced the effective interest rate over the life of the liability to 0% by recording interest income over the remaining term of the arrangement as an offset to the interest expense that was recognized in prior periods. The effective interest income rate for the three months ended March 31, 2020 was approximately 4.0%, while the effective interest expense rate for the three months ended March 31, 2019 was approximately 7.0%.

 

18

 

The following table shows the activity within the liability account for the three months ended and the period from inception to March 31, 2020 (in thousands):

 

   

Three months ended
March 31, 20
20

   

Period from
inception to
March 31, 2020

 

Liability related to sale of future royalties — beginning balance

  $ 92,035     $  

Proceeds from sale of future royalties

          61,184  

Non-cash royalty revenue

    (79

)

    (763

)

Non-cash interest (income) expense recognized

    (843

)

    30,692  

Liability related to sale of future royalties as of March 31, 2020

    91,113       91,113  

Less: current portion

    (321

)

    (321

)

Liability related to sale of future royalties — net of current portion

  $ 90,792     $ 90,792  

 

As royalties are remitted to PDL from ARPI LLC, as described in Note 1 “Organization and Summary of Significant Accounting Policies - Non-Cash Interest Income (Expense) on Liability Related to Sale of Future Royalties” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the balance of the liability will be effectively repaid over the life of the agreement. The Company will record non-cash royalty revenues and non-cash interest expense within its Condensed Consolidated Statements of Comprehensive Loss over the term of the Royalty Monetization.

 

 

8. Legal Proceedings

 

As of May 8, 2020, ten lawsuits have been filed by alleged Tetraphase stockholders challenging the merger. The first lawsuit, a putative class action complaint, is captioned Plumley v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-00496, and was filed by Patrick Plumley in the United States District Court for the District of Delaware. The Plumley complaint names as defendants Tetraphase and each member of the Tetraphase Board, as well as AcelRx and Merger Sub.  The second lawsuit is captioned Sahan v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-03069, and was filed by Herman Sahan in the United States District Court for the Southern District of New York.  The Sahan complaint names as defendants Tetraphase and certain members of the Tetraphase Board.  The third lawsuit is captioned Giacobbe v. Tetraphase Pharmaceuticals, Inc. et al., Case No. 1:20-cv-10762, and was filed by Charles Giacobbe in the United States District Court for the District of Massachusetts.  The Giacobbe complaint names as defendants Tetraphase and each member of the Tetraphase Board.  The fourth lawsuit is captioned Ravi v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-03142, and was filed by Surya Ravi in the United States District Court for the Southern District of New York.  The Ravi complaint names as defendants Tetraphase and each member of the Tetraphase Board.  The fifth lawsuit, a putative class action complaint, is captioned Garity v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-00542, and was filed by Edward Garity in the United States District Court for the District of Delaware. The Garity complaint names as defendants Tetraphase and each member of the Tetraphase Board, as well as AcelRx and Merger Sub.  The sixth lawsuit, a putative class action complaint, is captioned Kashavena v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 2081-cv-01005, and was filed by Vanamala Kashavena in the Middlesex County Superior Court.  The Kashavena complaint names as defendants Tetraphase and certain members of the Tetraphase Board, as well as AcelRx and Merger Sub.  The seventh lawsuit is captioned Waters v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-01896, and was filed by Joshua Waters in the United States District Court for the Eastern District of New York.  The Waters complaint names as defendants Tetraphase and each member of the Tetraphase Board.  The eighth lawsuit is captioned Gardner v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-03352, and was filed by James Gardner in the United States District Court for the Southern District of New York.  The Gardner complaint names as defendants Tetraphase and certain members of the Tetraphase Board. The ninth lawsuit is captioned Kopczynski v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-03426, and was filed by Christopher Kopczynski in the United States District Court for the Southern District of New York.  The Kopczynski complaint names as defendants Tetraphase and certain members of the Tetraphase Board.  The tenth lawsuit is captioned Lapi v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-03452, and was filed by Nisjet Lapi in the United States District Court for the Southern District of New York.  The Lapi complaint names as defendants Tetraphase and certain members of the Tetraphase Board. 

 

The Plumley, Sahan, Giacobbe, Ravi, Garity, Waters, Gardner, Kopczynski and Lapi complaints allege violations of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The plaintiffs in these actions generally allege that the registration statement on Form S-4 omits material information with respect to the proposed transaction, which renders such registration statement false and misleading. The Sahan complaint also alleges that the defendants breached their fiduciary duty of candor/disclosure, by allegedly disseminating a materially incomplete and misleading registration statement in connection with the merger.  The Kashavena complaint alleges that the members of the Tetraphase Board breached their fiduciary duties of care, loyalty/good faith and candor/disclosure by allegedly entering into the merger through a flawed and unfair process and disseminating a materially incomplete and misleading registration statement in connection with the merger.  The Kashavena complaint alleges that Tetraphase, AcelRx and Merger Sub aided and abetted in the alleged breach of fiduciary duties.

 

The complaints seek preliminary and permanent injunction of the proposed transaction and, if the merger is consummated, rescission or rescissory damages. The complaints also seek the dissemination of a registration statement that discloses certain information requested by the plaintiffs. In addition, the complaints seek attorneys’ and experts’ fees.

 

The defendants believe that the Plumley, Sahan, Giacobbe, Ravi, Garity, Kashavena, Waters, Gardner, Kopczynski and Lapi complaints are without merit.

 

With respect to each of the matters described above in this Legal Proceedings section, the Company is currently unable to predict the ultimate outcome of these matters or reasonably estimate a possible loss or range of loss, and thus, no amounts have been accrued in the condensed consolidated financial statements.

 

 

 

9. Warrants

 

Loan Agreement Warrants

 

In connection with the Loan Agreement, on May 30, 2019, the Company issued warrants to the Lender and its affiliates, which are exercisable for an aggregate of 176,679 shares of the Company’s common stock with a per share exercise price of $2.83, or the Warrants. As of March 31, 2020, warrants to purchase 176,679 shares of common stock issued to the Lender and its affiliates had not been exercised and were still outstanding. These warrants expire in May 2029.

 

19

 

 

10. Stock-Based Compensation

 

The Company recorded total stock-based compensation expense for stock options, stock awards and the 2011 Employee Stock Purchase Plan, or ESPP, as follows (in thousands):

 

   

Three Months Ended
March 31,

 
   

2020

   

2019

 

Cost of goods sold

  $ 46     $ 61  

Research and development

    200       224  

Selling, general and administrative

    900       822  

Total

  $ 1,146     $ 1,107  

 

As of March 31, 2020, there were 3,220,641 shares available for grant, 13,831,842 options outstanding and 1,451,952 restricted stock units outstanding under the Company’s 2011 Equity Incentive Plan and 2,052,431 shares available for grant under the ESPP.

 

 

11. Stockholders’ Equity

 

Common Stock

 

ATM Agreement 

 

The Company has entered into a Controlled Equity OfferingSM Sales Agreement, or the ATM Agreement, with Cantor Fitzgerald & Co., or Cantor, as agent, pursuant to which the Company may offer and sell, from time to time through Cantor, shares of the Company’s common stock having an aggregate offering price of up to $40.0 million. On May 9, 2019, the Company increased the aggregate offering price of shares of the Company’s common stock which may be offered and sold under the ATM Agreement by $40.0 million, for a total of $80.0 million.

 

During the three months ended March 31, 2020, the Company issued and sold 431,800 shares of common stock pursuant to the ATM Agreement, for which the Company received net proceeds of approximately $0.8 million. As of March 31, 2020, the Company has the ability to sell $44.5 million of the Company’s common stock under the ATM Agreement.

 

 

12. Net Loss per Share of Common Stock

 

The Company’s basic net loss per share of common stock is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding for the period. The diluted net loss per share of common stock is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, options to purchase common stock, restricted stock units, or RSUs, and warrants to purchase common stock were considered to be common stock equivalents. In periods with a reported net loss, common stock equivalents are excluded from the calculation of diluted net loss per share of common stock if their effect is antidilutive.

 

The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive:  

 

   

March 31,

 
   

2020

   

2019

 

ESPP, RSUs and stock options to purchase common stock

    15,630,340       13,983,586  

Common stock warrants

    176,679        

 

 

13.  Subsequent Events

 

On May 6, 2020, Tetraphase announced that it had received a proposal from La Jolla Pharmaceutical Company (“La Jolla”) to acquire Tetraphase for $22 million in cash, plus an additional $12.5 million in cash potentially payable under contingent value rights to be issued in the transaction (the “La Jolla Proposal”). On May 8, 2020, Tetraphase announced that its board of directors (the “Tetraphase Board”) had determined the La Jolla Proposal constitutes or could reasonably be expected to lead to a Superior Offer as defined in the AcelRx Merger Agreement. Accordingly, in accordance with the AcelRx Merger Agreement, the Tetraphase Board determined to consider the La Jolla Proposal, to enter into discussions and/or negotiations with respect to the La Jolla Proposal and, subject to La Jolla entering into an acceptable confidentiality agreement, to furnish non-public information to La Jolla. In that May 8, 2020 announcement, Tetraphase confirmed that Tetraphase (1) continues to recommend the AcelRx Merger Agreement with AcelRx to its stockholders, (2) is not modifying or withdrawing its recommendation with respect to the AcelRx Merger Agreement and the merger, or proposing to do so, and (3) is not making any recommendation with respect to the La Jolla Proposal. 

 

20

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited Consolidated Financial Statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2019, or Annual Report.

 

About AcelRx Pharmaceuticals, Inc.

 

We are a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings.

 

Our Portfolio

 

The following table summarizes our portfolio.

 

Product

 

Description

 

Target Use

 

Status

DSUVIA® 

 

Sufentanil sublingual tablet, 30 mcg

 

Moderate-to-severe acute pain in a medically supervised setting, administered by a healthcare professional

 

Received FDA approval in November 2018, commercial launch began first quarter of 2019.

 

             

DZUVEO

 

Sufentanil sublingual tablet, 30 mcg

 

Moderate-to-severe acute pain in a medically supervised setting, administered by a healthcare professional

 

Received European Commission, or EC, approval in June 2018.

 

             

Zalviso®

 

Sufentanil sublingual tablet system, 15 mcg

 

Moderate-to-severe acute pain in the hospital setting, administered by the patient as needed

 

In the U.S., positive results from Phase 3 trial, IAP312, announced in August 2017. Currently evaluating the timing of the resubmission of the NDA, which is in part dependent on the finalization of the FDA’s new opioid approval guidelines and process.

 

Approved in the European Union and marketed commercially by Grünenthal.

 

Proposed Acquisition of Tetraphase Pharmaceuticals, Inc.

 

On March 15, 2020, we entered into the Agreement and Plan of Merger, or merger agreement,  with Tetraphase Pharmaceuticals, Inc., or Tetraphase, and Consolidation Merger Sub, Inc., a Delaware corporation and indirect wholly-owned subsidiary of the Company, or Merger Sub, pursuant to which we will acquire Tetraphase. Pursuant to the merger agreement, each share of Tetraphase common stock issued and outstanding immediately prior to the effective time of the merger will automatically be converted into the right to receive 0.6303  shares of the Company’s common stock, subject to certain adjustments pursuant to the terms of the merger agreement, and a contingent value right for additional consideration to be paid to the then former securityholders of Tetraphase upon the achievement of certain sales milestones. The merger agreement also provides that (i) each option to purchase Tetraphase common stock, whether vested or unvested, will terminate at the closing, (ii) each unvested (a) restricted stock unit representing the right to vest in and be issued shares of Tetraphase common stock that vests in whole or in part contingent upon the attainment of one or more performance goals, or Company PRSU, and (b) each restricted stock unit representing the right to vest in and be issued shares of Tetraphase common stock that is not a Company PRSU shall vest in full and (iii) each warrant to purchase shares of Tetraphase common stock shall be treated in accordance with its terms, or as modified in any voting agreement or exchange agreement entered into with an applicable holder of such warrant.

 

The closing of the merger is expected following the special meeting of the stockholders of Tetraphase expected to be held on June 8, 2020, subject to customary closing conditions. For additional information regarding the Acquisition of Tetraphase Pharmaceuticals, Inc., see Note 1 “Organization and Summary of Significant Accounting Policies” in the accompanying notes to the Condensed Consolidated Financial Statements.

 

On May 6, 2020, Tetraphase announced that it had received a proposal from La Jolla Pharmaceutical Company, or La Jolla, to acquire Tetraphase for $22 million in cash, plus an additional $12.5 million in cash potentially payable under contingent value rights to be issued in the transaction, or the La Jolla Proposal. On May 8, 2020, Tetraphase announced that its board of directors, or the Tetraphase Board, had determined the La Jolla Proposal constitutes or could reasonably be expected to lead to a Superior Offer as defined in the AcelRx Merger Agreement. Accordingly, in accordance with the AcelRx Merger Agreement, the Tetraphase Board determined to consider the La Jolla Proposal, to enter into discussions and/or negotiations with respect to the La Jolla Proposal and, subject to La Jolla entering into an acceptable confidentiality agreement, to furnish non-public information to La Jolla. In that May 8, 2020 announcement, Tetraphase confirmed that Tetraphase (1) continues to recommend the AcelRx Merger Agreement with AcelRx to its stockholders, (2) is not modifying or withdrawing its recommendation with respect to the AcelRx Merger Agreement and the merger, or proposing to do so, and (3) is not making any recommendation with respect to the La Jolla Proposal.

 

21

 

Co-Promotion Agreement

 

On March 15, 2020, we entered into the Co-Promotion Agreement with Tetraphase to co-promote DSUVIA and Tetraphases’s XERAVA™ (eravacycline), which is FDA approved for the treatment of complicated intra-abdominal infections. Under the terms of this agreement, each company is responsible for maintaining compliance under the agreed marketing and promotion plan and achieving a minimum number of sales calls for each product. On March 16, 2020, in connection with entering into the Co-Promotion Agreement, we initiated a reduction in headcount, designed to eliminate the overlap with the Tetraphase commercial team in order to more efficiently commercialize DSUVIA alongside the Tetraphase commercial team and reduce operating expenses. We have eliminated 30 positions, mainly within the commercial organization. For additional information regarding the Co-Promotion Agreement and related Restructuring Costs see Note 1 “Organization and Summary of Significant Accounting Policies” in the accompanying notes to the Condensed Consolidated Financial Statements.

 

General Trends and Outlook

 

COVID-19-related

 

Government-mandated shelter-in-place orders and related safety policies on account of the COVID-19 pandemic are preventing us from operating our business in the normal course. In March and April of 2020, health officers of six counties in the San Francisco Bay Area of California (where our corporate office is based and many of our employees reside) issued orders requiring all non-essential businesses to cease all activities at facilities within the counties. The governor of the state of California also issued an executive order requiring all residents to shelter in place except as needed to maintain continuity of operation of critical infrastructure. As a result of these orders, we implemented a work from home policy for our California-based employees. Each state government has communicated separate but similar orders and policies to which we are adhering. In addition, hospitals, ambulatory surgery centers and other healthcare facilities have barred visitors that are not caregivers or mission-critical, and we have no visibility as to when these restrictions on access will be lifted. As a result, the educational and promotional efforts of our commercial and medical affairs personnel have been substantially reduced, and in some cases, stopped. We expect our near-term sales volumes to be adversely impacted as long as access to healthcare facilities by our commercial and medical affairs personnel continues to be limited. As a result, we also anticipate our operating expenses during this period to be lower than expected, primarily due to reduced travel, educational and promotional activities by our commercial and medical affairs teams. We will continue to evaluate the impact on our revenues and related metrics and operating expenses during this period and assess the need to adjust our expenses and expectations.

 

We have heard from a number of hospital customers and government representatives, and also read numerous media reports about a severe shortage of intravenous sedatives and analgesics, namely fentanyl, which we understand is directly and indirectly attributable to the COVID-19 situation. We remain in discussions with these potential customers as to how AcelRx, and specifically DSUVIA, can support this crisis and the patients requiring appropriate care. In addition, in response to a shortage of intravenous fentanyl and other IV opioids during the COVID-19 pandemic, AcelRx began outreach efforts to health care settings to inform them of how DSUVIA may help with these shortages.

 

One Zalviso supplier was unable to perform certain services as planned, given government orders impacting their business, and as a result, this supplier provided us with a force majeure notice. We, in turn, provided a force majeure notice to Grünenthal under our Amended MSA. At this time, we believe this halt in production will not have a significant impact on our financial results, but we continue to work with our suppliers and Grünenthal to manage Zalviso production activities.

 

As a result of international travel restrictions, the timing for testing and acceptance of our high-volume packaging line has been delayed. Based on available information, we project that the line will be installed in 2020 and qualification completed in 2021.

 

We will continue to engage with various elements of our supply chain and distribution channel, including our customers, contract manufacturers, and logistics and transportation providers, to meet demand for products and to remain informed of any challenges within our supply chain. We continue to monitor demand, and intend to adapt our plans as needed to continue to drive our business and meet our obligations during the evolving COVID-19 pandemic. However, if the COVID-19 pandemic continues and persists for an extended period of time, we may face disruptions to our supply chain and operations, and associated delays in the manufacturing and supply of our products. Such supply disruptions may adversely impact our ability to generate sales of and revenues from our products and our business, financial condition, results of operations and growth prospects could be adversely affected.

 

As the global pandemic of COVID-19 continues to rapidly evolve, it could result in a significant long-term disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. The extent to which the COVID-19 pandemic impacts our business, our ability to generate sales of and revenues from our approved products, and our future clinical development and regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, quarantines and social distancing requirements in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the virus.

 

22

 

Department of Defense

 

In April 2020, DSUVIA achieved Milestone C approval by the Department of Defense, a decision that clears the path for the Department of Defense to begin placing orders for DSUVIA.

 

Financial Overview

 

We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue commercialization activities to support the U.S. launch of DSUVIA, support Grünenthal’s European sales of Zalviso and any future research and development activities needed to support the U.S. approval of Zalviso, once the NDA is resubmitted. As a result, we expect to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.

 

We will incur capital expenditures related to the installation of our high-volume automated packaging line for DSUVIA, from which we expect to have qualified product being packaged beginning in 2021. We anticipate that the high-volume line for DSUVIA will contribute to a significant decrease in costs of goods sold in 2022 and beyond.

 

Our net loss for the three months ended March 31, 2020 was $15.9 million , compared to a net loss of $13.7 million for the three months ended March 31, 2019. As of March 31, 2020, we had an accumulated deficit of $414.0 million. As of March 31, 2020, we had cash, cash equivalents and short-term investments totaling $52.7 million compared to $66.1 million as of December 31, 2019.

 

Critical Accounting Estimates

 

The accompanying discussion and analysis of our financial condition and results of operations are based upon our unaudited Condensed Consolidated Financial Statements and the related disclosures, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our critical accounting policies and estimates are detailed in our Annual Report.

 

There have been no significant changes to our critical accounting policies or significant judgements and estimates for the three months ended March 31, 2020, from those previously disclosed in our Annual Report.

 

Results of Operations

 

Our results of operations have fluctuated from period to period and may continue to fluctuate in the future, based upon the progress of our commercial launch of DSUVIA, our research and development efforts, variations in the level of expenditures related to commercial launch and development efforts during any given period, and the uncertainty as to the extent and magnitude of the impact from the COVID-19 pandemic . Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results. In particular, the shelter-in-place orders related to the COVID-19 pandemic were implemented on March 16, 2020, just two weeks prior to the end of the first quarter of 2020. Accordingly, the first quarter of 2020 should not be viewed as indicative of future operating results expected in the remaining quarters of 2020 or beyond. To the extent our commercial and medical affairs personnel continue to be restricted from accessing hospitals and ambulatory surgical centers, and to the extent healthcare providers are continuing to limit elective surgeries, we expect our sales volume to be adversely affected.

 

23

 

Three Months Ended March 31, 2020 and 2019

 

Revenue

 

Product Sales Revenue

 

The Company’s product sales revenue consists of sales of DSUVIA in the U.S. and Zalviso in Europe.

 

Product sales revenue by product for the three months ended March 31, 2020 and 2019 was as follows:

 

   

Three Months Ended

                 
   

March 31,

   

$ Change

   

% Change

 
   

2020

   

2019

   

2020 vs. 2019

   

2020 vs. 2019

 

DSUVIA

  $ 155     $ 47     $ 108       230

%

Zalviso

    119       79       40       51

%

Total product sales revenue

  $ 274     $ 126     $ 148       117

%

 

The increase in DSUVIA product sales revenue for the three months ended March 31, 2020, as compared to the prior year period, is due to the ramp of the commercial launch of DSUVIA in the United States, which began in the first quarter of 2019.

 

The increase in Zalviso product sales revenue for the three months ended March 31, 2020, as compared to the prior year period, was primarily the result of increased orders from Grünenthal.

 

As of March 31, 2020, we had current and non-current portions of the deferred revenue balance under the Amended Agreements with Grünenthal of $0.3 million and $2.8 million, respectively. The estimated margin we expect to receive on transfer prices under the Amended Agreements was deemed to be a significant and incremental discount on manufacturing services, as compared to market rates for contract manufacturing margin. The original value assigned to this portion of the total allocated consideration was $4.4 million. We anticipate that the deferred revenue balance will decline on a straight-line basis through 2029, as we recognize product sales revenue under the Amended Agreements.

 

Contract and Other Collaboration Revenue

 

Contract and other collaboration revenue includes revenue under the Amended Agreements related to research and development services, non-cash royalty revenue related to the Royalty Monetization and royalty revenue for sales of Zalviso in Europe.

 

Contract and other collaboration revenue for the three months ended March 31, 2020 and 2019 was as follows (in thousands):

 

   

Three Months Ended

                 
   

March 31,

   

$ Change

   

% Change

 
   

2020

   

2019

   

2020 vs. 2019

   

2020 vs. 2019

 

Non-cash royalty revenue related to Royalty Monetization (See Note 7)

  $ 84     $ 85     $ (1

)

    (1

)%

Royalty revenue

    28       26       2       8

%

Other revenue

          28       (28

)

    (100

)%

Total contract and other collaboration revenue

  $ 112     $ 139     $ (27

)

    (19

)%

 

We estimate and recognize royalty revenue and non-cash royalty revenue on a quarterly basis. Adjustments to estimated revenue are recognized in the subsequent quarter based on actual revenue earned per the royalty reports received from Grünenthal. In addition, under the Royalty Monetization, we sold a portion of the expected royalty stream and commercial milestones from the European sales of Zalviso by Grünenthal to PDL. As a result, contract and other collaboration revenue is not expected to have a significant impact on our cash flows in the near-term since a significant portion of our European Zalviso royalties and milestones were already monetized with PDL in 2015.

 

Cost of Goods Sold

 

As mentioned above, we commenced commercial sales of DSUVIA in the first quarter of 2019.

 

24

 

Total cost of goods sold for the three months ended March 31, 2020 and 2019 was as follows (in thousands):

 

   

Three Months Ended

                 
   

March 31,

   

$ Change

   

% Change

 
   

2020

   

2019

   

2020 vs. 2019

   

2020 vs. 2019

 

Direct costs

  $ 246     $ 124     $ 122       98

%

Indirect costs

    1,265       1,106       159       14

%

Total costs of goods sold

  $ 1,511     $ 1,230     $ 281       23

%

 

Direct costs from contract manufacturers for DSUVIA and Zalviso totaled $0.2 million, including an inventory impairment charge of $0.1 million related to short-dated DSUVIA inventory that may expire before being sold, in the three months ended March 31, 2020. Direct costs from contract manufacturers for DSUVIA and Zalviso totaled $0.1 million in the three months ended March 31, 2019. Direct cost of goods sold for DSUVIA and Zalviso includes the inventory costs of the active pharmaceutical ingredient, or API, third-party contract manufacturing costs, estimated warranty costs, packaging and distribution costs, shipping, handling and storage costs.

 

The indirect costs to manufacture DSUVIA and Zalviso totaled $1.3 million and $1.1 million in the three months ended March 31, 2020 and 2019, respectively. Indirect costs include internal personnel and related costs for purchasing, supply chain, quality assurance, depreciation and related expenses.

 

For the foreseeable future, we anticipate negative gross margins on Zalviso product delivered to Grünenthal. Under the Amended Agreements, we sell Zalviso to Grünenthal at a predetermined transfer price. We do not recover internal indirect costs as part of the transfer price. In addition, at current low volume levels, our direct costs are in excess of the transfer prices we are receiving from Grünenthal. Furthermore, the Amended Agreements include declining maximum transfer prices over the term of the contract with Grünenthal. These transfer prices were agreed to assuming economies of scale that would occur with increasing production volumes (from the potential approval of Zalviso in the U.S. and an increase in demand in Europe) and corresponding decreases in manufacturing costs. We do not have long-term supply agreements with our contract manufacturers and prices are subject to periodic changes. However, we continue to look for additional cost saving opportunities. For example, we are currently consolidating the production of some of the components of Zalviso which we expect will result in lower manufacturing costs. To date, we have not yet resubmitted the Zalviso NDA and sales by Grünenthal in Europe have not been substantial. If we do not timely resubmit the Zalviso NDA and then receive timely approval and are unable to successfully launch Zalviso in the U.S., or the volume of Grünenthal sales does not increase significantly, we will not achieve the manufacturing cost reductions required in order to accommodate these declining transfer prices without a corresponding decrease in our gross margin.

 

Research and Development Expenses

 

The majority of our operating expenses to date have been for research and development activities related to Zalviso and DSUVIA. Research and development expenses included the following:

 

 

expenses incurred under agreements with contract research organizations and clinical trial sites;

 

 

employee-related expenses, which include salaries, benefits and stock-based compensation;

 

 

payments to third party pharmaceutical and engineering development contractors;

 

 

payments to third party manufacturers;

 

 

depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, and equipment and laboratory and other supply costs; and

 

 

costs for equipment and laboratory and other supplies.

 

We expect to incur future research and development expenditures to support the FDA regulatory review of the Zalviso NDA, once it is resubmitted. The timing of the resubmission of the Zalviso NDA is in part dependent on the finalization of the FDA’s new opioid approval guidelines and process.

 

We track external development expenses on a program-by-program basis. Our development resources are shared among all our programs. Compensation and benefits, facilities, depreciation, stock-based compensation, and development support services are not allocated specifically to projects and are considered research and development overhead.

 

25

 

Below is a summary of our research and development expenses during the three months ended March 31, 2020 and 2019 (in thousands, except percentages):

 

   

Three Months Ended

                 
   

March 31,

   

$ Change

   

% Change

 
   

2020

   

2019

   

2020 vs. 2019

   

2020 vs. 2019

 

DSUVIA

  $ 292     $ 145     $ 147       101

%

Zalviso

    29       182       (153

)

    (84

)%

Overhead

    1,091       1,050       41       4

%

Total research and development expenses

  $ 1,412     $ 1,377     $ 35       3

%

 

Research and development expenses during the three months ended March 31, 2020 remained consistent with the three months ended March 31, 2019, and included an increase in DSUVIA-related spending and overhead expenses, partially offset by a decrease in Zalviso-related spending.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses consisted primarily of salaries, benefits and stock-based compensation for personnel engaged in commercialization, administration, finance and business development activities. Other significant expenses included allocated facility costs and professional fees for general legal, audit and consulting services.

 

Total selling, general and administrative expenses for the three months ended March 31, 2020 and 2019, were as follows (in thousands, except percentages):

 

   

Three Months Ended

                 
   

March 31,

   

$ Change

   

% Change

 
   

2020

   

2019

   

2020 vs. 2019

   

2020 vs. 2019

 

Selling, general and administrative expenses

  $ 13,311     $ 9,976     $ 3,335       33

%

 

Selling, general and administrative expenses increased by $3.3 million during the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. The increase is primarily due to $1.8 million in business development costs related to the proposed acquisition of Tetraphase plus net incremental increases of $1.5 million in other selling, general and administrative expenses, including $1.1 million in higher personnel-related expenses. Prior to the March 16, 2020 reduction in headcount, our headcount for selling, general and administrative efforts in the three months ended March 31, 2020 included 73 employees compared to 54 employees in the three months ended March 31, 2019.

 

On March 16, 2020, in connection with entering into the Co-Promotion Agreement with Tetraphase, we eliminated 30 positions, mainly within the commercial organization. For additional information regarding the Co-Promotion Agreement and related Restructuring Costs see Note 1 “Organization and Summary of Significant Accounting Policies” in the accompanying notes to the Condensed Consolidated Financial Statements.

 

Other Income (Expense)

 

Total other expense for the three months ended March 31, 2020 and 2019, was as follows (in thousands, except percentages):

 

   

Three Months Ended

                 
   

March 31,

   

$ Change

   

% Change

 
   

2020

   

2019

   

2020 vs. 2019

   

2020 vs. 2019

 

Interest expense

  $ (855

)

  $ (376 )   $ (479

)

    (127

)%

Interest income and other (expense) income, net

    (65

)

    627       (692

)

    (110

)%

Non-cash interest income (expense) on liability related to sale of future royalties

    843       (1,607 )     2,450       (152

)%

Total other expense

  $ (77

)

  $ (1,356 )   $ 1,279       (94

)%

 

Interest expense consisted primarily of interest accrued or paid on our debt obligation agreements and amortization of debt discounts. Interest expense increased in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, primarily as a result of a higher outstanding loan balance. As of March 31, 2020, the accrued balance due under the Loan Agreement with Oxford was $24.5 million. Refer to Note 5 “Long-Term Debt” in the accompanying notes to the Condensed Consolidated Financial Statements for additional information.

 

Interest income and other (expense) income, net, for the three months ended March 31, 2020 and 2019 primarily consisted of interest earned on our investments and the change in the fair value of our contingent put option. In the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, other expense increased due to an increase in the fair value of the contingent put option associated with our Loan Agreement with Oxford. In addition, interest income decreased in the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, primarily due to a lower average investment balance, combined with lower yields on those investments.

 

26

 

The increase in non-cash interest income on the liability related to the sale of future royalties for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, is attributable to the Royalty Monetization that we completed in September 2015. As described in Note 7 “Liability Related to Sale of Future Royalties”, the Royalty Monetization has been recorded as debt under the applicable accounting guidance. We periodically assess the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than our initial estimates or the timing of such payments is materially different than our original estimates, we will prospectively adjust the amortization of the liability and the interest rate. During the three months ended June 30, 2019, we made a material revision to our estimates as the expected payments under the Royalty Monetization are less than the $65.0 million in gross proceeds received. The change in estimate reduced the effective interest rate over the life of the liability to 0% by recording interest income over the remaining term of the arrangement, prospectively, as an offset to the interest expense that was recognized in prior periods. The Company currently estimates that future payments to PDL over the remaining life of the arrangement will be approximately $20 million, therefore, a contingent gain of approximately $45 million may be recognized when it is realized upon expiration of the liability at the end of the Royalty Monetization term. Due to the significant judgments and factors related to the estimates of future payments under the Royalty Monetization arrangement, there are significant uncertainties surrounding the amount and timing of payments and the probability of realization of the estimated contingent gain. The effective interest income rate for the three months ended March 31, 2020 was approximately 4.0%, while the effective interest expense rate for the three months ended March 31, 2019 was approximately 7.0%. We anticipate that we will record approximately $3 million in non-cash interest income related to the Royalty Monetization for the year ending December 31, 2020.

 

Liquidity and Capital Resources

 

Liquidity

 

We have incurred losses and generated negative cash flows from operations since inception. We expect to continue to incur significant losses in 2020 and may incur significant losses and negative cash flows from operations in the future. We have funded our operations primarily through issuance of equity securities, borrowings, payments from our commercial partner, Grünenthal, monetization of certain future royalties and commercial sales milestones from the European sales of Zalviso by Grünenthal, funding from the DoD, and more recently with revenues from sales of DSUVIA since the commercial launch in the first quarter of 2019.

 

As of March 31, 2020, we had cash, cash equivalents and investments totaling $52.7 million compared to $66.1 million as of December 31, 2019. The decrease was primarily due to cash required to fund our continuing operations, as we continued our commercialization activities for DSUVIA and support for Grünenthal’s European sales of Zalviso, as well as business development activities related to the proposed acquisition of Tetraphase. We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through the second quarter of 2021. While we believe we have sufficient capital to meet our operational requirements through the second quarter of 2021, our expectations may change depending on a number of factors including the extent and magnitude of the impact from the COVID-19 pandemic, in particular the negative impact on sales volumes as our sales force is limited in its access to potential customers, our expenditures related to the United States commercial launch of DSUVIA and the proposed merger with Tetraphase. Our existing capital resources will not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to sustain our operations.

 

We have a Controlled Equity OfferingSM Sales Agreement, or the ATM Agreement, with Cantor Fitzgerald & Co., or Cantor, as agent, pursuant to which we may offer and sell, from time to time through Cantor, shares of our common stock. As of March 31, 2020, we had issued and sold an aggregate of approximately 10.7 million shares of common stock pursuant to the ATM Agreement, for which we had received net proceeds of approximately $34.5 million, after deducting commissions, fees and expenses of $1.0 million. As of March 31, 2020, we have the ability to sell approximately $44.5 million of our common stock under the ATM Agreement.

 

On May 30, 2019, we entered into the Loan Agreement with Oxford. Under the Loan Agreement, we borrowed an aggregate principal amount of $25.0 million under a term loan and used approximately $8.9 million of the proceeds from the Loan to repay our outstanding obligations under the Prior Agreement with Hercules. After deducting all loan initiation costs and outstanding interest on the Prior Agreement, we received $15.9 million in net proceeds. As of March 31, 2020, the accrued balance under the Loan Agreement was $24.5 million. For more information, see Note 5 “Long-Term Debt” in the accompanying notes to the Condensed Consolidated Financial Statements.

 

27

 

The Royalty Monetization will be repaid to PDL over the life of the agreement through a portion of the European royalties and milestones received under the Amended License Agreement with Grünenthal. For more information, see Note 7 “Liability Related to the Sale of Future Royalties” in the accompanying notes to the Condensed Consolidated Financial Statements.

 

Our cash and investment balances are held in a variety of interest-bearing instruments, including obligations of commercial paper, corporate debt securities, U.S. government sponsored enterprise debt securities and money market funds. Cash in excess of immediate requirements is invested with a view toward capital preservation and liquidity. We do not expect COVID-19 to have a material impact on our high quality, short-dated investments.

 

Cash Flows

 

The following is a summary of our cash flows for the periods indicated and has been derived from our Condensed Consolidated Financial Statements which are included elsewhere in this Form 10-Q (in thousands):

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 

Net cash used in operating activities

  $ (14,364 )   $ (13,240 )

Net cash provided by investing activities

    22,650       371  

Net cash provided by (used in) financing activities

    916       (1,794 )

 

Cash Flows from Operating Activities

 

The primary use of cash for our operating activities during these periods was to fund commercial readiness activities for our approved product, DSUVIA, and our product candidate, Zalviso, in addition to the support of Grünenthal’s European sales of Zalviso. Our cash used in operating activities also reflected changes in our working capital, net of adjustments for non-cash charges, such as depreciation and amortization of our fixed assets, stock-based compensation, non-cash interest income (expense) related to the sale of future royalties and interest expense related to our debt financings.

 

Cash used in operating activities of $14.4 million during the three months ended March 31, 2020, reflected a net loss of $15.9 million, partially offset by aggregate non-cash charges of $1.1 million and $0.5 million net change in our operating assets and liabilities. Non-cash charges included $1.1 million for stock-based compensation expense, $0.8 million in non-cash interest income on the liability related to the royalty monetization and $0.5 million in depreciation expense. The net change in our operating assets and liabilities included a $1.2 million decrease in accrued liabilities and a $1.5 million increase in accounts payable.

 

Cash used in operating activities of $13.2 million during the three months ended March 31, 2019, reflected a net loss of $13.7 million, partially offset by aggregate non-cash charges of $2.9 million. Non-cash charges included $1.6 million in non-cash interest expense on the liability related to the royalty monetization and $1.1 million for stock-based compensation expense. The net change in our operating assets and liabilities included a $1.5 million increase in inventories, a $1.3 million increase in prepaid expenses and other current assets, and a $0.8 million decrease in accrued liabilities partially offset by a $1.5 million increase in accounts payable.

 

Cash Flows from Investing Activities

 

Our investing activities have consisted primarily of our capital expenditures and purchases and sales and maturities of our available-for-sale investments.

 

During the three months ended March 31, 2020, cash provided by investing activities of $22.7 million was the net result of $35.5 million in proceeds from maturity of investments, offset by $12.7 million for purchases of investments and purchases of property and equipment of $0.1 million. During the three months ended March 31, 2019, cash provided by investing activities of $0.4 million was the net result of $4.9 million in proceeds from maturity of investments, offset by $3.9 million for purchases of investments and purchases of property and equipment of $0.7 million.

 

28

 

Cash Flows from Financing Activities

 

Cash flows from financing activities primarily reflect proceeds from the sale of our securities and payments made on debt financings.

 

During the three months ended March 31, 2020, cash provided by financing activities was primarily due to $0.8 million in net proceeds received under the ATM Agreement and $0.2 million in proceeds as a result of stock purchases made under our 2011 Employee Stock Purchase Plan, or ESPP, partially offset by $0.1 million used for payment of employee tax obligations relating to the vesting of restricted stock units. During the three months ended March 31, 2019, cash used in financing activities was primarily due to $2.1 million in payments of long-term debt partially offset by $0.3 million in proceeds as a result of stock purchases made under our ESPP and stock option exercises.

 

Operating Capital and Capital Expenditure Requirements

 

Our current operating plan includes expenditures related to the consummation of the proposed acquisition of Tetraphase and the continued launch of DSUVIA in the United States. This plan includes an assumption that COVID-19 related restrictions on access to potential customers and elective surgeries will be lifted by July 1, 2020, as well as anticipated activities required to resubmit the Zalviso NDA. These assumptions may change as a result of many factors. We will continue to evaluate the work necessary to successfully launch DSUVIA and gain approval of Zalviso in the United States and intend to update our cash forecasts accordingly. Our forecast that our existing capital resources will permit us to meet our capital and operational requirements through the second quarter of 2021 is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

 

Our future capital requirements may vary materially from our expectations based on numerous factors, including, but not limited to, the following:

 

 

the accuracy of our estimates regarding the sufficiency of our cash resources and expenses, including those related to the consummation of the proposed acquisition of Tetraphase;

 

 

the success of the Tetraphase merger, including anticipated cost synergies, if completed;

 

 

the impact and timing of COVID-19 on our operations, our sales representatives’ access to hospitals or other healthcare facilities, and our level of sales;

 

 

expenditures related to the launch of DSUVIA and potential commercialization of Zalviso;

 

 

future manufacturing, selling and marketing costs related to DSUVIA and Zalviso, including our contractual obligations to Grünenthal for Zalviso;

 

 

costs associated with business development activities and licensing transactions;

 

 

the outcome, timing and cost of the regulatory resubmission of Zalviso and any approval for Zalviso;

 

 

the initiation, progress, timing and completion of any post-approval clinical trials for DSUVIA, or Zalviso, if approved;

 

 

changes in the focus and direction of our business strategy and/or research and development programs;

 

 

milestone and royalty revenue we receive under our collaborative development and commercialization arrangements;

 

 

delays that may be caused by changing regulatory requirements;

 

 

the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;

 

 

the timing and terms of future in-licensing and out-licensing transactions;

 

 

the cost and timing of establishing sales, marketing, manufacturing and distribution capabilities;

 

 

the cost of procuring clinical and commercial supplies of DSUVIA and Zalviso;

 

 

the extent to which we acquire or invest in businesses, products or technologies; and

 

 

the expenses associated with any possible litigation.

 

In the long-term, our existing capital resources will not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to sustain our operations. We will have to raise additional funds through the sale of our equity securities, monetization of current and future assets, issuance of debt or debt-like securities or from development and licensing arrangements to sustain our operations and continue our development programs.

 

Please see “Part II., Item 1A. Risk Factors—Risks Related to Our Financial Condition and Need for Additional Capital.”

 

Off-Balance Sheet Arrangements

 

Through March 31, 2020, we have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

 

29

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

During the three months ended March 31, 2020, there were no material changes to our market risk disclosures as set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

Item 4. Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a–15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Evaluation of disclosure controls and procedures. As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

From time to time we may be involved in legal proceedings relating to intellectual property, commercial, employment and other matters arising in the ordinary course of business. Such matters are subject to uncertainty and there can be no assurance that such legal proceedings will not have a material adverse effect on our business, results of operations, financial position or cash flows.

 

The information disclosed under “Legal Proceedings” in Note 8, is incorporated herein by reference.

 

Item 1A. Risk Factors

 

This Quarterly Report on Form 10-Q contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-looking statements made by or on behalf of us, this section includes a discussion of important factors that could affect our actual future results, including, but not limited to, our revenues, expenses, net loss and loss per share. You should carefully consider these risk factors, together with all of the other information included in this Quarterly Report on Form 10-Q as well as our other publicly available filings with the U.S. Securities and Exchange Commission, or SEC. 

 

We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

 

Risks Related to COVID-19 Pandemic

 

Our business is being adversely impacted by the COVID-19 Pandemic.*

 

Our business has been adversely affected by the recent COVID-19 outbreak. Federal, state, local and foreign government orders on account of the COVID-19 pandemic are preventing us from conducting certain activities and obtaining supplies required to manufacture and deliver certain components for Zalviso. As such, one of our suppliers has provided us a notice of force majeure, and we, in turn, have provided a similar notice to Grünenthal. Furthermore, following local and state government orders in California and the counties in which our corporate office is located and many of our employees live, we implemented work from home policies, which are limiting certain of our operations. If the COVID-19 outbreak continues, we may need to limit operations further and implement additional limitations, such as extending our work from home policies. Moreover, hospitals and other healthcare facilities have implemented policies that limit access of our sales representatives to such facilities, which is causing a delay to, and thwarting, our educational and promotional efforts. Governments, hospitals and doctors, as a measure to combat the further spread of COVID-19, have reduced the number of procedures in which DSUVIA is administered as part of the pain treatment program, and temporarily halted performing elective surgeries, which will adversely impact the levels of our sales relating to such procedures. The ultimate impact of the COVID-19 outbreak is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, healthcare systems or the global economy as a whole. However, these effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely.

 

30

 

Risks Related to Our Planned Acquisition of Tetraphase Pharmaceuticals, Inc.

 

The failure to complete our planned acquisition of Tetraphase Pharmaceuticals, Inc. in a timely manner or at all, may adversely affect our business and our stock price.*

 

Our and Tetraphase Pharmaceuticals, Inc.’s, or Tetraphase’s, obligations to consummate our planned acquisition of Tetraphase are subject to the satisfaction or waiver of certain customary conditions, including, among others, (i) the adoption of the Agreement and Plan of Merger by a majority of the stockholders of Tetraphase; (ii) the absence of (A) any temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction enjoining or otherwise preventing the consummation of the merger or (B) any applicable law that makes consummation of the merger illegal; (iii) the absence of certain legal proceedings to which a governmental body is a party relating to the merger; (iv) subject to certain qualifications, the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under the merger agreement; (v) the absence of any material adverse effect on Tetraphase or our company since the date of the merger agreement; (vi) the registration statement on Form S-4 to register our common stock to be issued in the merger being declared effective by the SEC; and (vii) a minimum Tetraphase net cash balance. We cannot provide assurance that these or the other conditions to the completion of the planned acquisition of Tetraphase will be satisfied in a timely manner or at all. In addition, other factors may affect when and whether the acquisition will occur.

 

On May 6, 2020, Tetraphase announced that it had received a proposal from La Jolla Pharmaceutical Company, or La Jolla, to acquire Tetraphase for $22 million in cash, plus an additional $12.5 million in cash potentially payable under contingent value rights to be issued in the transaction, or the La Jolla Proposal. On May 8, 2020, Tetraphase announced that its board of directors, or the Tetraphase Board, had determined the La Jolla Proposal constitutes or could reasonably be expected to lead to a Superior Offer as defined in the AcelRx Merger Agreement. Accordingly, in accordance with the AcelRx Merger Agreement, the Tetraphase Board determined to consider the La Jolla Proposal, to enter into discussions and/or negotiations with respect to the La Jolla Proposal and, subject to La Jolla entering into an acceptable confidentiality agreement, to furnish non-public information to La Jolla. In that May 8, 2020 announcement, Tetraphase confirmed that Tetraphase (1) continues to recommend the AcelRx Merger Agreement with AcelRx to its stockholders, (2) is not modifying or withdrawing its recommendation with respect to the AcelRx Merger Agreement and the merger, or proposing to do so, and (3) is not making any recommendation with respect to the La Jolla Proposal. We can provide no assurance that the Tetraphase Board will not change its recommendation or attempt to terminate the AcelRx Merger Agreement in favor of the La Jolla Proposal or that we will ultimately succeed in acquiring Tetraphase.

 

If our planned acquisition of Tetraphase is not completed, our share price could fall to the extent that our current price reflects an assumption that we will complete the planned acquisition. Furthermore, if the planned acquisition of Tetraphase is not completed and the merger agreement is terminated, we may suffer other consequences that could adversely affect our business, results of operations and share price, including the following:

 

 

we have incurred and will continue to incur costs relating to the planned acquisition (including significant legal and financial advisory fees) and these costs are payable by us whether or not the planned acquisition is completed;

 

 

matters relating to the planned acquisition (including integration planning) may require substantial commitments of time and resources by our management team, which could otherwise have been devoted to other opportunities that may have been beneficial to us;

 

 

we may be subject to legal proceedings related to the acquisition or the failure to complete the acquisition;

 

 

the failure to consummate the acquisition may result in negative publicity and a negative impression of us in the investment community; and

 

 

any disruptions to our business resulting from the announcement and pendency of the acquisition, including any adverse changes in our relationships with our customers, suppliers, collaboration partners and employees, may continue or intensify in the event the merger is not consummated.

 

Uncertainty about our planned acquisition of Tetraphase may adversely affect our business and stock price, whether or not the planned acquisition is completed.*

 

We are subject to risks in connection with the pendency of our planned acquisition of Tetraphase, including the pendency and outcome of any legal proceedings against us, our directors and others relating to the planned acquisition and the risks from possibly foregoing opportunities we might otherwise pursue absent the planned acquisition of Tetraphase. Furthermore, uncertainties about the planned acquisition may cause our current and prospective employees to experience uncertainty about their future with us. These uncertainties may impair our ability to retain, recruit or motivate key management and other personnel.  The existence of the La Jolla Proposal could exacerbate the impact of any of these risks.

 

In addition, in response to the announcement of our planned acquisition of Tetraphase, our existing or prospective customers, suppliers or collaboration partners may:

 

 

delay, defer or cease purchasing our products or providing goods or services to us;

 

 

delay or defer other decisions concerning us, or refuse to extend credit terms to us;

 

 

cease further joint development activities; or

 

 

otherwise seek to change the terms on which they do business with us.

 

31

 

Existing and prospective customers, suppliers or collaboration partners may be reluctant to purchase our products, supply us with goods and service or continue collaborations due to the potential uncertainty about the direction of our product offerings and the support and service of our products after we complete the planned acquisition of Tetraphase.

 

We may fail to realize the benefits expected from our planned acquisition of Tetraphase, which could adversely affect our stock price.*

 

Our planned acquisition of Tetraphase, if completed, will be our largest acquisition to date. The anticipated benefits we expect from the planned acquisition are, necessarily, based on projections and assumptions about the combined businesses of our company and Tetraphase, which may not materialize as expected or which may prove to be inaccurate, in particular as we continue to experience challenges in conducting educational and promotional activities due to COVID-19. The value of our common stock following the completion of the planned acquisition could be adversely affected if we are unable to realize the anticipated benefits from the acquisition on a timely basis or at all. Achieving the benefits of the planned acquisition of Tetraphase will depend, in part, on our ability to integrate the business, operations and products of Tetraphase successfully and efficiently with our business. The challenges involved in this integration, which will be complex and time-consuming, include the following:

 

 

difficulties entering new markets and integrating new products in which we have no or limited direct prior experience;

 

 

successfully managing relationships with our combined supplier and customer base;

 

 

consolidating and integrating corporate, finance and administrative infrastructures and integrating and harmonizing business systems;

 

 

coordinating sales and marketing efforts to effectively position our capabilities and the direction of product development;

 

 

limitations prior to the completion of the acquisition on the ability of management of our company and of Tetraphase to conduct planning regarding the integration of the two companies;

 

 

the increased scale and complexity of our operations resulting from the acquisition;

 

 

retaining key employees of our company and Tetraphase;

 

 

obligations that we will have to counterparties of Tetraphase that arise as a result of the change in control of Tetraphase; and

 

 

minimizing the diversion of management attention from other important business objectives.

 

If we do not successfully manage these issues and the other challenges inherent in integrating an acquired business of the size and complexity of Tetraphase, then we may not achieve the anticipated benefits of the acquisition of Tetraphase and our revenue, expenses, operating results and financial condition could be materially adversely affected.

 

The acquisition of Tetraphase may result in significant charges or other liabilities that could adversely affect the financial results of the combined company.

 

The financial results of the combined company may be adversely affected by cash expenses and non-cash accounting charges incurred in connection with our integration of the business and operations of Tetraphase. The amount and timing of these possible charges are not yet known. Further, our failure to identify or accurately assess the magnitude of certain liabilities we are assuming in the acquisition could result in unexpected litigation or regulatory exposure, unfavorable accounting charges, unexpected increases in taxes due, a loss of anticipated tax benefits or other adverse effects on our business, operating results or financial condition. The price of our common stock following the acquisition could decline to the extent the combined company’s financial results are materially affected by any of these events.

 

The issuance of shares of our common stock in connection with the planned acquisition of Tetraphase will dilute our shareholders’ ownership interest in the company.

 

If the acquisition of Tetraphase is completed, up to approximately 14 million shares of our common stock will be issued to Tetraphase securityholders, and former Tetraphase securityholders will own, in the aggregate, up to approximately 14.6% of the combined company. This issuance of shares of our common stock will dilute your ownership interest in our company, and you will have a reduced ownership and voting interest in our company following the completion of this transaction. In addition, if we elect to settle any contingent value rights through the issuance of additional shares of common stock, you will experience further dilution.

 

32

 

Risks Related to Commercialization of DSUVIA® and Zalviso®

 

Our success is highly dependent on our ability to successfully commercialize DSUVIA. To the extent DSUVIA is not commercially successful, our business, financial condition and results of operations will be materially harmed.*

 

We invested a significant portion of our efforts and financial resources to develop and gain regulatory approval for DSUVIA and expect to continue making significant investments to commercialize DSUVIA. We believe our success is highly dependent on, and a significant portion of the value of our company relates to, our ability to successfully commercialize DSUVIA in the United States. The commercial success of DSUVIA depends heavily on numerous factors, including:

 

 

our ability to market, sell, and distribute DSUVIA;

 

 

our ability to establish and maintain commercial manufacturing with third parties;

 

 

acceptance of DSUVIA by physicians, patients and the healthcare community;

 

 

acceptance of pricing and placement of DSUVIA on payers’ formularies;

 

 

our ability to effectively compete with other medications for the treatment of moderate-to-severe acute pain in medically supervised settings, including IV-opioids and any subsequently approved products;

 

 

effective management of, and compliance with, the DSUVIA Risk Evaluation and Mitigation Strategy, or REMS, program;

 

 

continued demonstration of an acceptable safety profile of DSUVIA; and

 

 

our ability to obtain, maintain, enforce, and defend our intellectual property rights and claims.

 

In response to the COVID-19 pandemic, hospitals, ambulatory surgery centers and other healthcare facilities have barred visitors that are not caregivers or mission-critical and we have no visibility as to when this restriction on access will be lifted. As a result, our commercial and medical affairs teams’ educational and promotional efforts have been substantially reduced, and in some cases, stopped. As a result, we expect our near-term sales volumes to be adversely impacted for as long as access to healthcare facilities by our commercial and medical affairs personnel continues to be limited.

 

If we are unable to successfully commercialize DSUVIA, our business, financial condition, and results of operations will be materially harmed.

 

The commercial success of DSUVIA and Zalviso, if approved, in the United States, as well as DZUVEO and Zalviso in Europe, will depend upon the acceptance of these products by the medical community, including physicians, nurses, patients, and pharmacy and therapeutics committees.

 

The degree of market acceptance of DSUVIA and Zalviso, if approved, in the United States, or DZUVEO and Zalviso in Europe, will depend on a number of factors, including:

 

 

demonstration of clinical safety and efficacy compared to other products;

 

 

the relative convenience, ease of administration and acceptance by physicians, patients and health care payers;

 

 

the use of DSUVIA for the management of moderate-to-severe acute pain by a healthcare professional for patient types that were not specifically studied in our Phase 3 trials;

 

 

the use of Zalviso for the management of moderate-to-severe acute pain in the hospital setting for patient types that were not specifically studied in our Phase 3 trials;

 

 

the prevalence and severity of any adverse events, or AEs, or serious adverse events, or SAEs;

 

 

overcoming any perceptions of sufentanil as a potentially unsafe drug due to its high potency opioid status;

 

 

limitations or warnings contained in the U.S. Food and Drug Administration, or FDA-approved label for DSUVIA, or the European Medicines Agency, or EMA-approved label for DZUVEO, or Zalviso;

 

 

restrictions or limitations placed on DSUVIA due to the REMS program;

 

 

availability of alternative treatments;

 

 

existing capital investment by hospitals in IV PCA technology;

 

 

pricing and cost-effectiveness;

 

 

the effectiveness of our or any future collaborators’ sales and marketing strategies;

 

 

our ability to obtain formulary approval; and,

 

 

our ability to obtain and maintain sufficient third-party coverage and reimbursement.

 

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If our approved products do not achieve an adequate level of acceptance by physicians, nurses, patients and pharmacy and therapeutics committees, we may not generate sufficient revenue and become or remain profitable.

 

If we are unable to maintain or grow our sales and marketing capabilities or enter into agreements with third parties to market and sell our products outside of the United States, we may be unable to generate sufficient product revenue.

 

In order to commercialize DSUVIA and Zalviso, if approved, in the United States, we must maintain or grow internal sales, marketing, distribution, managerial and other capabilities or make arrangements with third parties to perform these services. We have entered into agreements with third parties for the distribution of DSUVIA and plan to enter into such agreements for Zalviso, if approved, in the United States; however, if these third parties do not perform as expected or there are delays in establishing such relationships for Zalviso, if approved, our ability to effectively distribute products would suffer.

 

We have entered into a collaboration with Grünenthal for the commercialization of Zalviso in Europe and Australia and intend to enter into additional strategic partnerships with third parties to commercialize our products outside of the United States. DZUVEO was approved by the EC in June 2018. We have not yet entered into a collaboration agreement with a strategic partner for the commercialization of DZUVEO in Europe, and there can be no assurance that we will successfully enter into such an agreement. We may also consider the option to enter into strategic partnerships for DSUVIA, or Zalviso, if approved, in the United States. We face significant competition in seeking appropriate strategic partners, and these strategic partnerships can be intricate and time consuming to negotiate and document.

 

We may not be able to negotiate future strategic partnerships on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any strategic partnerships because of the numerous risks and uncertainties associated with establishing strategic partnerships. Our current or future collaboration partners, if any, may not dedicate sufficient resources to the commercialization of Zalviso or DSUVIA/DZUVEO, or may otherwise fail in their commercialization due to factors beyond our control. If we are unable to establish effective collaborations to enable the sale of our products to healthcare professionals and in geographical regions that will not be covered by our own marketing and sales force, or if our potential future collaboration partners do not successfully commercialize our products, our ability to generate revenues from product sales will be adversely affected.

 

If we are unable to maintain or grow adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate sufficient product revenue and become profitable. We compete with many companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support of a third party to perform marketing and sales functions, we may be unable to compete successfully against these more established companies.

 

In March 2020, in connection with the Co-Promotion Agreement with Tetraphase Pharmaceuticals, Inc., we reduced the size of our commercial team to eliminate the overlap with the Tetraphase commercial team and, given our reduced workforce, we may experience difficulties in retaining our existing employees and managing our operations, including our continued commercialization of DSUVIA.*

 

As of March 31, 2020, we had 59 full-time employees. On March 15, 2020, we entered into the Agreement and Plan of Merger and the Co-Promotion Agreement with Tetraphase Pharmaceuticals, Inc., or Tetraphase. In connection with the Co-Promotion Agreement, we reduced the size of our commercial team to eliminate the overlap with the Tetraphase commercial team and reduce operating expenses. The restructuring resulted in the elimination of 30 positions, or approximately 33% of our workforce. We will need to retain and maintain our existing sales, managerial, operational, finance and other personnel and resources in order to continue the commercialization of DSUVIA and manage our operations. Our current infrastructure may be inadequate to support our strategy and our workforce reduction may be disruptive to our operations, may negatively affect our productivity, and constrain our commercialization activities. For example, our workforce reduction could yield unanticipated consequences, such as attrition beyond planned staff reductions, negative impact on employee morale and our corporate culture, or increase difficulties in our day-to-day operations and prevent us from successfully commercializing DSUVIA as rapidly as planned. If we encounter such unanticipated consequences, we may have difficulty retaining and attracting personnel. In addition, the implementation of any additional workforce or expense reduction programs may divert the efforts of our management team and other key employees, which could adversely affect our business. Furthermore, we may not realize, in full or in part, the anticipated benefits, savings and improvements in our cost structure from our cost reduction plan, due to unforeseen difficulties, delays or unexpected costs. If we are unable to realize the expected operational efficiencies and cost savings from the cost reduction plan, our operating results and financial condition would be adversely affected.

 

Guidelines and recommendations published by government agencies, as well as non-governmental organizations, and existing laws and regulations can reduce the use of DSUVIA, and Zalviso, if approved in the United States.     

 

Government agencies and non-governmental organizations promulgate regulations and guidelines applicable to certain drug classes that may include DSUVIA and Zalviso, if approved in the United States. Recommendations of government agencies or non-governmental organizations may relate to such matters as maximum quantities dispensed to patients, dosage, route of administration, and use of concomitant therapies. Government agencies and non-governmental organizations have offered commentary and guidelines on the use of opioid-containing products. We are uncertain how these activities and guidelines may impact DSUVIA and our ability to gain marketing approval of Zalviso in the United States. Regulations or guidelines suggesting the reduced use of certain drug classes that may include DSUVIA or Zalviso, or the use of competitive or alternative products as the standard-of-care to be followed by patients and healthcare providers, could result in decreased use of DSUVIA or Zalviso, if approved, or negatively impact our ability to gain market acceptance and market share. The U.S. government and state legislatures have prioritized combatting the growing misuse and addiction to opioids and opioid overdose deaths and have enacted legislation and regulations as well as other measures intended to fight the opioid epidemic. Addressing opioid drug abuse is a priority for the current U.S. administration and the FDA and is part of a broader initiative led by the HHS. Overall, there is greater scrutiny of entities involved in the manufacture, sale and distribution of opioids. These initiatives, existing laws and regulations, and any negative publicity related to opioids may have a material impact on our business and our ability to manufacture opioid products.

 

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Governmental investigations, inquiries, and regulatory actions and lawsuits brought against us by government agencies and private parties with respect to our commercialization of opioids could adversely affect our business, financial condition, results of operations and cash flows.

 

As a result of greater public awareness of the public health issue of opioid abuse, there has been increased scrutiny of, and investigation into, the commercial practices of opioid manufacturers by state and federal agencies. As a result of our manufacturing and commercial sale of DSUVIA in the United States and Zalviso in Europe, we could become the subject of federal, state and foreign government investigations and enforcement actions, focused on the misuse and abuse of opioid medications.

 

In addition, a significant number of lawsuits have been filed against opioid manufacturers, distributors, and others in the supply chain by cities, counties, state Attorney's General and private persons seeking to hold them accountable for opioid misuse and abuse. The lawsuits assert a variety of claims, including, but not limited to, public nuisance, negligence, civil conspiracy, fraud, violations of the Racketeer Influenced and Corrupt Organizations Act, or RICO, or similar state laws, violations of state Controlled Substance Act or state False Claims Act, product liability, consumer fraud, unfair or deceptive trade practices, false advertising, insurance fraud, unjust enrichment and other common law and statutory claims arising from defendants’ manufacturing, distribution, marketing and promotion of opioids and seek restitution, damages, injunctive and other relief and attorneys’ fees and costs. The claims generally are based on alleged misrepresentations and/or omissions in connection with the sale and marketing of prescription opioid medications and/or an alleged failure to take adequate steps to prevent abuse and diversion. While DSUVIA is designed for use solely in certified medically supervised healthcare settings and administered only by a healthcare professional in these settings, and is not distributed or available at retail pharmacies to patients by prescription, we can provide no assurance that parties will not file lawsuits of this type against us in the future. In addition, current public perceptions of the public health issue of opioid abuse may present challenges to favorable resolution of any potential claims. Accordingly, we cannot predict whether we may become subject to these kinds of investigations and lawsuits in the future, and if we were to be named as a defendant in such actions, we cannot predict the ultimate outcome. Any allegations against us may negatively affect our business in various ways, including through harm to our reputation.

 

If we were required to defend ourselves in these matters, we would likely incur significant legal costs and could in the future be required to pay significant amounts as a result of fines, penalties, settlements or judgments. It is unlikely that our current product liability insurance would fully cover these potential liabilities, if at all. Moreover, we may be unable to maintain insurance in the future on acceptable terms or with adequate coverage against potential liabilities or other losses. For more information about our product liability insurance and exclusions therefrom, please see the risk factor entitled “We face potential product liability claims, and, if such claims are successful, we may incur substantial liability” elsewhere in this section. The resolution of one or more of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Furthermore, in the current climate, stories regarding prescription drug abuse and the diversion of opioids and other controlled substances are frequently in the media or advocated by public interest groups. Unfavorable publicity regarding the use or misuse of opioid drugs, the limitations of abuse-deterrent formulations, the ability of drug abusers to discover previously unknown ways to abuse opioid products, public inquiries and investigations into prescription drug abuse, litigation, or regulatory activity regarding sales, marketing, distribution or storage of opioids could have a material adverse effect on our reputation and impact on the results of litigation.

 

Finally, various government entities, including Congress, state legislatures or other policy-making bodies, or public interest groups have in the past and may in the future hold hearings, conduct investigations and/or issue reports calling attention to the opioid crisis, and may mention or criticize the perceived role of manufacturers, including us, in the opioid crisis. Similarly, press organizations have and likely will continue to report on these issues, and such reporting may result in adverse publicity for us, resulting in reputational harm.

 

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A key part of our business strategy is to establish collaborative relationships to commercialize and fund development and approval of our products, particularly outside of the United States. We may not succeed in establishing and maintaining collaborative relationships, which may significantly limit our ability to develop and commercialize our products successfully, if at all.*

 

We will need to establish and maintain successful collaborative relationships to obtain international sales, marketing and distribution capabilities for our products. The process of establishing and maintaining collaborative relationships is difficult, time-consuming and involves significant uncertainty. For example:

 

 

our partners may seek to renegotiate or terminate their relationships with us due to unsatisfactory clinical or regulatory results, manufacturing issues, a change in business strategy, a change of control or other reasons;

 

 

our contracts for collaborative arrangements are or may be terminable at will on written notice and may otherwise expire or terminate, and we may not have alternatives available to achieve the potential for our products in those territories or markets;

 

 

our partners may choose to pursue alternative technologies, including those of our competitors;

 

 

we may have disputes with a partner that could lead to litigation or arbitration, including in connection with any contractual force majeure notices tied to the COVID-19 pandemic;

 

 

we have limited control over the decisions of our partners, and they may change the priority of our programs in a manner that would result in termination of the agreement or add significant delays to the partnered program;

 

 

our ability to generate future payments and royalties from our partners depends upon the abilities of our partners to establish the safety and efficacy of our drugs, maintain regulatory approvals and our ability to successfully manufacture and achieve market acceptance of our products;

 

 

we or our partners may fail to properly initiate, maintain or defend our intellectual property rights, where applicable, or a party may use our proprietary information in such a way as to invite litigation that could jeopardize or potentially invalidate our proprietary information or expose us to potential liability;

 

 

our partners may not devote sufficient capital or resources towards our products; and

 

 

our partners may not comply with applicable government regulatory requirements necessary to successfully market and sell our products.

 

If any collaborator fails to fulfill its responsibilities in a timely manner, or at all, any research, clinical development, manufacturing or commercialization efforts pursuant to that collaboration could be delayed or terminated, or it may be necessary for us to assume responsibility for expenses or activities that would otherwise have been the responsibility of our collaborator. If we are unable to establish and maintain collaborative relationships on acceptable terms or to successfully and timely transition terminated collaborative agreements, we may have to undertake development and commercialization activities at our own expense or find alternative sources of capital.

 

Approval of Zalviso and DZUVEO in Europe has resulted in a variety of risks associated with international operations that could materially adversely affect our business.

 

Our existing collaboration with Grünenthal for Zalviso requires us to supply product to support the European commercialization of Zalviso. In addition, with the June 2018 approval of DZUVEO in Europe, we intend to enter into agreements with third parties to market DZUVEO in Europe, which may also require us to supply product to those third parties. We may be subject to additional risks related to entering into international business relationships, including:

 

 

multiple, conflicting, and changing laws and regulations such as privacy and data regulations, transparency regulations, tax laws, export and import restrictions, employment laws, regulatory requirements, including for drug approvals, and other governmental approvals, permits, and licenses;

 

 

reduced protection for intellectual property rights;

 

 

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

 

different payer reimbursement regimes, governmental payers, patient self-pay systems and price controls;

 

 

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

 

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

 

business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.

 

Any of these factors could have a material adverse effect on our business.

 

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If we, or current and potential partners, are unable to compete effectively, our products may not reach their commercial potential.  

 

The U.S. biotechnology and pharmaceutical industries are characterized by intense competition and cost pressure. DSUVIA competes, and Zalviso, if approved in the U.S., will compete, with a number of existing and future pharmaceuticals and drug delivery devices developed, manufactured and marketed by others. In particular, DSUVIA may compete with a wide variety of products and product candidates including (i) injectable opioid products, such as morphine, fentanyl, hydromorphone and meperidine; (ii) oral opioids such as oxycodone and hydrocodone; (iii) generic injectable local anesthetics, such as bupivacaine or branded formulations thereof; (iv) non-steroidal anti-inflammatory drugs, or NSAIDS, including ketorolac in intranasal or generic IV form, and IV meloxicam; and (v) transmucosal fentanyl products. Zalviso, if approved in the U.S., may compete with a number of opioid-based treatment options, including IV PCA pumps, oral PCA devices, and transdermal opioid PCAs.

 

Key competitive factors affecting the commercial success of our approved products are likely to be efficacy, safety profile, reliability, convenience of dosing, price and reimbursement. Many of our competitors and potential competitors have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of drug candidates, obtaining FDA and other regulatory approval of products, and the commercialization of those products. Accordingly, our competitors may be more successful than we are in obtaining FDA approval for drugs and achieving widespread market acceptance. Our competitors’ drugs or drug delivery systems may be more effective, have fewer adverse effects, be less expensive to develop and manufacture, or be more effectively marketed and sold than any product we may seek to commercialize. This may render our products obsolete or non-competitive. We anticipate that we will face intense and increasing competition as new drugs enter the market, additional technologies become available, and competitors establish collaborative or licensing relationships, which may adversely affect our competitive position. These and other competitive risks may materially adversely affect our ability to attain or sustain profitable operations.

 

Hospital or other health care facility formulary approvals for DSUVIA or Zalviso, if approved, in the United States may not be achieved, or could be subject to certain restrictions, which could make it difficult for us to sell our products.*

 

Obtaining hospital or other health care facility formulary approvals can be an expensive and time-consuming process. We cannot be certain if and when we will obtain formulary approvals to allow us to sell our products into our target markets. In particular, the restrictions on our commercial and medical affairs teams’ access to hospitals and other health care facilities could adversely impact the number of formulary approvals we anticipated achieving in 2020, and for as long as these restrictions remain in place, or new restrictions are implemented, we may have limited visibility or difficulties in obtaining these formulary approvals. Failure to obtain timely formulary approval will limit our commercial success. If we are successful in obtaining formulary approvals, we may need to complete evaluation programs whereby DSUVIA, or Zalviso, if approved, is used on a limited basis for certain patient types. The evaluation period may last several months and there can be no assurance that use during the evaluation period will lead to formulary approvals of DSUVIA, or Zalviso, if approved. Further, even successful formulary approvals may be subject to certain restrictions based on patient type or hospital protocol. Failure to obtain timely formulary approvals for DSUVIA, or Zalviso, if approved, would materially adversely affect our ability to attain or sustain profitable operations.

 

Coverage and adequate reimbursement may not be available for DSUVIA or Zalviso, if approved, in the United States, or DZUVEO or Zalviso in Europe, which could make it difficult for us, or our partners, to sell our products profitably.  

 

Our ability to commercialize DSUVIA or Zalviso, if approved, in the United States, any future collaboration partner’s ability to commercialize DZUVEO in Europe, or Grünenthal’s ability to expand sales of Zalviso in Europe successfully will depend, in part, on the extent to which coverage and adequate reimbursement will be available from government payer programs at the federal and state levels, authorities, including Medicare and Medicaid, private health insurers, managed care plans and other third-party payers.

 

No uniform policy requirement for coverage and reimbursement for drug products exists among third-party payers in the United States or Europe. Therefore, coverage and reimbursement can differ significantly from payer to payer. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payer separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. Our inability to promptly obtain coverage and adequate reimbursement rates from third party payers could significantly harm our operating results, our ability to raise capital needed to commercialize our approved drugs and our overall financial condition.

 

A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third-party payers have attempted to control costs by limiting coverage and the amount of reimbursement for particular medical products. There have been a number of legislative and regulatory proposals to change the healthcare system in the United States and in some foreign jurisdictions that could affect our ability to sell our products profitably. These legislative and/or regulatory changes may negatively impact the reimbursement for our products, following approval. The availability of numerous generic pain medications may also substantially reduce the likelihood of reimbursement for DSUVIA or Zalviso, if approved, in the United States, and DSUVIA/DZUVEO and Zalviso in Europe and elsewhere. The application of user fees to generic drug products may expedite the approval of additional pain medication generic drugs. We expect to experience pricing pressures in connection with our sales of DSUVIA and Zalviso, if approved, in the United States, Grünenthal’s European sales of Zalviso, and future product sales of DZUVEO, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. If we fail to successfully secure and maintain reimbursement coverage for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and our business will be harmed.

 

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Furthermore, market acceptance and sales of our products will depend on reimbursement policies and may be affected by future healthcare reform measures. Government authorities and third-party payers, such as private health insurers, hospitals and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. We cannot be sure that reimbursement will be available for DSUVIA or Zalviso, if approved, in the United States, or DZUVEO or Zalviso in Europe. Also, reimbursement amounts may reduce the demand for, or the price of, our products. For example, we anticipate we may need comparator studies of DZUVEO in Europe to ensure premium reimbursement in certain countries. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize DSUVIA or Zalviso, if approved, in the United States, or DZUVEO or Zalviso in Europe.

 

Additionally, the regulations that govern marketing approvals, pricing, coverage and reimbursement for new drugs vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues able to be generated from the sale of the product in that country. For example, separate pricing and reimbursement approvals may impact Grünenthal’s ability to market and successfully commercialize Zalviso in the 28 EU member states, at the time of the agreement, plus Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory. Adverse pricing limitations may hinder our ability to recoup our investment in DSUVIA in the United States, or Zalviso, even after obtaining FDA marketing approval.

 

The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses.  

 

If we are found to have improperly promoted off-label uses of our products, including DSUVIA or Zalviso, if approved, in the United States, we may become subject to significant liability. Such enforcement has become more common in the industry. The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription drug products. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. While we have received marketing approval for DSUVIA for our proposed indication, physicians may nevertheless use our products for their patients in a manner that is inconsistent with the approved label, if the physicians personally believe in their professional medical judgment it could be used in such manner. However, if the FDA determines that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties and a requirement for corrective advertising, including Dear Doctor letters. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an off-label use, which could result in significant civil, criminal and/or administrative penalties, damages, fines, disgorgement, individual imprisonment, exclusion from government-funded healthcare programs, such as Medicare and Medicaid, contractual damages, reputational harm, increased losses and diminished profits and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. The FDA or other enforcement authorities could also request that we enter into a consent decree or a corporate integrity agreement or seek a permanent injunction against us under which specified promotional conduct is monitored, changed or curtailed. If we cannot successfully manage the promotion of DSUVIA or Zalviso, if approved, in the United States, we could become subject to significant liability, which would materially adversely affect our business and financial condition.

 

If we are unable to establish and maintain relationships with group purchasing organizations any future revenues or future profitability could be jeopardized.

 

Many end-users of pharmaceutical products have relationships with group purchasing organizations, or GPOs, whereby such GPOs provide such end-users access to a broad range of pharmaceutical products from multiple suppliers at competitive prices and, in certain cases, exercise considerable influence over the drug purchasing decisions of such end-users. Hospitals and other end-users contract with the GPO of their choice for their purchasing needs. We expect to derive revenue from end-user customers that are members of GPOs for DSUVIA and Zalviso, if approved. Establishing and maintaining strong relationships with these GPOs will require us to be a reliable supplier, remain price competitive and comply with FDA regulations. The GPOs with whom we have relationships may have relationships with manufacturers that sell competing products, and such GPOs may earn higher margins from these products or combinations of competing products or may prefer products other than ours for other reasons. If we are unable to establish or maintain our GPO relationships, sales of DSUVIA and Zalviso, if approved, and related revenues could be negatively impacted.

 

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We intend to rely on a limited number of pharmaceutical wholesalers to distribute DSUVIA and Zalviso, if approved, in the United States.

 

We intend to rely primarily upon pharmaceutical wholesalers in connection with the distribution of DSUVIA and Zalviso, if approved, in the United States. As part of the DSUVIA REMS program, we monitor distribution and audit wholesalers’ data. If our wholesalers do not comply with the DSUVIA REMS requirements, or if we are unable to establish or maintain our business relationships with these pharmaceutical wholesalers on commercially acceptable terms, or if our wholesalers are unable to distribute our drugs for regulatory, compliance or any other reason, it could have a material adverse effect on our sales and may prevent us from achieving profitability.

 

Risks Related to Clinical Development and Regulatory Approval

 

Existing and future legislation may increase the difficulty and cost for us to commercialize our products and affect the prices we may obtain.*

 

In the United States and some foreign jurisdictions, the legislative landscape continues to evolve, including changes to the regulation of opioid-containing products. There have been a number of legislative and regulatory changes and proposed changes regarding healthcare systems that could prevent or delay marketing approval of Zalviso outside of Europe. These changes will restrict or regulate post-approval activities for DSUVIA, DZUVEO and Zalviso, and affect our ability to profitably sell any products for which we obtain marketing approval. For example, in February 2016, the FDA announced a comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on American families and communities. As part of this plan, the FDA announced that it intended to review product and labeling decisions and re-examine the risk-benefit paradigm for opioids. In June 2019, the FDA issued draft guidance related to a new benefit/risk framework for new opioid analgesic products, which proposes that the new product candidate show some benefit over an existing product. In July 2019, the FDA informed two New Drug Application, or NDA, applicants with August 2019 Prescription Drug User Fee Act, or PDUFA, dates for their opioid candidate products that the FDA was postponing product-specific advisory committee meetings for opioid analgesics while it continues to consider a number of scientific and policy issues relating to this class of drug. In September 2019, the FDA held a public hearing to receive stakeholder input on the approval process for new opioids. The timing of the resubmission of the Zalviso NDA is dependent upon the finalization of the FDA’s new opioid approval guidelines and process.

 

In the European Union, or EU, the pricing of prescription drugs is subject to government control. In addition, the EU provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use.

 

In the United States, the Affordable Care Act (as defined below) was enacted in an effort to, among other things, broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, impose new taxes and fees on the health industry and impose additional health policy reforms. Aspects of the Affordable Care Act that may impact our business include:

 

 

extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

 

 

expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

 

 

expansion of eligibility criteria for Medicaid programs, thereby potentially increasing manufacturers’ Medicaid rebate liability;

 

 

expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the federal Anti-Kickback Statute, new government investigative powers and enhanced penalties for non-compliance; and

 

 

a Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

 

The Affordable Care Act has the potential to substantially change health care financing and delivery by both governmental and private insurers and may also increase our regulatory burdens and operating costs.

 

There remain judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed Executive Orders and other directives designed to delay the implementation of certain provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, several bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and Jobs Act of 2017 includes a provision that repealed, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Additionally, the 2020 federal spending package permanently eliminated, effective January 1, 2020, the Affordable Care Act’s mandated “Cadillac” tax on high-cost employer-sponsored health coverage and medical device tax, and effective January 1, 2021, also eliminates the health insurer tax. In December 2018, the Centers for Medicare & Medicaid Services, or CMS, published a new final rule permitting further collections and payments to and from certain Affordable Care Act qualified health plans and health insurance issuers under the Affordable Care Act risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amended the Affordable Care Act, effective January 1, 2019, to increase from 50% to 70% the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. On December 14, 2018, a Texas U.S. District Court Judge ruled that the Affordable Care Act is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017. Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the Affordable Care Act are invalid as well. On March 2, 2020, the United States Supreme Court granted the petitions for writs of certiorari to review this case, and has allotted one hour for oral arguments, which are expected to occur in the fall. It is unclear how this decision, such litigation and other efforts to repeal and replace the Affordable Care Act will impact the Affordable Care Act. We expect that the Affordable Care Act, as currently enacted or as it may be amended or repealed in the future, and other healthcare reform measures that may be adopted in the future, could have a material adverse effect on our industry generally and on our ability to successfully commercialize our products. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we or our collaborators are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we or our collaborators are not able to maintain regulatory compliance, our products may lose regulatory approval and we may not achieve or sustain profitability, which would adversely affect our business.

 

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In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. Aggregate reductions of Medicare payments to providers of 2% per fiscal year went into effect on April 1, 2013 and will stay in effect through 2030 unless Congressional action is taken. The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which was signed into law in March 2020 and is designed to provide financial support and resources to individuals and businesses affected by the COVID-19 pandemic, suspended the 2% Medicare sequester from May 1, 2020 through December 31, 2020, and extended the sequester by one year, through 2030. The American Taxpayer Relief Act further reduced Medicare payments to several providers, including hospitals.

 

Moreover, the Drug Supply Chain Security Act of 2013 imposes additional obligations on manufacturers of pharmaceutical products, among others, related to product tracking and tracing. Among the requirements of this legislation, manufacturers are required to provide certain information regarding the drug product to individuals and entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product.

 

In the United States, there has been increasing legislative and enforcement interest with respect to specialty drug pricing practices. Specifically, there have been several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. At the federal level, the Trump administration’s budget proposal for fiscal year 2021 includes a $135 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs. On March 10, 2020, the Trump administration sent “principles” for drug pricing to Congress, calling for legislation that would, among other things, cap Medicare Part D beneficiary out-of-pocket pharmacy expenses, provide an option to cap Medicare Part D beneficiary monthly out-of-pocket expenses, and place limits on pharmaceutical price increases. Additionally, the Trump Administration previously released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contained proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. HHS has begun soliciting feedback on some of these measures and has implemented others under its existing authority. For example, in September 2018, Centers for Medicare & Medicaid Services, or CMS, announced that it will allow Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019. Although these, and other measures will require additional authorization to become effective, Congress and the Trump Administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, measures designed to encourage importation from other countries and bulk purchasing. Furthermore, even after initial price and reimbursement approvals, reductions in prices and changes in reimbursement levels can be triggered by multiple factors, including reference pricing systems and publication of discounts by third party payers or authorities in other countries. In Europe, prices can be reduced further by parallel distribution and parallel trade, i.e. arbitrage between low-priced and high-priced countries. If any of these events occur, revenue from sales of Zalviso and DZUVEO in Europe would be negatively affected. 

 

Legislative and regulatory proposals have been made to expand post-approval requirements and further restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our products, if any, may be.

 

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We expect that additional healthcare reform measures will be adopted within and outside the United States in the future, any of which could negatively impact our business. For example, it is possible that additional governmental action is taken to address the COVID-19 pandemic. The continuing efforts of the government, insurance companies, managed care organizations and other payers of healthcare services to contain or reduce costs of healthcare may adversely affect the demand for any drug products for which we have obtained or may obtain regulatory approval, our ability to set a price that we believe is fair for our products, our ability to obtain coverage and reimbursement approval for a product, our ability to generate revenues and achieve or maintain profitability, and the level of taxes that we are required to pay.

 

We may experience market resistance, delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory agency policy regarding opioids generally, and sufentanil specifically.

 

In February 2016, the FDA announced a comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on American families and communities. As part of this plan, the FDA announced that it intended to review product and labeling decisions and re-examine the risk-benefit paradigm for opioids. In June 2019, the FDA issued draft guidance related to a new benefit/risk framework for new opioid analgesic products, which proposes that the new product candidate show some benefit over an existing product. In September 2019, the FDA held a public hearing to receive stakeholder input on the approval process for new opioids. The timing of the resubmission of the Zalviso NDA is dependent upon the finalization of the FDA’s new opioid approval guidelines and process.

 

In May 2017, an Opioid Policy Steering Committee was established to address and advise regulators on opioid use. The Committee was charged with three initial questions: (i) should the FDA require mandatory education for healthcare professionals, or HCPs, who prescribe opioids; (ii) should the FDA take steps to ensure the number of prescribed opioid doses is more closely tailored to the medical indication; and (iii) is the FDA properly considering the risk of abuse and misuse of opioids during its drug review process. Zalviso has not been designed with an abuse-deterrent formulation and is not tamper-resistant. As a result, Zalviso has not undergone testing for tamper-resistance or abuse deterrence.

 

The FDA can delay, limit or deny marketing approval for many reasons, including:

 

 

a product candidate may not be considered safe or effective;

 

 

the manufacturing processes or facilities we have selected may not meet the applicable requirements; and,

 

 

changes in their approval policies or adoption of new regulations may require additional work on our part.

 

Part of the regulatory approval process includes compliance inspections of manufacturing facilities to ensure adherence to applicable regulations and guidelines. The regulatory agency may delay, limit or deny marketing approval of our product candidate, Zalviso, as a result of such inspections. In June 2014, the FDA completed an inspection at our corporate offices. We received a single observation on a Form 483 as a result of the inspection. Although we believe we have adequately addressed this observation in revised standard operating procedures, we, our contract manufacturers, and their vendors, are all subject to preapproval and post-approval inspections at any time. The results of these inspections could impact our ability to obtain FDA approval for Zalviso and, if approved, our ability to launch and successfully commercialize Zalviso in the United States. In addition, results of FDA inspections could impact our ability to maintain FDA approval of DSUVIA, and our ability to expand and sustain commercial sales of DSUVIA in the United States.

 

Any delay in, or failure to receive or maintain, approval for Zalviso in the United States could prevent us from generating meaningful revenues or achieving profitability. Zalviso may not be approved even if we believe it has achieved its endpoints in clinical trials. Regulatory agencies, including the FDA, or their advisors, may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Regulatory agencies may change requirements for approval even after a clinical trial design has been approved. The FDA exercises significant discretion over the regulation of combination products, including the discretion to require separate marketing applications for the drug and device components in a combination product. Zalviso is being regulated as a drug product under the NDA process administered by the FDA. The FDA could in the future require additional regulation of Zalviso, or DSUVIA, under the medical device provisions of the Federal Food, Drug and Cosmetic Act, or FDCA. We must comply with the Quality Systems Regulation, or QSR, which sets forth the FDA’s current good manufacturing practice, or cGMP, requirements for medical devices, and other applicable government regulations and corresponding foreign standards for drug cGMPs. If we fail to comply with these regulations, it could have a material adverse effect on our business and financial condition.

 

Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing trials. For example, DSUVIA is subject to a deferred post-marketing requirement for study in the pediatric population ages 6-17 years. Our protocol for this trial is not due until August 2020. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. For example, we intend to seek approval of Zalviso for the management of moderate-to-severe acute pain in adult patients in the hospital setting; however, our clinical trial data was generated exclusively from the post-operative segment of this population, and the FDA may restrict any approval to post-operative patients only, which would reduce our commercial opportunity.

 

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The success of Zalviso relies, in part, on obtaining regulatory approval in the United States.

 

The success of Zalviso relies, in part, upon our ability to develop and receive regulatory approval of this product candidate in the United States for the management of moderate-to-severe acute pain in adult patients in the hospital setting. Our Phase 3 program for Zalviso initially consisted of three Phase 3 clinical trials. We reported positive top-line data from each of these trials and submitted an NDA for Zalviso to the FDA in September 2013, which the FDA then accepted for filing in December 2013. In July 2014, the FDA issued a Complete Response Letter, or CRL, for our NDA for Zalviso, or the Zalviso CRL. The Zalviso CRL contained requests for additional information on the Zalviso System to ensure proper use of the device. The requests include submission of data demonstrating a reduction in the incidence of device errors, changes to address inadvertent dosing, among other items, and submission of additional data to support the shelf life of the product. Furthermore, in March 2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we had performed in response to the issues identified in the Zalviso CRL, a clinical trial was needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. Based on the results of our Type C meeting with the FDA in September 2015, we completed the protocol review with the FDA and initiated this study, IAP312, in September 2016. 

 

IAP312 was a Phase 3 study in post-operative patients designed to evaluate the effectiveness of changes made to the functionality and usability of the Zalviso device and to take into account comments from the FDA on the study protocol. The IAP312 study was designed to rule out a 5% device failure rate. The study design required a minimum of 315 patients. In the IAP312 study, sites proactively looked for tablets that were dispensed by the patient but failed to be placed under the tongue, known as dropped tablets. The FDA refers to dropped tablets as inadvertent dispensing. Correspondence from the FDA suggests that they may include the rate of inadvertent dispensing along with the device failures to calculate a total error rate. The IAP312 study evaluated all incidents of misplaced tablets; however, per the protocol, the error rate calculation does not include the rate of inadvertent dispensing. If the FDA includes the rate of inadvertent dispensing along with the device failures to calculate a total error rate, the resulting error rate may be unacceptable to the FDA. Further, the correspondence from the FDA suggests that we may need to modify the REMS program for Zalviso to address dropped tablets. The IAP312 results will supplement the three Phase 3 trials already completed in the Zalviso NDA resubmission. The timing of the resubmission of the Zalviso NDA is dependent upon the finalization of the FDA’s new opioid approval guidelines and process.

 

There is no guarantee that the additional work we performed related to Zalviso, including the IAP312 trial, will result in our successfully obtaining FDA approval of Zalviso in a timely fashion, if at all. Although we believe the IAP312 study met safety, satisfaction and device usability expectations, there is no guarantee the IAP312 trial results will address the issues raised by the FDA. For example, the FDA may include the rate of inadvertent dispensing along with the device failures to calculate a total error rate and the resulting error rate may be unacceptable to the FDA, or the FDA may still have concerns regarding the performance of the device, inadvertent dosing (dropped tablets), or other issues. At any future point in time, the FDA could require us to complete further clinical, Human Factors, pharmaceutical, reprocessing or other studies, which could delay or preclude any NDA resubmission or approval of the NDA and could require us to obtain significant additional funding. We may not be able to identify appropriate remediations to issues that the FDA may raise, and we may not have sufficient time or financial resources to conduct future activities to remediate issues raised by the FDA. We intend to seek a label indication for Zalviso for the management of moderate-to-severe acute pain in adult patients in the hospital setting. However, our clinical trial data was generated exclusively from the post-operative segment of this population, and the FDA may restrict any approval to post-operative patients only, which would reduce our commercial opportunity.

 

Upon resubmission of the Zalviso NDA, the FDA may hold an advisory committee meeting to obtain committee input on the safety and efficacy of Zalviso. Typically, advisory committees will provide responses to specific questions asked by the FDA, including the committee’s view on the approvability of the drug under review. Advisory committee decisions are not binding, but an adverse decision at the advisory committee may have a negative impact on the regulatory review of Zalviso. Additionally, we may choose to engage in the dispute resolution process with the FDA.

 

Our proposed trade name of Zalviso has been approved by the EMA and is currently being used in Europe. It has also been conditionally approved by the FDA, which must approve all drug trade names to avoid medication errors and misbranding. However, the FDA may withdraw this approval in which case any brand recognition or goodwill that we establish with the name Zalviso prior to commercialization may be worthless.

 

Any delay in approval by the FDA of the Zalviso NDA, once it is resubmitted, may negatively impact our stock price and harm our business operations. Any delay in obtaining, or inability to obtain, regulatory approval would prevent us from commercializing Zalviso in the United States, generating revenues and potentially achieving profitability. If any of these events occur, we may be forced to delay or abandon our development efforts for Zalviso, which would have a material adverse effect on our business.

 

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Positive clinical results obtained to date for Zalviso may be disputed in FDA review, do not guarantee regulatory approval and may not be obtained from future clinical trials.

 

We have reported positive top-line data from each of our four Zalviso Phase 3 clinical trials completed to date, as well as our Phase 2 clinical trials for Zalviso. However, even if we believe that the data obtained from clinical trials is positive, the FDA has, and in the future could, determine that the data from our trials was negative or inconclusive or could reach a different conclusion than we did on that same data. Negative or inconclusive results of a clinical trial or difference of opinion could cause the FDA to require us to repeat the trial or conduct additional clinical trials prior to obtaining approval for commercialization, and there is no guarantee that additional trials would achieve positive results or that the FDA will agree with our interpretation of the results. If the FDA were to require any additional clinical trials for Zalviso, our development efforts would be further delayed, which would have a material adverse effect on our business. Any such determination by the FDA would delay the timing of our commercialization plan for Zalviso and adversely affect our business operations.

 

Delays in clinical trials are common and have many causes, and any delay could result in increased costs to us and jeopardize or delay our ability to obtain regulatory approval and commence product sales.  

 

We have experienced and may in the future experience delays in clinical trials of our product candidates. While we have completed four Phase 3 clinical trials and several Phase 2 clinical trials for Zalviso, future clinical trials may not begin on time, have an effective design, enroll a sufficient number of patients or be completed on schedule, if at all. For example, we postponed the start of IAP312, originally planned for the first quarter of 2016, to September 2016. The postponement was due to a delay in the receipt and testing of final clinical supplies for this trial. As a result, the development timeline for Zalviso was further extended.

 

Our post-approval clinical trials for DSUVIA, or any future FDA-required clinical trials for Zalviso, could be delayed for a variety of reasons, including:

 

 

inability to raise funding necessary to initiate or continue a trial;

 

 

delays in obtaining regulatory approval to commence a trial;

 

 

delays in reaching agreement with the FDA on final trial design;

 

 

imposition of a clinical hold by the FDA, Institutional Review Board, or IRB, or other regulatory authorities;

 

 

delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;

 

 

delays in obtaining required IRB approval at each site;

 

 

delays in recruiting suitable patients to participate in a trial;

 

 

delays in the testing, validation, manufacture and delivery of the tablets and device components of DSUVIA or Zalviso;

 

 

delays in having patients complete participation in a trial or return for post-treatment follow-up;

 

 

clinical sites dropping out of a trial to the detriment of enrollment or being delayed in entering data to allow for clinical trial database closure;

 

 

time required to add new clinical sites; or

 

 

delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials.

 

If any future FDA-required clinical trials are delayed for any reason, our development costs may increase, our approval process for Zalviso could be delayed, our ability to commercialize and commence sales of Zalviso could be materially harmed, and our ability to maintain FDA approval of DSUVIA could be jeopardized, which could have a material adverse effect on our business.

 

Zalviso may cause adverse effects or have other properties that could delay or prevent regulatory approval or limit the scope of any approved label or market acceptance. DSUVIA may cause adverse effects or have other properties that could limit market acceptance.

 

Adverse events, or AEs, caused by Zalviso could cause us, other reviewing entities, clinical trial sites or regulatory authorities to interrupt, delay or halt any future FDA-required clinical trials and could result in the denial of regulatory approval. Phase 2 clinical trials we conducted with Zalviso did generate some AEs, but no significant adverse events, or SAEs, related to the trial drug. In our Phase 3 active-comparator clinical trial (IAP309), 8% of Zalviso-treated patients dropped out of the trial prematurely due to an AE (11% in the IV patient-controlled morphine group), and we observed three serious adverse events, or SAEs, that were assessed as possibly or probably related to study drug (one- respiratory depression in the Zalviso group and two- abdominal distension and ileus in the IV patient-controlled morphine group). In our Phase 3, double-blind, placebo-controlled, abdominal surgery trial (IAP310), 6% of Zalviso-treated patients dropped out of the trial prematurely due to an AE (9% in placebo group). There were no SAEs determined to be related to study drug. In our Phase 3, double-blind, placebo-controlled, orthopedic surgery trial (IAP311), 7% of Zalviso-treated patients dropped out of the trial prematurely due to an AE (7% in placebo group). Four patients (three in the Zalviso group and one in the placebo group) experienced an SAE considered possibly or probably related to the trial drug by the investigator. The SAEs possibly or probably attributed to Zalviso were severe oxygen saturation decrease, sinus tachycardia and confusional state. In our Phase 3 multicenter, open-label study of Zalviso (IAP312), 3% of patients dropped out prematurely due to an AE. Five patients experienced SAEs in the IAP312 study and none of these were considered possibly or probably related to the study drug by the investigator.

 

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In our Phase 2 DSUVIA placebo-controlled bunionectomy study (SAP202), two patients in the DSUVIA 30 mcg group (5%) discontinued treatment due to an AE, one unrelated to study drug and the other probably related to study drug. There were no SAEs deemed related to study drug. In our Phase 3 placebo-controlled abdominal surgery study (SAP301), one DSUVIA-treated patient (1%) dropped out of the trial prematurely due to an AE (4% in placebo group). There were two SAEs determined to be related to study drug in the placebo-treated group and no related SAEs in the DSUVIA group. In our Phase 3 open-label, single-arm emergency room study (SAP302), no DSUVIA-treated patients dropped out of the trial prematurely due to an AE. One patient had an SAE - angina pectoris - possibly related to study drug. In our post-operative study in patients aged 40 years or older (SAP303), 3% of DSUVIA-treated patients dropped out of the trial prematurely due to an AE. There were no SAEs deemed related to study drug.

 

If DSUVIA or, if approved, Zalviso cause serious or unexpected side effects after receiving marketing approval, a number of potentially significant negative consequences could result, including:

 

 

regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution in the form of a modified REMS program;

 

 

regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;

 

 

we may be required to change the way the product is administered or conduct additional clinical trials;

 

 

we could be sued and held liable for harm caused to patients; or,

 

 

our reputation may suffer.

 

Any of these events could prevent us from achieving or maintaining market acceptance of DSUVIA or, if approved, Zalviso, and could substantially increase the costs of commercializing our products.

 

Additional time may be required to obtain U.S. regulatory approval for Zalviso because it is a drug/device combination product candidate.    

 

DSUVIA and Zalviso are combination products with both drug and device components. The FDA requires both the drug and device components of combination product candidates to be reviewed as part of an NDA submission. There are very few examples of the FDA approval process for drug/device combination products such as DSUVIA and Zalviso. As a result, we experienced delays in the development and commercialization of DSUVIA, and may experience future delays in the development and commercialization of Zalviso, due to regulatory uncertainties in the product development and approval process, in particular as it relates to a drug/device combination product approval under an NDA.

 

The process for obtaining approval of an NDA is time consuming, subject to unanticipated delays and costs, and requires the commitment of substantial resources.

 

If the FDA determines that any of the clinical work submitted, including the clinical trials, Human Factors studies and bench testing submitted for a product candidate in support of an NDA were not conducted in full compliance with the applicable protocols for these trials, studies and testing as well as with applicable regulations and standards, or if the FDA does not agree with our interpretation of the results of such trials, studies and testing, the FDA may reject the data and results. The FDA may audit some or all of our clinical trial sites to determine the integrity of our clinical data. The FDA may audit some or all of our Human Factors study sites to determine the integrity of our data and may audit the data and results of bench testing. Any rejection of any of our data would negatively impact our ability to obtain marketing authorization for our product candidate, Zalviso, and would have a material adverse effect on our business and financial condition. In addition, an NDA may not be approved, or approval may be delayed, as a result of changes in FDA policies for drug approval during the review period. For example, although many products have been approved by the FDA in recent years under Section 505(b)(2) of the FDCA, objections have been raised to the FDA’s interpretation of Section 505(b)(2). If challenges to the FDA’s interpretation of Section 505(b) (2) are successful, the FDA may be required to change its interpretation, which could delay or prevent the approval of such an NDA. More generally, the FDA’s comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on American families and communities may result in delays and challenges in obtaining NDA approval. Any significant delay in the acceptance, review or approval of an NDA that we have submitted would have a material adverse effect on our business and financial condition and would require us to obtain significant additional funding.

 

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Although we have obtained regulatory approval for DSUVIA, and even if we obtain regulatory approval for Zalviso in the United States, we and our collaborators face extensive regulatory requirements and our products may face future development and regulatory difficulties.

 

Although we have obtained regulatory approval for DSUVIA, and even if we obtain regulatory approval for Zalviso in the United States, the FDA may impose significant restrictions on the indicated uses or marketing of our products or impose ongoing requirements for potentially costly post-approval trials or post-market surveillance. For example, DSUVIA is subject to a deferred post-marketing requirement for study in the pediatric population ages 6-17 years. Our protocol for this trial is not due until August 2020. Additionally, the labeling approved for DSUVIA includes restrictions on use due to the opioid nature of sufentanil. If approved, the labeling for Zalviso will likely include similar restrictions on use.

 

DSUVIA in the United States is also subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record-keeping and reporting of safety and other post-market information. The holder of an approved NDA is obligated to monitor and report AEs and any failure of a product to meet the specifications in the NDA. The holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws. If approved, Zalviso will be subject to these same requirements.

 

We must also register and obtain various state prescription drug distribution licenses and controlled substance permits, and any delay or failure to obtain or maintain these licenses or permits may limit our market and materially impact our business. In certain states we cannot apply for a license until a drug is approved by the FDA. The state licensing process may take several months which would delay commercialization in those states. In addition, manufacturers of drug products and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMPs and adherence to commitments made in the NDA. If we, or a regulatory agency, discover previously unknown problems with a product, such as AEs of unanticipated severity or frequency, or problems with the facilities where the product is manufactured, a regulatory agency may impose restrictions relative to that product or the manufacturing facilities, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.

 

If we fail to comply with applicable regulatory requirements following approval of our products, a regulatory agency may:

 

 

issue a warning letter asserting that we are in violation of the law;

 

 

seek an injunction or impose civil or criminal penalties or monetary fines;

 

 

suspend or withdraw regulatory approval;

 

 

suspend any ongoing clinical trials;

 

 

refuse to approve a pending NDA or supplements to an NDA submitted by us;

 

 

seize product; or

 

 

refuse to allow us to enter into supply contracts, including government contracts.

 

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize DSUVIA, or, if approved, Zalviso, and generate revenues.

 

Except for Zalviso and DZUVEO, which are both approved in Europe, we may never obtain additional regulatory approvals for our products and product candidates outside of the United States, which would limit our ability to realize their full market potential.

 

In order to market any products outside of the United States, we or our commercial partners, including Grünenthal in Europe, must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. On September 22, 2015, we announced that the EC had approved Grünenthal’s MAA for Zalviso for the management of acute moderate-to-severe post-operative pain in adult patients. In April 2016, Grünenthal completed the first commercial sale of Zalviso. In June 2018, we announced that the EC had granted marketing approval of DZUVEO for the treatment of patients with moderate-to-severe acute pain in medically monitored settings. We have not yet entered into a collaboration agreement with a strategic partner for the commercialization of DZUVEO in Europe and there can be no assurance that we will successfully enter into such an agreement.

 

Part of the foreign regulatory approval process includes compliance inspections of manufacturing facilities to ensure adherence to applicable regulations and guidelines. The foreign regulatory agency may delay, limit or deny marketing approval as a result of such inspections. We, our contract manufacturers, and their vendors, are all subject to preapproval and post-approval inspections at any time. The results of these inspections could impact our ability to obtain regulatory approval of DSUVIA and Zalviso in countries outside of the United States and Europe, or our ability to launch and successfully commercialize these products, once approved. In addition, results of EMA inspections could impact our ability to maintain EC approval of Zalviso and DZUVEO, and Grünenthal’s ability to expand and sustain commercial sales of Zalviso in Europe.

 

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Outside of Europe, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional non-clinical trials or clinical trials, which could be costly and time consuming. Regulatory requirements can vary widely from country-to-country and could delay or prevent the introduction of our products in those countries. Our current clinical trial data may not be sufficient to support marketing approval or premium reimbursement in all territories. For example, we anticipate we may need comparator studies for DZUVEO in Europe to ensure premium reimbursement in certain countries. Grünenthal does have products approved in international markets; however, Grünenthal’s experience in international markets does not guarantee compliance with regulatory requirements in those markets. Similarly, while we have obtained approval of DZUVEO in Europe, even if we are successful in entering into a collaboration agreement with a commercial partner, we will be substantially dependent on that commercial partner to comply with regulatory requirements. If we, or our commercial partners, fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be harmed.

 

DSUVIA requires, and, if approved, Zalviso will require, a REMS program.

 

DSUVIA was approved in the United States with a REMS program. If Zalviso is approved in the United States, it will also require a REMS program. The DSUVIA REMS program includes restrictions on product distribution and use only in certified medically supervised settings. Before DSUVIA is distributed, an authorized representative from each medically supervised setting must sign an attestation that they have the ability to manage acute opioid overdose and will train all relevant staff on administration of DSUVIA, including the importance of only dispensing the product in a medically supervised setting. Therefore, REMS-certification is a key gating item to generating product revenues for DSUVIA. In addition, the REMS program for DSUVIA may significantly increase our costs to commercialize this product. While we have received pre-clearance from the FDA regarding certain aspects of the proposed required REMS program for Zalviso, we cannot predict the final REMS program to be required as part of any FDA approval of Zalviso. Depending on the extent of the REMS requirements, any U.S. launch may be delayed, the costs to commercialize Zalviso may increase substantially and the potential commercial market could be restricted. Furthermore, risks of sufentanil that are not adequately addressed through the proposed REMS program for Zalviso may also prevent or delay its approval for commercialization.

 

Risks Related to Our Financial Condition and Need for Additional Capital

 

We have incurred significant losses since our inception, anticipate that we will continue to incur significant losses in 2020 and may continue to incur losses in the future.*    

 

We have incurred significant net losses in each year since our inception in July 2005, and as of March 31, 2020, we had an accumulated deficit of $414.0 million.

 

We have devoted most of our financial resources to research and development, including our non-clinical development activities and clinical trials. To date, we have financed our operations primarily through the issuance of equity securities, borrowings, payments from our commercial partner, Grünenthal, monetization of certain future royalties and commercial sales milestones from the European sales of Zalviso by Grünenthal, funding from the DoD, and more recently with revenues from sales of DSUVIA since the commercial launch in the first quarter of 2019. . The size of our future net losses will depend, in part, on the rate of future expenditures and our ability to generate revenues. We expect to continue to incur substantial expenses as we support commercialization activities for DSUVIA, conduct research and development activities, including the FDA regulatory review of the Zalviso NDA, once resubmitted, and support the manufacturing and supply of Zalviso in Europe for Grünenthal. Grünenthal’s sales of Zalviso in Europe have historically been small. If DSUVIA is not successfully commercialized in the U.S., or if Zalviso is not successfully developed or commercialized in the U.S., or if revenues are insufficient following marketing approval, we will not achieve profitability and our business may fail. Our success is also dependent on current and future collaborations to market our products outside of the United States, which may not materialize or prove to be successful.

 

We have not yet generated significant product revenue and may never be profitable.

 

Our ability to generate revenue from commercial sales and achieve profitability depends on our ability, alone or with collaborators, to successfully complete the development of, obtain the necessary regulatory approvals for, and commercialize our products. Although we received FDA approval of DSUVIA, and recently began the commercial launch of DSUVIA in the United States, we may never generate enough revenues from sales of DSUVIA, or Zalviso, if approved, in the United States to become profitable. Although DZUVEO was approved by the EC in June 2018, we have not yet entered into a collaboration agreement with a strategic partner to commercialize DZUVEO in Europe and there can be no assurance that we will successfully enter into such an agreement. While we have a collaboration agreement with Grünenthal for commercialization of Zalviso in Europe and Australia, Grünenthal may not achieve a level of commercial sales of Zalviso for which we would receive sales milestone payments.

 

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In September 2015, we consummated a monetization transaction with PDL BioPharma, Inc., or PDL, pursuant to which we sold to PDL for $65.0 million 75% of the European royalties from sales of Zalviso and 80% of the first four commercial milestones under the License Agreement, subject to a capped amount, referred to as the Royalty Monetization. Accordingly, even if Grünenthal is successful in commercializing Zalviso in the Territory, we will receive only 25% of the royalties and 20% of the first four commercial milestones under the License Agreement, and 100% of the royalties after the capped amount is reached. We do not anticipate generating significant near-term revenues from DSUVIA or Zalviso, if approved, in the United States. Our ability to generate future revenues from product sales depends heavily on our success in:

 

 

maintaining regulatory approval for DSUVIA and obtaining and maintaining regulatory approval for Zalviso in the United States; and

 

 

launching and commercializing DSUVIA and Zalviso, if approved, in the United States by building, internally or through collaborations, an institutionally focused sales force, and launching and commercializing DZUVEO and Zalviso internationally by entering into collaborations, including with Grünenthal, which may require additional funding.

 

Because of the numerous risks and uncertainties associated with launching a commercial pharmaceutical product, pharmaceutical product development and the regulatory environment, we are unable to predict the timing or amount of increased expenses, or when, or if, we will be able to achieve or maintain profitability. Our expenses could increase beyond expectations if we are delayed in receiving regulatory approval for Zalviso in the United States, or if we are required by the FDA to complete activities in addition to those we currently anticipate or have already completed.

 

We anticipate continuing to incur significant costs associated with commercializing DSUVIA in the United States. Even if we are able to generate revenues from the sale of DSUVIA or Zalviso, if approved, in the United States, we may not become profitable and may need to obtain additional funding to continue operations.

 

We are substantially dependent on our commercial partner, Grünenthal, to successfully commercialize Zalviso in Europe.

 

Under our agreements with Grünenthal, we granted Grünenthal rights to commercialize Zalviso in the Territory for human use in pain treatment within, or dispensed by, hospitals, hospices, nursing homes and other medically supervised settings. In September 2015, the EC approved Grünenthal’s MAA for Zalviso for the management of acute moderate-to-severe post-operative pain in adult patients, and Grünenthal began its European launch of Zalviso with the first commercial sale occurring in April 2016. Historically, sales volumes have been low and there is no guarantee that Grünenthal will achieve commercial success in its Zalviso launch in the European Union or anywhere in the Territory.

 

During the pilot and launch phases in the various European countries, Grünenthal reported certain issues from HCPs with the initial set up of the Zalviso controllers before being given to patients for use. To address the issues, we have assisted Grünenthal with implementing additional training for HCPs and we have revised the controller software. Controllers with the revised software, which were delivered in December 2016, have undergone extensive bench testing and we believe we have successfully addressed the issues as presented. Additional devices were delivered beginning in early 2017. Controllers with the U.S. version of the revised software were also used in the IAP312 clinical study that was initiated in September 2016. There can be no assurance that the issues identified in the initial pilot and launch phases by Grünenthal will not have a material adverse impact on the current and future sales of Zalviso in Europe. Further, if new issues occur, there may be a material adverse impact on the future sales of Zalviso in Europe which may have a negative impact on future revenues received and recognized by us.

 

We may not realize the expected benefits from our collaboration with Grünenthal due to a number of important factors, including:

 

 

The timing and amount of any payments we may receive under our agreements will depend on, among other things, the efforts, allocation of resources, and successful commercialization of Zalviso by Grünenthal in Europe;

 

 

Grünenthal may change the focus of its commercialization efforts or pursue higher-priority programs;

 

 

Grünenthal may reduce or stop its commercialization efforts in countries where it has the sole right to commercialize Zalviso; and

 

 

Grünenthal may terminate its agreements with us, adversely affecting our potential revenue from Zalviso;

 

Any failures in commercialization of Zalviso outside the United States could have a material adverse impact on our business, including an adverse impact on the commercialization of DSUVIA or the development of Zalviso in the United States, if related to issues underlying the sufentanil sublingual tablet technology, safety or efficacy. Additionally, we agreed to certain representations and covenants relating to the Amended Agreements under our agreements with PDL, and, if we breach those representations or covenants, we may become subject to indemnification claims by PDL and liable to PDL for its indemnifiable losses relating to such breaches. The amount of such losses could be material and could have a material adverse impact on our business.

 

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We have not yet entered into a collaboration agreement with a strategic partner for the commercialization of DZUVEO in Europe.  

 

DZUVEO was approved by the EC in June 2018, but we have not yet entered into a collaboration agreement with a strategic partner to commercialize DZUVEO in Europe. If we are unable to enter into such an agreement, we may never generate revenues from sales of DZUVEO. If we are successful in identifying a commercial partner and entering into a collaboration agreement, we will be substantially dependent on this partner to successfully commercialize DZUVEO in Europe. Any failures in the commercialization of DZUVEO in Europe could have a significant adverse impact on our revenues and operating results.

 

Any future collaboration agreement for DZUVEO will likely require us to support the manufacturing and supply of the product in Europe for our commercial partner. In addition, we anticipate we may need comparator studies in Europe to ensure premium reimbursement in certain countries. Our inability to profitably manufacture and supply DZUVEO to any future commercial partner, or to successfully complete these additional comparator studies and obtain premium reimbursement in certain countries, may prevent, limit or delay commercialization and any associated future revenues from DZUVEO in Europe.

 

We may be unable to achieve the manufacturing cost reductions required in order to accommodate the declining transfer prices under the Amended Agreements without a corresponding decrease in our gross margin.

 

Under the Amended Agreements with Grünenthal, we sell Zalviso at a predetermined transfer price that is currently less than the direct cost of manufacture at our contract manufacturers. In addition, we do not recover internal indirect costs as part of the transfer price. Furthermore, the Amended Agreements include declining maximum transfer prices over the term of the contract with Grünenthal. These transfer prices were agreed to assuming economies of scale that would occur with increasing production volumes (from the potential approval of Zalviso in the U.S. and an increase in demand in Europe) and corresponding decreases in manufacturing costs. We do not have long-term supply agreements with our contract manufacturers and prices are subject to periodic changes. To date, we have not received U.S. approval of Zalviso and sales by Grünenthal in Europe have not been substantial. We do not expect sales by Grünenthal in Europe to be substantial in the foreseeable future. If we do not receive timely approval of Zalviso in the U.S., are unable to successfully launch Zalviso in the U.S., or the volume of Grünenthal sales does not increase significantly, we are unlikely to achieve the manufacturing cost reductions required in order to accommodate these declining transfer prices without a corresponding decrease in our gross margin on Zalviso product sales.

 

We have limited experience commercializing DSUVIA, which may make it difficult to predict our future performance or evaluate our business and prospects.

 

Since inception, our operations have been primarily focused on developing our technology and undertaking pharmaceutical development and clinical trials for DSUVIA and Zalviso, understanding the market potential for DSUVIA and Zalviso, and preparing for the commercialization of DSUVIA and the potential commercialization of Zalviso in the United States. We launched commercialization efforts for DSUVIA in February 2019. As a result of our limited commercialization experience, any predictions that are made about our future performance, or viability, or evaluation of our business and prospects, may not be accurate.

 

We will require additional capital and may be unable to raise capital, which would force us to delay, reduce or eliminate our commercialization efforts and product development programs and could cause us to cease operations.*    

 

Launch of a commercial pharmaceutical product and pharmaceutical development activities can be time consuming and costly. We expect to incur significant expenditures in connection with our ongoing activities including the commercial launch of DSUVIA in the United States and support for FDA regulatory review of the Zalviso NDA, once resubmitted. While we believe we have sufficient capital resources to continue planned operations through the second quarter of 2021, we will need additional capital to pursue full commercialization of DSUVIA and Zalviso, if approved.

 

Clinical trials, regulatory reviews, and the launch of commercial product are expensive activities. In addition, commercialization costs for DSUVIA and Zalviso, if approved, in the United States may be significantly higher than estimated as a result of technical difficulties or otherwise. Revenues may be lower than expected and costs to produce such revenues may exceed those revenues. We will need to seek additional capital to continue operations. Such capital demands could be substantial. In the future, we may seek to sell additional equity securities, including under the Sales Agreement with Cantor, and debt securities, monetize or securitize certain assets including future royalty streams and milestones, refinance our loan agreement, obtain a revolving credit facility, enter into product development, license or distribution agreements with third parties, or divest DSUVIA or Zalviso. Such arrangements may not be available on favorable terms, if at all.

 

Future events and circumstances, including those beyond our control, may cause us to consume capital more rapidly than we currently anticipate. Furthermore, any product development, licensing, distribution or sale agreements that we enter into may require us to relinquish valuable rights. We may not be able to obtain sufficient additional funding or enter into a strategic transaction in a timely manner. If adequate funds are not available, we would be required to reduce our workforce, reduce the scope of, or cease, the commercial launch of DSUVIA, or the development of Zalviso in advance of the date on which we exhaust our cash resources to ensure that we have sufficient capital to meet our obligations and continue on a path designed to preserve stockholder value.

 

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Securing additional financing may divert our management from our day-to-day activities, which may adversely affect our ability to commercialize DSUVIA or develop Zalviso. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:

 

 

significantly scale back or discontinue the commercialization of DSUVIA, or the development of Zalviso;

 

 

seek additional corporate partners for Zalviso on terms that might be less favorable than might otherwise be available;

 

 

seek corporate partners for DSUVIA/DZUVEO on terms that might be less favorable than might otherwise be available; or

 

 

relinquish, or license on unfavorable terms, our rights to technologies or products that we otherwise would seek to develop or commercialize ourselves.

 

To fund our operations, we may sell additional equity securities, which may result in dilution to our stockholders, or debt securities, which may impose restrictions on our business.*

 

We expect that significant additional capital will be needed in the future to continue our planned operations. In order to raise additional funds to support our operations, we may sell additional equity securities, including under the Controlled Equity OfferingSM Sales Agreement, or the ATM Agreement, with Cantor Fitzgerald & Co., or Cantor, as agent. We may sell common stock, convertible securities, or other equity securities in one or more transactions at prices and in a manner we determine from time to time. Selling additional equity securities may result in dilution to our existing stockholders and new investors may be materially diluted by subsequent sales. Incurring additional indebtedness, including through the sale of debt securities, would result in increased fixed payment obligations and could also result in additional restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions, such as minimum cash balances, that could adversely impact our ability to conduct our business. Sales of equity or debt securities may also provide new investors with rights superior to our existing stockholders. If we are unable to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected, and we may not be able to meet our debt service obligations.

 

In addition, worsening economic conditions and other adverse effects or developments relating to the ongoing COVID-19 pandemic may negatively affect the market price of our stock, regardless of our actual operating performance. The market price for our common stock is likely to continue to be volatile, particularly due to the ongoing COVID-19 pandemic, and subject to significant price and volume fluctuations in response to market, industry and other factors. If additional funding is not available on favorable terms, if at all, due to these factors, we may not be able to obtain sufficient additional funding to support our operations.

 

The terms of our loan agreement with Oxford may restrict our current and future operations, particularly our ability to respond to changes in business or to take certain actions, including to pay dividends to our stockholders.

 

On May 30, 2019, the Company entered into the Loan Agreement with Oxford Finance LLC, or Oxford, a Delaware limited liability company, as the Lender. The Loan Agreement contains, and any future indebtedness we incur will likely contain, a number of restrictive covenants that impose operating restrictions, including restrictions on our ability to engage in acts that may be in our best long-term interests. The Loan Agreement includes covenants that, among other things, restrict our ability to (i) declare dividends or redeem or repurchase equity interests; (ii) incur additional liens; (iii) make loans and investments; (iv) incur additional indebtedness; (v) engage in mergers, acquisitions, and asset sales; (vi) transact with affiliates; (vii) undergo a change in control; (viii) add or change business locations; and (ix) engage in businesses that are not related to our existing business. The Loan Agreement also requires that we at all times maintain unrestricted cash of not less than $5.0 million.

 

A breach of any of these covenants could result in an event of default under the Loan Agreement. Upon the occurrence of such an event of default, a default interest rate of an additional 5% may be applied to the outstanding loan balances and all outstanding obligations under the Loan Agreement can be declared to be immediately due and payable If our indebtedness is accelerated, we cannot assure you that we will have sufficient assets to repay the indebtedness. The restrictions and covenants in the Loan Agreement and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.

 

We might be unable to service our existing debt due to a lack of cash flow and might be subject to default.    

 

As of March 31, 2020, we had approximately $24.5 million of accrued debt under the Loan Agreement. The Loan Agreement has a scheduled maturity date of June 1, 2023 and is secured by a first priority security interest in substantially all of our assets, with the exception of our intellectual property and those assets sold under the Royalty Monetization, where the security interest is limited to proceeds of intellectual property if it is licensed or sold.

 

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If we do not make the required payments when due, either at maturity, or at applicable installment payment dates, or if we breach the agreement or become insolvent, the Lender could elect to declare all amounts outstanding, together with accrued and unpaid interest, and other payments, to be immediately due and payable. Additional capital may not be available on terms acceptable to us, or at all. Even if we were able to repay the full amount in cash, any such repayment could leave us with little or no working capital for our business. If we are unable to repay those amounts, the Lender will have a first claim on our assets pledged under the Loan Agreement. If the Lender should attempt to foreclose on the collateral, it is unlikely that there would be any assets remaining after repayment in full of such secured indebtedness. Any default under the Loan Agreement and resulting foreclosure would have a material adverse effect on our financial condition and our ability to continue our operations. 

 

Risks Related to Our Reliance on Third Parties

 

We rely on third party manufacturers to produce commercial supplies of DSUVIA in the United States, commercial supplies of Zalviso in Europe, and clinical supplies of Zalviso in the United States. The failure of third party manufacturers to provide us with adequate commercial and clinical supplies could result in a material adverse effect on our business.

 

Third party manufacturers produce commercial and clinical supplies of our products and product candidates. Reliance on third party manufacturers entails many risks including:

 

 

the inability to meet our product specifications and quality requirements consistently;

 

 

a delay or inability to procure or expand sufficient manufacturing capacity;

 

 

manufacturing and product quality issues related to scale-up of manufacturing;

 

 

costs and validation of new equipment and facilities required for scale-up;

 

 

a failure to maintain in good order our production and manufacturing equipment for our products;

 

 

a failure to comply with cGMP and similar foreign standards;

 

 

the inability to negotiate manufacturing or supply agreements with third parties under commercially reasonable terms;

 

 

termination or nonrenewal of manufacturing or supply agreements with third parties in a manner or at a time that is costly or damaging to us;

 

 

the reliance on a limited number of sources, and in some cases, single sources for product components, such that if we are unable to secure a sufficient supply of these product components, we will be unable to manufacture and sell our products in a timely fashion, in sufficient quantities or under acceptable terms;

 

 

the lack of qualified backup suppliers for those components that are currently purchased from a sole or single source supplier;

 

 

operations of our third-party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations, including the bankruptcy of the manufacturer or supplier, or government orders related to the COVID-19 pandemic;

 

 

carrier disruptions or increased costs that are beyond our control; and

 

 

the failure to deliver our products under specified storage conditions and in a timely manner.

 

Any of these events could lead to stock outs, inability to successfully commercialize our products, clinical trial delays, or failure to obtain regulatory approval. Some of these events could be the basis for FDA action, including injunction, recall, seizure, or total or partial suspension of production.

 

In addition, we have not yet entered into a collaboration agreement for the sale of DZUVEO in Europe, but we anticipate that any future collaboration agreement will likely require us to manufacture and supply DZUVEO to our commercial partner. As mentioned above, we are obligated to manufacture and supply Zalviso under the Amended Agreements with Grünenthal for use in Europe and their other licensed territories. If we are unable to establish a reliable commercial supply of Zalviso for Grünenthal’s Territory, we may be unable to satisfy our obligations under the Amended Agreements in a timely manner or at all, and we may, as a result, be in breach of the Amended Agreements. If any such breach, or other breach, were to be material and remain uncured, it could result in Grünenthal terminating the Amended Agreements, which in turn could result in us being responsible for indemnification of losses suffered by PDL under the Royalty Monetization. If any of these events were to occur, our business would be materially adversely affected.

 

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We rely on limited sources of supply for the active pharmaceutical ingredient, or API, of DSUVIA and Zalviso and any disruption in the chain of supply may cause a delay in supplying DSUVIA and Zalviso.*

 

Currently we only have one supplier qualified as a vendor for the manufacture of DSUVIA, known as DZUVEO in Europe, and Zalviso with the FDA and EMA, respectively. If supply from the approved vendor is interrupted, there could be a significant disruption in commercial supply. For example, our API provider for DSUVIA is changing its process for manufacturing our drug, which c