AcelRx Pharmaceuticals(ACRX) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements Presents unaudited condensed consolidated financial statements, including balance sheets, comprehensive loss, stockholders' deficit, cash flows, and detailed notes Condensed Consolidated Balance Sheets Presents the company's financial position, detailing assets, liabilities, and stockholders' deficit at specific dates | Metric | Dec 31, 2019 (in thousands) | Mar 31, 2020 (in thousands) | Change (in thousands) | | :----- | :-------------------------- | :-------------------------- | :-------------------- | | Total Assets | $91,356 | $77,339 | $(14,017) | | Total Liabilities | $132,774 | $132,620 | $(154) | | Total Stockholders' Deficit | $(41,418) | $(55,281) | $(13,863) | | Cash and cash equivalents | $14,684 | $23,886 | $9,202 | | Short-term investments | $51,453 | $28,839 | $(22,614) | Condensed Consolidated Statements of Comprehensive Loss Details the company's financial performance, including revenue, operating expenses, and net loss over a period | Metric | 3 Months Ended Mar 31, 2020 (in thousands) | 3 Months Ended Mar 31, 2019 (in thousands) | Change (in thousands) | % Change | | :----- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Total Revenue | $386 | $265 | $121 | 45.7% | | Total Operating Costs & Expenses | $16,234 | $12,583 | $3,651 | 29.0% | | Loss from Operations | $(15,848) | $(12,318) | $(3,530) | 28.7% | | Total Other Expense | $(77) | $(1,356) | $1,279 | (94.3%) | | Net Loss | $(15,925) | $(13,674) | $(2,251) | 16.5% | | Net Loss per Share (basic & diluted) | $(0.20) | $(0.17) | $(0.03) | 17.6% | Condensed Consolidated Statements of Stockholders' Deficit Outlines changes in stockholders' equity, including accumulated deficit and additional paid-in capital | Metric | Dec 31, 2019 (in thousands) | Mar 31, 2020 (in thousands) | Change (in thousands) | | :----- | :-------------------------- | :-------------------------- | :-------------------- | | Total Stockholders' Equity (Deficit) | $(41,418) | $(55,281) | $(13,863) | | Accumulated Deficit | $(398,106) | $(414,031) | $(15,925) | | Additional Paid-in Capital | $356,609 | $358,670 | $2,061 | - Net proceeds from issuance of common stock in connection with equity financings contributed $784 thousand, and stock-based compensation added $1,146 thousand to additional paid-in capital[13] Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities | Metric | 3 Months Ended Mar 31, 2020 (in thousands) | 3 Months Ended Mar 31, 2019 (in thousands) | Change (in thousands) | | :----- | :----------------------------------------- | :----------------------------------------- | :-------------------- | | Net cash used in operating activities | $(14,364) | $(13,240) | $(1,124) | | Net cash provided by investing activities | $22,650 | $371 | $22,279 | | Net cash provided by (used in) financing activities | $916 | $(1,794) | $2,710 | | Net increase (decrease) in cash and cash equivalents | $9,202 | $(14,663) | $23,865 | | Cash and cash equivalents—End of period | $23,886 | $73,312 | $(49,426) | Notes to Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Organization and Summary of Significant Accounting Policies Describes the company's business, product focus, and key accounting policies - AcelRx focuses on developing and commercializing innovative therapies for acute pain in medically supervised settings, specifically DSUVIA/DZUVEO and Zalviso[20] - DSUVIA (sufentanil sublingual tablet, 30 mcg) was FDA approved in November 2018 and commercially launched in Q1 2019 in the US. DZUVEO (same product) received EC marketing approval in June 2018[20][21] - Zalviso (sufentanil sublingual tablet system, 15 mcg) is approved in Europe and commercialized by Grünenthal GmbH; US regulatory approval is pending resubmission of NDA, dependent on FDA's new opioid approval guidelines[20][23] - On March 15, 2020, AcelRx entered into an agreement to acquire Tetraphase Pharmaceuticals, Inc., with Tetraphase shareholders to receive AcelRx common stock and a contingent value right[25] - A co-promotion agreement was also signed with Tetraphase to co-promote DSUVIA and Tetraphase's XERAVA™, leading to a reduction of 30 positions (primarily commercial) at AcelRx to eliminate overlap and reduce operating expenses[27][36] - The company has incurred recurring operating losses and negative cash flows since inception and expects this to continue until DSUVIA gains significant market acceptance[28] 2. Investments and Fair Value Measurement Details the company's investment portfolio and fair value measurement classifications | Metric | Dec 31, 2019 (in thousands) | Mar 31, 2020 (in thousands) | Change (in thousands) | | :----- | :-------------------------- | :-------------------------- | :-------------------- | | Total cash, cash equivalents and short-term investments | $66,137 | $52,725 | $(13,412) | | Money market funds | $598 | $16,102 | $15,504 | | Commercial paper | $39,260 | $29,751 | $(9,509) | | Corporate debt securities | $10,054 | $1,676 | $(8,378) | - The company's financial instruments include Level I (money market funds) and Level II (U.S. government agency securities, commercial paper, corporate debt securities) assets, and Level III liabilities (contingent put option liability)[48] | Metric | Dec 31, 2019 (in thousands) | Mar 31, 2020 (in thousands) | Change (in thousands) | | :----- | :-------------------------- | :-------------------------- | :-------------------- | | Contingent put option liability (Level III) | $437 | $746 | $309 | 3. Inventories, net Provides a breakdown of inventory components and related valuation adjustments | Metric | Dec 31, 2019 (in thousands) | Mar 31, 2020 (in thousands) | Change (in thousands) | | :----- | :-------------------------- | :-------------------------- | :-------------------- | | Total Inventories | $3,295 | $3,099 | $(196) | | Raw materials | $1,153 | $1,146 | $(7) | | Work-in-process | $593 | $0 | $(593) | | Finished goods | $1,549 | $1,953 | $404 | - An inventory impairment charge of $0.1 million was recorded for DSUVIA inventory at risk of expiring before sale[52] 4. Revenue from Contracts with Customers Explains revenue recognition policies and disaggregates revenue by product and source | Metric | 3 Months Ended Mar 31, 2020 (in thousands) | 3 Months Ended Mar 31, 2019 (in thousands) | Change (in thousands) | % Change | | :----- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Total Revenue | $386 | $265 | $121 | 45.7% | | DSUVIA Product Sales | $155 | $47 | $108 | 230% | | Zalviso Product Sales | $119 | $79 | $40 | 51% | | Non-cash royalty revenue | $84 | $85 | $(1) | (1%) | | Royalty revenue | $28 | $26 | $2 | 8% | | Other revenue | $0 | $28 | $(28) | (100%) | - The increase in DSUVIA sales is attributed to the ramp-up of its commercial launch in the US, while Zalviso sales increased due to higher orders from Grünenthal[121][122] - The company is eligible for up to $194.5 million in additional milestone payments from Grünenthal for Zalviso, based on regulatory/development efforts ($28.5M) and net sales targets ($166.0M)[56] - Deferred revenue related to a significant discount on Zalviso manufacturing services for Grünenthal under Amended Agreements was $3.1 million at March 31, 2020, recognized straight-line through 2029[62][63] 5. Long-Term Debt Details the company's long-term debt obligations and related financial instruments - On May 30, 2019, AcelRx secured a $25.0 million term loan from Oxford Finance LLC, using $8.9 million to repay a prior agreement with Hercules[67] - Interest expense related to the Oxford Loan Agreement was $0.8 million for the three months ended March 31, 2020, up from $0.4 million for the Prior Agreement in the same period of 2019, due to a higher outstanding loan balance[66][70][136] - Warrants exercisable for 176,679 shares of common stock were issued to Oxford, classified as a discount to the loan[69] - The company is building out a suite within Catalent Pharma Solutions' facility for DSUVIA manufacturing, with $1.7 million capitalized as leasehold improvements as of March 31, 2020, under a $2.0 million obligation[71] 6. Leases Outlines the company's lease arrangements, costs, and future payment obligations | Metric | 3 Months Ended Mar 31, 2020 (in thousands) | | :----- | :----------------------------------------- | | Operating lease costs | $340 | | Sublease income | $(150) | | Net lease costs | $190 | - Weighted-average remaining lease term for operating leases is 3.83 years, with a weighted-average discount rate of 11.72%[74] | Year | Future Minimum Lease Payments (in thousands) | | :--- | :----------------------------------------- | | 2020 (remaining nine months) | $953 | | 2021 | $1,305 | | 2022 | $1,345 | | 2023 | $1,386 | | 2024 | $116 | | Total | $5,105 | 7. Liability Related to Sale of Future Royalties Describes the accounting for the sale of future royalties and changes in related liabilities - In September 2015, AcelRx sold 75% of European Zalviso royalties and 80% of the first four commercial milestones to PDL for $65.0 million, capped at $195.0 million[80] - A material revision in Q2 2019 reduced the effective interest rate to 0% prospectively, as estimated future payments to PDL are now approximately $20 million, less than the $65.0 million received. This change resulted in non-cash interest income[81][82][139] | Metric | Mar 31, 2020 (in thousands) | | :----- | :-------------------------- | | Liability related to sale of future royalties — beginning balance | $92,035 | | Non-cash royalty revenue | $(79) | | Non-cash interest (income) expense recognized | $(843) | | Liability related to sale of future royalties as of March 31, 2020 | $91,113 | 8. Legal Proceedings Summarizes ongoing legal actions, particularly those related to the proposed Tetraphase merger - Ten lawsuits have been filed by Tetraphase stockholders challenging the proposed merger with AcelRx, alleging violations of Section 14(a) of the Exchange Act and Rule 14a-9, and breach of fiduciary duties[85][86] - The complaints seek preliminary and permanent injunction of the merger, rescission or rescissory damages, and dissemination of a revised registration statement[87] - AcelRx believes the complaints are without merit and is currently unable to predict the ultimate outcome or estimate a possible loss[88] 9. Warrants Details outstanding warrants for common stock and their terms - Warrants to purchase 176,679 shares of common stock, with an exercise price of $2.83 per share, were issued to Oxford Finance LLC on May 30, 2019, and remain outstanding as of March 31, 2020, expiring in May 2029[89] 10. Stock-Based Compensation Reports stock-based compensation expenses across various categories | Expense Category | 3 Months Ended Mar 31, 2020 (in thousands) | 3 Months Ended Mar 31, 2019 (in thousands) | | :--------------- | :----------------------------------------- | :----------------------------------------- | | 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 2011 Equity Incentive Plan[92] 11. Stockholders' Equity Describes changes in stockholders' equity, including common stock issuances - The company issued and sold 431,800 shares of common stock under the ATM Agreement, generating approximately $0.8 million in net proceeds during Q1 2020[94] - As of March 31, 2020, the company has the ability to sell an additional $44.5 million of common stock under the ATM Agreement[94] 12. Net Loss per Share of Common Stock Calculates basic and diluted net loss per share and related share counts | Metric | 3 Months Ended Mar 31, 2020 | 3 Months Ended Mar 31, 2019 | | :----- | :-------------------------- | :-------------------------- | | Net loss per share (basic and diluted) | $(0.20) | $(0.17) | | Shares used in computing net loss per share | 80,057,405 | 78,788,790 | - Common stock equivalents, including ESPP, RSUs, stock options (15,630,340 shares), and common stock warrants (176,679 shares), were excluded from diluted EPS calculation as they were antidilutive due to the net loss[95][96] 13. Subsequent Events Discloses significant events occurring after the balance sheet date - On May 6, 2020, Tetraphase received an acquisition proposal from La Jolla Pharmaceutical Company for $22 million cash plus $12.5 million in CVRs[97] - Tetraphase's board determined the La Jolla Proposal could reasonably lead to a "Superior Offer" and is considering it, while still recommending the AcelRx Merger Agreement[97][98] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes financial condition and results, covering business, product portfolio, Tetraphase acquisition, Q1 2020 performance, and liquidity About AcelRx Pharmaceuticals, Inc. Provides an overview of AcelRx's core business and strategic focus - AcelRx is a specialty pharmaceutical company focused on developing and commercializing innovative therapies for use in medically supervised settings[99] Our Portfolio Showcases the company's key product candidates and their development status | Product | Description | Target Use | Status | | :------ | :---------- | :--------- | :----- | | DSUVIA ® | Sufentanil sublingual tablet, 30 mcg | Moderate-to-severe acute pain in a medically supervised setting | FDA approval Nov 2018, commercial launch Q1 2019. | | DZUVEO | Sufentanil sublingual tablet, 30 mcg | Moderate-to-severe acute pain in a medically supervised setting | EC approval June 2018. | | Zalviso ® | Sufentanil sublingual tablet system, 15 mcg | Moderate-to-severe acute pain in the hospital setting | US: Positive Phase 3 results, NDA resubmission timing dependent on FDA guidelines. EU: Approved and marketed by Grünenthal. | Proposed Acquisition of Tetraphase Pharmaceuticals, Inc. Details the planned acquisition of Tetraphase and associated terms and risks - AcelRx entered into a merger agreement on March 15, 2020, to acquire Tetraphase Pharmaceuticals, Inc[102] - Tetraphase stockholders will receive 0.6303 shares of AcelRx common stock and a contingent value right for additional consideration based on XERAVA™ net sales[102] - The merger is expected to close after Tetraphase's special stockholder meeting on June 8, 2020[103] - On May 6, 2020, La Jolla Pharmaceutical Company made a competing acquisition proposal for Tetraphase, which Tetraphase's board deemed could lead to a "Superior Offer"[104] Co-Promotion Agreement Describes the strategic co-promotion partnership and its operational impacts - AcelRx and Tetraphase entered a Co-Promotion Agreement on March 15, 2020, to co-promote DSUVIA and XERAVA™[106] - In connection with this agreement, AcelRx eliminated 30 positions, mainly within its commercial organization, to reduce operating expenses and eliminate overlap with the Tetraphase commercial team[106] General Trends and Outlook Discusses current market trends, including COVID-19 impacts, and future business prospects - COVID-19 pandemic has resulted in government-mandated shelter-in-place orders and restrictions on sales force access to healthcare facilities, substantially reducing educational and promotional efforts[107] - Near-term sales volumes are expected to be adversely impacted, while operating expenses are anticipated to be lower due to reduced travel and promotional activities[107] - AcelRx is discussing how DSUVIA can support the severe shortage of intravenous sedatives and analgesics (e.g., fentanyl) during the COVID-19 pandemic[108] - A Zalviso supplier issued a force majeure notice due to government orders, causing a halt in production, though not expected to significantly impact financial results[109] - International travel restrictions have delayed the testing and acceptance of the high-volume packaging line, now projected for installation in 2020 and qualification in 2021[110] - DSUVIA achieved Milestone C approval by the Department of Defense in April 2020, clearing the path for DoD orders[113] Financial Overview Summarizes the company's financial performance and capital position - The company incurred a net loss of $15.9 million for the three months ended March 31, 2020, compared to $13.7 million in the prior-year period[116] - As of March 31, 2020, the accumulated deficit was $414.0 million[116] | Metric | Dec 31, 2019 (in thousands) | Mar 31, 2020 (in thousands) | Change (in thousands) | | :----- | :-------------------------- | :-------------------------- | :-------------------- | | Cash, cash equivalents and short-term investments | $66,137 | $52,725 | $(13,412) | - The company expects to continue incurring operating losses and negative cash flows until DSUVIA gains significant market acceptance[114] - Capital expenditures are planned for a high-volume automated packaging line for DSUVIA, expected to decrease cost of goods sold from 2022 onwards[115] Critical Accounting Estimates Explains key accounting judgments and assumptions made by management - Financial statements require management to make estimates and assumptions, which are based on historical experience and market-specific factors[117] - No significant changes to critical accounting policies or estimates were made during the three months ended March 31, 2020[118] Results of Operations Analyzes the company's financial results, including revenue and expense trends Revenue Details the company's revenue streams, including product sales and collaboration revenue | Metric | 3 Months Ended Mar 31, 2020 (in thousands) | 3 Months Ended Mar 31, 2019 (in thousands) | Change (in thousands) | % Change | | :----- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Total Product Sales Revenue | $274 | $126 | $148 | 117% | | DSUVIA Product Sales | $155 | $47 | $108 | 230% | | Zalviso Product Sales | $119 | $79 | $40 | 51% | | Total Contract and Other Collaboration Revenue | $112 | $139 | $(27) | (19%) | - DSUVIA sales increased due to the ramp-up of its commercial launch in the US, while Zalviso sales increased due to higher orders from Grünenthal[121][122] - Contract and other collaboration revenue is not expected to significantly impact near-term cash flows due to the 2015 royalty monetization with PDL[124] Cost of Goods Sold Analyzes the costs directly associated with product sales and manufacturing | Metric | 3 Months Ended Mar 31, 2020 (in thousands) | 3 Months Ended Mar 31, 2019 (in thousands) | Change (in thousands) | % Change | | :----- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Total Cost of Goods Sold | $1,511 | $1,230 | $281 | 23% | | Direct costs | $246 | $124 | $122 | 98% | | Indirect costs | $1,265 | $1,106 | $159 | 14% | - Direct costs for Q1 2020 included a $0.1 million inventory impairment charge for short-dated DSUVIA inventory[126] - Negative gross margins are anticipated for Zalviso delivered to Grünenthal due to predetermined transfer prices that do not cover internal indirect costs and are currently below direct costs at low volumes[128] Research and Development Expenses Reports expenditures on R&D activities for product development | Metric | 3 Months Ended Mar 31, 2020 (in thousands) | 3 Months Ended Mar 31, 2019 (in thousands) | Change (in thousands) | % Change | | :----- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Total R&D Expenses | $1,412 | $1,377 | $35 | 3% | | DSUVIA | $292 | $145 | $147 | 101% | | Zalviso | $29 | $182 | $(153) | (84%) | | Overhead | $1,091 | $1,050 | $41 | 4% | - Future R&D expenditures are expected to support the FDA regulatory review of the Zalviso NDA, with timing dependent on FDA's new opioid approval guidelines[130] Selling, General and Administrative Expenses Details expenses related to sales, marketing, and general corporate functions | Metric | 3 Months Ended Mar 31, 2020 (in thousands) | 3 Months Ended Mar 31, 2019 (in thousands) | Change (in thousands) | % Change | | :----- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Selling, General and Administrative Expenses | $13,311 | $9,976 | $3,335 | 33% | - The increase was primarily driven by $1.8 million in business development costs related to the proposed Tetraphase acquisition and $1.5 million in other SG&A increases, including $1.1 million in higher personnel-related expenses[134] - A headcount reduction of 30 positions in the commercial organization was initiated on March 16, 2020, in connection with the Co-Promotion Agreement with Tetraphase[135] Other Income (Expense) Summarizes non-operating income and expenses, including interest and royalty-related items | Metric | 3 Months Ended Mar 31, 2020 (in thousands) | 3 Months Ended Mar 31, 2019 (in thousands) | Change (in thousands) | % Change | | :----- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Total Other Expense | $(77) | $(1,356) | $1,279 | (94%) | | 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%) | - Interest expense increased due to a higher outstanding loan balance from the Oxford Loan Agreement[136] - Non-cash interest income on the royalty monetization liability increased significantly due to a Q2 2019 revision in estimates, reducing the effective interest rate to 0% prospectively and resulting in interest income recognition[139] - Interest income decreased due to a lower average investment balance and lower yields[137] Liquidity and Capital Resources Assesses the company's cash position, funding needs, and capital management strategies Liquidity Evaluates the company's ability to meet short-term financial obligations and funding outlook - AcelRx has incurred losses and negative cash flows from operations since inception and expects this to continue[140] | Metric | Dec 31, 2019 (in thousands) | Mar 31, 2020 (in thousands) | Change (in thousands) | | :----- | :-------------------------- | :-------------------------- | :-------------------- | | Cash, cash equivalents and investments | $66,137 | $52,725 | $(13,412) | - Existing capital resources are anticipated to meet operational requirements through Q2 2021, but additional capital will be required to fund operations until sufficient revenues are generated[141] - The company has the ability to sell approximately $44.5 million of common stock under its ATM Agreement as of March 31, 2020[142] - The accrued balance under the Oxford Loan Agreement was $24.5 million as of March 31, 2020[143] Cash Flows Analyzes cash movements from operating, investing, and financing activities | Metric | 3 Months Ended Mar 31, 2020 (in thousands) | 3 Months Ended Mar 31, 2019 (in thousands) | | :----- | :----------------------------------------- | :----------------------------------------- | | 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) | - Operating cash usage was driven by commercial readiness for DSUVIA and Zalviso, and support for Grünenthal's European sales[147] - Investing cash flow was primarily from $35.5 million in proceeds from investment maturities, offset by $12.7 million in new investment purchases[151] - Financing cash flow included $0.8 million from ATM Agreement sales and $0.2 million from ESPP purchases[154] Operating Capital and Capital Expenditure Requirements Outlines future funding needs for operations and capital investments - Future capital requirements are highly variable, influenced by the Tetraphase acquisition, COVID-19 impact on sales, DSUVIA/Zalviso commercialization, and regulatory timelines[155][156] - Long-term operations will require additional capital through equity sales, debt issuance, asset monetization, or licensing arrangements[157] Off-Balance Sheet Arrangements Discloses any significant off-balance sheet financial commitments - The company has not entered into any off-balance sheet arrangements or held any variable interest entities as of March 31, 2020[158] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk disclosures occurred in Q1 2020 compared to the 2019 Annual Report - No material changes to market risk disclosures occurred in Q1 2020[160] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2020, with no material changes in internal control - Disclosure controls and procedures were evaluated and found effective at the reasonable assurance level as of March 31, 2020[162] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[163] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings The company is involved in legal proceedings related to the proposed Tetraphase merger, as detailed in Note 8 of the financial statements - Information on legal proceedings is incorporated by reference from Note 8 of the financial statements[165] Item 1A. Risk Factors Details significant risks that could materially affect future results, covering COVID-19, acquisitions, commercialization, and financial condition Risks Related to COVID-19 Pandemic Highlights specific risks and impacts stemming from the COVID-19 global health crisis - COVID-19 has adversely affected business operations, including restrictions on activities, supply chain disruptions, and limited sales representative access to healthcare facilities[168] - Government orders have reduced procedures where DSUVIA is administered and temporarily halted elective surgeries, negatively impacting sales[168] - The ultimate impact of COVID-19 on operations, healthcare systems, and the global economy is highly uncertain[169] Risks Related to Our Planned Acquisition of Tetraphase Pharmaceuticals, Inc. Details risks associated with the proposed merger, including completion uncertainty and integration challenges - The acquisition is subject to customary closing conditions, including Tetraphase stockholder approval and absence of legal impediments, with no assurance of timely completion[171] - A competing proposal from La Jolla Pharmaceutical Company has emerged, which Tetraphase's board considers a potential "Superior Offer," posing a risk to the AcelRx merger[172] - Failure to complete the merger could lead to a fall in AcelRx's share price, incur significant costs, divert management attention, and result in negative publicity or legal proceedings[173] - Uncertainty about the acquisition may adversely affect employee retention, recruitment, and relationships with customers, suppliers, and partners[174][175] - Integration of Tetraphase's business, if completed, presents challenges such as entering new markets, managing relationships, consolidating infrastructure, and retaining key employees, which could impact financial results[176] - The issuance of up to approximately 14 million shares of AcelRx common stock to Tetraphase securityholders will dilute existing AcelRx shareholders' ownership interest (up to 14.6%)[179][180] Risks Related to Commercialization of DSUVIA® and Zalviso® Outlines challenges in achieving market acceptance and sales for key products - Commercial success of DSUVIA is highly dependent on market acceptance by physicians, patients, and healthcare community, effective marketing, manufacturing, pricing, and compliance with the REMS program[181] - COVID-19 restrictions on sales force access to healthcare facilities are substantially reducing educational and promotional efforts, adversely impacting near-term DSUVIA sales volumes[182] - Market acceptance of DSUVIA and Zalviso depends on clinical safety/efficacy, convenience, overcoming perceptions of sufentanil's potency, regulatory label limitations, and payer formulary acceptance[184][185] - Inability to maintain or grow sales and marketing capabilities, or secure effective third-party collaborations for international markets, could hinder product revenue generation[187][189][190] - A headcount reduction of 30 positions in the commercial team, linked to the Tetraphase co-promotion agreement, may disrupt operations and impact DSUVIA commercialization[192] - Government guidelines and regulations, particularly concerning opioids, can reduce DSUVIA and Zalviso use and impact market acceptance[193][194][195] - The company faces potential governmental investigations and lawsuits regarding opioid commercialization practices, which could result in significant legal costs, fines, and reputational harm[197][198][199][200][201][202] - Failure to establish and maintain collaborative relationships, especially for international commercialization, could limit the ability to develop and commercialize products successfully[204][205] - Intense competition from existing and future pharmaceuticals, including injectable and oral opioids, NSAIDs, and transmucosal fentanyl products, poses a risk to DSUVIA and Zalviso's commercial potential[211][212] - Difficulty in obtaining hospital formulary approvals for DSUVIA and Zalviso, exacerbated by COVID-19 access restrictions, could limit commercial success[213] - Lack of adequate coverage and reimbursement from government and third-party payers for DSUVIA and Zalviso in the US and Europe could hinder profitable sales[214][215][216][217][219][220] - Risks of off-label promotion, inability to establish GPO relationships, and reliance on a limited number of pharmaceutical wholesalers could adversely affect business[221][222][223][224] Risks Related to Clinical Development and Regulatory Approval Addresses uncertainties in product development, regulatory pathways, and evolving guidelines - Evolving legislation and regulatory changes, particularly concerning opioid-containing products, could increase commercialization costs and affect pricing[225] - The timing of Zalviso NDA resubmission is dependent on the finalization of FDA's new opioid approval guidelines and process[225][239] - Healthcare reform measures, including the Affordable Care Act and proposals to reduce drug prices, could negatively impact reimbursement and profitability[227][228][229][230][232][234][237] - Market resistance, delays, or rejections may arise from additional government regulation or changes in policy regarding opioids generally and sufentanil specifically[238] - Zalviso, as a drug/device combination product, faces regulatory uncertainties and potential delays in the approval process[263][264] - Adverse events from Zalviso or DSUVIA could delay or prevent regulatory approval, limit the scope of approved labels, or lead to withdrawal of approval[257][258][259][261][262] - Delays in clinical trials, common in the industry, could increase costs and jeopardize regulatory approval and product sales[253][254][255][256] - Extensive regulatory requirements for DSUVIA and, if approved, Zalviso, including post-approval trials, surveillance, and compliance with cGMPs, pose ongoing challenges[268][269][270][271][272][273] - Obtaining foreign regulatory approvals outside Europe is difficult, costly, and time-consuming, limiting market potential if unsuccessful[274][275][276][278] - DSUVIA requires, and Zalviso will require, a REMS program, which imposes distribution and use restrictions, potentially increasing commercialization costs and restricting the market[279] Risks Related to Our Financial Condition and Need for Additional Capital Focuses on financial sustainability, operating losses, and future funding requirements - The company has incurred significant net losses since inception, with an accumulated deficit of $414.0 million as of March 31, 2020[280] - AcelRx expects to continue incurring substantial expenses for DSUVIA commercialization, Zalviso R&D, and European sales support, and may never achieve profitability[281][282][284][285] - The company is substantially dependent on Grünenthal for Zalviso's commercial success in Europe, but historical sales have been low, and issues with device setup have occurred[286][287][288] - The company has not yet secured a strategic partner for DZUVEO commercialization in Europe, which could significantly impact revenues[289][290] - Inability to achieve manufacturing cost reductions for Zalviso to accommodate declining transfer prices under agreements with Grünenthal could decrease gross margins[292][293] - Limited experience commercializing DSUVIA makes future performance predictions difficult[294][295] - Additional capital will be required beyond Q2 2021 for full commercialization of DSUVIA and Zalviso, with potential financing methods including equity sales (dilution risk), debt issuance (restrictive covenants), or licensing arrangements[296][297][298][299][300] - The loan agreement with Oxford contains restrictive covenants (e.g., on dividends, additional debt, mergers) and requires maintaining $5.0 million in unrestricted cash, with a breach potentially leading to accelerated debt repayment[302][303][304] - Inability to service existing debt ($24.5 million accrued under Oxford Loan Agreement as of March 31, 2020) could lead to default and foreclosure on pledged assets[305][306] - The company does not intend to pay dividends on common stock, limiting returns to stock value[390][391] Risks Related to Our Reliance on Third Parties Examines risks associated with dependence on external manufacturers, suppliers, and partners - Heavy reliance on third-party manufacturers for commercial and clinical supplies of DSUVIA and Zalviso entails risks such as inability to meet specifications, capacity issues, quality problems, and compliance failures[307][308] - Disruptions from conditions unrelated to AcelRx's business, including supplier bankruptcy or government orders related to COVID-19, could impact operations[308] - The company relies on limited, and in some cases single, sources for API and other product components, posing a risk of supply chain disruption[311] - Manufacture of sufentanil sublingual tablets requires specialized equipment and expertise, with a limited number of facilities, increasing risks of disruption if equipment breaks down[312] - Manufacturing issues, including scale-up challenges, equipment reliability, and quality of components, could delay commercialization and regulatory approval[314][315] - Dependence on contract manufacturers like Patheon for sufentanil sublingual tablets means compliance with cGMPs and regulatory guidelines is critical; failure could lead to delays or need for alternative suppliers[317][318][320] - The company is pursuing an automated filling and packaging line for DSUVIA and DZUVEO, but its successful purchase, installation, validation, and regulatory approval are not assured[322] - Reliance on CROs for clinical trials means limited control over their performance, and non-compliance with cGCPs could lead to data unreliability and delays[323][324][325][326] Risks Related to Our Business Operations and Industry Covers operational, compliance, and industry-specific challenges - Sufentanil-based products are Schedule II controlled substances, subject to extensive DEA regulation (quota system, security, record-keeping), which can lead to significant compliance costs and potential supply disruptions[328][329] - Relationships with healthcare professionals and partners are subject to anti-kickback, fraud and abuse, and other healthcare laws, exposing the company to penalties if non-compliant[330][331][332][333][334] - Maintaining conformity of the quality system to ISO standards and complying with European laws are essential for commercial sales of the Zalviso device in Europe[335][336] - Significant disruptions of information technology systems or data security incidents could result in financial, legal, regulatory, business, and reputational harm[337][338][339][340] - Business interruptions from natural disasters (e.g., earthquakes in the San Francisco Bay Area), pandemic diseases (COVID-19), or man-made incidents could delay operations and sales efforts[341] - Future success depends on retaining key executives and attracting/retaining qualified scientific, manufacturing, and commercial personnel, facing intense competition in the industry[342] - Potential acquisitions or strategic transactions could divert management attention and incur costs[343][344][345] - Commercial sales of DSUVIA and Zalviso expose the company to product liability claims, which could result in substantial liability and costs, potentially exceeding insurance coverage[346][347][348] - Employee misconduct, including non-compliance with regulatory standards and fraud, could lead to significant penalties and reputational harm[349][350] Risks Related to Our Intellectual Property Discusses risks concerning patent protection, infringement, and trade secrets - AcelRx relies on 80 issued patents worldwide covering sufentanil sublingual tablets, delivery devices, and platform technology, with DSUVIA patents providing coverage until 2031 and a European DZUVEO device patent until 2036[351] - Commercial success depends on defending current patents against third-party challenges and expanding the patent portfolio, with no assurance of success[353][354] - The company faces risks of patent infringement claims from competitors, which could lead to litigation, damages, licensing costs, or injunctions[358][360] - Patent positions are highly uncertain, involving complex legal questions and evolving interpretations, which may limit the scope of protection[355][363] - Litigation involving intellectual property is expensive, time-consuming, and could divert management attention, potentially leading to invalidation of patents or public announcements affecting stock price[357][365] - Inadequate protection of proprietary rights, including trade secrets, could allow competitors to use technologies and erode competitive advantage[367][368] - Failure to pay periodic maintenance fees or comply with procedural requirements could result in loss of patent rights[369][370] - Enforcing intellectual property rights globally is challenging due to varying laws and enforcement levels, particularly in developing countries[371][372] - Failure to secure trademark registrations in all potential markets could adversely affect the business[373] Risks Related to Ownership of Our Common Stock Highlights factors affecting stock price volatility and shareholder value - The trading price of common stock has experienced significant volatility (e.g., $0.76 to $2.07 in Q1 2020) and is likely to remain volatile due to various factors[375] - Factors influencing stock price volatility include commercialization success of DSUVIA/Zalviso, funding availability, Tetraphase merger outcome, COVID-19 impacts, regulatory decisions, competition, and industry perception[375][376] - Sales of a substantial number of common stock shares by existing stockholders or future equity offerings could depress the market price and cause dilution[379][380] - The company is exposed to securities-related class action litigation, which is expensive and can divert management resources[381][382][383] - The ability to use net operating loss carryforwards ($212.4 million federal, $113.5 million state as of Dec 31, 2019) may be limited by future taxable income generation and ownership changes under Section 382[384][385][386] - The effective tax rate may fluctuate due to changes in profitability mix, audits, tax laws, and the newly enacted federal income tax law[387][388] - The company does not intend to pay dividends on common stock, and is prohibited from doing so under the Loan Agreement, limiting stockholder returns to stock value[390][391] - Provisions in the company's charter documents and Delaware law could make it more difficult or costly for a third party to acquire the company[392][393][394] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds occurred during the period - None[395] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the period - None[395] Item 4. Mine Safety Disclosures Not applicable - Not applicable[395] Item 5. Other Information No other information to disclose - None[395] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the merger agreement with Tetraphase, co-promotion agreement, and various certifications - Key exhibits include the Agreement and Plan of Merger with Tetraphase (Exhibit 2.1), Form of CVR Agreement (Exhibit 10.1), Form of Voting Agreement (Exhibit 10.2), Form of Exchange Agreement (Exhibit 10.3), and Co-Promotion Agreement with Tetraphase (Exhibit 10.4)[397] - Certifications of Principal Executive Officer and Principal Financial and Accounting Officer are included as Exhibits 31.1, 31.2, and 32.1[397]