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AcelRx Pharmaceuticals, Inc. (NASDAQ:ACRX)

Q4 2013 Earnings Conference Call

March 3, 2014 4:30 PM ET

Executives

James Welch – VP and CFO

Richard King – President and CEO

Analysts

Louise Chen – Guggenheim Partners

Randall Stanicky – RBC Capital Markets

Mario Corso – Mizuho Securities

David Amsellem –Piper Jaffray

Graig Suvannavejh – MLV & Co.

Operator

Welcome to the AcelRx Pharmaceuticals Fourth Quarter and Year-End 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold the question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded today, March 03, 2013.

I would now like to turn the call over to Mr. Jim Welch, Vice President and Chief Financial Officer. Please go ahead.

James Welch

Thank you, Amy. Good afternoon and welcome to today’s call. This is Jim Welch. Joining me on the call today is Richard King, AcelRx’s President and CEO. Earlier today, AcelRx issued its fourth quarter and year-end 2013 financial results which we will discuss in more detail on this call. In addition, we’d like to provide you with a corporate update and a review of our commercial preparations for Zalviso, our Sufentanil Sublingual NanoTab System that has been evaluated for the treatment of moderate to severe acute pain in the hospital setting, as well as provide an update on our ARX-04 program. The financial results press release has been posted to the website at www.acelrx.com. Also, a replay of this conference call will be made available later today on the Investor page of our website. Please keep in mind that the risks and uncertainties involved in the company’s business may affect the matters referred to in forward-looking statements made by management during today’s call. As a result, the company’s performance may differ from those expressed in/or indicated by such forward-looking statements, which are qualified in their entirety by the cautionary statements contained in the press release and in the company’s Securities and Exchange Commission filings.

I will now turn the call over to Richard King.

Richard King

Thank you, Jim and welcome everyone to this afternoon’s call. 2013 was a very successful and exciting year for AcelRx across three major areas of activity. First, clinical and regulatory; second, business development and licensing; and finally, the commencement and build out and expansion of our commercial capabilities. Success in these areas has propelled AcelRx from a purely clinical development stage company, to one that is establishing full commercial capability in advance of an anticipated U.S. launch. That transformation gone underway in the second half of 2013 and has continued to accelerate in 2014. During 2013, we announced positive results from two pivotal Phase 3 double blind placebo controlled studies of Zalviso in managing moderate to severe post-operative pain, which added to the positive results from the head to head study comparing Zalviso to IV PCA morphine that we announced in the fourth quarter of 2012. The data from these Phase 3 studies and the results of other clinical and pre-clinical work allowed us to file our New Drug Application or NDA for Zalviso in September of 2013.

Subsequently, in December 2014 the FDA – sorry 2013, the FDA accepted the application for filing and confirmed a PDFUA action date of July 27, 2014. Our lead product Zalviso also known as the Sufentanil NanoTab System is a patient activated, non-invasive analgesia system which delivers 15mcg of Sufentanil per sublingual dose as needed for pain control subject to a 20 minute lockout period between doses. Our proposed indication for Zalviso is the management of moderate to severe acute pain in adult patients in the hospital setting. In its Phase 3 study, Zalviso demonstrated a consistently rapid onset of pain relief, faster impact than the intravenous morphine that is commonly used to manage moderate to severe pain in a hospital. Zalviso also demonstrated sustained and effective pain control as a mono-therapy for up to 72 hours after surgery. The observed adverse events in these studies were typical of opioid usage postoperatively generally mild-to-moderate in nature and similar in both active and placebo treatment groups of the majority of adverse events.

We believe that as a result of the efficacy and tolerability of Zalviso, combined with the simplicity and patient centric nature of our Zalviso delivery device, patient satisfaction with Zalviso was high and again superior to an IV morphine comparator. Additionally, nurses managing these patients in our clinical studies reported high use of scores of Zalviso than IV morphine, reflecting the fact that they saw Zalviso as less time consuming and less bothersome for them in set up and patient management. If approved by the FDA, we believe Zalviso could provide hospital and patients with an attractive alternative to the current standard of care specific to the IV PCA delivered opioid such as morphine and hydromorphone. Now since the submission of the NDA in September, we have been in dialogue with the FDA and it appears to the agency’s actively reviewing the applications. The success demonstrated so far in our clinical developments of Zalviso and progress on the regulatory fronts has allowed us to move forward on our commercial activities, including data presentations and medical meetings, finalization of contract manufacturing capabilities, marketing research and building out our own commercial internal commercial team.

Within AcelRx, we are establishing a commercial team behind David Chung, our Chief Commercial Officer. He is building a Zalviso focused marketing team with steps in hospital product marketing, marketing research and sales operations. We plan to bring ourselves management team onboard in mid-2014 ahead of our anticipated PDFUA date. We are also anticipating of adding a medical science liaison team ahead of the PDFUA date to highlight the challenges of postoperative pain management, particularly those associated with the IV PCA use. If Zalviso receives approval as planned, our expectation is to hire approximately one-third of our planned sales professionals, about 20 people, as key account managers during the third quarter of this year. These initial members of the sales team along, with our sales management team and the MSL team will pursue formulary positions for Zalviso in U.S hospitals. Based on our recent market research, this process can take from two to 12 months depending on the hospital, the number of products they have under reviewed at any one time, and on the frequency of P&T meetings. As a result of this time dependent process step, we anticipate hiring the remainder of the sales force about 45 additional sales professionals that will bring the total sales force size of approximately 65 in the first quarter of 2015, and at that point we will initiate a full commercial launch.

As part of our Zalviso education and awareness efforts, last year we presented the Zalviso Phase 3 data at more than 20 meeting medical meetings, resulting in approximately 35 poster presentations, eight oral product presentations and 10 sponsored satellite symposiums. This activity will accelerate in 2014, as we conduct and present further analyses of the data that illustrate the potential value of Zalviso could offer to healthcare professionals. As we prepare for launch, we are also conducting additional market research. As noted previously, we’ve completed pharmacy and therapeutics committee at market research that defines the hospital decision process and the associated timelines, as well as the interest in adopting Zalviso to formulary. That research is yielding encouraging results, suggesting that over 40% of the hospitals surveyed are interested in adopting Zalviso based purely on the available clinical profile and irrespective of cost. And a further 40% is interested in making the product available on formulary subject to pricing that enables demonstration of a favorable cost benefit analysis. We’ve also conducted mock P&T committee meetings with directors of pharmacy from different regions of the U.S., to evaluate the receptivity to Zalviso and to evaluate the pharmacoeconomic rationale supporting product use, and continue to see encouraging feedback related to the pharmacoeconomics that can support Zalviso.

We’ve also completed our initial segmentation and positioning work with both physicians and nurses. This combined with our P&T research is starting to clarify both the hospital type what early formulary adoption might occur and critically within the hospital, the characteristics of the healthcare professional specialty and individual characteristics that may support early usage of Zalviso in the hospital. This research is both confirming some previously health beliefs about where early adoption might occur, and also revealing some new opportunities to us about the potential for Zalviso usage. This work is still ongoing, but we’ll form the basis of our decisions about sales professional location based on hospital receptivity and physician targeting strategy based on individual [inaudible] receptivity. On the manufacturing front, we currently have manufacturing capacity for the first couple of years and have now production site at Patheon in Cincinnati, and we are in the final stages of building out largest scale commercial capacity at this site that should provide capacity for the next five to seven years.

Now making Zalviso available in markets outside the U.S. has been an important, strategic and corporate goal for AcelRx. A major step towards achieving that objective was realized in December, when we entered into a commercialization agreement with Grunenthal for commercial rights in Europe and Australia, a territory with nearly 500 million people. If approved, Zalviso might become available for pain treatment within or dispensed by a hospital, hospice, nursing home or other medically supervised setting in these geographies. We are very pleased with the terms of the Grunenthal agreement that includes a $30 million upfront payment, $220 million in future development commercial milestones, plus tiered royalties on net sales in the percentage range of mid-teens to mid-20s. Approximately, a third of the $250 million combined upfront in milestones are associated with upfront and development and regulatory milestones, the remaining two-thirds of the milestone proceeds are associated with annual net sales achievements in the covered territories. Grunenthal will pursue and maintain the MAA for the drug portion of Zalviso, and AcelRx will pursue and maintain the CE Mark for the Zalviso device. We are preparing along with Grunenthal to file the MAA for the drug product of the Zalviso system in mid-2014, and plan to meet with the European Medicines Agency and also with the repertoire countries shortly to discuss the filings. In the meantime, I’m pleased to announce that we’ve learnt that the EMA has approved the brand name Zalviso for use in Europe, meaning that the brand will be recognizable as a global brand to physicians that are working in both the U.S. and in Europe.

As you are aware, the device components of the Zalviso system will be CE marked for use in Europe and additionally AcelRx plans to become ISO 13485 certified in support of the CE mark. AcelRx has selected the notified body for the CE mark and is preparing for the presentation of the device materials to that group called PSI in the UK. We anticipate both ISO 13485 certification and CE Mark approval for the Zalviso device in the second half of 2014. AcelRx will manufacture and supply the drug and device elements of Zalviso from its U.S. contract manufacturing facilities to satisfy Grunenthal demands. Importantly, by adding Grunenthal’s ex-U.S. demand to AcelRx’s U.S. demand, we anticipate the to realize earlier economies of scale and reduced cost of goods associated with higher manufacturing volumes. We continue to engage in discussions with potential partners regarding commercial rights to Zalviso in additional geographic markets, such as Asia and South America. We remain committed to seeing Zalviso made available to patients around the world through partnerships, with organizations skilled in commercializing products in a hospital setting. In many parts of the world, the high custom IV pumps has prevented the use of IV PCA morphine and Zalviso’s much anticipated much lower cost may be an attractive alternative for these underserved markets.

We believe that the demand for pain treatment and the size of the market continues to grow. Postoperative pain treatment is already a large market that exceeds $5 billion in annual sales based on estimates for the U.S., Japan and the five largest EU countries combined. In the U.S., we believe there are over 12 million procedures per year, where moderate to severe postoperative pain occurs and approximately 95% of these patients could be candidates for treatment with Zalviso. Within this post-surgical group, about two-thirds of the population is admitted as inpatient to the hospital where we will be attempting to replace IV PCA as the current standard of care for managing postoperative pain. In addition, about one-third of the population is ambulatory, meaning that they are in the hospital for less than 23 hours where an IV PCA system is too cumbersome to set up, but is simple to use non-invasive patient controlled analgesia system such as Zalviso may be appropriate and attractive.

Our market research also indicates that there are in excess of 700 million hospital in patients with moderate to severe pain that is not postoperative, and that over two-third of the patient group can be candidates for treatment with Zalviso. This group will include hospitalized patients with a variety of clinical conditions that result in moderate severe pain, such as [inaudible], burns, sickle cell disease among others. Outside the U.S. in countries with advanced healthcare systems, we believe there are three to four times the many patients undergoing surgical procedures that result in moderate severe pain each year, where Zalvsio could provide effective and well-tolerated postsurgical pain management. In Europe, Grunenthal estimates that may be 17.5 million patients annually undergoing procedures resulting in moderate to severe pain that would be appropriate for management with Zalviso. Now let me turn my attention and update you briefly on ARX-04.

ARX-04 is a product candidate in development for the treatment of moderate to severe acute pain, consisting of a 30 mcg of Sufentanil NanoTab and a single dose applicator that is administered by a healthcare professional. Last year, AcelRx reported top-line data showing that the primary endpoints was achieved in a placebo-controlled dose finding Phase 2 clinical trial of ARX-04 for acute pain. This study randomized 101 patients following bunionectomy surgery and found that patients treated with 30 mcg dose of Sufentanil NanoTab had significantly greater pain reduction as measured by Summed Pain Intensity Difference to baseline during the 12-hour trial period that placebo treated patients with a p value of .003. In December of last year, we completed an end of Phase 2 with the FDA to seek the agency’s feedback on our future development plans for ARX-04. To enable review as a 505 (b)(2) NDA, the agency requested a 500 patients safety database, consisting of 100 patients exposed to multiple doses of ARX-04 and 400 patients exposed to a single dose of ARX-04. The agency confirmed that the bunionectomy trial I just described could be considered as adequate and well controlled and would satisfy as a pivotal study. Therefore, a single additional Phase 3 registration study to be conducted in a model of pain using a split 12 primary endpoint would fulfill agency requirements for pivotal studies. We plan to begin this Phase 3 study during the second half of ‘14 and results should be available during the second half of 2015.

In addition in the first half of 2014, we will conclude a single Phase 1 study, evaluating single and repeat dose PK with the goal of determining whether the initial exposure of patients in the Zalviso study program could satisfy the agency request to single dose patient exposures. We estimate the overall cost of ARX-04 Phase 3 program roughly $15 million, spread out over 2014 and 2015 with the majority of the expense in 2015. The Department of Defense remains interested in the ARX-04 product but with limitations in funding due to sequestration, AcelRx plans to advance the ARX-04 Phase 3 program forward on its own. ARX-04 may ultimately beneficial in a variety of amenity supervised settings, including use in battlefield injury, by paramedics during patient transport, in the emergency room or for postoperative patients following either shot today or ambulatory surgery who do not require more long-term patient analgesia. According to the Centers for Disease Control and Prevention, there were more than 130 million injury-related emergency department visits in 2010 in the U.Ss, with 95 million of these patients receiving some form of analgesic agent for pain. Additionally in 2006, there were 35 million ambulatory surgical procedures conducted in ambulatory surgery centers in the U.S., with patients being managed in the ASC typically for one to 12 hours for pain after the procedure.

In addition, paramedics transport approximately 15 million patients annually with an estimated 20% of these patients requiring treatment for moderate to severe pain. All of these are potential opportunities for ARX-04. Our market research showed interest in ARX-04 was high in the four to five out of five range among healthcare provider including paramedics, ER nurses, ER physician and AFT surgeons. ER physicians said they would potentially use ARX-04 in 20% to 75% of their patients suffering from moderate to severe pain that primary interest stemming from the ability to rapid onset acute pain control without the need for a needle or an IV. We view the market opportunity for ARX-04 as differentiated from Zalviso since it deals with truly acute short term management of pain and at the same time complementary to Zalviso, since patient management is located in or affiliated to hospitals where our Zalviso commercial focus is centered.

So with that overview, let me turn the call over to Jim who will review our financial results for 2013.

James Welch

Thank you, Richard and good afternoon everyone. AcelRx reported net profit for the fourth quarter of 2013 of $17.8 million or $0.41 per share, compared to a net loss of $10.5 million or $0.41 per share for the fourth quarter of 2012. Common shares used in calculating basic earnings per share were 43 million in the fourth quarter of 2013 compared to 25.6 million in the period of one year ago today. During the fourth quarter of 2013, AcelRx recognized revenue of $27.6 million compared with $1.7 million for the fourth quarter of 2012. The fourth quarter of 2013 revenue includes $27.4 million of revenue recognized from the $30 million upfront payment received from Grunenthal and $200,000 of revenue for reimbursement of work completed under the research grant on USAMRMC for the development of ARX-04, a Sufentanil NanoTab for the treatment of moderate to severe acute pain. With the recording of the $200,000 of reimbursement from the USAMRMC grant in the fourth quarter, AcelRx has completed utilized the $5.6 million of grant.

Research and development or R&D expenses in the quarter ended December 31, 2013 totaled $4.3 million compared to $7.8 million for the quarter ended December 31, 2012 and compared to the $6.5 million in the preceding quarter ended September 30, 2013. The decrease of R&D expense compared to the fourth quarter of 2012 reflects a reduction in Phase 3 development cost for Zalviso, which reported top-line data in the second quarter of 2013. R&D expenses for the third quarter of 2013 included an NDA filing fee for Zalviso of approximately $2 million. Without that fee, R&D expenses in the third quarter of 2013 would have been $4.6 million. Selling, general and administrative expenses were $3.3 million the fourth quarter of 2013 compared with $1.9 million for the fourth quarter 2012. The increase is fairly due to an increase in commercial activities related to Zalviso, including increased market research activities and the initial build of internal marketing capabilities. The fourth quarter of 2013 SG&A expenses include $1 million of marketing expenses back in the last quarter. The other expenses reporting other income and expense in the fourth quarter of 2013 were $1.9 million compared to an expense of $2 million in the fourth quarter of 2012. The fourth quarter 2013 other expense includes a $0.7 million non-cash charge in the fourth quarter of 2013, resulting from the liability accounting related to the warrants issued in connection with the pipe financing completed back of 2012. The primary determinant of this charge is an increase in the price during the fourth quarter of 2013 and its resulting impact on the Black-Scholes of these warrants. Additionally, in connection with the negotiated debt with Hercules, AcelRx recorded a fourth quarter $1.2 million non-cash charge for the extinguishment of the original Hercules loan that was paid off upon signing of the new debt arrangements.

On an as adjusted basis for the fourth quarter 2013, which excludes the $27.4 million revenue recorded from the Grunenthal upfront, the $1.2 million one-time non-cash charges associated with the debt negotiation and the $0.7 million non-cash expense resulted from the liability accounting related to the warrants issued in connection with the pipe completed back in June 2012. The adjusted net loss for the fourth quarter of 2013 would have been $7.7 million or $0.18 per share. For the full year of 2013, AcelRx reported revenue of $29.5 million, a net loss of $22.4 and commensurate loss per share of $0.59. This compares to revenue of 2.4 million and a net loss of $33.4 million or a loss per share of $1.51 in 2012. As of December 31, 2013 AcelRx had cash and cash equivalents and investments of $103.7 million compared to $59.8 million at December 31, 2012. In July 2013, AcelRx raised approximately $48 million through net proceeds through the issuance of 4.37 million share of common stock in an underwritten public offering. In December ‘13, we received an upfront licensing fee at $30 million from Grunenthal under the terms of a collaboration agreement for Zalviso in Europe and Australia, and we received an additional $6 million from the renegotiated debt agreement with Hercules. Now, I’d like to provide you with some guidance regarding our financial business and expectations for the rest of 2014.

AcelRx recorded as revenue reimbursement pursuant to the 2011 5.6 million USAMRMC grant. Recognition of the revenue from this grant has resulted in recorded revenues of $5.6 million through December 31, 2013 and there is no funding remaining under this grant to-date. AcelRx expects the first Grunenthal regulatory milestone to be triggered with the planned submission of the MAA in the mid-14. This should result in a $5 million milestone anticipated in the third quarter of 2014. AcelRx forecasts that quarterly R&D expenses through the end of 2014 will be relatively constant and consistent across all quarters with total 2014 R&D expenses expected to be in the range of $27 million to $29 million for the year. Additionally, AcelRx anticipates general and administrative expenses excluding the sales and marketing cost will increase gradually over quarter-over-quarter as the company builds infrastructure to support Zalviso’s commercial activity. Consistent with the planned commercial preparation, sales and marketing costs are expected to accelerate over the quarters of 2014, as the company prepares for a possible approval and planned commercial launch of Zalviso.

In 2014, total SG&A costs in the $21 million to $23 million range are anticipated assuming timely FDA approval for Zalviso in the third quarter of 2014. With the preceding guidance, the total operating expenses for 2014 is anticipated to be in the range of $48 million to $52 million. Other income and expense in future periods is expected to include non-cash charges that result from the liability accounting treatment of the warrants in connection with the pipe financing completed in the second quarter of 2012. Since the primary determinant of this charge is share price during each quarter and its impact on Black-Scholes valuation of the warrants, the impact in future periods is difficult to predict and is not included in the guidance. Finally, AcelRx believes its current cash, cash equivalents and investments and cash available under credit facilities are sufficient to fund operations, at least through 2015, and actually well into 2016 and cash flow breakeven and that excludes any potential proceeds from possible Grunenthal milestones.

With this, I will now turn the call back over to, Richard.

Richard King

Thanks, Jim and before we answer your questions, I’d like to briefly summarize our major goals and potential milestones, looking at over the coming months. Zalviso is under review at the FDA for the management of moderate severe acute pain in adult patients in the hospital setting with the PDUFA date of July 27, 2014. Dialogue with the agency is active and ongoing. MMA filing via the centralized procedure in the EU for Zalviso is being prepared by AcelRx and Grunenthal and we expect to make our submission in mid-2014. We are engaged with a notified body BSI to pursue ISO 13485 certification for AcelRx and a CE Mark for the Zalviso device in Europe. We anticipate realization of both of these key milestones in the second half of 2014. The build out of our commercial capabilities is ongoing, with sales leadership to be added in the first half of 2014 and approximately a third of the sales organizations to be added in the third quarter assuming timely approval of Zalviso. We plan to put the full sales force in place in first quarter of 2015. Based on the end of Phase 2 meeting, we conducted with the FDA at the end of 2013, we are preparing to initiate a Phase 3 registration ARX-04 in the second half of 2014, and we would anticipate conclusion of the study about a year later in the second half of 2015. We continue to explore partnerships with Zalviso outside the U.S., Europe and Australia with a particular focus on Asia and South America. The coming months will be highly active ones as I’ve just described we’re looking forward to another strong and productive year for AcelRx.

With that, I’d like to open the call for questions. Amy, I’m going to turn it back to you so you can coordinate I’d appreciate it.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And our first question comes from Louise Chen with Guggenheim Partners.

Louise Chen – Guggenheim Partners

Hi. Thanks for taking my questions. I had a few. So one question I had was on your REMs for Zalviso we’ve gotten quite a few questions regarding that and how confident you feel that, that review process will go smoothly and potential diversion issues in hospital and how you’ll handle that? And then the second question we’ve got quite a bit of is with respect to the competitive landscape increasing number of postoperative pain drugs or pain drugs in general potentially coming to market over the next few years and you’ll fit within the treatment paradigm? And then lastly, if you could comment on Mike Royal leaving saw some press release this morning that he’s going to Toronto and just wanted to see what your thoughts are on that one? Thank you.

Richard King

Okay. Thanks, Louise. So firstly REMs obviously as part of the applications for the NDA for Zalviso we’ve submitted a proposed REMs to the agency. We haven’t had any feedback on that rems yet and that will be part of the negotiation around the time of labeling. It tends to be one of the latter things that gets discussed so I think that will be discussion to be held at that stage. It did reference particular diversion in the hospital that is obviously a topic of focus to Zalviso we’re concerned with that ability for health care professionals to divert particular clear liquids in hospital setting and certainly Zalviso has built-in to it systems that can prevent against that particular diversion issue. I will say that the discussion is already with the agency they recognize I think the particular attributes to Zalviso that are trying to mitigate against that potential healthcare professional diversion in hospital setting. So I think that will be a productive area of dialogue for us. Competitive landscape I guess that large market opportunities do tend to attract competitors into the landscape I think that the we see a lot of room I think for people to co-exist in that market place. The goal that I have and the goal that AcelRx has is when physicians post-surgery or even outside of the surgical setting are looking for an opioid to help manage pain and there is still nothing as effective as an opioid to manage that moderate severe acute pain experienced by people particularly in the hospital setting but the opioid that they reach for is Zalviso. And the Zalviso system has an overall patient controlled analgesia system provides many, many benefits to patients and healthcare professionals alike in the management of that moderate to severe acute pain in hospital settings. Lastly, in terms of Mike yes there was an announcement this morning that Mike will be joining Cadence Pharmaceuticals. We didn’t put a press release out on this Mike is not a Section 16 officer report to the panel chief medical officer and very personal reasons for why Mike decided to move at this stage. His family is located in Southern California the amount of travel both up to AcelRx’s offices in San Francisco as well as across the U.S. and even internationally has been weighing on Mike for some time and I respect his decision to make a change at this stage to be located in a company which is in a San Diego area. And obviously I want to acknowledge the share of Mike’s work he’s done as well ensuring that we present to the agency very attractive NDA. Pam has picked up Mike’s workload and we are moving forward and exactly at the same phase and frame as we worked previously and don’t anticipate us missing a beat as we move towards the commercialization of Zalviso.

Operator

The next question comes from Randall Stanicky at RBC Capital Markets.

Randall Stanicky – RBC Capital Markets

Great. Thanks guys. I guess I had a couple may be Jim could you help us with the cost structure. How should we think about the OpEx spend ramping this year? And where I’m really trying to go with this is to get a sense is as we exit this year what’s the run rate I know adding some more ‘15 just trying to get a sense of how to get that cost structure going forward? And then I have a follow up.

James Welch

Okay. As I had mentioned as you look at the R&D cost which you have we’ve got ARX-04 kicking in a little bit later this year but if you look at the spending pattern over the course of the year, it’s going to be relatively fixed in the run rate that I had given you from Q1 Q2 Q3 and Q4 as there is a lot of in Phase 4 that are for the Phase 3 that we will be going to in the first half of the year. So it’s really there’s not going to be a spending ramp on the R&D side it’s going to be kind of a stepped up consistent spend over the course of the year. If you look at SG&A, SG&A we have basically if you take out the look at the marketing costs that’s the cost that’s really going to be ramping towards the back half of this year presuming a FDA approval in mid Q3. We in Q4 of ‘13 our marketing costs of that comment was about $1 million in the fourth quarter of last year and you’ll see that build up quite significantly toward the end of the year as we prepare for the commercial launch in Q1 of ‘15. The SG&A side I think you will see – it will creep up generally speaking, but it’s going to be much more modest in terms of ramp in sales and marketing side. That’s kind of why we gave the guidance that we did in around that on the sales and marketing side in below 20s and so forth and much of that is going to be sales and marketing.

Richard King

I’ll perhaps add to that and these numbers are not a secret. So if we’re talking about earning about a third sales force of 20 people in effectively what it’s going to be Q4 then you can expect an annualized salary rate round about $250,000 on the representatives that we’ll be adding fully loaded which request about $500 million on an annual basis you can then quarter from there. And similarly 65 reps it’s about 250,000 a head so again the bulk of the cost is going to come in at sales force and you can expect an annual carry cost of total sales force 65 reps turn $50,000 about 60 plus million dollars a year.

Randall Stanicky – RBC Capital Markets

Okay. That’s helpful. And then one more Richard for you as you talked about in the prepared comments the new opportunities for Zalviso in some of the work that you’ve done in Poland. When you roll this out, how do you sell into that group of patients that you’re not the traditional postsurgical IV PCA morphine patient base. Is there a concerted effort that you can expand into that [inaudible] phase until the other – how are you thinking about doing it I guess how long do you expect that could take?

Richard King

That’s a great question, Randall and one of the things that we’ve been very focused on doing on as referenced previously is an expensive segmentation related market research with physicians of various different use and colors. And what’s interesting to me is that there are a number of non-surgical specialties that are identifying themselves through this research as dynamically interested in Zalviso as the surgical specialties themselves are ultimately what we are seeing is there is a broad consensus that Zalviso could represent between 30% and 50% share of their either post op or moderate severe pain patients depending on which segment that you’re in. That seems to be consistent in that range across the different specialties that we talked to with interests in both the post-op and non-postop patients. The ramp is slightly different depending on actually the individual physician we’re able to characterize physicians according to their tendency to adopt new technologies and what we’re seeing is those who have adopted new technologies historically regardless of whether they’re in a surgical specialty or managing patients outside of a surgical specialty seem to be both eager to adopt earlier to adopt and with higher market share ultimately than the physicians who are traditionally more lagged in terms of new technology adoptions. That’s a very important piece of information as we think about how we will target our sales force and also have a segment in the market and drive into those different surgical and non-surgical specialties. In summary, at this stage I’m not suggesting that we’ll go surgical first and non-surgical later, I’m suggesting that across the spectrum here we’re seeing the ability to go and talk to physicians about the management of their acute pain patients and Zalviso fits pretty much broadly across the entire spectrum.

Randall Stanicky – RBC Capital Markets

Got it. That’s helpful. And I’ll just leave to you at one question is it possible that we could see another international partnering deal this year? Thanks.

Richard King

Possible. And I’ve always tended to said this historically, it’s very difficult to predict timing on these things. As you’ll recall, we didn’t do coming up to the Grunenthal execution and deal execution, we will – we’re engaged. There are folks who are interested in Zalviso outside of the U.S., Europe and Australia and the timing of when that gets consummated is dependent on both parties coming to an agreement that can be announced.

Randall Stanicky – RBC Capital Markets

All right. Thanks guys.

Richard King

Thanks.

Operator

The next question comes from Mario Corso with Mizuho.

Mario Corso – Mizuho Securities

Good evening. A couple of things I wanted to ask. Related to the FDA process, is there anything you can say kind of at a higher level is there anything you see or heard that would make you think that in July FDA action or FDA approval is not a high likelihood? And I’m wondering from there any particular issues that have surprised you in the process of going as planned from the commercial side may be more specifically from the prior question as it relates to EXPAREL, I think some investors look at the success there and think that the need for opiates is really getting obviated. So I wonder if you have any market research or comments that would help people think about the segmentation that would go on there. And then thirdly, any thoughts on when we might see some of your pharmacoeconomic analyses that you’ll be going to hospitals with? Thanks very much.

Richard King

Okay. Thanks, Mario. So first question nothing that I’ve seen or heard at this stage is suggesting that there is an inability to get through July 27th PDUFA date. Other than that I can’t give any color but nothing at the moment that point against that based on the dialogue agency etcetera. On your second issue, in terms of EXPAREL, and is the needs for opioid obviated? So this – it’s a common misconception and you got to remember that there are various mechanisms that which multi-modal analgesia could reduce down the dependency on any one single form of analgesia and that’s relevant because pain is multi-factorial in nature, it’s multi pathway based and managing pain effectively actually requires a multimodal approval. And certainly things like [inaudible] which has been around for quite long as a would infiltration agent field block but also as a local nerve block has been used for many, many years to provide that support to patients in that postoperative realm.

Last time then you get your pain coming up to patient and then you got to manage them differently. And certainly there is no indication I think in any of the studies that are involving moderate to severe pain that suggest that anything other than opioid is the most effective way of managing that market to severe pain. You need to provide the pain relief that the opioid can muster and can handle if you’re going to effectively and efficiently control moderate to severe pain. My goal as I said earlier is regardless of the multimodal approach and that will I think continue to be the case links forward. We want to be the opioid age of patients, physicians surgeons and also patient reach for managing that difficult moderate to severe pain. Lastly in terms of pharmacoeconomic analysis we are working extensively on P analysis. In fact we have presented – we have submitted a number of manuscripts to pharmacoeconomic journals that are beginning to describe the pharmacoeconomic analytics for Zalviso particularly the marketplace that we’re entering updating the cost of IV PCA in particular. Those we haven’t talked about publically as since in submission form for manuscript issuance. We anticipate that later this year and then we’ll obviously update/share that full information set with everybody. But I don’t want to jeopardize the publication process at this stage. I hope that satisfies.

Operator

The next question comes from David Amsellem Piper Jaffray.

David Amsellem – Piper Jaffray

Thanks. Just a couple. So on the Grunenthal partnership with the upfront payments with the milestones how does that play into your decision to potentially accelerate or move forward development on ARX-02 or 03 or is that something that you’re still committed to looking for partners both domestically and internationally? And then secondly, just on your one of your competitors your primary competitor medicines company they had an interesting slide in there in their presentation sort of layering picture of IONSYS versus Zalviso and trying to make a point that their product was simpler and easier to use. So I was wondering since clearly there’s been no shortage of commentary about these two products how you would response to that and essentially what that counter detailing message would be?

Richard King

Thanks, David. Good point on the Grunenthal milestones. Obviously, they’re not flanked at the moment in supporting either Zalviso in the commercial breakeven point or in the ARX-04 program within funding those with the currently available test results that we have access to. So yes it would open up access for 02 and 03 interestingly as well though since the unveiling of the Zalviso data set, there is a more active dialogue now again on 02 and 03 from a partnering standpoint. So, a number of avenues that we will explore. I believe 02 and 03 with ARX-02 breakthrough pain we’ll be the only non- Sufentenail based approach in managing cancel breakthrough pain with some really neat packaging technology around controlling access to the product where we think relevant and 03 is very novel sublingual combined pain relief analgesic and also model sedative that comfortable patients going procedures outside of the hospital setting or in the physician’s office.

Both have strong relevance, less commercially relevant to since the focus for us acute care setting in the hospital, but still I think have extreme relevance and extreme commercial relevance and we continue to explore ways in which we can move those forward. I wish I could put all my through simultaneously but sometimes you kind of have to make those choices. On the medical[ph] company with IONSYS it’s kind of this market is big enough as I referenced earlier to accommodate a good number of players. And I have no issue with the idea that actually having two players out there is going to result in faster conversion of IV PCA to other better treatment modalities than technology. So I’m not in the lease bit of that product introduction. I do think there is account to detail mechanism that’s relevant here and in particular what I’m seeing based on the market research that we’re getting back from surgeons and from nurses, the primary interest of these folks is rapid control of pain which predicts a better outcome for patients in that postoperative setting in particular but also outside of the postoperative setting as well.

And when you look at the ability of Zalviso to in real time control pain from the outset of use of the product versus the challenges of doing that with IONSYS because transfer across the skin is inherently slower and it’s more challenging the is going to provide breakthrough pain relief for those first three hours that’s a fundamental but immediately kind of trumps the fact that the IONSYS product that 30 second set up versus ours which is a 90 second set up, but both simple products to use but both much, much simpler than IV PCA mechanism, that both can carve out a relevant part of this marketplace. I just have to think that product is a better proposition for people in the both the short and the long run.

David Amsellem – Piper Jaffray

Okay. And Richard if I may just sneak in a quick follow up and you may have addressed this so I apologize if you have. Just in terms of pricing of Zalviso in Europe. I know that Grunenthal controls the product, but can you share any light how we should think about that?

Richard King

So it’s an interesting one. Again, turning back to for a second, when IONSYS was originally introduced in Europe it was priced by J&J and about $120 a day. That was back seven plus years ago. I think there was sensitivity to that price points so I think at that kind of price level, we would run ourselves into difficulty 120 bucks a day $240 over two days, still I think seven, eight years further on. But certainly as we did some research on price sensitivity, similar price points to the range that we’ve talked about the lower end of the range that we talked about in the U.S. that kind $150 wasn’t necessarily a negative reaction amongst physicians in Europe.

David Amsellem – Piper Jaffray

Okay. Thank you.

Operator

[Operator Instructions]. The next question comes from Graig Suvannavejh at MLV & Company.

Graig Suvannavejh – MLV & Co.

Thank you. Thanks for taking my questions and congrats on the quarter. A few questions like I’ll just focus on the 04 program. Could you just may be remind us in terms of what you’re thinking about the Phase 3 trial with the similarities and what the differences might be versus the prior Phase 2 trial that you ran it may be some of the doses or the dose that you might be exploring in the Phase 3 program? And just given the fact that you’ve decided to move forward and fund this on your own, how you’re thinking about may be commercializing on a go forward basis?

Richard King

Okay. So if you recall, the Phase 2 study was a bunionectomy study so it was a model of what’s called bony pain and the FDA fundamentally wants for its pain assessment, a model of bony pain, a model of visceral pain. So the bony pain model is done, the visceral pain model which will be the subjects of the Phase 3 studies you can think of it as looking very similar of what we did with Zalviso in the abdominal surgery that we reported as 310 study that we reported back in Q2 of 2013, as a good example of how to do that study effectively. The product is a 30 mcg dose in a Sufentanil NanoTab. Its healthcare professional administered in response to patient request as opposed to the Zalviso system which is a 15 mcg dose on the patient control. And the limitation on the ARX-04 program is that we’re expecting to see dosing no more frequently than once per hour. So it means that for short term acute use where you’ve got a patient that’s under very kind of monitoring and watching by healthcare professional staffs such as in the being transported by the paramedic, such as in the ambulatory surgery center surgery, may be in the where you’re transferring out of the operating room before you get Zalviso going to the floor, the kind of to manage that patient to pain in the could be managed by ARX-04. Those are the areas where we see commercial activity and because that commercial opportunity of hospital if you think about it, hospital, the [inaudible], and AFCs of proximal to the hospital we see this as a very complementary product in the sales rep bag to Zalviso maintaining that focus on acute pain responding in different parts of the hospital systems.

Graig Suvannavejh – MLV & Co.

Okay, great. Thank you. And then if I could just follow up on Zalviso. I know that there were plans on looking at perhaps about future point next generation delivery devices and perhaps version 2.0. So can you may be give us an update where you stand there and the timings of the new things that might come to the market? What kind of studies you might need to get that approved? Thanks.

Richard King

Yes. We are interested in generalizing this device on a repeat basis. We see a number of opportunities to enhance the functionality of the device. We took public wireless communication to the nursing station directive EMR so on with a number of other areas that we have interest in as well. So I don’t expect to get to that point of introducing Gen 2 in the first two or three years of commercial lives or want to establish Zalviso in the hospital setting initially, but ultimately our goal is to obsolete our own technology and the course to generate perhaps a new and extended IP for the products. We think the majority of these iteration to the device can be managed through supplements to the original label as opposed to new clinical data and through device related testing outside of that clinical experience. But it will depend on what we ultimately do with the device as to whether we’ll need to generate any new clinical information but our expectation is low likelihood of requirement.

Graig Suvannavejh – MLV & Co.

Okay. Thank you.

Richard King

Thanks, Graig.

Operator

At this time, we show no further questions. Would you like to make any closing remarks?

Richard King

I want to say thank you everybody for some great questions today. Really appreciate digging in on the AcelRx story and look forward to seeing you all soon. Take care.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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Source: AcelRx Pharmaceuticals' CEO Discusses Q4 2013 Results - Earnings Call Transcript

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