Talphera Inc (TLPH) 2013 Q4 法說會逐字稿

Welcome to the AcelRX Pharmaceuticals fourth-quarter and year-end 2013 financial results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded today, March 3, 2014. I would now like to turn the call over to Jim Welch, Vice President and Chief Financial Officer. Please go ahead.

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, would 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 on our 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.

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 outs 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 advanced of an anticipated US lunch. That transformation got 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 postoperative pain, which added to the positive results from a 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 2013. Subsequently, in December 2014 the FDA accept -- sorry, 2013 -- the FDA accepted the application for filing and confirmed a PDUFA action date of July 27, 2014.

Our lead product, Zalviso, also known as the sufentanil sublingual NanoTab system, is a patient-activated noninvasive analgesia system, which delivers 15 micrograms 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 studies, Zalviso demonstrated a consistently rapid onset of pain relief; faster, in fact, than the intravenous morphine that is commonly used to manage moderate to severe pain in hospital. Zalviso also demonstrated sustained and effective pain control as a monotherapy 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 for 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 higher ease of care scores as Zalviso than IV morphine, reflecting the fact that they saw the Zalviso is less time consuming and less bothersome for them in set up and patient management.

If approved by the FDA, we believe Zalviso could provide hospitals and patients with an attractive alternative to the current standard of care, specifically IV PCA-delivered opioids such as morphine and hydromorphone. Since the submission of the NDA in September, we have been dialogue with the FDA and it appears that the Agency is actively reviewing the application.

The success demonstrated so far in our clinical development of Zalviso, and progress on the regulatory front, has allowed us to move forward on our commercial activities, including data presentations at 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 depth in hospital product marketing, marketing research, and sales operations. We plan to bring our sales management team on board in mid-2014 ahead of our anticipated PDUFA dates. We are also anticipating adding a medical science liaison team ahead of the PDUFA date to highlight the challenges of postoperative pain management, particularly those associated with IV PCA use.

If Zalviso receives approval as planned, our expectation is to hire approximately 1/3 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 [position] of Zalviso in US hospitals.

Based on our recent market research, this process can take from 2 to 12 months, depending on the hospital, the number of products that they have under review at any one time and on the frequency of P&T meetings. As a result of this time-dependent process debt, we anticipate hiring remainder of the sales force, about 45 additional sales professionals, that will bring the total sales force size to 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 medical meetings, resulting in approximately 35 poster presentations, 8 oral product presentations, and 10 sponsored satellite symposium. This activity will accelerate in 2014 as we conduct and present further analyses of the data that illustrates the potential value that Zalviso could offer to healthcare professionals. As we prepare for launch, we are also conducting additional market research.

As noted previously, we have completed pharmacy and therapeutics committee 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 enable demonstration of a favorable cost-benefit analysis.

We've also conducted mock P&T committee meeting directors of pharmacy from different regions of the US to evaluate the receptivity to Zalviso and to evaluate the pharmacoeconomic rational 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 where early formulary adoption might occur and, critically, within the hospital, the characteristics of the healthcare professionals, specialty and individual characteristics that may support early usage of Zalviso in the hospital.

This research is both confirming some previously held beliefs about where early adoption might occur and also is revealing some new opportunities to us about the potential for Zalviso usage. This work is still ongoing but will form a basis of our decisions about sales professional location based on hospital receptivity and physician targeting strategy based on individual doctor receptivity.

On the manufacturing front, we currently have manufacturing capacity for the first couple of years and are now at our production site at Patheon in Cincinnati. We are in the final stages of building out larger 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 US has been an important strategic and corporate goal for AcelRx. A major step toward achieving that objective was realized 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 hospital, hospice, nursing home or other medically supervised settings in these geographies.

We are very pleased with the terms of the Grunenthal agreement that include a $30 million upfront payment, $220 million in future development and commercial milestones, plus tiered royalties on net sales in the percentage range of mid-teens to mid-20%. Approximately 1/3 of the $250 million combined upfront and milestones are associated with upfront and developments in regulatory milestones. That remaining 2/3 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 a 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 filing.

In the meantime, I'm pleased to announce that we've learned that the EMA has approve 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 US and in Europe. As you are aware, the device component of the Zalviso system will be CE marked for use in Europe and additionally AcelRx plans to become ISO 13485 certified in support of that 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 the BSI 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 US contract manufacturing facilities to satisfy Grunenthal's demands. Importantly, by adding Grunenthal's ex-US demand to AcelRx's US demand, we anticipate being able to realize earlier economies of scale and reduce 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 cost of IV pumps has prevented the use of IV PCA morphine and Zalviso's 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 US, Japan and the five largest EU countries combined. In the US, 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 2/3 of the population is admitted as inpatients 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 1/3 of the population is ambulatory, meaning that there are the hospital for less than 23 hours, where an IV PCA system is too cumbersome to set up but a simple to use, noninvasive patient controlled analgesia system such as Zalviso may be appropriate and attractive.

Our market research also indicates that there are in excess of 7 million hospital inpatients with moderate to severe pain that is not postoperative, and that over 2/3 of this patient group may be candidates for treatment with Zalviso. This group will include hospitalized patients with a variety of clinical conditions that result in moderate to severe pain such as diverticulitis, burns, sickle cell disease among others.

Outside the US, in countries that have advanced healthcare systems, we believe there are three to four times as many patients undergoing surgical procedures that result in moderate to severe pain each year where Zalviso could provide effective and well-tolerated post surgical pain management. In Europe, Grunenthal estimates there 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 product candidate in development for the treatment moderate to severe acute pain, consisting of a 30 microgram sufentanil NanoTab in a single dose applicator that is administered by a healthcare professional. Last year, AcelRx reported top line data showing that the primary endpoint 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 a 30 microgram dose of sufentanil NanoTab had significantly greater pain reduction as measured by summed pain intensity difference to baseline during the 12-hour trial period than placebo-treated patients with a p-value of 0.003. In December of last year, we completed an end-of-Phase 2 meeting 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 patient safety database consisting of 100 patients exposed to multiple doses of ARX-04 and 400 patient 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 visceral model of pain, using a SPID-12 primary endpoint would fulfill Agency requirements for pivotal studies. We plan to begin this Phase 3 study during the second half of 2014 and results should be available during the second half of 2015.

In addition, in the first half of 2014 we will conduct 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 of single-dose patient exposures. We estimate the overall cost of the ARX-04 Phase 3 program at roughly $15 million, spread out over 2014 and 2015 with the majority of 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 be beneficial in a variety of medically supervised settings, including use in battlefield injury, by paramedics during patient transport, in the emergency room or for postoperative patients following either short stay or ambulatory surgery who do not require more long-term patient-controlled 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 US, with 95 million of these patients receiving some form of analgesic agent for pain. Additionally, in 2006 there were 35 million ambulatory surgery procedures conducted in ambulatory surgery centers in the US, with patients being managed in the ASC typically for 1 to 12 hours obtained after the procedure. In addition, paramedics transported approximately 15 million patients annually, with an estimated 20% of these patients requiring treatment or 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 our of five range among healthcare providers, including paramedics, ER triage nurses, ER physicians, and ASC surgeons. ER physicians said they would potential use ARX-04 in 20% to 75% of the patients suffering from moderate to severe pain, their primary interest stemming from the ability to deliver rapid onset acute pain control without the need for a needle or an IV.

We do -- 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, complimentary to Zalviso, since patient management is located in, or affiliated to, hospitals where our Zalviso commercial focus center. So with that overview, let me turn the call over to Jim, who will review our financial results for the fourth quarter of 2013.

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 using 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 from 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 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 for the fourth quarter of 2013 compared with $1.9 million for the fourth quarter of 2012. The increase is primarily 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 reported in 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 in June of 2012.

The primarily determinant of this charge is an increase in the price during the fourth quarter of 2013 and its resulting impact on the Black-Scholes evaluation 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 arrangement.

On an as-adjusted basis for the fourth quarter of 2013, which excludes the $27.4 million revenue recorded from the Grunenthal upfront. The $1.2 million one-time non-cash charge associated with the debt renegotiation and the $0.7 million non-cash expense resulting 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 2013, AcelRx reported revenue of $29.5 million, a net loss of $23.4 million and a 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, 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 in net proceeds through the issuance of 4.37 million shares of common stock in an underwritten public offering. In December 2013, we received an upfront licensing fee of $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 would like to provide you with some guidance regarding our financial business and expectations for the rest of 2014.

AcelRx recorded as revenue reimbursements received pursuant to the 2011 $5.6 million USAMRMC grant. Recognition of the revenue from this grant has resulted in record 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 mid 2014. This should result in a $5 million milestone, anticipated in the third quarter of 2014.

AcelRx forecasts its 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 its sales and marketing costs, will increase gradually quarter-over-quarter in 2014 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 were 2014 are 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 we issued in connection with the PIPE financing completed in the second quarter of 2012. Since the primary determinate of this charge is the share price during each quarter and it's effect on Black-Scholes valuation of the warrants, the impact of future periods -- in future periods is difficult to predict and is not included in our guidance.

Finally, AcelRx believes its cash, 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 will break even, and that excludes any potential proceeds from possible Grunenthal milestones. With this, I will now turn the call back over to Richard.

Thanks, Jim, and before we answer your questions, I'd like to briefly summarize our major goals and potential milestones looking out over the coming months. Zalviso is under review with the FDA for the management of moderate to severe acute pain in adult patients in the hospital setting, with a PDUFA date of July 27, 2014. Dialogue with the Agency is active and ongoing.

An MAA 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 1/3 of the sales organization to be added in the third quarter, assuming timely approval of Zalviso. We plan to put the full sales force in place in the 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 trail for 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 US, Europe and Australia, with a particular focus on Asia and South America. The coming months will be highly active ones as I just described. We are looking forward to another strong, productive year for AcelRx.

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

(Operator Instructions)

Our first question comes from Louise Chen of Guggenheim.

Hi, thanks for taking my questions. I had a few.

So, one question I had was on your our 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 the hospital and how you will handle that.

And then the second question we've gotten quite a bit 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 how you will fit within the treatment paradigm.

And then lastly if you can comment on Mike Royal leaving. I saw some press release this morning that he's going to Sorrento and just wanted to see what your thoughts were on that one. Thank you.

Okay. Thanks Louise. So firstly REMS.

Obviously, as part of the applications for the NDA for Zalviso, we have 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 and so I think that will be a discussion to be held at that stage.

You did reference potential diversion in the hospital. That is obviously a topic of focus for Zalviso. We're concerned with that ability for healthcare professionals to divert particularly clear liquids in the hospital setting, and certainly Zalviso has built-in to it systems that can prevent against that particular diversion issue.

I will say that discussion is already come up with the agency. They recognize, I think, the particular attributes of Zalviso and trying to mitigate against that potential healthcare professional diversion in the hospital setting. So I think that will be a productive area dialogue for us.

Competitive landscape? I guess that large-market opportunities do tend to attract competitors into the landscape. I think that we see a lot of room, I think, for people to coexist in that marketplace. 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's still nothing as effective as an opioid to manage that moderate to severe acute pain experienced by people particularly in the hospital setting, that the opioid that they reach for is Zalviso. And the Zalviso system as 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 the hospital setting.

Lastly, in terms of Mike, yes there was an announcement this morning that Mike will be joining Sorrento Pharmaceuticals. We didn't put a press release out on this. Mike is not a Section 16 officer. He reports to Dr. Pamela Palmer, our 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 US, and indeed 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 the San Diego area.

And, obviously, I also wanted to acknowledge the work that Mike is done, as well, in ensuring that we present to the agency a very attractive NDA. Pam has picked up Mike's workload and we are moving forward in exactly the same phase and frame as we were previously, and don't anticipate us missing a beat as a move towards the commercialization of Zalviso.

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

Great. Thanks, guys. I just had a couple.

Maybe,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 to get a sense as we exit this year, what is the run rate? And I know we're going to be adding some more reps in early 2015. I'm just trying to get a sense of how we should we be thinking about that cost structure going forward, and then I have a follow up.

As I had mentioned, as you look at the R&D costs, what you have is, 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 that run rate that I had given you from Q1, Q2 and Q3 and Q4 as there's a lot of Phase 4 costs that are preparatory for the Phase 3 that we will be going through the first half of the year. So there's not going to be a spending ramp on the R&D side.

It's going to be a kind of a stepped-up, consistent spend over the course of the year. If you look at 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.

In Q4 2013, 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 towards the end of they end of the year as we prepare for the commercial launch in Q1 of 2015. The SG&A side, I think, we will see it stay -- it will creep up, generally speaking, but it's going to be much more modest in terms of ramp than anything you see on the sales and marketing side. That's kind of why we gave the guidance that we did around that -- on the sales and marketing side in the low-20%s and so forth, and much of that is going to be sales and marketing.

I will perhaps just add to that, and these numbers are not a secret. If we are talking about adding about a third of the sales force, about 20 people in effectively what is going to be Q4, then you can expect an annualized salary rate of around about $250,000 on the representatives that we will be adding, fully loaded, which equates to about $5 million on an annual basis, and you can then quote it from there.

And similarly, for 65 reps it's about $250,000 a head. So again, the bulk of the cost is going to come in that sales force and you can expect an annual carried cost of the total sales force -- 65 reps at $250,000 at about $16 plus million dollars a year.

Okay. That's helpful.

And then one more, Richard, for you. As you talked about in the prepared comments, the new opportunities for Zalviso and some of the work that you've done in the polling folks. When you roll this out, how do you sell into that group of patients that's not the traditional post-surgical IV PCA morphine patient basis? Is there a concerted effort that you can expanded to that 23-hour hospital stay base and some of the others? How are you thinking about doing it, and I guess how long do you expect that to take?

That's a great question, Randall. One of the things that we've been very focused on doing, and I've referenced previously, is some extensive segmentation related market research with physicians of various different hues and colors. 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're seeing is that there is a broad consensus that Zalviso could represent between 30% and 50% share of their either post-op or moderate to severe pain patients depending on which segment that you are in. That seems to be consistent in that range, across the different specialties that we talk to with interest in both post-op and non-post-op patients.

The ramp is slightly different depending on, actually, the individual physician. We are 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 are 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 laggard in terms of new technology adoption.

That's a very important piece of information as we think about how we will target our sales force and also how we will segment the market and drive into those different surgical and non-surgical specialties. At this stage, I'm not suggesting that will go surgical first and then 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.

Got it. That's helpful. I'll just leave you with one question. Is it possible we could see another international partnering deal this year? Thanks.

It's possible. I've always tended to -- said this historically. It's very difficult to predict timing on these things. As you recall, we didn't do, coming up to the Grunenthal execution and deal execution. We're engaged. There are folks who are interested in Zalviso outside of the US, Europe and Australia, and the timing of when that gets consummated is dependent on both parties coming to an agreement that can be announced.

All right. Thanks, guys.

Thanks.

Your next question comes from Mario Corso at Mizuho.

Good evening. A couple things I wanted to ask. Related to the FDA process, is there anything you could say, kind of at a higher level, is there anything you've seen or heard that would make you think that a July FDA action or FDA approval is not a high likelihood? And I'm wondering from there, are there any particular issues that have surprised you in the process, or if it's all going as planned?

On the commercial side, maybe more specifically than the prior question as it relates to Exparel, I think 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 will be going to hospitals with?

Thanks very much.

Thanks, Mario.

First question, nothing that I've seen or heard at this stage is suggesting that there is an inability to get to the July 27th PDUFA approval on that date. Other than that, I can't give any color but there's nothing at the moment that points against that, based on dial-up with the agency, interface with the agency, et cetera.

On your second issue, in terms of Exparel and is the need for opiates obviated? This is a common misconception, and you have got to remember that there are various mechanisms by which multimodal analgesia can 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 approach.

And certainly things like bupivacaine, which been around for a long time now as a wound infiltration agent, a field block, but also as a local nerve block, has been used for many, many years to provide that support for patients in that postoperative realm. Lasts for a certain period of time, then you get your pain coming at the patient and then you've got to manage them differently.

And certainly there is no indication, I think, in any of any of the studies that are involving moderate to severe pain that suggests that anything other than an opioid is the most effective way of managing that moderate to severe pain. You need to provide the pain relief that an opioid can muster and can handle if you're going to effectively and efficiently control moderate to severe pain.

My goal, and I said it earlier, is regardless of the multimodal approach, and that will continue to be the case going forward, we want to be the opioid agent that physicians, surgeons and ultimately patients reach for in managing that difficult moderate to severe pain.

Lastly, in terms of pharmacoeconomic analyses, we are working extensively on PE analyses. In fact, we have presented -- sorry, 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 are entering, updating the cost of IV PCA in particular. Those we haven't talked about publicly, since they are in submission form for manuscript issuance.

We anticipate that later this year and then we'll, obviously, at that stage share that fuller information set with everybody. But I don't want to jeopardize the publication process at this stage.

Hope that satisfies.

Your next question comes from David Amsellem at Piper Jaffray.

Thanks. Just a couple.

From the Grunenthal partnership, with the upfront payment, with the milestone stream, how does that play into your decision to potentially accelerate more move-forward development on ARX-02 or 03? Or is that something that you are still committed to looking for partners, both domestically and internationally.

And then secondly, just on one of your competitors, or your primary competitor, Medicines Company, they had an interesting slide 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. I was wondering since, clearly, there has been no shortage of commentary about these two products, how you would respond to that, and essentially what that counter detailing message would be.

Thanks.

Thanks, David. Good point on the Grunenthal milestones.

Obviously, they are not factored at the moment into supporting either Zalviso into commercial -- to its commercial breakeven point, or indeed the ARX-04 program. We're funding those out of the currently available cash resources that we have access to. So yes, it would open up access to 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 counter breakthrough pain will be the only non-phentanyl-based approach to managing cancer breakthrough pain with some really neat packaging technology around controlling access to the product that we think will be very relevant. And 03, this very novel sublingual combined pain relief, anxiolytic and also moderate sedative that would provide comfort for patients undergoing procedures outside of the hospital setting, particular in the physician's office. Both have strong relevance.

Less commercially relevant to AcelRx, since the focus for us is that kind of 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 this forward. I wish I could put all my kids through college simultaneously but sometimes you have to make those choices.

On the Medicines Company, with Ionsys, you know, 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 then old technology. So I am not in the least bit adverse to that product introduction.

I do think there is a counter detail mechanism that's relevant here, and in particular what I'm seeing based on the market research there we're getting back from surgeons and from nurses, the primary interest for these folks is rapid control of pain, which predicts a better outcome for a patient in that postoperative setting in particular, but also outside of the postoperative setting, as well. When you look at the ability of Zalviso to, in real time, control pain from the outset of use of the product versus the challengers, we're doing that with Ionsys because transfer across the skin is inherently slower and it's more challenging. The nurse has got to provide breakthrough pain relief for those first three hours.

That's a fundamental that immediately trumps the fact that the Ionsys product is a 30-second set up versus ours, which is a 90-second set up. They're both simple products to use but both much, much simpler than the IV PCA mechanism. They both can carve out a relevant part of this marketplace. I just happen to think that the Zalviso product is a better proposition for people in both the short and the long run.

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

It's an interesting one. Again, we can turn back to Ionsys for a second. When Ionsys was originally introduced in Europe, it was priced by J&J at about $120 a day. That was back seven plus years ago. I think there was a sensitivity to that price point.

So I think at that price level we would run ourselves into difficulty. $120 a day, $240 over two days still, I think, even seven, eight years further on. But certainly, as we did some research on price sensitivity, similar price points to the range that we talked about, the lower end of the range of we talked about in the US, that kind of $150 wasn't necessarily a negative reaction amongst physicians in Europe.

Thank you.

(Operator Instructions)

Your next question comes from Greg Suvannavejh at MLV and Company.

Thank you. Thanks for taking my questions and congratulations on the quarter. A few questions, if I could. Maybe I will focus on the 04 program.

Could you remind us in terms of what you're thinking about the Phase 3 trial, what the similarities and what the differences might be versus the prior Phase 2 trial that you ran, 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 commercializing that on a go-forward basis.

If you recall, the Phase 2 study was a bunionectomy study, so it's a model of what's called bony pain. The FDA fundamentally wants for its pain assessments a model of bony pain and a model of visceral pain. The bony pain model is done. The visceral pain model, which will be the subject of the Phase 3 studies, you can think of it as looking very similar to what we did with Zalviso in the abdominal surgery study that we reported, a 310 study, that we reported back in Q2 of 2013 as a good example of how to do that study effectively.

The product, remember, is a 30 microgram dose in a sufentanil NanoTab. It's healthcare professional-administered in response to patient request, as opposed to the Zalviso system which is a 15-microgram dose under patient control. The limitation on the ARX-04 program is that we are 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 tight monitoring and watching by healthcare professional staff such as in the ER, such as being transported by the paramedic, such as in the ambulatory surgery center post surgery, and maybe such as in the PACU where you're transferring out of the operating room before you get Zalviso going to the floor, the titration to manage that patient's pain in the PACU can be managed by ARX-04. Those are the areas where we see commercial opportunity.

And because that commercial opportunity is all peri-hospital -- you think about it, ER, hospital, the PACU, hospital, the paramedic is peri-hospital and the ASCs in the hospital or proximal to the hospital. We see this as a very complementary product in the sales rep's bag to Zalviso, maintaining that focus on acute pain, but responding to different parts of the hospital system.

Okay, great. Thank you. And then if I could follow-up on Zalviso, I know that there were plans on looking at, perhaps at some future point in time, next-generation delivery devices and perhaps version 2.0. Can you maybe give us an update on where you stand there, and timing of when you think that might come to the market, and what kind of studies you might need to get that approved? Thanks.

Yes. So, yes, we are interested ultimately in generationalizing this device on a repeat basis. We see a number of opportunities to enhance functionality of the device. We've talked publicly about wireless communication to the nursing station, direct to the EMR and so on. There's a number of other areas we have interest in as well.

I don't expect to get to that point of introducing gen two for the first two to three years of commercial life. We'll want to establish Zalviso in the hospital setting initially. But ultimately, our goal is to obsolete our own technology in the course to generate, perhaps, some new and extended IP for the product.

We think that the majority of these iterations 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 the clinical experience. But it will depend on what we ultimately do with the device, as to whether we will need to generate any new clinical information. But our expectation at the moment is that's a low likelihood of requirement.

Okay. Thank you.

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

Only 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.

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