Talphera Inc (TLPH) 2014 Q3 法說會逐字稿

Good afternoon and welcome to the AcelRx Pharmaceuticals Q3 financial results conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Tim Morris. Please go ahead, sir.

Thank you, Chad. Good afternoon everyone, and welcome to today's call. On today's call, I'm joined by Richard King, Chief Executive Officer, and Adrian Adams, Chairman of the Board.

On today's call, we will provide an update on the activities since the receipt of the complete response letter or CRL for Zalviso that we received on July 25, 2014. We will discuss the progress on the European regulatory approvals of Zalviso, we will provide an update on ARX-04, we will review the financial results for the quarter and nine months ending September 30, 2014. We will update our financial guidance for the remainder of 2014, and lastly we will take your questions.

During the call today, we will make forward-looking statements including but not limited to the Company's Zalviso NDA and the CRL, our plans to address the issues raised in the CRL, our anticipated resubmission of the Zalviso NDA to the FDA including the scope of the resubmission, the timing of the resubmission and the FDA review time, planned initiation of phase 3 clinical trial for ARX-04, the therapeutic and commercial potential of AcelRx Pharmaceuticals product candidates including Zalviso, statements related to future financial results including 2014 financial guidance and cash forecast, potential milestones and royalty payments under the Grunenthal agreement, the process and timing of the submission, the marketing authorization application or MMA and the CE registration in the EU and the status of the collaboration agreement with Grunenthal or any other future potential collaborations. These forward-looking statements are based on AcelRx Pharmaceuticals' current expectations and inherently involve significant risks and uncertainties.

AcelRX Pharmaceuticals' actual results and timing of events could differ materially from those anticipated in such forward-looking statements as result of these risk and uncertainties, which include without limitation risks related to AcelRX Pharmaceuticals' ability to receive regulatory approval for Zalviso, any delays or inability to obtain and maintain regulatory approval of its product candidates including Zalviso in the United States and Europe, our ability to obtain sufficient funding to commercialize Zalviso and proceed with clinical development of ARX-04, the success cost and timing of all product development activities and clinical trials and other risks as detailed in the risk factors and elsewhere in AcelRx Pharmaceuticals' US Securities and Exchange Commission filings and reports including our quarterly report on form 10-Q filed with the SEC on August 11, 2014. AcelRx Pharmaceuticals undertakes no duty or obligation to update any forward-looking statements contained in this release as a result of new information, future events or changes in its expectations. I would now turn the call over to Adrian Adams, the Chairman of our Board of Directors.

Thank you Tim and good afternoon everyone. the Company has asked me to join the call today on behalf of the Board of Directors to comment on the announcement made last week of the departure of Richard King, the Company's President and Chief Executive Officer. The decision made by the Board of Directors was not made lightly and reflects our strong desire to seek a president and chief executive officer with a proven experience and capabilities to take the Company into the next and most import phase of its evolution.

The Board of Directors has initiated a search for a new president and chief executive officer, and we are pleased that Richard has agreed to remain with the Company as president and chief executive officer while the search is ongoing and until the new CEO is in place. Speaking for the board and the whole Company, we sincerely thank Richard for his significant contributions in leading the Company to this point, including its transition to a public company, multiple capital raising transactions, an important partner in transaction with Grunenthal and Zalviso and ARX-04 clinical developments.

Finally, I and the board would like to emphasize that we remain confident about the Zalviso and ARX-04 development programs, the work that is being done towards a timely resubmission of the Zalviso NDA and the first quarter of 2015, and last but certainly not least, the potential for this company to create significant shareholder value. With that, I would now turn the call over to Richard for discussion of the business activities and to provide a regulatory update on Zalviso.

Thank you very much Adrian, and I would like to thank everyone for joining us this afternoon for this call. I plan to address progress with Zalviso in the US and in Europe, progress on the patent front, and provide an update on status with ARX-04.

As we previously discussed, in the US the FDA issued a Complete Response Letter or CRL for the Company's NDA for Zalviso. The CRL contains requests for additional information on Zalviso system to ensure proper use of the device. The request includes submission of data, demonstrating a reduction in the incidence of optical system errors, changes to the instructions for use for the device to address inadvertent dosing, and submission of additional data to support the shelf life of the product among other things.

At the end of September, we held a teleconference with the FDA to review our proposed response to the Zalviso CRL. Prior to the meeting, we provided a briefing document outlining plans for our response to the aforementioned issues in the CRL.

During the teleconference with the FDA, we confirmed that bench testing could be an acceptable approach to evaluate a reduction in optical system errors subject to agreement with the test protocol and the target optimal system error rates. We plan to submit bench test protocol to the Agency for review and comment shortly.

The protocol will clearly delineate all planned changes to reduce the optical system error rate including addressing specific questions raised by the Agency in its written response to the Company's proposal. To address the risk of inadvertent misplacement of tablets, we proposed mitigations for the Zalviso system and IFU and to test these mitigations by way of a human factors study. The protocol for the human factor study is in the final stage of completion and will shortly be submitted to the FDA for review and comments.

In the CRL, the FDA specified that the appropriate test mechanism to evaluate mitigations for the inadvertent dispensing of tablets is via human factor study. We believe that the protocol we're preparing for review by the Agency to evaluate the mitigation that we proposed for this issue should meet the requirements specified by the Agency.

At the same time as we submit the human factors protocol, and at the request of the Agency, we will also provide a rationale for why clinical evaluation of these mitigations is inappropriate and unnecessary. We hope to receive feedback on both of the items in the response from the FDA. The Agency of course always reserves the right to decide on the adequacy of the design of the study to address any given question as well as the right to determine if the data from the study satisfactorily addresses the questions being asked.

The FDA confirmed that the review of these responses will qualify the class 2 review requiring a six-month review clock. The Agency also confirmed that the adequacy of the bench test study and the human factor study and the results of the studies will be subject to final review and approval by the FDA.

We also proposed including additional stability data in the resubmission to support the proposed 24 month shelf life of the Zalviso system. The FDA has agreed with this approach subject to review of the data previously submitted and to be submitted.

Based on the communication with the FDA and subject to the timing of the FDA review and comment on protocols, to be submitted for the bench testing and human factor study, we're targeting resubmission of the Zalviso NDA in the first quarter of 2015. However, depending on feedback from the FDA on the protocols and materials to be submitted, the timing and filing of the NDA could be later than the first quarter of 2015.

Let me turn attention to the progress with Zalviso in Europe. As you are aware, we are progressing towards CE Mark in device components of the Zalviso system.

There are two stages to securing a CE Mark. The first requires AcelRx quality systems to be iso-13485 certified, and the second requires a technical review of the Zalviso system. Recently, an order of our quality systems was completed by our Notified Body, the British Standards Institute with no major or minor observations recorded.

As we announced earlier today, AcelRx is now received iso-13485 certification validating AcelRx quality systems. This certification is the first step towards obtaining a CE Mark.

We're also pleased to confirm that BSI is in the process of reviewing the Zalviso technical file. Assuming BSI finds the technical file to be acceptable, we anticipate obtaining a CE Mark for the Zalviso device in the near future. Continuing with Europe, the marketing authorization application or MAA review continues in Europe for our marketing partner Grunenthal with 120 day questions from the EMA expected later this month.

I'm also pleased to announce Grunenthal has submitted an MAA to the Swiss Agency for therapeutic products, also known as Swissmedic, for Zalviso for the management of moderate to severe acute pain in adult patients in a medically supervised environment. We're pleased with the progress Grunenthal has made with Zalviso in Europe, initially with the filing of the MMA with EMA and now with the filing with Swissmedic We look forward to a Swissmedic's review of the application and to the potential approval of the Zalviso in Switzerland.

In October of this year, we provided an update on additions to our intellectual property portfolio. Since late last year, we received 11 issued patents including both pharmaceutical and device patents with a combination of competition and method claims which expanded the scope of protection for both Zalviso and our pipeline programs.

Our growing patent estate now totals 30 issued patents worldwide. These issued patents covered AcelRx's NanoTab, medication delivery devices and platform technology and include 13 issued US patents, four issued European patents, and 13 issued patents in other international territories including Japan and China. These issued patents are expected to provide coverage through 2027 to 2030.

Turning attention now to ARX-04, as previously announced in June 2014, we completed a pharmacokinetic study in support of the ARX-04 development program. In a study of healthy volunteers, it was shown that two sublingual administrations of a Zalviso 15 microgram sublingual tablet dosed 20 minutes apart were equivalent to one sublingual administration of an ARX-04 30 microgram subfentanil tablet.

As a reminder, the total ARX-04 safety database required by the FDA is 500 patients comprised of 100 patients receiving multiple doses of ARX-04 and 400 patients receiving a single dose. We proposed the inclusion of approximately 300 patients from the Zalviso clinical program in the ARX-04 safety database to the FDA to partially address the 400 patients single dose safety database requirements. We're seeking FDA agreement on this proposal, and we have designed the two phase 3 ARX-04 trials accordingly.

In addition, I'm pleased to announce that in response to a proposal submitted earlier this year, we have been notified by the Department of Defense that AcelRx has been offered a contract to provide funding for the development of ARX-04 including funding for the proposed phase 3 studies. We're in the process of completing the initial contracting process with the DoD, including negotiation of the amount and timing of the contract. Currently we plan to defer the initiation of the ARX-04 phase 3 trials until the contract is complete.

We anticipate the contract negotiation process to conclude in the first quarter of 2015, allowing us to initiate the two phase 3 studies show the thereafter. However if negotiations with the DoD become protracted, we may elect to initiate the first trial on our own rather than sustain additional delays. However, if negotiations are successful, we believe the contract will provide significant funding for the development of ARX-04.

On the medical affairs front, we announced the results from the IP 310 study have been published in Regional Aesthesia and Pain Medicine or RAPM, a peer-reviewed journal with broad multidisciplinary readership. IP 310 was a randomized placebo controlled phase 3 trial evaluating the safety and efficacy of Zalviso, also refer to as the sublingual subfentanil tablet system or SSTS for the primitive postoperative pain from patients following open abdominal surgery. With that summary of updates, I would like to turn the call back over to Tim to provide an update on the financial and investor relations.

Thank you Richard. For the third quarter 2014, we had a net income of $671,000 or $0.02 basic net income per share or $0.13 on a diluted net share. This compares to $11 million net loss or $0.26 basic and diluted net loss per share for the third quarter last year.

Net income in the current quarter as compared to net loss in the prior-year quarter was primarily due to an increase in revenue from the receipt and recognition of the $5 million milestone payment for the MMA submission under the collaboration agreement with Grunenthal and non-cash income from the reevaluation of the pipe warrants issued in connection with the PIPE financing in June 2012, partially offset by an increase in operating expenses. Change in the valuation of PIPE warrants are recorded to the other income or expense line item in the P&L.

During the third quarter of 2014, the change in value of the PIPE warrants resulted in other income of $6.4 million for the quarter whereas the change in fair value of the pipe warrants in the third quarter 2013 resulted in other expense of $2.4 million for the period, a positive swing of $8.8 million. As reminder this is a non-cash charge.

Financial performance may be better measured by looking at the income or loss from operations. The loss from operations of $5.1 million decreased in the third quarter 2013 compared to the loss of $8.3 million in the third quarter of 2013. The decrease in the operating loss was due to lower research and development expenses, primarily due to reduced development work to support the FDA's review of the Zalviso NDA, partially offset by higher general administrative expenses primarily related to pre-commercialization efforts for Zalviso.

For the nine months ended September 30, 2014, we reported net loss of $19.5 million or $0.45 per share basic net loss and $0.63 diluted net loss per share. This compares to $41.2 million net loss or [$1.70] basic and diluted net loss per share for the same period in 2013.

The net loss from operations of $25.9 million decreased for the first nine months of 2014 compared to the loss of $26.7 million in the first nine months of 2013. The decrease in the operating loss was due to lower R&D expenses as the clinical trials for Zalviso ended in 2013, partially offset by higher G&A expenses primarily related to the pre commercialization efforts for Zalviso.

As of September 30, 2014, we had cash and cash equivalents and investments of $85.6 million compared to $92.3 million at the end of June and $103.7 million at the end of December 2013. The decrease in cash during the year was driven by cash used in operations partially offset by the $10 million drawdown of the second tranche from the loan and security agreement with Hercules in June of 2014. As mentioned above, we received a $5 million milestone payment from Grunenthal.

We revised our financial guidance for 2014 with operating expenses anticipated to be in the range of $43 million to $47 million. Our estimated cash equivalent and investment balances have December 31, 2014 should be at least $68 million. I refer you to the press release for more details on the third quarter financial results.

As we enter the fourth quarter, we will continue our investor relations activities and presence. We have a number of conference presentations planned in the next two months including the Credit Suisse healthcare conference in Phoenix this week, the Jefferies global healthcare conference in London on November 20, the Piper Jaffray healthcare conference in New York on December 2, our RBC corporate access day December 4 in Denver, and the Guggenheim one-on-one conference December 16 in Boston. With that, I'd like to turn the call back to Richard.

Thanks Tim. I'd like to now open the call for questions, so Chad if you could turn it back to you so you can coordinate, I'd appreciate it.

(Operator Instructions)

Louise Chen, Guggenheim.

Hi, thanks for taking my questions. I apologize in advance for the awkwardness of asking these since Richard, you're on the phone, but there has been a lot of controversy surrounding potential replacements for you. And I was curious, first of all myself and others have thought you've done a great job with the Company. So I'm curious specifically as to why the Board's decision to change the CEO now. And then the timing obviously is controversial given that you're head of resubmission. So wondering why not do the resubmission and then look for someone. And there hasn't been a replacement announced; before they announced that there's going to be a change. So that's obviously run a lot of concern from people. And so maybe I will stop there and see if you could answer any of those questions. Thanks.

Louise, firstly thanks for the comments. Why don't I turn that question over to Adrian to address that.

Thanks Richard. And thank you for the questions. Clearly I think decisions like this are never easy. I think in taking this decision, it had done nothing whatsoever to do with any concerns in relation to the operations of the business. I'm very importantly and any concerns in relation to the work that was being done in anticipation of the resubmission of the Zalviso in the first quarter of next year. It had everything to do with looking to make sure that as we move through the course of 2015 and beyond that we have a CEO in place with the proven experience and success in the capabilities to take this Company to the next level.

We are delighted as I mentioned that Richard has agreed to stay on until we secure that new CEO, and we anticipate that to be in the first half of next year. With regard to the timing, obviously as I mentioned I think decisions like this are not made in a light fashion. I think a more certainly I think there's been a tremendous amount of work that is been done to date and is being done as we speak to make sure that there are no issues in relation to the timing of the resubmissions. And clearly I think one of the reasons we are very pleased that Richard has agreed to stay on until we get a new CEO is to ensure that things are done in a seamless fashion. And with that, I will turn back to Richard.

Does that address your question, Louise?

It does, maybe if I could just push a little bit more. I was always under the impression that, Richard, you were experienced and have successfully launched products and run companies. I guess maybe I'm curious as to specifically what the Board is looking for in a new CEO that -- maybe if they could give more specifics around that?

You're quite [thought broadly of] the Management team at AcelRx. I think we have a very good quality of Management team and they're all contributing in many different areas. And most certainly I think from the looks at the track record to date in relation to what has been done so already commented on that, I think most certainly the Company has moved to a very nice stage.

That said, I think it is our responsibility as a Board of Directors, given the very significant shareholder value creation is to make sure that as we move into the next very exciting phase of the Company that we have that skill set and proven successful experience to take us forward into the next phase. And most certainly, I think this has nothing to do with any disagreement between Richard and the Company or indeed any matters related to the Company operations. And so clearly I think we're in a good situation as we are at this particular point in time. And this has everything to do with making sure that as a Board of Directors we have everything in place to put ourselves in a very strong position to increase shareholder value over the course of time.

Thank you very much.

Thank you very much for the question.

Randall Stanicky, RBC Capital.

Great, thanks guys. Let me ask this another way. As you move towards commercial approval, what else do you need from a Management perspective? I'm just thinking about the Chief Commercial Officer or other people in that place, thanks.

Clearly I think one looks at the broader aspects of capabilities and proven experience, I think we recognize the commercialization of Zalviso subject to FDA approval is of fundamental importance and clearly as it relates to the choice of a new CEO. That particular good capability and competence is a very strong component of that as is the broad a general management aspects in relation to building this Company moving forward. And we feel that now is the right time for us to look at the next phase of evolution of the Company, and there's a lot of different components that will come into the choice of a new CEO.

And very importantly, and again stepping back to what I mentioned earlier, we're very pleased that Richard as agreed to stay on until that new CEO is in place. And we will make sure that the decision-making and the qualities that we're looking for in a CEO drive the timelines of that. We want to make sure that we choose the right CEO to take us into the next stage of developed

Got it. And then let me just ask a question of where we are with the process. Have we submitted the protocol to FDA, and if not, when would you expect to do that? And then how long do you think it's going to be for the FDA to come back to you? And where I'm going with this and try to understand if the timing has been pushed back a little bit if we're thinking about early 2015 before we understand what else we need to do for submission. Thanks.

Good question. Obviously these protocols are critical documents, and we want to get them exactly right. So we are taking every opportunity to review them both via very careful internal review and also by external expert review as well. But the protocol submission for both bench testing and also for human factors are imminent.

Thanks.

David Amsellem, Piper Jaffray.

Thanks. I guess at the risk of beating a dead horse, I will try to ask the question different way. Adrian, maybe you could provide specifics on what are the ideal qualities in a new CEO. Maybe if you could give us more color on that, and what exactly would that CEO do, to be frank, that would be different from what Richard could do? Thanks.

Thank you again for the question. I will reiterate a number of points. And we will certainly I don't want to get into comparisons of any profile of a new CEO that we will recruit versus Richard. I think that is not appropriate. I think Richard has done a very good job of getting the Company to where it is at this particular point in time. I think just to reiterate I think the Company is in very good shape. I think more certainly we think is very attractive proposition for a potential new CEO. I think we will certainly given the potential to unlock significant shareholder value over the course of time, we're pretty confident that the identification [and introduction] of a new CEO will be of great benefit to the Company.

I think one references a deep track record of success and in terms of deep commercial experiences, the broader aspects of those attributes and capabilities that we think are important as we move into the next phase. And this is nothing to do in relation to any challenges we have to date in terms of where we are at this particular point in time as I've referenced in my earlier comments. I think we're very pleased with what Richard has done to get the Company to the next level. This is all about putting in place a CEO that has the proven deep experience and success and capabilities not just commercially, although that is very important, but broadly to take the Company to the next stage. And I think that is sufficient comment at this particular point time.

Let me ask a follow up, if I may just switching gears. How would you comment on the relationship with Grunenthal? There's obviously been -- you obviously [updated the CRL] and response pending and the management change. Is there anything that's changed in your relationship with Grunenthal given the upheaval? Thanks

Let me comment first David. The answer is we've had a very good working relationship with Grunenthal ever since those in the run-up to signature on the agreement and ever since that time as well. We worked hand in glove with them from a regulatory standpoint as we prosecute the marketing authorization application in Europe and also as we prosecute the CE Mark process for Zalviso device. I might go one stage further. We have a joint steering committee, Tim, you are on that joint steering committee between ourselves and Grunenthal. Maybe you could comment from the inside of that side of things as well.

Sure. I actually think that Grunenthal is pleased with the progress we made on the filing and the application in Europe. As we've mentioned before, we got our ISO-13485 certification. The next step will be the CE Mark, and we're basically on time to have a decision by CHMP in the third quarter of next year. While the CRO setback in the US and change in CEO will be something we will have to deal with internally here. I think for the most part Grunenthal still sees the extreme value in the product, they're still preparing their commercial prep and [MA] process remains on schedule. So I think they're very satisfied.

I will add one other thing to that as well. Which is that today or tomorrow, I'm not quite sure which of the two, but there is an expanded board meeting in Germany at Grunenthal. And Pam is actually there presenting to the board to give them full insight to the Zalviso opportunity and continue to cement that relationship going forward. So I think that is a solid one and is one which is active and dynamic.

Thank you.

Pleasure.

Boris Peaker, Cowen.

Good evening gentlemen. I just want to probe a little further into the FDA discussions. What exactly is the FDA looking in the bench protocol as well as the human factors study protocol? I'm trying to get a sense of how standardized are those to make sure that I understand if there's going to be a lot more back and forth on something like this or is there clear templates to follow?

Okay. There's never a template when you've got a very specific and unique product which is what the Zalviso starts off as. Bench testing though is, as it's described, we basically take systems, we put them through a test protocol on the bench, and we look for the rate at which the system produces unexpected optical errors. And that is a fairly standard process in relation to the work that we've done to evolve the Zalviso system to address those optical system errors. With the Zalviso system itself is unique, the process of bench testing is fairly standard, and we think we're filling all of the right necessary elements to support that bench testing.

Similarly as well for the mitigations that have been developed to avert the inadvertent dosing of Zalviso tablets, that 15 tablets and a 30,000 overall that were identified in phase 3. When you evaluate mitigations that are involved instructions for use, instructions for patients, instructions for healthcare providers, you do that through human factor testing as the appropriate test vehicle. Again the human factors test while specific to Zalviso is fairly standardized from a device standpoint. So we're following those standardized procedures, and obviously the specific areas of how effective are these mitigations that of been developed is a subject of very specific elements of the human factors test that are unique to Zalviso.

I see, and have they specified how they determine if human factors study is success or failure, what frequency of failure is acceptable?

That is part and parcel of the protocol review. We will propose that in the protocol review for the bench test. Human factors is a little more imprecise than that. Looking for the effectiveness of the training solutions that you proposed as mitigations to the issues you're trying to address.

If those prove to be ineffective, then you go and reevaluate those mitigations and try and make them effective so health professionals and patients can follow them reliably. But there's -- we believe the mitigations that we have developed and proposed the test of human factors are going to prove effective in that they will prove to be straightforward for both patients and healthcare professionals to follow and can be validated through the human factors test.

Got you, and my last question is on the sales force. With the delay in the NDA, what is your strategy for the sales force. Are you making contingent offers or do you delay hiring? Where do you stand?

Yes. On the sales side of things, we have four out of seven of our regional director positions filled. We did not recruit any of our sales -- those are the sales managers. They're the guys that manage the sales team -- the 65 sales representatives. We did not recruit any of our 65 sales representatives. We're waiting for the approval to go ahead and do that.

What we will do now as we look towards the resubmission of the NDA and a six-month review clock is that we will prepare contingency offers such that at the time of the approval, the ability to go and move forward to recruit quickly a sales organization is in place. And that will happen obviously in the latter part of next year. So that is how we propose to do it. But at the stage we will retain and continue to leverage the experience of our four Institute regional business directors who are evaluating our institutional sales targets to make sure that we understand which of those we go to first so we can maximize the ramp for the Zalviso introduction.

Okay thank you very much for taking my questions.

Thanks, Boris.

Ed Arce, Roth Capital Partners.

Thanks for taking my questions. Most of them have been asked, but I do have one further. I was curious about -- you mentioned that in addition to submitting the protocols for both bench testing and human factors study's, you will be also providing some evidence that clinical evaluations of either of these two is unnecessary. I'm wondering to what degree do you think that is a likely scenario and why do you think that, that is a likely scenario and why do you think that is really necessary as part of the submission? Thanks.

That's a great question. Thanks Ed. And again I would go back to the CRL for a minute. In the CRL that we received, the FDA was very specific in that in order to evaluate the mitigations for inadvertent dispensing of tablets, they identified human factor testing and they specified human factor testing as being the appropriate test mechanism in the complete response letter. And we concur with that. We think that is exactly the right response.

At the same time, they also invited us to provide a rationale as to why clinical evaluation of these mitigations is inappropriate and unnecessary. We will do that alongside the protocols, and obviously we want to see what comes of that dialogue. But at this stage, that's how we propose to handle things with the Agency to respond to their request for a human factors protocol and also to request for why clinical evaluation is inappropriate.

Thank you.

Biren Amin, Jefferies.

Thanks for taking my question. I guess a couple of questions on Zalviso. Once you submit the bench test and human factors protocols, is it typical for FDA to respond in 30 days? And I'm wondering whether it's Company's estimate that it would start the two test this quarter? Thanks.

Unfortunately typical is I don't think typical is available to us. I think that -- we think certainly [based] on historical elements associated with the Zalviso development program that 30 to 60 days is not at all unusual or it's the norm. But we're in a situation of the CRL which is why the commentary about the expectation that the FDA will get back to us in a timely fashion but without a specific guarantee that they will do so. So we are -- that is the reason for the hesitancy on saying definitively in Q1 for the response to go into the Agency.

In terms of the protocols themselves, since we have the protocols in hand, we will actually execute those protocols ahead of feedback from the Agency. The Agency comes back with comments that modify those elements, then obviously we will modify and repeat accordingly. But that's why we're spending the time to make sure that we have covered every aspect that we can do, associated with these particles. To answer your question, we will initiate the work this year, but obviously the issue is whether it will satisfy the Agency's needs will depend on the Agency's feedback to the protocols.

And Richard, how long do you anticipate it would take to finish those tests?

The relatively short test, so the bench test is in the four to six weeks range. Human factors test is in the similar actually four to six weeks, closer to four. That's the scale of our work.

Got it. And then maybe another question on Zalviso, given [Zyoxel] PDUFA and potential for Zyoxel for launch in Q2 of next year, would that at all influence how the Company thinks about pricing for the Zalviso?

That's a good question. I will go back historically. It has priced once before in Europe, where they priced at around about $120 or so per patch per day of treatment. That is certainly a robust price point. As you know, it's the top end of where we described the IV PCA costs on a per day basis based on analysis of the [premier data] set. But that was seven or eight years ago. And that device has evolved somewhat since then.

I'm quite aware the Zyoxel's particle price is up to anybody to guess. Our evaluation for Zalviso will be based primarily on the market, the market opportunity, how we want to approach the marketplace, and the ability of us to leverage the Zalviso value against the expectations for pricing the product in the market place. Obviously our first and foremost intent is to see Zalviso used as broad as possible in the institutional setting. We believe it has a significant value to offer to patients and healthcare providers and institutions. And pricing of Zalviso will be effective of that opportunity first and foremost and secondarily will look at what Zyoxel does.

And then maybe a question on ARX-04. What are the key issues that the Company needs to complete in order to finalize the DoD contract?

We have been notified that we have been awarded a grant. There are basically two elements that need to be completed. The first is an agreement with our clinical approach that there's a human [office] of approval for protocols that are conducted under DoD grants that have to review our protocols and be comfortable with them.

And secondly there is a negotiation around actual final value of the contracts reflective of the work that is to be planned. We apply for this grant some time ago, and of course in the intervening time we continue to evaluate the scale and cost of the ARX-04 program. And that discussion is to be held with the DoD to finalize the terms of the contract. So those are basically two elements, clinical review and then contract review and agreement.

Okay. Just a final question, this one's probably for Adrian. On the CEO search, does the Board have any candidates on deck? And I guess in terms of the process, will there be a particular person on the Board that is spearheading the search or is this a decision by committee?

As it relates to the search, we have just initiated the search. I don't think would have been appropriate for the Board to initiate a search without having the discussion with Richard. As it relates to obviously moving forward with the search, I think this will be a search that were done by the nominating and governance committee that is chaired by Mark Wan. I'm a member of that and Steve Hoffman as well. So it will be done by a nominating governance committee and that will make recommendations to the Board.

Great. Thank you.

Thank you.

John Newman, Canaccord Genuity.

Hi guys, this is Kevin Ng for John Newman. Thanks for taking my question. Just playing devil's advocate here, in case the FDA does come back to you requiring additional clinical studies, are you prepared for this type of resubmission currently and how fast can you guys respond to the FDA with this resubmission?

At this stage, the Agency has requested a rationale for why clinical evaluation of the mitigations that we proposed of human factors is inappropriate and unnecessary. So let's assume because again there is no guarantees in this life. Let's assume that they came back and said okay we've decided that with human factors work isn't appropriate. There is a number of things that one could do. Firstly there's a mix of human factors and clinical work that could be done. You could actually evaluate human factors work in clinically disposed patients. That is one halfway [house].

The clinical study work itself we haven't contemplated, and so I don't think it would be appropriate to talk about how long it would take to do that. Certainly given the rate of which we have dropped tablets, which is 15 tablets in 30,000, clinically proving that they reduce that rate would be not an insignificant amount of work if it was at all possible. So that is something which we would need to evaluate that is not part of our evaluations.

Okay, thank you.

Pleasure.

Oren Livnat, JMP Securities.

Thanks Rich. You just teed me up for my question, with the extremity low 0.05% tablet misplacement rate, and I think it was less than 1% of patients that, that happened in. Given those rates are extremely low, can you just help us understand is the FDA asking you to show some reduction in the actual rate based on updated interface and instructions? Or is the point just to show that people understand that, that could happen? And what to do if it does?

It's the latter. Again I will go back to the CRL. FDA is very specific. They talk about mitigations to the inadvertent dispensing of tablets and that the appropriate testing vehicle which we agree with being human factors to evaluate that.

So we're talking about mitigations to reduce it as far as you can and then also what to do in the event that it does occur, and we all acknowledge that if you are asking individuals to take something from A to B there's always the possibility of a misstep between A and B. And so to instruct both patient and healthcare provider as to what to do in the event that something goes wrong between picking up the device and then putting it under your tongue to dispense a tablet. It's very much the latter, the mitigations that we proposed would be appropriate as the Agency suggests to test for human factors.

Just to follow up again, so obviously the second part of that what to do if it does occur, I get. But again since we're talking about smaller numbers people and very rare occurrences, presumably there is not going to be any data you can point to, to show that you've in fact mitigated their actual occurrence because the rate is going to be so low. So is it just intuitive like asking a patient a question -- do understand that you need to be aware of this? So that implies that they would be less likely to make that error? Do you know what I mean?

Human factors doesn't quite work that way. What human factors does is you give a patient or healthcare provider instruction and you evaluate their ability to follow the instruction. And the basic sense that if they could follow the instruction, then you can mitigate whatever it is you're trying to assess. I will give you a concrete example. With Zalviso, we have a thumbtack which the patient wears on their thumb, has to be close to the dose button to get a dose. Correct?

Yes.

If the patient picks up the device with the hand that has the thumbtack on, there's a risk they could press the dose button somewhere between picking up the device and putting it in their mouth. If you instruct the patient to pick it up not with the hand with the thumbtack but with the other hand, then they can follow that instruction repeatedly, there is no way that you can actually dose a tablet until you bring the thumb with the thumbtack up to the dose button and press it, which presumably you can instruct them to make sure it is in their mouth beforehand.

As part of what we've already submitted to the Agency as one of the mitigations to evaluate -- to demonstrate the mitigations against the inadvertent dispensing of tablets. That's part of one of the elements they haven't reviewed yet. And so it done a number of mitigations already and presented those to the Agency against this particular issue. And what we're doing now, proposing to evaluate is continuous events as it relates to what to do in the event of a dropped tablet for either the patient or the nurse.

I hate to harp on this, but again since these rates are so low, yes, you can see that someone used the other hand and what percentage did that. But obviously the rate was so low. And if you look at guidance for device human factor studies, obviously there's nothing is set in stone with the FDA, but they do talk about acceptably low error rates when it comes to devices. And I would think that 0.05% error rate that you saw in clinical trials would not alarm anybody especially -- in the setting of a health care setting, not at home.

So I'm just wondering if there is any chance that you can't show statistically or hard data proving quote-unquote mitigation, is there any reason to think they could say -- you did it, you improved your instructions, you at least addressed the issue, but the rate is so low anyways it's not a deal breaker for us.

Difficult to comment really. Again the regulatory body has obviously requested that we look at this issue and that we do put in as many mitigations as we can to what is already as you rightly discussed a low rate of occurrence. We have done that partly in the materials that have been submitted. We continue to do that. And I think the call here -- and if there's responsibility to sponsor to put in as many mitigations as possible to reduce that error rate down to as low as possible.

Again, I don't think anybody's expectation is to get to a zero rate to no dropped tablets. Humans are humans. And we will continue to move forward to evaluate the mitigations that we are describing to the Agency, and that will be part of the protocol that we present to the Agency for them to review and comment on.

Thank you for everything.

This concludes our question-and-answer session. I would like to turn the conference back to Richard King for any closing remarks.

Thanks Chad. I like to thank Tim and Adrian for their joining the conference call today. And obviously also to thank everyone for your time and questions on this call and indeed on previous calls as we move forward. Just one other comment, I think Dave Amsellem referred to beating a dead horse. I don't like to be called a dead horse, but that is a time and place for another discussion later on. Anyway with that thought, I will leave you and have a good rest of the day.

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